FinTech

Crypto and Insolvency Brochure

Issue link: https://digital.shearman.com/i/1479657

Contents of this Issue

Navigation

Page 14 of 47

Determining Jurisdiction in the U.K. Cryptoassets & Insolvency 15 Determining the law applicable to cryptoassets and transactions involving them will be an important consideration for any party seeking to submit a claim to such assets. However, linking a cryptoasset transaction to a particular applicable law is problematic—cryptoassets are not tangible and due to their decentralized nature operate with customers through software in different jurisdictions minute-by-minute. It is notable that similar issues concerning the law(s) applicable to de-materialized securities—a much more established and ubiquitous type of financial asset than cryptoassets—remain uncertain and controversial in English law. A party might seek to argue that cryptoassets are located wherever the wallets containing them are located. In the case of software or hardware-based wallets (i.e., those which physically store the relevant keys on a computer or other device in a party's possession), this may be the location of the relevant device. For a hot wallet, provided by a third party via the internet, it could be the location at which the wallets are hosted (i.e., the site of the relevant servers). Alternatively, a party may assert that the Hague PRIMA Convention applies, such that (at least certain) cryptoassets should be treated as securities and any cross-border transaction in relation to them be governed by the laws of the jurisdiction where the intermediary maintaining an account to which the securities are credited is located. The Law Tech Delivery Panel has suggested that the following factors might be particularly relevant in determining whether English and Welsh law governs the proprietary aspects of dealings in cryptoassets (although it does not provide guidance as to the significance of each factor and/or whether these should be considered as standalone or collective): i. whether any relevant "off-chain" asset is located in England and Wales; ii. whether there is any centralized control in England and Wales; iii. whether a particular cryptoasset is controlled by a particular participant in England and Wales (because a private key is stored there); iv. whether the law applicable to the relevant transfer (perhaps by reason of the parties' choice) is English law. On the other hand, the UKJT has stated "there is very little reason to try to allocate a location to an asset which is specifically designed to have none because it is wholly decentralized." Without a legally binding global framework, this legal uncertainty will apply across jurisdictions, meaning complex and contentious cross-border issues are likely to feature in many cryptoasset insolvencies. Ion Science Ltd v. Persons Unknown (2021) and Danisz v. Persons Unknown (2022) English Courts have traditionally regarded the lex situs (i.e., the location of an asset for the purposes of determining the law governing proprietary rights associated with it) to be the place where the asset is located. However, in Ion Science (discussed further in Appendix 2), the Court held that the lex situs for a cryptoasset is the place where the person or entity that owns the asset is domiciled. More recently, in the interim proprietary injunction application in Danisz, the Court approved several prior decisions on cryptocurrency including its status as a form of property and the lex situs being the domicile of its owner. With little sign of dissent from the English courts in such interim judgments, the body of cases is not only growing but also (more importantly) demonstrates an aligned approach when determining such propositions.

Articles in this issue

view archives of FinTech - Crypto and Insolvency Brochure