Andrea Bonomi, Matthias Lehmann, and Shaheeza Lalani (eds), Blockchain and Private International
Law (Brill, 2023) pp. 494-528.

Chapter 18

Blockchain-based Negotiable Instruments:
with Particular Reference to Bills of Lading andInvestment Securities
Koji Takahashi

1

Meaning of “Blockchain-based Negotiable Instruments”

This paper will consider what the choice-of-law rules should be for issues
pertaining to blockchain-based negotiable instruments.
The concept of “negotiable instruments” refers to instruments representing relative rights (namely, entitlements that may be asserted against a certain
person) such as rights to claim the performance of obligations and corporate
membership rights. Which instruments fall under this description depends on
the applicable law. It covers, for example, “Wertpapier,” defined by the Swiss
Code of Obligations (Obligationenrecht) as any document with which a rightis linked in such a way that it can neither be asserted nor transferred to others
without the document (Article 965). The concept of “negotiable instruments”
as used in this paper is broader than the same expression as ordinarily understood in English law. Under the latter, “negotiable instruments” ordinarilymean the instruments which allow a bona fide transferee to acquire a better
title than what the transferor had. In this narrow sense, bills of lading are notnegotiable instruments under English law1 although they are under German
and Japanese law.2 As this paper will examine negotiable instruments in thewider sense,3 it will cover bills of lading and investment securities within its
scope of analysis.

1 The Law Commission, Digital assets: electronic trade documents: A consultation paper (Consultation Paper 254) (Crown 2021), para. 3.15.
2 § 932 of the German Civil Code (Bürgerliches Gesetzbuch (BGB); Articles 520–5, 520–15 andArticle 520–20 of the Japanese Civil Code.
3 It is also acknowledged in England that there are broad and narrow senses of negotiability:
Law Commission (n 1), para. 3.9.

Koninklijke Brill NV, Leiden, 2023 | DOI:10.1163/9789004514850_020
This is an open access chapter distributed under the terms of the CC BY-NC-ND 4.0 license.

Blockchain-based Negotiable Instruments

495

The concept of “blockchain-based negotiable instruments” refers to tokens
issued on a blockchain which are meant to serve as negotiable instruments.
This paper’s main focus is on blockchain-based bills of lading and blockchain-based investment securities (called crypto-securities). This paper will
not make any particular mention of promissory notes, bills of exchange or
cheques since no notable trend for issuing them on blockchains is observed asof the time of writing (August 2021), but they are not excluded from its scope.
Intrinsic or “native” tokens (namely, tokens of self-anchored value) such as
cryptocurrencies are outside the scope of this paper4 since they do not represent any relative rights.

2

Social Significance and Legal Hurdle

Negotiable instruments are useful to facilitate the assignment (either anoutright transfer or an assignment by way of pledging) of the rights they represent. The assignment of such rights would, without negotiable instruments,
have to follow cumbersome steps, including steps necessary for securing theerga omnes effect (the effect against the whole world). Negotiable instruments
could, through their possession and transfer, simplify the steps for assignment.
Negotiable instruments in paper form are a clumsy tool as they are costly
and time-consuming to handle and there is a risk of loss. The clumsiness could
be reduced by digitization. There are, however, technological and legal hurdles.
The technological hurdle is how to guarantee the uniqueness of a negotiable instrument in an electronic environment. A negotiable instrument must
be a unique object to ensure that only one person is entitled to assert the right
represented by it. But the nature of an electronic record is such that it can beeasily copied to create indistinguishable duplicates. Prior to the arrival of theblockchain technology or distributed ledger technology (DLT), the uniquenessof an electronic form of negotiable instrument could only be guaranteed bymeans of a central register. In this architecture, the trusted intermediary who
maintains the register decides which records are true. Now, with the blockchain technology, it has become possible for the first time in history to reacha consensus on a single true version of electronic records on a decentralised
platform. A token on a blockchain is subject to the exclusive control of theholder of the corresponding private key, with the result that no two persons
could claim to hold the same token. In this architecture, the uniqueness of an

4 Except to the extent they shed a useful light on analysis. See section 5.6.3 infra.

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Takahashi

electronic record can be guaranteed without the need to put trust in intermediaries. Like paper-based negotiable instruments, blockchain-based negotiable instruments may be traded on a peer-to-peer basis. Tokens serving the roleof negotiable instruments will lay the foundation for a vital aspect of the token
economy.
The remaining hurdle to the digitization of negotiable instruments is theabsence of a good legal infrastructure. Unless the applicable law recognises
blockchain-based tokens as negotiable instruments, they cannot be handledwith confidence. Even if the parties to a transfer of such tokens have agreed
to treat them as being equivalent to paper-based negotiable instruments, itwould not be sufficient since third parties are not bound by their agreement.
Whether the token economy will fly or not, therefore, depends much on thedevelopment of a good legal infrastructure. The latter concerns both substantive rules and choice-of-law rules. In what follows, this paper will first examine
the emerging substantive rules for blockchain-based negotiable instruments.
The remainder of this paper will then turn to the choice-of-law question.

3

Emerging Substantive Rules

3.1
Bills of Lading
Bills of lading are negotiable instruments, issued by the carrier of goods, which
represent the right to claim the delivery of goods from the carrier. They are thebackbone of seaborne trade in goods.
Since paper-based bills of lading are slow to be transmitted, they often do
not arrive at the port of destination until after the goods have arrived. Consequently, the goods often have to be delivered without the presentation of billsof lading, which in turn can cause a myriad of problems. As such difficulties
could be avoided with the use of electronic bills of lading, there were a number of attempts to digitise in the past decades. Prior to the invention of theblockchain technology, a central register was the only conceivable architecture
for digitization. Due to its design as a closed system, a central-register bill of
lading does not work seamlessly unless all the parties who have stakes become
registered members. This membership requirement has been a major obstacle
to the spread of electronic bills of lading. A breakthrough may, however, be in
the offing with the advent of blockchain, which has made it possible to issue
electronic bills of lading on a platform for the use of which no permission isrequired.5
5 See Koji Takahashi, “Electronic bill of lading on blockchain” (Blockchain, Cryptocurrency,
Crypto-asset and the Law, 18 October 2015) <https://bit.ly/3t3Hudo>.

Blockchain-based Negotiable Instruments

497

A paper-based bill of lading would be a mere piece of paper in the absenceof recognition that it is legally a bill of lading.6 Likewise, an electronic billof lading would be a mere electronic record unless there is recognition that
it is legally equivalent to a paper bill of lading. An agreement between the
carrier and one of the cargo interests to treat an electronic record as equivalent to a paper bill of lading would not be sufficient since it is not binding onthird parties.7 The past projects of electronic bills of lading have been beset by
the lack of legal recognition, which has resulted in the reluctance of banks toaccept electronic bills of lading as adequate collateral. In most legal systems,
the lack of legislative support continues to this day. Under Japanese law, forexample, the provision on the creation of bills of lading (Article 758(1) of theCommercial Code) is silent on the possibility of using electronic records incontrast to the provision on seawaybills8 (Article 770(3) of the same Code)which expressly acknowledges the possibility of providing an electronic
record. Recently, however, some States have reformed their laws to give recognition to electronic bills of lading, including those based on blockchains.
Some of such legal systems, as well as a few international instruments, will be
examined below.
3.1.1
German Law
German law recognises a qualified electronic record as a bill of lading. When
its Commercial Code (Handelsgesetzbuch) was reformed in 2013, provisions
on electronic bills of lading were introduced in § 516. Paragraph 2 of that
section provides that an electronic record which fulfils the same functions
as a bill of lading is equivalent to a bill of lading, provided that it is ensured
that the authenticity and integrity of the record are maintained. Paragraph
3 empowers the Ministry of Justice and Consumer Protection to issue an
ordinance (Rechtsverordnung) to regulate the details of an electronic bill of
lading. The Ministerial ordinance has not yet been issued but that should notstop the courts from recognising an electronic record as a bill of lading if it

6 This does not mean that a statutory definition of “bill of lading” is necessary for legal recognition. Under English law, to determine whether a document is a bill of lading, a court willconsider certain characteristics of the document, including whether it is titled “bill of lading”
and whether it contains information ordinarily found in a bill of lading. Law Commission(n 1), para. 3.32.
7 For a view to the same effect, see id., para. 2.37.
8 Seawaybills, unlike bills of lading, are non-negotiable instruments since they do not represent the right to claim the delivery of goods but are mere evidence of the receipt of goods andthe terms of a carriage contract.

498

Takahashimeets the requirements as provided in paragraph 2.9 As these requirements
are expressed in technology agnostic language, blockchain-based tokens are
not excluded from the qualified electronic records.10 The electronic records
recognised as bills of lading are subject to the provisions applicable to paperbased bills of lading (§§ 929 et seq. of the Civil Code (Bürgerliches Gesetzbuch)), including the provision permitting bona fide acquisition (§ 932).11
3.1.2
Swiss Law
Swiss law allows a bill of lading to be issued in the form of a blockchain-based
token. Switzerland enacted in 2020 the Federal Act on the Adaptation of Federal Law to Developments in Distributed Ledger Technology (Bundesgesetz
zur Anpassung des Bundesrechts an Entwicklungen der Technik verteilter
elektronischer Register) (hereinafter “DLT Act”). The Act made a number ofchanges to the Code of Obligations with effect from 1 February 2021.
Of particular relevance to bills of lading is Article 1153a. It was inserted by
the DLT Act and provides that documents of title to goods such as bills of lading may be issued in the form of “ledger-based securities”12 (Registerwertrechte,
droits-valeurs inscrits) (paragraph 1). The “ledger-based securities” are definedby Article 973d, also inserted by the DLT Act, as a right which, in accordancewith an agreement between the parties, is registered in a “securities ledger”(Wertrechteregister, registre de droits-valeurs) and may be exercised and transferred to others only via the securities ledger (paragraph 1). The technicalrequirements of a securities ledger are laid down (paragraph 2), including
the requirements that its integrity is protected against unauthorised changes
and that creditors must be able to view the ledger entries without the involvement of a third party. Although the Code of Obligation does not use the words“blockchain” or “distributed ledger,” the official explanatory note for the DLT
Act cites some examples of public and private blockchains which the Federal

9

10
11
12

David Saive, Das elektronische Konnossement: Umsetzung der Anforderungen aus § 516
Abs. 2 HGB durch funktionsäquivalente Blockchain-Token (Mohr Siebeck 2020), 64. For acontrary view, see Clyde & Co. LLP, The legal status of electronic bills of lading: A report for
the ICC Banking Commission (ICC Banking 2018), 37 [Tim Schommer].
On one interpretation, the use of a private blockchain is required to fulfil these requirements: Saive (n 9), 190.
Id., 79.
This is the expression used in the unofficial English translation of the Code publishedat the official publication site for Swiss federal law (https://www.fedlex.admin.ch/eli/cc/27/317_321_377/en; Federal Act on the Amendment of the Swiss Civil Code (Part Five:The Code of Obligations) of 30 March 1911, SR 220) (“Swiss Code of Obligations”).

Blockchain-based Negotiable Instruments

499

Council believes would satisfy the requirement of integrity.13 There is, therefore, no doubt that blockchain-based negotiable instruments may qualify as“ledger-based securities.”
The DLT Act also inserted in the Code of Obligations other provisions
on various aspects of ledger-based securities, which would also be applicable to blockchain-based bills of lading. These include provisions permitting
bona fide acquisition (Article 973e(3)) and provisions detailing the procedure
for a cancellation declaration (Kraftloserklärung) (Article 973h). The latter
would be useful where the private key for a blockchain-based bill of lading
is lost.
The official explanatory note for the DLT Act states that Article 1153a
is in line with the Rotterdam Rules (United Nations Convention on Contracts for the International Carriage of Goods Wholly or Partly by Sea), which
Switzerland has signed but not yet ratified.14 We will now turn to thisConvention.
3.1.3
Rotterdam Rules
The Rotterdam Rules is an international convention adopted by the United
Nations in 2008. Though not yet in force at the time of writing (August 2021),
it embraces “negotiable electronic transport record” (Articles 8, 50 and 51(4)),
a concept which covers electronic bills of lading. One of the underlying principles of the Rotterdam Rules is technological neutrality: the law should neither require nor assume the adoption of a particular technology. It follows
that blockchain-based tokens are not excluded a priori from the concept of“negotiable electronic transport record.” But only an electronic record that
fulfils the prescribed requirements (laid down in Article 9) may qualify as
such. These requirements are a manifestation of the principle of functional
equivalence, a principle which treats only an electronic record fulfilling theessential functions of a paper document as legally equivalent to the latter. If
these requirements are satisfied,15 blockchain-based bills of lading are admissible under the Rotterdam Rules.

13

14
15

Botschaft zum Bundesgesetz zur Anpassung des Bundesrechts an Entwicklungen derTechnik verteilter elektronischer Register (27 November 2019), BBI 2020 233, (The Act
entered into force 1 February 2021, RO 2021 33), 281.
Id., 291.
For an analysis, see Koji Takahashi, “Blockchain Technology and Electronic Bills of Lading”(2016) 22 Journal of International Maritime Law 202, 207.

500

Takahashi

3.1.4

UNCITRAL Model Law on Electronic Transferable Records and the
National Legislation Based on It
In 2017, the UNCITRAL (United Nations Commission on International Trade
Law) adopted the Model Law on Electronic Transferable Records. It lays down
the attributes which an electronic record needs to possess for it to be treatedas legally equivalent to the corresponding “transferable document.” Defined asa document that entitles the holder to claim the performance of the obligation
indicated in it and to transfer the right to performance through its transfer(Article 2), a “transferable document” is broadly synonymous with a paperbased “negotiable instrument” in the sense used in this paper. Bills of lading
are covered by this concept whereas investment securities, though logicallycovered, are excluded (Article 1(3)). The Model Law adheres to the principles oftechnology neutrality and functional equivalence. Accordingly, the attributesof an electronic record that it lays down reflects the function of a “transferable
document.” If these are satisfied,16 a blockchain-based bill of lading is deemed
to be legally equivalent to a paper-based bill of lading.
In describing some of these attributes, the Model Law requires the use of areliable method to establish the exclusive control of an electronic record that
replicates a transferable document (Articles 10(1)(b)(i)(ii) and 11(1)(a)). It lists
a number of circumstances by reference to which the reliability of a method
must be evaluated, including the existence of a declaration by an accreditationbody (Article 12(a)(vi)), but it leaves the details of accreditation to nationallaws. To date, the Model Law has served as the basis for legislation in a few
jurisdictions including Bahrain17 and Singapore.18 The legislation of these twojurisdictions gives some details as to the procedure, requisites, and effects ofaccreditation.19

16

17

18
19

For an analysis, see ೏ᖯ‫׹ݛ‬ψ‫ڶ‬㧗ဳࠦ圸ሽ՗֏圸圩坋圸垗垮垄坰垂坨垹垴‫شܓ‬圸ऄऱᓰᠲԫํ๛ဳࠦ圲ʳ UNCITRAL 垣垈垬ऄ圵㷂‫ؾ‬圡地ԫωʳ in (2020) 5
㧺Ꮎ࠷֧ऄ䝤㢸‫ڣ‬໴ʳ24, 29–36 (Koji Takahashi, “Legal Issues Arising from the Use of
Blockchains for the Dematerialization of Negotiable Instruments: with a Particular Focus
on Bills of Lading and the UNCITRAL Model Law” (2020) 5 Yearbook of the Japanese Association of International Business Law 24, 29–36).
The Law No. 55 of 2018 with Respect to Electronic Transferable Records (with effect from
1 February 2019) (“Bahraini legislation”). For an analysis, see Koji Takahashi, “Bahraini legislation based on the UNCITRAL MLETR” (Blockchain, Cryptocurrency, Crypto-assets andthe Law, 21 March 2019) <https://bit.ly/3mUpy3w>.
Part IIA of the Singaporean Electronic Transaction Act (with effect from 19 March 2021)(“Singapore legislation”).
Articles 15 to 17 of the Bahraini legislation (n 17); Articles 16O(2) and 16Q of the Singapore
legislation (n 18).

Blockchain-based Negotiable Instruments

501

3.1.5
English Law
At the time of writing (August 2021), English law does not give recognition
to electronic bills of lading. The Law Commission has issued a consultation
paper20 which contains a draft bill to make provision for trade documents
in electronic form to have the same effect as trade documents in paper form.
The consultation paper makes a number of remarks on blockchains and DLT. If
the proposed bill is enacted, qualified electronic bills of lading would have thesame effect as paper bills of lading. It would entail that a person who becomesthe lawful holder of an electronic bill of lading has transferred to and vested
in him all rights of suit under the contract of carriage (§ 2(1) of the Carriage ofGoods by Sea Act 1992). In contrast to German and Swiss law, examined in sections 3.1.1 and 3.1.2 above, a bona fide transferee of an electronic bill of lading
would not acquire a better title than the transferor since paper bills of lading
are generally subject to the nemo dat principle21 under English law.22
3.2
Investment Securities
Investment securities include company shares and bonds. When issued on a
blockchain, they are referred to by various names such as crypto-securities,
tokenised securities, and security tokens. This paper will call them cryptosecurities unless the context compels other appellations.23
Investors today typically hold dematerialised securities through a chainof custodians. They are exposed to custody risks and may, depending on theapplicable law,24 be prevented from exercising the rights which investors
directly holding shares would be entitled to.25 Since the blockchain technology
20
21

22
23

24

25

Law Commission (n 1), Appendix 4.
The principle of nemo dat quod non habet (no one can give what he has not got) meansthat a person who does not own property cannot confer it on another: Jonathan Law andElizabeth A. Martin (eds), Dictionary of Law (6th edn, Oxford: OUP 2006), 354.
Id., para. 3.15. See also the text accompanying (n 1).
For example, in discussing Swiss law, the phrase “ledger-based securities” will be used as
it is an English expression adopted in the unofficial translation published at the official
site (See (n 12)), though that phrase covers, not just crypto-securities (as will be noted in
section 3.2.2 infra) but also other blockchain-based negotiable instruments such as billsof lading (as noted in section 3.1.2 supra).
Cf. In some legal systems, intermediaries standing between an investor and the issuer
have no legal significance and the investor is treated as the direct owner of the securities:
Roy Goode et al., Explanatory Report of the Hague Securities Convention (2nd edn, HCCH
2017), para. Int-22.
See, for example, the English case of Eckerle v Wickeder [2013] EWHC 68, in which theinvestors holding shares through a chain of intermediaries were denied entitlement to a
remedy – either to have a shareholder resolution cancelled or to receive an order for thepurchase of their shares - which would be available to investors directly holding shares.

502

Takahashi

allows for disintermediation, crypto-securities, like paper-based securities,
may be held directly by the investors. A direct link between the issuer and theinvestors enables the issuer to identify the investors in real time and enables
the investors to exercise their rights straightforwardly. In addition, if combinedwith smart contract functionality, a complex capital structure of a company
can be administered automatically, without human intervention.26
Crypto-securities would be nothing but an electronic record unless they
are recognised as legally equivalent to paper-based securities. An agreement
between the issuer and an investor to treat them as equivalent to paper-based
securities would not be sufficient since it is not binding on third parties. In
some legal systems, crypto-securities may be recognised as legally equivalent
to paper-based securities based on the interpretation of the existing law. In
Austria, for example, the practice of issuing crypto-securities is premised on
the understanding that they are securities under the existing law.27 But legal
uncertainty is likely to set in where there is no specific legislation. Thus in
Japan, opinion is divided over the conditions under which a negotiable instrument may be created. A leading opinion considers that there must at least
be customary law authorising the creation of a negotiable instrument.28 This
hurdle would be high for blockchain-based negotiable instruments since thepractice of using blockchains for the purpose of emulating negotiable instruments is as yet far from established. Recently, a few States have introduced
legislation that recognises crypto-securities. Three such legal systems will be
examined below.
3.2.1
Liechtenstein Law
In Liechtenstein, the Token and TT Service Provider Act (Token- und VTDienstleister-Gesetz: TVTG) entered into effect on 1 January 2020. It introduced

26
27

28

There are also other disadvantages investors holding shares through intermediaries may
suffer: see Eva Micheler, “Intermediated securities from the perspective of investors: problems, quick fixes and long-term solutions,” in Louise Gullifer and Jennifer Payne (eds),
Intermediation and Beyond (Oxford: Hart Publishing 2020), 1, 3.
Travis Laster & Marcel Rosner, “Distributed Stock Ledgers and Delaware Law” (2018) 73
The Business Lawyer 319, 331.
The Tokenizer, “The Security Token RegRadar Report” (The Tokenizer, July 2021), 57 [Oliver
Völkel] <https://bit.ly/3yBR6xa> accessed 1 June 2022. For a detailed analysis, see Oliver
Völkel, „Initial Coin Offerings aus kapitalmarktrechtlicher Sicht“ (2017) Zeitschrift fürEnergie und Technikrecht 03/2017 103, 105–106.
Noted in ‫ءګ‬एߊʳ& ࡿմ‫ݛ‬ᖫψ坣坼垄垉垸垉垹坰垴圵圮圎地ωin ⅔֚՗ʳ(ed.)όᄆ㢆ᇷ㶷圸ऄऱࢤᔆ圲㨗೭ύʳ(2021) 1611 ८ᘜ೸ࠃ‫ࠏܒ‬ʳ104, 111 (Haruo Narimotoand Hiroki Iwai, “Regarding Asset Tokens,” in Takane Hori (ed), Legal Nature and Practiceof Crypto Assets (2021) 1611 Financial and Commercial Case Law 104, 111).

Blockchain-based Negotiable Instruments503

the notion of token defined as a record on a TT (trustworthy technologies)
system which represents claims, membership rights or other absolute or relative rights (Article 2(1)(c)). It defines the trustworthy technologies (vertrauenswürdige Technologien: VT) in technology neutral language (Article 2(1)(a))
with the blockchain technology or DLT primarily in mind.29 The TVTG provides
that disposition of a token results in the disposition of the right represented byit (Article 7(1)). The Act also provides that the disposition of a token requires
the transfer of the token, the agreement between the transferor and the transferee, and the transferor’s entitlement to dispose of it (Article 6(2)). According
to the Act, the holder of the TT Key, which is meant to be the private key for a
blockchain-based token,30 is presumed to be the person entitled to dispose of
the token (Article 5(1)). On that basis, the Act permits bona fide acquisitions(Erwerb kraft guten Glaubens) (Article 9) and the release of obligors by bonafide performance (Befreiungswirkung) (Article 8(2)). The Act further lays down
the procedure for a cancellation declaration (Kraftloserklärung) of tokens incase of loss of a TT Key (Article 10).
3.2.2
Swiss Law
In Switzerland, the DLT Act, examined in section 3.1.2 above, amended Article622(1) of the Code of Obligations. The latter now provides that company shares
may be issued as “ledger-based securities” if the company’s articles of association so stipulate. As a result, it is now possible to issue blockchain-based
shares. The provisions inserted in the Code of Obligations which concern various aspects of ledger-based securities, seen in section 3.1.2 above, would also
be applicable to blockchain-based shares.
3.2.3
German Law
In Germany, the Act on Electronic Securities (Gesetz über elektronische
Wertpapiere: eWpG) was enacted in 2021. For the time being, its application islimited to bearer bonds (§ 1), though it may eventually be extended to other securities.31 It provides that securities may be issued as “electronic securities” (elektronisches Wertpapier) by effecting an entry in an “electronic securities register”
29

30
31

See section 2.5 of the Report and Application of the Government to the Parliament of the
Principality of Liechtenstein Concerning the Creation of a Law on Tokens and TT Service
Providers (Tokens and TT Service Provider Act; TVTG) and the Amendment of Other Laws
(No. 54/2019).
Id., 2.2.1.
Begründung zum Regierungsentwurf des Gesetzes zur Einführung von elektronischen
Wertpapieren, BT-Drucksache 19/26925, 24.02.2021, 38 <https://dserver.bundestag.de/btd/19/269/1926925.pdf>.

504

Takahashi(elektronisches Wertpapierregister) (§ 2(1)). It also provides that electronic
securities generally have the same legal effect as paper securities (§ 2(1)). The
concept of “electronic securities register” covers both central register (zentrale
Register) and crypto-securities register (Kryptowertpapierregister) (§ 4(1)). It
is further provided that a crypto-securities register must be kept on a forgery-proof recording system in which the data is logged in time sequence andsaved against unauthorised deletion and subsequent changes (§ 16(1)). This
provision, though using a technology-neutral expression, clearly envisages
blockchains. The eWpG also contains provisions on the transfer of electronic
securities (§ 25) and their bona fide acquisition (§ 26).

4Emerging Choice-of-Law Rules

In the foregoing section (section 3), we have examined examples of legislation
on substantive rules which give recognition to blockchain-based negotiable
instruments. We will now turn our attention to choice-of-law rules.
There are hardly any tailor-made choice-of-law rules for blockchain-basednegotiable instruments.32 The Liechtenstein Token and TT Service Provider
Act, examined in section 3.2.1 above, only contains what may be read as unilateral choice-of-law rules.33 Switzerland and Germany have, however, recently

32

33

The proposed EU Regulation on the law applicable to the third-party effects of assignments of claims (Proposal for a Regulation of the European Parliament and of theCouncil on the law applicable to the third-party effects of assignments of claims, [2018]
COM/2018/096 final, 2018/044 (COD)) contains, in the version amended by the Council
on 28 May 2021 (Council of the European Union, “Proposal for a Regulation of the European Parliament and of the Council on the law applicable to the third-party effects ofassignments of claims - General approach (9050/21)” (CEU, 28 May 2021) <https://data.consilium.europa.eu/doc/document/ST-9050-2021-INIT/en/pdf>), a choice-of-law rule
which provides that the law applicable to the assigned claim governs the third-party
effects of the assignment of “claims arising out of crypto assets.” Id., Article 4(2)(ba).
Financial instruments and electronic money are excluded from this rule. It is not clear
whether the concept “claims arising out of crypto assets” covers claims represented by
crypto assets serving as blockchain-based negotiable instruments. It remains to be seen
whether this proposed rule will make its way into the final text.
Tokens and TT Service Provider Act (n 29), Article 3(2) provides that the chapter titled“civil law foundation (Zivilrechtliche Grundlagen)” of the Act is applicable where tokens
are generated or issued by a TT Service Provider having its seat or domicile in Liechtenstein or where the parties transacting tokens expressly declare its provisions to be applicable.

Blockchain-based Negotiable Instruments

505

introduced in their legislation choice-of-law rules applicable to blockchainbased negotiable instruments. These will be examined below.
4.1
Swiss Law
In Switzerland, the DLT Act, examined in sections 3.1.2 and 3.2.2 above,
amended the Federal Act on Private International Law (Bundesgesetz überdas Internationale Privatrecht) with effect from 1 February 2021. The amendment inserted Article 145a, according to which whether a claim (Forderung)is represented by a negotiable instrument in paper or an equivalent form isdetermined by the law designated in the instrument or, failing such a designation, by the law of the State where the issuer has its seat or, in its absence, ishabitually resident (paragraph 1). The same rules apply to documents of title
to goods such as bills of lading (Article 106(1)) on the rationale that the rightto claim the delivery of goods is also a claim (Forderung).34 Blockchain-based
bills of lading would be a negotiable instrument in a form equivalent to paper
for the purpose of these rules. On the other hand, Article 145a has no application to the instruments representing company shares. It is assumed35 that thelaw applicable to the company (lex societatis) determines whether shares canbe represented by an instrument and to what extent the transfer of the instrument entails the assignment of the shares.
If the legal system specified by Article 145a(1) links the assignment of a claim
to the transfer of the negotiable instrument by which it is represented, the nextquestion that will arise is how the instrument is transferred. According to theofficial explanatory note for the DLT Act,36 this question is governed by thesame law as specified by Article 145a(1) if the instrument is in electronic form.
If the instrument is in paper form (physischer Titel), that issue is subject to thelaw of the place where it is located (lex cartae sitae) (Article 145a(2) and, withrespect to documents of title to goods, Article 106(2)). The Federal Council’s
DLT Report,37 which laid the groundwork for the DLT Act, states that the lex
cartae sitae principle has no application where the instrument is recorded ona distributed ledger as its situs is difficult to be envisioned.38

34
35
36
37

38

The Botschaft (n 13), 298.
Id., 299.
Id., 300.
Swiss Federal Council, “Legal framework for distributed ledger technology and blockchain
in Switzerland” (The Federal Council, 14 December 2018) <https://www.newsd.admin.ch/
newsd/message/attachments/55153.pdf> (hereafter “Federal Council’s DLT Report”).
Id., para. 5.3.3.6.

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The same report observes that in most cases a negotiable instrument will
designate a legal system in its terms and conditions.39 The law so designatedwill usually be the same as the law governing the claim represented by the
instrument, though these two laws do not necessarily coincide with eachother. The difference may sometimes surface where the instrument represents
a claim which arises prior to the creation of the instrument. Thus, it could happen, though infrequently, that a bill of lading contains a choice-of-law clausein favour of one legal system while the contract of carriage contains a choiceof-law clause in favour of another legal system.
The law designated by a negotiable instrument will usually be the sameas the law specified in the “registration agreement (Registrierungsvereinbarung),” though they may not, on a strict analysis, necessarily be the same. The
Code of Obligations provides that the transfer of ledger-based securities is subject to the stipulations of the registration agreement (Art. 973f) and that theagreement must be recorded in the securities ledger or in a linked accompanying database (Art. 973d(2)). According to the official explanatory note for the
DLT Act,40 the registration agreement is an agreement to assert or transfer aright only through a tamper-resistant securities ledger. It is further explainedthat this agreement may be made by means of terms and conditions for theissuance of ledger-based securities.
As regards the pledging of a claim, Article 105, rather than Article 145a,
is applicable.41 The DLT Act extended the application of that Article to theblockchain-based negotiable instruments by inserting therein a provision saying that the rule for the pledging of claims (Forderungen) is also applicable tothe pledging of other rights, provided they are represented by a book-entry
security (Wertrecht, droit-valeur), a paper negotiable instrument (Wertpapier,papier-valeur) or an equivalent instrument (Article 105(2)).42 The rule referred
to in this provision states that in the absence of a choice of law by the parties,43
the law of the place of the pledgee’s habitual residence governs the pledging
of claims. It is explained in a commentary that this connecting factor was
adopted since a pledgee is considered to be an economically decisive person.44
39
40
41
42
43

44

Id., para. 5.3.3.2.
The Botschaft (n 13), 276.
Id., 300.
Id., 297.
The choice of law made by the parties cannot be asserted against third parties (Article
105(1)), though third parties may accept the chosen law if it would work to their advantage: Andreas Bucher (ed), Commentaire Romand: Loi sur le droit international privé –Convention de Lugano (Helbing & Lichtenhahn, 2011), 854 [by Louis Gaillard].
Id., 855.

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507

A contrast may be made with the pledging of the other rights, which is referredto the law applicable to the right in question (Article 105(2)). According to
a commentary, such other rights include the rights of authors and patents,
hereditary shares, and land titles.45 The same commentary states that the legislature considered that these other rights would not usually be pledged inbulk.46 In contradistinction, the legislature apparently considered that rights
represented by negotiable instruments would more often be pledged in bulk.
4.2
German Law
The Act on Electronic Securities (eWpG), examined in section 3.2.3 above,
contains choice-of-law rules in § 32, which refers to the law of the State supervising the register-keeping entity (registerführende Stelle) in whose electronic
securities register (elektronisches Wertpapierregister) the instrument is entered(paragraph 1). According to an official explanatory note,47 the supervising
State was chosen as the connecting factor because the general “lex rei sitae”
principle (enshrined in Article 43(1) of the Introductory Act to the German
Civil Code (Einführungsgesetz zum Bürgerlichen Gesetzbuch: EGBGB)), which
would point to the law of the place of the certificate (“lex cartae sitae”) if the
securities were in paper form, would make no sense if the instrument is inelectronic form, and also because identifying the place of an electronic register
is difficult.
After specifying the primary connecting factor in paragraph 1, § 32 goeson to provide subsidiary connecting factors in paragraph 2. Thus, in the cases
where the register-keeping entity is not under the supervision of any State, §32(2) specifies the seat (Sitz) of the register-keeping entity as the connecting
factor. Again, in the cases where the seat cannot be identified, § 32(2) specifies the seat of the issuer of the electronic securities as the connecting factor.
It does not, however, offer a solution where the same register-keeping entity
comes under the supervision of more than one State.
What is somewhat puzzling about these provisions is that they presupposethat there is necessarily a register-keeping entity for the electronic securities
register. As noted in section 3.2.3 above, the concept of “electronic securities register” (elektronisches Wertpapierregister) covers both central register(zentrale Register) and crypto-securities register (Kryptowertpapierregister)(§ 4(1)). It is easy to see that there is a register-keeping entity for central registers. With respect to crypto-securities registers, the register-keeping entity is
45
46
47

Id.
Id.
Gesetzentwurf der Bundesregierung (n 31), 69.

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Takahashi

defined as someone who is designated as such by the issuer or, failing such adesignation, the issuer itself (§ 4(10) and § 16(2)). But it is also provided thatthe register-keeping entity must ensure that the register accurately reflects thecurrent legal situation at all times (§ 7(2)), which seems to imply that the register-keeping entity is technically equipped to change the register at will. Whilethat possibility may exist with private blockchains (blockchains administeredby a specific entity), it would not be possible with public blockchains (blockchains for which there is no specific entity acting as administrator). It seems
to follow that a crypto-securities register (Kryptowertpapierregister) within themeaning of this Act is necessarily a private blockchain.48

5Discussion on Choice-of-Law Rules

In the foregoing sections (sections 3 and 4), we have examined the substantive
rules and choice-of-law rules of some States applicable to blockchain-basednegotiable instruments. We will now consider what the choice-of-law rules
should be for the issues arising out of such instruments.
5.1
Architecture of Trading and Holding
As the choice of law analysis is an exercise of finding appropriate connecting
factors to localise the issues in specific jurisdictions, it would be helpful to envision the architecture of holding and trading of blockchain-based negotiable
instruments. The representation below is based on the author’s understandingof the emerging architecture and prediction towards the future for the tradingand holding of blockchain-based bills of lading and crypto-securities. There is,however, a great deal of murkiness in the emerging architecture and a lot of
uncertainty over how it will develop.

48

For a similar comment on the draft bill, see Matthias Lehmann, “Stellungnahme zum
Referentenentwurf für ein Gesetz über elektronische Wertpapiere (eWpG)” (14 September 2020), 12 <https://bit.ly/2W7iWDW>. Dominik Kloka and Georg Langheld, “Gesetz
zur Einführung von elektronischen Wertpapieren beschlossen” (Noerr Newsroom, 10
May 2021) <https://bit.ly/3kAcNJ1>, also observes the tension with the decentralization philosophy of the blockchain technology. On the other hand, Thorsten Voß, “DerRegierungsentwurf des eWpG und das Depotrecht – Ein Warnruf” (2021) 1 Zeitschrift für
das Recht der digitalen Wirtschaft 16, 18, suggests, on the assumption that public blockchains could serve as an electronic securities register, that insurance may be a solution
for curbing the risk of civil liability that the register-keeping entity may incur for failing toproperly maintain the register.

Blockchain-based Negotiable Instruments

Figure 18.1

509

Inter-operability of digital negotiable instruments
source: Loh, S.Y. (2021, March 31). Trade - Adapting to present
and future challenges, Maritime Trade Digitalisation –Electronic Bills of Lading [Webinar], Infocomm MediaDevelopment Authority of Singapore. https://www.mpa.gov.sg/web/portal/home/maritime-companies/research-development/technology-webinars

5.1.1
Bills of Lading
Lately, projects using blockchains as a solution to digitise bills of lading havesprung up. Several among them have received approval from the International
Group of P&I Clubs, an approval necessary for their insurance coverage to beextended.49 Notwithstanding the advantage of a permissionless blockchainarchitecture as noted in section 3.1 above, some of these projects appear to bemember-only systems. One of the models utilising a permissionless blockchain
is illustrated in Figure 18.1. The center of this figure shows a public blockchain,
which is necessarily permissionless since there is no specific entity to give permissions to its users. But all sensitive information could be hidden from public
view, so that the details of bills of lading such as the names of the parties andthe content of the cargo are transmitted outside the blockchain by means ofconventional methods of communication such as emails. The interface withthe blockchain may be provided by a number of commercial entities competing to offer user-friendly services.

49

The Swedish Club, “Electronic (Paperless) Trading” (The Swedish Club, 29 March 2021)<https://bit.ly/3kGUWQm>.

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Takahashi

5.1.2
Crypto-securities
Financial sectors are subject to intensive regulation to safeguard the integrityof the market and to counter money laundering. A conventional regulatory
approach relies on the existence of a specific entity which is supervised andheld accountable. There is a view that says the involvement of regulated entities is necessary even where blockchains are used to issue and trade securities.50
That would not, however, mean that crypto-securities may only be issued on
private blockchains administered by a specific entity since there are also otheractors whom the regulators may target. These include the providers of aninterface with the blockchain, wallet providers, the operators of trading platforms, the issuer of crypto-securities, and the keeper of shareholder or bondholder directories.51 Compliance with anti-money laundering rules may also
be facilitated by innovations in the area of e-identity, which does not have tobe granted by financial intermediaries but can be part of the e-government
tools.52 There is currently the practice of issuing crypto-securities on publicblockchains53 and this practice may continue in the future whether in themainstream or on the fringe.
As the blockchain technology allows for disintermediation, crypto-securities may be issued directly to investors, held by them directly without relying
on third party custodians, and traded peer-to-peer or on a defi (decentralised

50

51

52
53

Andrea Pinna and Wiebe Ruttenberg, “Distributed ledger technologies in securities
post-trading – Revolution or evolution?” (2016) European Central Bank Occasional Paper
Series 172, 23.
The directories of shareholders and bondholders may be kept in a separate databasefrom the blockchain on which crypto-tokens are issued. That database may itself takethe form of a blockchain, as acknowledged in § 81a(2) of the Final Part (Schlussabteilung) of the Liechtenstein Persons and Companies Act (Personen und Gesellschaftsrecht(PGR) vom 20. Januar 1926). It is not impossible that the same blockchain on which thecryptosecurities are issued is used as directories of shareholders and bondholders, asacknowledged by the Botschaft (n 13), 274. Whenever a blockchain is used as directoriesof shareholders or bondholders, it will necessarily be a private blockchain to avoid disclosing confidential information such as the identity of the holders: See Olivier Favre
et al., “Trends and Developments” (Schellenberg Wittmer Ltd, 17 June 2021) <https://bit.ly/2VgQ77I>.
Pinna and Ruttenberg (n 50), 30.
Oliver Völkel and Bryan Hollmann, “Tokenization in Austria” (Stadler Völkel, 2021),
2 <https://bit.ly/2ULzXmK> states that the Ethereum blockchain, a major publicblockchain, is most frequently used for the purpose of tokenization. The Bitbond, the firstof regulated crypto-securities in Germany, was offered on the Stellar blockchain, anotherexample of public blockchain (para. 7.2.1 of Bitbond, “Securities Prospectus of Bitbond
Finance GmbH, Berlin” (Bitbond, 30 January 2019) <https://www.bitbondsto.com/files/bitbond-sto-prospectus.pdf>).

Blockchain-based Negotiable Instruments

Figure 18.2

511

Issuance and trading of security tokens

finance) platform. If, however, issuers and traders wish for a high liquidity
environment to issue and trade crypto assets, they may prefer using centralised
platforms (see Figure 18.2). Centralised platforms include crypto-assets
exchanges, traditional securities exchanges, and multilateral trading facilities.
Their availability depends on the applicable regulatory regimes.
The current uncertainty over the architecture of trading and holding
crypto-securities54 is particularly acute on the side of the secondary market.
Where crypto-securities are traded on a peer-to-peer basis or on a defi platform, no intermediaries would be needed (See Figure 18.3).
Where, on the other hand, a centralised trading platform is used, thearchitecture will vary considerably. Thus, if the crypto-securities are listed
on a crypto-assets exchange or a similar trading platform, the retail investors
may directly participate in trading.55 If the crypto-securities are listed on a

54

55

Also acknowledged by the Proposal for the Regulation of the European Parliament andof the Council on a pilot regime for market infrastructures based on distributed ledger
technology, [2020] 2020/0267 (COD), Recital (3).
The Swiss DLT Act introduced, with effect from 1 August 2021, a new chapter (Ch. 4a inTitle 2) in the Financial Market Infrastructure Act (Bundesgesetz über die Finanzmarktinfrastrukturen und das Marktverhalten im Effekten- und Derivatehandel (Finanzmarktinfrastrukturgesetz, FinfraG) vom 19. Juni 2015, SR 958.1) to create a new license category
for “DLT trading facilities” (DLT-Handelssysteme) which, unlike the pre-existing trading
platforms licensed in Switzerland, allow retail investors to trade crypto-securities directly(Article 73c(1)(e)). For an analysis, see Manuel Meyer and Yves Mauchle, “Switzerland”(2021) Butterworths Journal of International Banking and Financial Law 157, 159.

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Takahashi

Figure 18.3

Trading on a distributed ledger
Source: Diagram 4 from Pinna & Ruttenberg, “Distributed
ledger technologies in securities post-trading” supranote 50, p. 31

traditional securities exchange or a multilateral trading facility (MTF), theretail investors may only be able to participate in trading through their brokers.
Some trading platforms may dispense with intermediaries for post-trading
phases (see Figure 18.4) by adopting a distributed ledger settlement process
which may be combined with a smart contract functionality. In some cases,
crypto-securities may be held by a central securities depository (CSD) withpossibly a layer of custodians between the latter and retail investors.
5.2
The Lineup of Issues for Choice of Law
Blockchain-based negotiable instruments will raise a number of issues forwhich the governing law needs to be determined. The lineup is as sketchedout below.56
To begin with, there are issues of creation and cancellation of a blockchain-based negotiable instrument. Most fundamentally, there is the issue of
1 whether a blockchain-based token may be created to serve as a negotiable

56

This lineup is not meant to be exhaustive. Additionally, there is, for example, the issueof what impact, if any, the rescission or termination of the underlying contract has on
the assignment of the right which has been effected through the transfer of a negotiable
instrument. There is also the issue, unique to a blockchain-based instrument, of what
effects a hard-fork of the blockchain has on the represented right.

Blockchain-based Negotiable Instruments

Figure 18.4

513

Post-trade clearing and settlement on a distributed ledger
Source: Diagram 3 from Pinna & Ruttenberg, “Distributed
ledger technologies in securities post-trading” supra note
50, p. 29

instrument to represent the right in question.57 This issue may be understoodto comprise a sequence of sub-issues: whether a negotiable instrument may
be created for the right in question; whether a negotiable instrument may bein electronic form; and whether the electronic negotiable instrument may
take the form of a blockchain-based token. The flip side of issue 1 is issue 2:
whether a blockchain-based negotiable instrument may, in case of loss of theprivate key, be cancelled. Where a paper-based negotiable instrument is lost,
stolen or destroyed, some legal systems provide for procedures for a cancellation declaration (Kraftloserklärung) of the instrument, so that the beneficiary could assert the right represented by it without the possession of it.58 The
57

58

See e.g., § 516(2) of the German Commercial Code (Handelsgesetzbuch), mentioned
in section 3.1.1 supra; Article 1153a of the Swiss Code of Obligations (n 12), mentioned
in section 3.1.2 supra; Article 2(1)(c) of the Tokens and TT Service Provider Act (n 29),
mentioned in section 3.2.1 supra; Article 622(1) of the Swiss Code of Obligations (n 12),
mentioned in section 3.2.2 supra; and § 2(1) of the German Act on Electronic Securities(Gesetzes zur Einführung von elektronischen Wertpapieren vom 3. Juni 2021 (BGBl. I S.
1423) (“eWpG”)), mentioned in section 3.2.3 supra.
See e.g., Article 973h of the Swiss Code of Obligations (n 12), mentioned in section 3.1.2
supra, and Article 10 of the Tokens and TT Service Provider Act (n 29), mentioned in section 3.2.1 supra. Such procedures do not generally exist in common law jurisdictions. With
respect to the cancellation of bills of lading, see Koji Takahashi, “Judicial Decree to Terminate the Validity of Lost Bills of Lading” (2008) 39 Journal of Maritime Law & Commerce
551, 552.

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Takahashi

issue whether such procedures are available would also arise with a blockchain-based negotiable instrument.
The legal systems which recognise blockchain-based negotiable instruments would associate with them certain effects concerning the assertion anddischarge of the rights represented by them. The issues which may arise inthis connection59 include 3 whether, for the exercise of the right represented
by such an instrument, it is necessary to become a holder of the instrument.
There is also the issue 4: in what circumstances, if any, the obligor is discharged
from its obligation by providing performance to the holder of such an instrument should it be proven that the latter is not the owner of the right represented by it.60
The legal systems which recognise blockchain-based negotiable instruments would also associate with them certain effects concerning the assignment of the rights represented by them. The basic issue which will arise in thisconnection is 5 what are the requisites for the right represented by such an
instrument to be assigned, in particular whether it is necessary and/or sufficient for the instrument to be transferred to the assignee. Under some legal systems, the qualification of an instrument as a negotiable instrument may meanthat its transfer is both necessary and sufficient to assign the right represented
by it, leaving only the question of what the requisites are for the transfer ofthe instrument.61 But that would not be the only conceivable model since the“representation” of a right by an instrument could have diverse implications.
59

60
61

These issues are excluded from the scope of the Rome I Regulation (Regulation (EC) No
593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I), [2008] OJ L177/6 (“Rome I Regulation”)) since
they concern obligations arising out of the negotiable character of a negotiable instrument (id., Article 1(2)(d)). Under this provision, the word “negotiable” seems to be used
in a sense broader than that which describes the character of an instrument that allows abona fide transferee to acquire a better title than what the transferor had. For the meaningof broader and the narrower senses, see section 1 supra). For a contrary view under Article
1(2)(c) of the Rome Convention (The Convention of 19 June 1980 on the Law Applicable toContractual Obligations, [1980] OJ L/1980/266/1), see William Tetley, with the assistanceof Robert C. Wilkins, International Conflict of Laws: Common, Civil and Maritime (Montreal: Blais 1994), 309, 311–312. In this book, it is argued that a bill of lading is not subject
to the exclusion of Article 1(2)(c) because it is not a negotiable instrument in either thecommon law or the civil law (except under the German theory). It should be noted, however, that the Rome I Regulation (n 59) seems to acknowledge that bills of lading possess
negotiable character (see Rome I Regulation (n 59), Recital (9)).
See e.g., Article 8(2) of the Tokens and TT Service Provider Act (n 29), mentioned in section 3.2.1 supra.
See e.g., id., Article 6(2) mentioned in section 3.2.1 supra.

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Another issue of particular importance is the possibility of bona fide acquisition, that is to say 6 whether and under what conditions a bona fide transfereeof an instrument may acquire a better title than the transferor.62
5.3
Solution Suggested by this Paper
This paper suggests that the lex creationis should be applied to determine theissues from 1 to 4. The lex creationis is the law under which the right represented by the negotiable instrument is created, such as the law applicableto the underlying claim. For example, with respect to the right to claim thedelivery of goods represented by a bill of lading, it is the governing law of thecarriage contract.63 With respect to the right to claim the payment of a sumof money represented by a bond,64 it is the governing law of the bond, which
would usually be specified in the prospectus. With respect to the membershipright represented by a company share, it is the lex societatis, which would,
depending on the applicable choice-of-law rules, be the law of the place ofincorporation or the law of the real seat of the company.
With respect to issues 5 and 6, this paper suggests that the lex creationis
should as a general rule be applicable in relation to all negotiable instruments(including bills of lading and investment securities) issued on a blockchain,subject to exceptions for the following two categories of cases: Firstly, where apermissioned blockchain is used to issue the negotiable instrument and there
is consent to a choice-of-law clause by all its users, the law specified by theclause should prevail over the lex creationis. Secondly, where crypto-securities
62

63

64

See e.g., § 932 of the German Civil Code (n 2), mentioned in section 3.1.1 supra; § 26 of theeWpG (n 57), mentioned in section 3.2.3 supra; Article 973e(3) of the Swiss Code of Obligations (n 12), mentioned in section 3.1.2 supra; and Article 9 of the Tokens and TT Service
Provider Act (n 29), mentioned in section 3.2.1 supra.
As determined by Article 5 of the Rome I Regulation (n 59), if the latter is applicable. The
determination of the governing law of a carriage contract is not excluded from the scopeof the Regulation even where the right to claim the delivery of goods under the contract
is represented by a bill of lading since that obligation does not arise out of the negotiablecharacter of a bill of lading (See id., Article 1(2)(d)).
It includes a convertible bond until it is converted into equity: See para. 522 of UNCITRAL,“UNCITRAL Model Law on Secured Transactions: Guide to Enactment” (UNCITRAL, 2017)<https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/mlst_guide_to_enactment_e.pdf>. It also includes a profit participation certificate (Genussschein) which represents a profit participation right (Genussrecht), i.e., the right that is
granted by a corporation and limited to monetary claims (with membership rights suchas voting rights being excluded) (Klaus Weber (ed), Creifeld’s Rechtswörterbuch (26th edn.,
München: C.H. Beck 2021)). According to Völkel and Hollmann (n 53), 2, Genussrecht iscurrently the most popular right to be tokenised in Austria.

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Takahashi

are held with an intermediary, the governing law should be determined inaccordance with the existing choice-of-law rules for securities held with anintermediary. In the situations which fall within both of these two categories,
the rule for the second category should take precedence.
What follows will first elucidate the meaning of “lex creationis” and thenoffer the basic reason for the solution suggested above.
5.4
The Meaning of “lex creationis”
Professor Ooi, a long-term proponent of applying the lex creationis for the
proprietary aspects of securities – whether certificated or held with an intermediary – extends her proposition to crypto-securities in her latest paper.65
Given the prominence of Professor Ooi’s writings in this field of law, it is worth
noting that what is meant by the lex creationis in her paper does not seem to be
exactly identical to the same expression used in the present paper. Both papers
understand the concept of lex creationis as referring to the law under which
the object in question is created.66 The object in question seems, however,different: while the present paper looks to the right represented by a negotiable instrument, Professor Ooi’s paper appears (at least in some places) tolook to the token or other medium representing the right. This is gleaned fromthe observation in her paper that “the law of the system” is a manifestation of
the lex creationis.67 The meaning of “the law of the system” is said to be different depending on the type of securities – whether certificated, intermediated,or in the form of crypto-securities. For intermediated securities, it is said to be
the law of the intermediated system and for crypto-securities, it is said to be
the law of the “cryptosecurities system.” The latter is described as a system thatallows for the crypto-securities to be created and issued within it.68 Professor
Ooi argues that the law of that system should be applicable to the proprietary
aspects of crypto-securities. Whatever exactly is meant by the law of the “cryptosecurities system,” it does not appear to be necessarily the same as the lex
creationis of the right represented by crypto-securities.

65

66
67
68

Maisie Ooi, “Choice of Law in the Shifting Sands of Securities Trading,” in Andrew
Dickinson and Edwin Peel (eds), A Conflict of Laws Companion (Oxford: Oxford University
Press 2021), 199.
Id.
Id., 220.
Id. It is, however, also said elsewhere (id., 219) that the law of the cryptosecurities system”
is the law “with which the cryptosecurities have their most significant connection.”

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517

5.5
The Basic Reason for the Suggestion
As noted in section 5.3 above, this paper suggests that the lex creationis, the law
under which the right represented by a blockchain-based negotiable instrument is created, should be applied to determine all the issues from 1 to 4 and,subject to two rules of exception, issues 5 and 6. This suggestion basically restson the ground that all these issues concern the state-of-being (namely, creation, extinction, and all intervening dispositions such as transfers and encumbrances) of the right in question. To determine the state-of-being of a rightby applying the law under which it is created is not only logical but would
also usually meet the expectation of the interested parties. The point will be
expounded below with respect to each of the issues from 1 to 6.
The issue 1 whether a blockchain-based token may be created to serve as anegotiable instrument to represent the right in question concerns the stateof-being of the right. The point might be better appreciated if the issue isre-phrased as “whether the right in question may be represented by a blockchainbased token serving the role of a negotiable instrument.” So re-phrased, itwould also be appreciated that the answer should be the same69 irrespectiveof whether the negotiable instrument is in paper or electronic form and irrespective of whether it is recorded in a central register or distributed ledger.
Issue 2 should be dealt with in the same way as issue 1 since it is the flipside of the latter. Again, the issue concerns the state-of-being of the represented right. With respect to a paper-based bill of lading which is lost, stolen
or destroyed, a leading scholarly opinion in Japan favours the application of
the law of the country in which the port of discharge is situated to determine
the issue corresponding to 2.70 This opinion is based on the idea that the way
in which a right may be asserted is closely connected to the law of the place
where it is to be asserted. Another scholarly opinion favours the application of
the law governing the carriage contract on the ground that how the loss of abill of lading may be remedied is a question that affects the right against thecarrier in terms of how it may be asserted.71 The latter opinion accords withthis paper’s suggestion in both conclusion and reasoning.

69

70
71

A leading scholarly opinion in Japan with respect to paper-based bills of lading alsofavours the application of the law governing the contract of carriage (noted in ۸ມ㿡ό㧺Ꮎ࠷֧ऄύʳ(Hiroshi Sano, International Trade Law (4th edn, Yuhikaku 2014), 157).
As noted in Takahashi (n 58), 560, though this opinion is not shared by the author.
As noted in ೏ᖯ‫׹ݛ‬ψํ๛ဳࠦ圸ೈ䊐ެࡳ圸圩坋圸ֆ‫ق‬ႝ‫֫ܫ‬以圸㧺Ꮎဪ‫ܒ‬ጥᝤωʳ(Koji Takahashi, “Jurisidiction to Issue a Decree Terminating the Validity of Lost
Bills of Lading” (2008) 199 Kaijiho Kenkyu Kaishi 2, 5).

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Takahashi

Issues 3 and 4 pertain to the assertion and discharge of the right represented
by a blockchain-based negotiable instrument and, accordingly, concern thestate-of-being of that right.
Likewise, issues 5 and 6 pertain to the assignment of the represented rightand, again, concern the state-of-being of that right. Since any purported assignment of the same right outside the blockchain may, depending on the applicable choice-of-law rules, also be subject to the lex creationis, a divergence
between on-chain and off-chain transactions may be avoided.
Issues 5 and 6 pertaining to the assignment of the represented right should
be distinguished from the question what effect, if any, bills of lading have on
the disposition of real rights in the goods. Bills of lading represent the rightto claim the delivery of goods under a contract of carriage, rather than real
rights in the goods.72 Nonetheless, the applicable law may associate with themcertain effects concerning real rights in the goods.73 Thus, the transfer of a billof lading may have the effect of passing property in goods under some legal
systems.74 Under other legal systems, the transfer of a bill of lading perfects
the passing of property in goods by conferring on the transferee an erga omnes
title, a title which can be asserted against all persons.75 The issue of what effect,
if any, bills of lading have on the disposition of real rights in goods concerns
the state-of-being of the real rights and should be determined by the lex situsof the goods, regardless of the medium of the bills of lading.76

72
73
74

75

76

Also noted in the Federal Council’s DLT Report (n 37), para. 5.3.3.4 (fn. 343).
Id.
The repealed English Bills of Lading Act 1855 (1855 c. 111) stated in the opening of section
1 that “[e]very Consignee of Goods named in a Bill of Lading, and every Endorsee of a Billof Lading to whom the Property in the Goods therein mentioned shall pass, upon or byreason of such Consignment or Endorsement” (emphasis supplied).
As is the position under Japanese law by virtue of the combined effect of Article 178 of
the Japanese Civil Code (n 2) and Article 763 of the Japanese Commercial Code (Act No.
48 of 9 March 1899). The former provides that the passing of property in movable goods
may not be asserted against third parties unless the goods have been delivered to thetransferee. The latter provides that the delivery of a bill of lading to its lawful holder has
the same legal effect as the delivery of the goods represented by it.
For the same view in the context of paper-based bills of lading, see e.g., 䄡ࢷবψढऱ䊐‫ܓ‬䈅এ圸ᄷ㩅ऄ圲ሎಬဳࠦ圸䷦۩ωʳ (Takuya Shima, “The Law Applicable to Real
Rights and the Issuance of Documents of Title to Goods” (2014) 64 Hokkaido University
Law Review 1, 38). The Federal Act on Private International Law of Switzerland (“PILA”)
provides that if several persons assert a real right in goods, some directly, others on thebasis of a title document, the law applicable to the goods themselves determines whoseright prevails (Federal Act on Private International Law (PILA) of 18 December 1987, SR
291, Article 106(3)).

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5.6
Considerations Relevant Only to Issues 5 and 6
This paper’s suggestion that the lex creationis should be applicable would not
be so controversial with respect to issues 1 to 4. There is, however, more roomfor disagreement with its suggestion for issues 5 and 6 that, as a general rule,
the lex creationis should be applicable. It is because there are considerations,other than the state-of-being of the right argument, which are relevant toissues 5 and 6. Focusing on these issues,77 the following analysis will examine
three of these considerations.
5.6.1
Whether the Lex Rei Sitae Principle Should Be Followed
Where the negotiable instrument is in paper form, a conventional view would
apply the law of the place where the instrument is situated (lex cartae sitae),rather than the lex creationis of the represented right, to determine the issues
corresponding to 5 and 6.78 The lex cartae sitae is a manifestation of the lex
rei sitae principle, a principle whereby the property aspects of an asset are to
be decided by the law of the place where the asset is situated. The latter is awell-established principle for tangible assets and is justified for promoting legal
certainty since the location of a tangible asset is easily ascertainable. As theright represented by a negotiable instrument is not tangible, the conventionalview may be understood as fictionally treating the location of the negotiable
instrument as the situs of the represented right. Since the economic value ofa negotiable instrument, being a mere piece of paper, is miniscule, it would
make no practical sense to treat a negotiable instrument itself as an object ofassignment. Practically, the transfer of a negotiable instrument is only meaningful if it has some effects concerning the assignment of the represented right.
77

78

Making a separate treatment of these issues would not be unconventional in the choiceof-law analysis for paper-based securities, as may be observed in the distinction of the
Wertpapiersachstatut (the law applicable to the real right aspects of a negotiable instrument) from the Wertpapierrechtsstatut (the law applicable to the rights represented by anegotiable instrument). For this distinction, see e.g., Stefan Grundmann and Moritz Renner (eds), Bankvertragsrecht 2: Commercial Banking: Zahlungs- und Kreditgeschäft (5thedn, De Gruyter 2014), 482 [Renner].
See e.g., Louis d’Avout, “Property and Proprietary Rights,” in Jürgen Basedow et al. (eds),
Encyclopedia of Private International Law (Edward Elgar 2017), 1429 at para. III.1.(c), whichmakes an observation on the basis of an examination of national laws that the lex creationis governs the technique of transferring an asset and where that law provides for a
document permitting transfer, the lex situs of the document governs the transfer. See also
Article 106(2) of the Swiss PILA (n 76) as well as the Botschaft (n 13), 300 on Article 145aof the same Act (examined in section 4.1 supra), para. (2) of which is only applicable topaper instruments. A leading scholarly opinion in Japan with respect to paper-based billsof lading also favours the lex cartae sitae (noted by Sano (n 69), 157).

520

TakahashiThis conventional view may be defended as promoting legal certainty as
long as the location of the negotiable instrument is easily ascertainable. Thatis the case where the negotiable instrument is in paper form and held directlyby the beneficiary.79 The conventional view is harder to be defended where thenegotiable instrument is in electronic form.80 Where the electronic negotiable
instrument is recorded in a central register, it might still be possible to resort
to another fiction of treating the location of the register as the situs of the
instrument. Such a fiction, however, would not work with blockchain-basednegotiable instruments as they are recorded in distributed ledgers for which
there is no single location.81 It seems, therefore, appropriate to abandon the lex
rei sitae principle where the negotiable instrument is issued on a blockchain.
5.6.2
Whether a Bulk Assignment Should Be Facilitated
Investment securities may be assigned in bulk since they are, unlike documentsof title to goods, fungible. This raises the question whether the choice-of-law
rules for crypto-securities should facilitate a bulk assignment, namely theassignment of a diverse portfolio of securities.
The application of the lex creationis would undermine the efficiency of abulk assignment. It would impose a significant burden on the assignee, who
would have to check and comply with the law governing each of the securities
comprising the portfolio. It would even make it practically impossible to pledge
a pool of securities which changes composition over time. There is a view thatcriticises the lex creationis rule for this reason.82 There is even an argumentthat says the application of different laws to a diverse portfolio would undomuch of the benefit of the blockchain technology.83 And there is a call for achoice-of-law approach that specifies a single law to govern the entire portfolio

79
80

81
82

83

As securities certificates become immobilised and centralised with the development of
the intermediate holding system, it has become less easy to ascertain their location.
The Japanese Commercial Code (n 75) used to contain a provision (Article 483), which
provided that certain other provisions of the same Code were applicable to the transfer
taking place in Japan of the shares and bonds issued by a foreign company. This provision,
though not being a choice-of-law rule per se, could be seen as manifesting the notion thatthe lex cartae sitae should be the applicable law. It was repealed in 2004 by a law reform
to facilitate the digitization of securities.
As examined in sections 4.1 and 4.2 supra, similar observations have influenced the Swiss
and German legislature in devising their choice-of-law solutions.
䄡ࢷবψࣂ⡣ऄ圸䕋㭠圕坓坉圩垛垹垒垹垭坺ဳࠦެ㶙ωʳ(Takuya Shima, “Paperless Securities Settlement from the Perspectives of Conflict of Laws,” in Տᆺ㰭ભ՗ʳ(ed.)ό坮垤垄坸垦垭坺ެ㶙圲ऄ๵ᖞύʳ(Emiko Chiba (ed), Cashless Payment and Regulations (Minjuhô Kenkyûkai 2019), 414, 435).
Philipp Paech, “Securities, Intermediation and the Blockchain – An Inevitable Choice
between Liquidity and Legal Certainty?” (2016) 21 Uniform Law Review 612, 636.

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521

of crypto-securities.84 One such choice-of-law rule would be to apply the lawof the place where the assignor is habitually resident or has its seat. This connecting factor would, however, encounter difficulties where there is a chain of
assignments.85 An alternative choice-of-law rule would be to apply the law of
the place where the assignee is habitually resident or has its seat. As examinedin section 4.1 above, a similar rule is adopted by Article 105(2) of the Federal
Act on Private International Law of Switzerland, though it is only concernedwith an assignment by way of pledging as opposed to an outright transfer.
There is, on the other hand, a view that casts doubt on whether the need tofacilitate a bulk assignment is relevant to crypto-securities.86 Which viewpoint
is right? The works of the UNCITRAL seem instructive. The Model Law on
Secured Transactions (2016) provides as a general rule that the law applicableto the creation and effects of a security right in an intangible asset is the law of
the State in which the grantor is located (Article 86).87 For non-intermediatedsecurities, however, the Model Law provides for exceptions to the general rule.
Thus, the law applicable to the creation and effects of a security right in non-intermediated equity securities is the law under which the issuer is constituted(Article 100(1)) and the law applicable to the creation and effect of a security
right in non-intermediated debt securities is the law governing the securities(Article 100(2)). These rules accordingly designate the lex creationis of therights represented by the non-intermediated securities.88 Their rationale is tobe found in an earlier work of the UNCITRAL, the Legislative Guide on Secured
Transactions (2007). This guide states89 that where it is customary to conduct
due diligence on each receivable to be assigned, a choice-of-law rule applying
the law governing the receivable would work well while that rule would raise
84
85

86
87

88
89

Mark Kalderon, Ferdisha Snagg, and Claire Harrop, “Distributed ledgers: A Future in Financial
Services?” (2016) 31 Journal of International Banking Law and Regulation 243, 248.
Financial Markets Law Committee, “Distributed Ledger Technology and Governing Law:
Issues of Legal Uncertainty” (FMLC, March 2018), para. 6.22 <http://fmlc.org/wp-content/
uploads/2018/05/dlt_paper.pdf> (“FMLC Report”). For this criticism as it applies to theassignment of receivables outside the context of negotiable instruments, see Trevor C. Hartley, “Choice of Law Regarding the Voluntary Assignment of Contractual Obligations under
the Rome I Regulation” (2011) 60 International and Comparative Law Quarterly 29, 55.
The FMLC Report (n 85). It does not give reasons beyond mentioning the DLT environment.
This rule is also consistent with Articles 22 and 30 of the United Nations Convention on
the Assignment of Receivables in International Trade (New York, 2001), 12 December
2001.
Equity securities are shares and the debt securities include bonds: UNCITRAL, Guide toEnactment (n 64), para. 519.
UNCITRAL, “UNCITRAL Legislative Guide on Secured Transactions” (UNCITRAL, 2010),
394 <https://uncitral.un.org/sites/uncitral.un.org/files/media-documents/uncitral/en/09-82670_ebook-guide_09-04-10english.pdf> accessed 1 June 2022.

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Takahashi

difficulties in a bulk assignment where due diligence on each receivable would
be either too costly or impossible. It may be inferred from this statement thatthe provisions of Article 100 of the Model Law are based on the presumptionthat where non-intermediated securities are assigned, a bulk assignment is
not customary. Unless and until a contrary trading practice develops, it seems
prudent to also adopt this presumption for crypto-securities90 and allow due
diligence to be conducted on each of the securities involved on the basis of thelex creationis. Since Article 100 makes no distinction between certificated anduncertificated securities,91 it may, on a literal interpretation, be read to cover
crypto-securities,92 except where they are held with an intermediary.93 A separate consideration applies where crypto-securities are held with an intermediary. As detailed later in section 5.7.2, this paper suggests a rule of exception
for that category of cases.
5.6.3
Whether a Divergence with Intrinsic Tokens Should Be Avoided
As stated in section 1 above, this paper does not deal with intrinsic tokens(namely, tokens of self-anchored value) such as cryptocurrencies since they do
not represent any relative rights. But they do give rise to issues pertaining toassignment,94 which correspond to issues 5 and 6. This may lead one to thinkthat the choice-of-law rules for these two types of tokens should be aligned.95
From this point of view, there is a criticism of the choice-of-law rule applying
90
91
92

93

94

95

It must be acknowledged that this position is contrary to the idea presumably underpinning Article 105(2) of the Swiss PILA (n 76), examined in section 4.1 supra.
UNCITRAL, Guide to Enactment (n 64), para. 515.
Koji Takahashi, “Implications of Blockchain Technology for the UNCITRAL Works,” in the
United Nations Commission on International Trade Law (ed), Modernizing International
Trade Law to Support Innovation and Sustainable Development (United Nations 2017), 81,
87.
Intermediated securities are excluded from the scope of the Model Law (Article 1(3)(c))
for the reason that the choice-of-law question is treated by the Hague Securities Convention (the Convention of 5 July 2006 on the Law Applicable to Certain Rights in Respect ofSecurities held with an Intermediary): UNCITRAL, Guide to Enactment (n 64), para. 26.
For an analysis on substantive rules on these issues, see e.g., Koji Takahashi, “Cryptocurrencies Entrusted to an Exchange Provider: Shielded from the Provider’s Bankruptcy?” inCharl Hugo (ed), Annual Banking Law Update 2018: Recent Legal Developments of Special
Interest to Banks (JUTA 2018), 1, 6.
For an analysis on that assumption, see e.g., ཤՀୃிψ㢳უຏຄ圵䈅圣坕㧺Ꮎऱ圴ऄऱംᠲ圵䈅圣坕‫ە‬ኘω८ᘜऄ೭ઔߒ㢸ό㢳უຏຄ圵䈅圣坕ߏऄՂ垸጑ᅮऄՂ圸ᓯംᠲ圸㻕ಘύʳ(2019) pp. 53, 76 (Tetsuo Morishita, “Consideration of International Legal Issues on Virtual Currencies,” in Financial Law Study Group, Examination of
Problems in Private Law and Supervision Law Regarding Virtual Currencies (2019) 53, 76).
For a contrary view, see Ooi (n 65), 212.

Blockchain-based Negotiable Instruments523

the lex creationis for creating a divergence with intrinsic tokens.96 No matter
what choice-of-law rules are adopted for intrinsic tokens, the lex creationis rulewould create a divergence for the simple reason that the lex creationis of therepresented right cannot be envisaged for intrinsic tokens.
It seems, however, possible to defend the lex creationis rule since, despite theapparent similarity, there is a significant difference between the issues raisedby these two types of tokens. Unlike the issues raised by intrinsic tokens which
concern the assignment of the tokens themselves, the issues raised by tokens
serving the role of a negotiable instrument concern the assignment of the represented right. The transfer of a negotiable instrument is only the means to
assign the right. Since the gravity of the issues is centered on the state-of-beingof the represented right, the application of the lex creationis seems defensible.
5.7
The Rules of Exception for Issues 5 and 6
The preceding analysis has offered the basic reason for the lex creationis rule inrelation to all the issues from 1 to 6 (in section 5.5 above) and sought to defend
it from possible criticisms in the context of issues 5 and 6 (in section 5.6 above).
As noted in section 5.3 above, this paper suggests making exceptions to the lex
creationis rule for issues 5 and 6 in the following two categories of cases. Firstly,
where a permissioned blockchain is used to issue a negotiable instrument andthere is consent to a choice-of-law clause by all its users, the law specified by
the clause should prevail over the lex creationis. Secondly, where crypto-securities are held with an intermediary,97 the governing law should be determinedin accordance with the existing choice-of-law rules for securities held with anintermediary. In the situations which fall within both of these two categories,
it is suggested that the rule for the second category should take precedence.
Another possible idea is to make a third rule of exception which, for the
category of cases where crypto-securities are traded on a centralised platform,
refers to the law of the jurisdiction regulating the platform. This rule would
promote legal certainty since traders using a centralised platform should
usually be aware of the the regulatory regime of the platform. Whether the96
97

See e.g., Shima (n 82).
Where the crypto-securities are listed and traded on a crypto-assets exchange, the provider of the exchange is not an intermediary in this sense since the retail investors may
directly participate in trading (see the text accompanying (n 55)). Where, on the other
hand, the crypto-securities are listed on a traditional securities exchange or a multilateral trading facility (MTF), the retail investors may only be able to participate in trading
through their brokers. Whether the provider of a crypto-assets exchange may act as a
broker will depend on the applicable regulatory regime. If it does, it is an intermediary
within the meaning of the present discussion.

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Takahashi

introduction of this rule is warranted depends, however, on how the architecture of trading will develop and in particular whether any of the situations
coming under this category falls outside the second category. What follows will
elaborate on the rules of exception for the first and second categories.
5.7.1

Where a Permissioned Blockchain is Used and There is Consent toa Choice-of-Law Clause by all Its Users
Where a private blockchain is used to issue a negotiable instrument,98 there isa specific entity acting as its administrator. The administrator may make theblockchain “closed” by requiring anyone wishing to use it to obtain its permission. In granting permission, the administrator may require all users to give
their consent to the terms and conditions it has fixed. In the terms and conditions, the administrator may include a choice-of-law clause. If such a clausemay be construed as addressing issues 5 and 6, it should be given effect99 since
it would foster legal certainty more than the application of the lex creationis
does. To that extent, the general choice-of-law rule in favour of the lex creationis should be replaced.
Some of the proponents who support giving effect to such a choice-of-law
clause argue that the freedom of choice should be restricted.100 Seeing the danger that an uninhibited choice of law might be used to avoid regulatory rules, it
is argued that the chosen law should be approved by regulators or alternatively
that the choice of a legal system having no connection to the DLT enterpriseshould not be permitted.101 The need for restriction on the freedom of choiceseems, however, doubtful since the law applicable to issues 5 and 6 should haveno bearing on the application of regulatory rules (such as the rules imposing
licensing or registration requirements on the issuance of crypto-securities orthe brokering of their trading). The process of determining the applicable regulatory rules102 is quite different from the choice-of-law rules for private-law
issues.
In many cases, even where a private blockchain is used, there will be no
choice-of-law clause addressing issues 5 and 6. Thus, there may be no terms
98
99
100
101
102

Concerning the question whether the blockchain on which crypto-securities are issued
must necessarily be a private blockchain, see a brief discussion in section 5.1.2 supra.
See also the FMLC Report (n 85), paras. 6.5 and 6.7; Paech (n 83), 636; Morishita (n 95), 77;
Shima (n 82), 435.
See e.g., the FMLC Report (n 85), paras. 6.8 and 6.9; Morishita (n 95), 78; Shima (n 82), 434.
The FMLC Report (n 85), paras. 6.8 and 6.9.
For an analysis, see Koji Takahashi, “Prescriptive Jurisdiction in Securities Regulations:
Transformation from the ICO (Initial Coin Offering) to the STO (Security Token Offering)and the IEO (Initial Exchange Offering)” (2020) 45 Ilkam Law Review 31, 33.

Blockchain-based Negotiable Instruments

525

and conditions fixed for using the blockchain. Even if there are, these may notcontain a choice-of-law clause. Even if there is a choice-of-law clause, it may
be construed as only addressing contractual issues on the use of the blockchain. In light of this, it might be thought that the rule of exception to thelex creationis rule should be broader and cover all cases where private blockchains are used to issue negotiable instruments. Since private blockchains areinvariably administered, such a choice-of-law rule might rely on a connecting
factor defined by reference to the administrator. For example, it might specify
the law of the place where the administrator is habitually resident or has its
seat. Alternatively, it might specify the law of the jurisdiction supervising theadministrator.
A difficulty such choice-of-law rules may encounter is the identification of asingle administrator. The governance of blockchains varies considerably. Manyare operated by a consortium of entities who share the role of administration
or divide it among themselves. A connecting factor which relies on a single
administrator would not work with such blockchains.103 And it may not be
always clear in the eyes of the users of the blockchain whether it is administered by a single entity or operated by a consortium of entities. Even where asingle administrator is identified, a choice-of-law rule specifying the law of theplace where the administrator is habitually resident or has its seat would be
difficult to apply if the administrator operates from multiple places. A choiceof-law rule specifying the law of the jurisdiction supervising the administrator
would be unworkable where the administrator comes under the supervision of
more than one jurisdiction.104
For these reasons, it may be said that the lex creationis rule is superior, interms of transparency, to any choice-of-law rules which rely on a connecting
factor defined on the basis of the administrator of a private blockchain. It follows that the exception to the lex creationis rule should be limited to the cases
where the negotiable instrument is issued on a permissioned blockchain with
its terms and conditions including a choice-of-law clause for issues 5 and 6.
5.7.2
Where Crypto-Securities Are Held with an Intermediary
It is possible that in some cases crypto-securities are held with an intermediary. They may be held, for example, by a central securities depository (CSD)
possibly with a layer of custodians between the latter and retail investors.
What other situations fall within this category of cases depends on how the103
104

For a similar view, see the FMLC Report (n 85), 6.17.
As noted in section 4.2 supra in relation to a similar choice-of-law rule (§ 32(1)) containedin the eWpG (n 57).

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architecture of holding and trading crypto-securities will develop. Thereis a view that says crypto-securities in this category of cases should be subject to the same choice-of-law rules as exist today for securities held with anintermediary.105
The existing choice-of-law rules for intermediated securities are not internationally unified. There is a divide between, on the one hand, the instruments of the European Union which specify the applicable law by reference
to the place of the relevant account106 and, on the other, the Hague Securities
Convention107 which follows the contractual PRIMA (Place of the RelevantIntermediary Approach) (Art. 4). These approaches are subject to their own
share of criticisms. Thus, against the EU approach, it is noted that legal certainty is lacking with the localization of the relevant account108 especiallywhere a multinational intermediary is involved. The account-by-accountapproach of the Hague Convention is criticised for giving rise to the so-called
double interests problem.109 Notwithstanding these criticisms and the lack ofinternational uniformity, should the existing choice-of-law rules be extended
by analogy to crypto-securities held with an intermediary? To address thisquestion, the following considerations also seem material.
As noted in section 3.2 above, one of the advantages of the blockchain
technology lies in its capability to create a direct link between the issuer andthe holder of securities. This advantage would be fortified by the applicationof the lex creationis since it would allow the issuer to ascertain the owner ofcrypto-securities with relative ease. That advantage is, however, forsaken
where the crypto-securities are held with an intermediary: under some legal

105
106

107
108

109

See e.g., Christiane Wendehorst, “Digitalgüter im Internationalen Privatrecht” (2020)
Praxis des Internationalen Privat- und Verfahrensrechts 490, 497; Shima (n 82), 435.
Article 9(2) of the Settlement Finality Directive (Directive 98/26/EC of the European Parliament and of the Council of 19 May 1998 on settlement finality in payment and securities
settlement systems, [1998] OJ L166/45), Article 24 of the Winding-up Directive (Directive
2001/24/EC of the European Parliament and of the Council of 4 April 2001 on the reorganisation and winding up of credit institutions, [2001] OJ L125/15), and Article 9(1) of the
Financial Collateral Directive (Directive 2002/47/EC of the European Parliament and of
the Council of 6 June 2002 on financial collateral arrangements, [2002] OJ L168/43).
At the time of writing (August 2021), there are only few contracting States. But theseinclude influential States like the United States and Switzerland.
See e.g., Paech (n 83), 623. See also the European Commission, “Communication fromthe Commission to the European Parliament, the Council, the European Economic andSocial Committee and the Committee of the Regions on the applicable law to the proprietary effects of transactions in securities,” (COM/2018/089 final), para. 3.1.
See e.g., Maisie Ooi, “The Hague Securities Convention: a critical reading of the road map”
(2005) Lloyd’s Maritime and Commercial Law Quarterly 467, 484.

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systems, the investor’s recourse in the intermediated system primarily lies witha claim against its immediate intermediary rather than the exercise of the right
represented by the securities against the issuer. This means that the argument
for applying the lex creationis is so much the weaker. Furthermore, it should
be recalled that while the lex creationis rule represents an approach that looks
through the tiers of intermediaries to the level of the issuer, that approach was
rejected by the drafters of the Hague Securities Convention110 because of thefrequency of portfolio transactions which is observed with securities held withan intermediary. The same consideration would be relevant to crypto-securities held with an intermediary. Additionally, one may note that where crypto-securities and traditional securities are held by the same intermediary, theapplication of the same law would have the advantage of simplicity.111
Although the relevant considerations seen in the above paragraphs pull in
opposite directions, it may be concluded on balance that the existing choiceof-law rules for securities held with an intermediary should be extended byanalogy to crypto-securities held with an intermediary.

6

Final Remarks

This paper has considered a solution for the choice-of-law issues arising fromblockchain-based negotiable instruments, in particular the issues from 1 to 6
listed in section 5.2 above. It has suggested in section 5.3 above that the lex creationis of the right represented by the instrument should be applied to issues 1
to 4. With respect to issues 5 and 6, which concern the assignment of the represented right, the lex creationis should also be applicable as a general rule albeit
subject to the two rules of exception as detailed in section 5.7 above.
The relative importance of the rules of exception will depend on how thetrading practice will develop in the future. If, for example, the use of permissioned blockchains with a choice-of-law clause in their terms and conditions
grows, the rule of exception for that category will commensurately grow in its
importance.
The solution suggested by this paper may also need to be revised depending on how the practice and architecture of trading will develop. If, for example, a bulk assignment becomes an important practice for non-intermediatedcrypto-securities to such an extent that it is no longer customary to conduct
due diligence on each of the crypto-securities to be assigned, the argument
110
111

Goode et al. (n 24), para. Int-38.
Wendehorst (n 105), 490, 497.

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for choice-of-law rules facilitating a bulk assignment will earn more strength.112
Again, depending on how the architecture of trading will develop, it may
become warranted to introduce a third rule of exception applying the law of
the jurisdiction regulating the centralised trading platform.113
The blockchain technology has made it possible to emulate paper-basednegotiable instruments in an electronic environment. As tokens serving therole of negotiable instruments lay the foundation for a vital aspect of the token
economy, it is one of the most promising areas of application of the blockchain
technology. For that kind of economy to fly, it is essential to have a good legal
infrastructure in terms of both substantive rules and choice-of-law rules. Asof the time of writing (August 2021), it is still early days and the available legal
materials are scarce. Hopefully, the analysis presented by this paper, thoughpartly tentative due to the nascent state of market development, will stimulate
further debate in this important area of law.

112
113

See section 5.6.2 supra.
See section 5.7 supra.