UK lodges 'supranational approach' to decentralized disputes
Getting your Trinity Audio player ready...
The United Kingdom Law Commission—a statutory independent body that keeps U.K. laws under review and recommends reform—opened a consultation on June 5 to determine the tricky and controversial issue of which country's laws apply when disputes arise over decentralized digital assets and networks.
First reported by Ledger Insights on June 6, the Commission proposed an innovative 'supranational approach' that considers protocol whitepapers and network participant expectations rather than attempting to apply existing territorial rules to complex decentralized disputes to overcome this dilemma.
Since the entry of distributed ledger technology (DLT) and its most famous iteration, blockchain, onto the global scene, legal systems around the globe have been struggling to get to grips with the decentralized—or semi-decentralized—structure of many entities utilizing the technology.
Legal processes are often reliant on companies and groups having a physical location to determine which jurisdiction's laws apply; when a dispute arises, in which country's court the parties should litigate their dispute; and after a judgment is passed, how it can be recognized and enforced in the courts of another country.
Private international law is the body of domestic law that supplies the rules used to determine these questions, and it is premised on the principle that all national systems of law are limited in their application to sovereign territories defined by geographical boundaries – often known as the 'territoriality principle.'
Decentralized DLT and blockchain entities challenge this tradition by transcending and defying geographical boundaries—a phenomenon described by the Law Commission as 'omniterritoriality.'
The proposed solution
In order to meet this challenge and ensure that decentralized entities remain answerable to laws, irrespective of where they may be operating, the Law Commission proposed developing a 'supranational' approach – i.e., one that transcends national boundaries or governments.
This approach would involve the creation of 'a special body of substantive rules of decision that apply only in private law cases in which the law of no country would be appropriate to apply to resolve the issue in dispute and the law of every country would be appropriate to apply to resolve the issue in dispute.' According to the Law Commission, the supranational approach is often formalized through conventions and treaties. It does not require the special substantive rules to be a state-based law or agreed upon at an international level.
This approach would involve the creation of 'a special body of substantive rules of decision that apply only in private law cases in which the law of no country would be appropriate to apply to resolve the issue in dispute and the law of every country would be appropriate to apply to resolve the issue in dispute.'
According to the Law Commission, the supranational approach is often formalized through conventions and treaties and does not require the special substantive rules to be a state-based law or agreed upon at an international level.
In other words, for peer-to-peer transactions on truly decentralized networks, the courts would not be required to identify the 'applicable law,' rather they would aim for a 'just disposal of proceedings' by reference to a range of different factors, including the legitimate expectations of the parties based on the terms of the relevant decentralized protocol and any white paper or other public document relating to the network.
In this way, a dispute that crosses international boundaries, multiple jurisdictions, and lacks any physical location could be raised in the U.K. courts, and the parties could appeal to laws of other jurisdictions when making their arguments.
Though the Commission's proposal would be initially for the U.K. courts to take up, depending on how it played out other countries may follow suit and apply a similar approach to complex blockchain and DLT disputes.
By proposing supranational rules that consider the unique characteristics of decentralized networks such as blockchain, the U.K. Law Commission is innovating itself in an attempt to meet the challenges of new innovative technologies and systems present to traditional legal systems.
Thus, the Law Commission's efforts represent a significant step toward filling a substantial legal hole around the issue of jurisdiction and decentralized entities.
The consultation will remain open until September 8, 2025.
Editor's note: This article has been updated.
Watch | Tech of Tomorrow: Diving into the impact of tech in shaping the future
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