Rise of the crypto market

Lately the crypto market has made its way back into the focus of the finance sector, with all of the popular crypto currencies reaching an all-time high one after another and the market crashing shortly thereafter. In addition, a constantly rising number of businesses is or already has implemented blockchain-based applications in their daily business and/or are starting to accept payment with crypto currencies.

However, with the rise in popularity and acceptance of crypto assets, the question of how crypto assets and blockchain fit into the current legal framework and whether specific regulations should be passed has become increasingly important. These topics are now more than ever of critical importance to the daily business of many companies.

Besides legal questions on specific areas, such as property rights or capital markets issues, the question of the applicable law is of utmost importance.

The international private law provisions stipulate the laws applicable to certain matters (e.g. property rights, non-)contractual obligations or corporate law). In most cases this requires a cross-border element, such
as the contracting parties being resident in different countries.

Concrete legislation is sorely lacking in Europe

To date the Austrian legislator has not passed or enacted any blockchain or crypto specific laws. A look across the Austrian boarders shows that the situation in most parts of Europe is not any different. While a fair amount of countries have started certain blockchain projects and/or initiatives, almost none have passed any specific regulations. Only a few countries have taken the opportunity and passed a legal framework for blockchain businesses and crypto assets, such as the Grand Dutchy of Liechtenstein, Switzerland or Malta.

On EU level, a proposal for a regulation on crypto asset markets is currently under review and discussion. The proposal includes measures to further enable and support the potential of digital finance in terms of innovation and competition while mitigating the risks.

International private law implications on crypto assets and related contracts

General cross-border characteristic of crypto assets gives rise to question of applicable laws

Why is international private law relevant in the context of blockchain and crypto assets? The main reason is the simple (technical) nature of blockchain, where data is stored decentralised in a large number of copies with the so-called nodes. Nodes are computers which validate blockchain transactions and maintain the blockchain network and, since
in most of the common blockchain systems almost anyone can set up a node, are spread around the entire world. Therefore, as a crypto asset is not only stored at a single location (e.g. a single computer or server) but rather with various nodes, the question of the laws applicable to a crypto asset arises.

Contractual obligations – choice of law is highly relevant

The law applicable to contractual obligations is mainly determined by European laws (i.e. the Rome I Regulation). The case principle is for the contracting parties to freely chose the law applicable to the contractual obligations arising thereunder. Given that the majority of countries have not passed any blockchain-specific regulations thus far, such free choice of law becomes highly relevant in relation to crypto or blockchain related contracts, as this allows the parties to opt into blockchain friendly law regimes or at least into a regime that provides legal certainty.

Therefore, it makes sense to compare the legal status quo prior to concluding blockchain related contracts in order to choose the most favourable legal framework. However, there are restrictions of the free choice of law in respect of certain types of contracts, such as consumer contracts or insurance contracts.

If no (valid) choice of law has been made, the law applicable to contractual obligations arising under a blockchain related contract are dependent on the specific type of contract or whether the contract was concluded with a trading platform, such as a crypto exchange. In the latter case, the applicable law will usually be determined by the location of the seat of the respective crypto exchange.

Property rights by country vary and raise important issues

As crypto assets are treated extremely different within European countries in terms of the quality and protection of property rights, the question of the applicable property law is crucial. For example, this is relevant to determine, if a crypto asset is treated as an asset or a claim or for modalities of a transfer of ownership.

Since crypto assets are stored decentralised in various copies throughout the blockchain network, in order to determine the property law applicable thereon, the place where the crypto asset is located needs to be determined. Currently there is no real guidance on how to determine the place where a crypto asset is located. However, first suggestions are, that the wallet to which the respective crypto asset is allocated shall constitute its location.

Corporate law – particularly relevant for share issuance in the form of crypto assets

From a corporate law perspective, the common question of interest is whether the applicable law allows the shares of a corporation to be issued in the form of crypto assets (e.g. by way of a security token offering (STO)), which however is not a question of international private law. In general, the corporate law applicable to a corporation is determined by the location of its seat.

The blockchain technology brought up a blockchain-based type of corporation, the so-called Decentralised Autonomous Organisation (DAO). A DAO is an organisation which is based on rules encoded as a computer programme that is transparent and only controlled by the organisation members. The legal status of DAOs is however currently unclear. Naturally due to its decentralised structure, DAOs usually do not have a detectable seat. Therefore, the determination of the corporate law applicable to a DAO is dependent on the specifics of the DAO and, in most cases, will require in-depth analyses.