If blockchain transactions are international a priori, how do you choose the law applicable to them? Does Philippine blockchain law apply to VHCEx deposits and withdrawals?
Let’s say the relevant authorities acknowledge their jurisdiction over the dispute arising out of a blockchain transaction and managed to identify the persons in question. Then, the court is to determine the law applicable to the transaction.
Keeping in mind so many if’s with regard to such a dispute, it would be reasonable to assume that such a dispute usually arises out of a contract made effective in the real world. In this case, the chosen law is expressed and agreed upon by the parties in the agreement. It is of the essence, of course, to choose the law of a state that recognizes blockchain transactions and is more blockchain-friendly in general.
Given that all VHCEx transactions are to be considered the subject to Philippine law which, in turn, regulates both blockchain p2p transactions and ICO tokens we can arrive at the conclusion that all possible disputes arising out of these transactions are to be decided in Philippine courts with the Philippine law being applicable to those disputes.
The things are getting more complicated when the parties fail to determine the applicable law or choose the law which simply has blockchain transactions fallen out of scope, thus making the choice of law invalid. What fallback rule is correct then, when we’re speaking about international blockchain transactions?
Here, we’re stuck with the impossibility to define the geographical location of a transaction. Should we take the law of the country of the location of the mining pool that mined the block where the transaction was listed? Or maybe the country of the sender, or recipient? What if both jurisdictions do not deal with blockchain transactions in courts?
The most on-the-surface answer to this appears to be the application of lex fori. This paradigm would not refer to the location of the transaction but would apply the law of the jurisdiction that has at least some connection with the question of the case.
The challenge to establish a direct or the closest connection to the case is not new, as it is also related to the determination of the law applicable to securities held with an intermediary. In the search for the help with determining the applicable law to blockchain transactions, we need to resort to the help of the Hague Convention on the Law Applicable to Certain Rights in Respect of Securities Held with an Intermediary. One might argue that this Convention fully applies to blockchain transactions related tokenized securities, as Art. 1 (1)(a) states that the term ‘securities’ includes all financial instruments or assets (other than cash). If we accept this notion, we can say that the Convention is actually the first international legally binding document that takes into account all aspects of flow of securities in dematerialized environment.
With regard to the choice of law issue, the Convention provides for the task of court to seek for an objective connection of the law of a state where the direct intermediary of the account holder maintains his or her securities account as a fallback rule.
One more important feature of the Convention is that allows for a choice of a designated law not to the whole dispute and the rights arising out of the securities in question but also to the thirds of the third parties obtaining direct or indirect relation to these securities. It also sets the order of priority of creditors to a tokenized security. This is especially important to tokenized securities as their ownership is always fractional. However, in relation to the tokenized securities we usually encounter in practice, this order is sought to be unnecessary, as the tokenholders have equal rights when a sale of the security takes place.
Unfortunately, application of the conflict-of-law system finds the best suitability in private blockchains, since they always have people in charge of the administration of the blockchain - the obligation completely similar to those of securities intermediaries. For public blockchains, however, the implementation of this system is more of a rare thing to encounter than a commonplace. Luckily, when business entities conclude contracts with transactions taking place in public blockchains, they do choose the law most of the time.