Navigating the Draft Principles on Digital Assets: A Comprehensive Overview

The rapid growth and global adoption of digital assets have highlighted the need for a comprehensive and harmonized legal framework. Recognizing this, the International Institute for the Unification of Private Law (UNIDROIT) has developed the Draft Principles on Digital Assets. This article aims to provide a foundational legal framework for the regulation of digital assets, which can be adopted and adapted by jurisdictions worldwide.

1. Background of UNIDROIT's Draft Principles on Digital Assets

UNIDROIT, an independent intergovernmental organization, has been working towards developing and modernizing private law since its establishment in 1926. With a focus on harmonizing international private law, UNIDROIT has played a pivotal role in creating model laws, conventions, and principles that have influenced legal systems around the world.

Recognizing the transformative impact of digital assets on the global economy and the existing legal challenges, UNIDROIT initiated a project to develop a set of principles addressing the fundamental legal issues surrounding digital assets. The Draft Principles on Digital Assets, released for public consultation in January 2023, represent the culmination of extensive research and collaboration among experts in various fields, including law, finance, technology, and policy.

2. Purpose and Scope of the Draft Principles

The primary purpose of the Draft Principles on Digital Assets is to provide a common legal framework that different jurisdictions can adopt to regulate digital assets consistently and effectively. The Draft Principles address various aspects of digital asset transactions, including property rights, the roles, and responsibilities of digital asset service providers, dispute resolution, and cross-border issues.

In terms of scope, the Draft Principles cover a wide range of digital assets, including cryptocurrencies, tokens, and other digital representations of value or rights. They apply to digital asset systems, such as blockchain networks and digital asset service providers, encompassing entities involved in issuing, managing, exchanging, storing, or transferring digital assets.

3. Key Definitions and Concepts

3.1. Digital Assets

The Draft Principles define "digital assets" as an electronic record capable of being subject to control. This broad definition covers various types of digital assets, including cryptocurrencies, utility tokens, security tokens, non-fungible tokens (NFTs), and other digital representations of value or rights. The Draft Principles adopt a functional equivalence approach and technology-neutral stance, ensuring that the framework remains adaptable to the diverse range of digital assets that may emerge.

3.2. Control

In the context of digital assets, "control" is a fundamental concept within the Draft Principles. Control refers to initiating and effecting a digital asset transfer or delegating that power to another person. The notion of control plays a vital role in determining the legal implications of digital asset transactions, particularly regarding property rights and the transfer of those rights.

3.3. Legal Relationships

The Draft Principles focus on the legal relationships between parties involved in digital asset transactions. These parties may include transferors, transferees, intermediaries, and third parties. The Draft Principles address the legal implications of these relationships, including rights, obligations, and liabilities, without explicitly referring to the term "digital asset service providers." The Draft Principles aim to promote trust, transparency, and accountability within the digital asset ecosystem by establishing a clear and harmonized framework for parties engaged in digital asset transactions.

4. Property Rights and Digital Assets

The Draft Principles on Digital Assets address the legal aspects of property rights concerning digital assets, guiding the recognition, creation, and transfer of these rights, as well as priority and third-party rights.

4.1. Recognition of Property Rights

The Draft Principles emphasize that digital assets can be recognized as objects of property rights, regardless of their form or the legal classification in a specific jurisdiction. By identifying digital assets as objects of property rights, the Draft Principles provide a basis for legal certainty and facilitate enforcing rights and obligations arising from digital asset transactions.

4.2. Creation and Transfer of Property Rights

The Draft Principles establish that property rights in digital assets can be created and transferred through control, as defined in the Draft Principles. The party exercising control over a digital asset is the right holder. Furthermore, the Draft Principles outline that the transfer of property rights in digital assets occurs when the transferee acquires digital asset control, subject to any applicable legal requirements.

4.3. Priority and Third-Party Rights

The Draft Principles address the priority issue among competing claims to digital assets. They stated that priority is determined by the order in which the competing claimants acquired control of the digital asset.

Additionally, the Draft Principles guide the protection of third-party rights, emphasizing that the rights of a transferee in a digital asset are subject to any pre-existing rights or interests, such as security interests or other encumbrances.

5. Intermediated Digital Assets

While the Draft Principles do not explicitly discuss "Digital Asset Service Providers," they do delve into the concept of intermediated digital assets and the legal relationships and responsibilities that emerge from these scenarios.

Intermediaries play a crucial role in facilitating digital asset transactions. They may act on behalf of transferors, transferees, or other parties involved in digital asset transactions. Intermediaries can include custodians, wallet providers, and digital asset exchanges. By managing digital assets on behalf of their clients, intermediaries contribute to the digital asset ecosystem's efficiency and security.

The Draft Principles address the legal relationships between parties and intermediaries involved in digital asset transactions. They establish that parties using intermediaries are subject to certain rights and obligations, including the duty to provide accurate and complete information, the obligation to comply with the intermediary's rules and procedures, and the right to receive information about the digital assets held by the intermediary.

Intermediaries, in turn, have specific duties and responsibilities, such as the duty to maintain appropriate records, the obligation to execute transactions in a timely and accurate manner, and the responsibility to ensure the confidentiality of clients' information.

The Draft Principles also tackle the liability of intermediaries for losses or damages resulting from their actions or omissions. They guide the circumstances under which intermediaries can be held liable for failing to fulfill their duties and the potential limitations of their liability.

6. Enforcement

To provide legal certainty and predictability in cross-border digital asset transactions, the Draft Principles emphasize the importance of determining the jurisdiction and applicable law governing disputes arising from these transactions. They encourage parties to agree on the choice of jurisdiction and applicable law, taking into account factors such as the location of the parties, the digital asset systems involved, and the nature of the dispute.

The Draft Principles call for developing harmonized rules and cooperation among jurisdictions to facilitate recognizing and enforcing judgments and awards in digital asset-related disputes. This approach aims to enhance the legal certainty and predictability for parties engaged in digital asset transactions.

Link to the Draft Principles: https://www.unidroit.org/wp-content/uploads/2023/01/Draft-Principles-and-Commentary-Public-Consultation.pdf

The evolving landscape of digital assets and the emerging legal framework present both opportunities and challenges for Web3 projects. Prokopiev Law Group is well-positioned to help Web3 projects navigate these legal requirements by offering expert advice and tailored solutions. Our team of experienced professionals understands the complexities of digital asset regulations and is committed to staying up-to-date with the latest developments. By partnering with Prokopiev Law Group, Web3 projects can confidently move forward, ensuring compliance with the applicable legal framework and fostering a responsible and sustainable digital asset ecosystem.

DISCLAIMER: The information provided is not legal, tax, or accounting advice and should not be used as such. It is for discussion purposes only. Seek guidance from your own legal counsel and advisors on any matters. The views presented are those of the author and not any other individual or organization. The information provided is for general educational purposes only and is not investment advice. The author of this material makes no guarantees or warranties about the accuracy or completeness of the information. A professional should review any action based on the information discussed. The author is not liable for any loss from acting on the information discussed.