UNIDROIT Publishes Principles on Digital Assets and Private Law

On May 18, 2023, the International Institute for the Unification of Private Law (UNIDROIT), the intergovernmental organization for modernizing and coordinating private law, published a set of draft Principles on Digital Assets and Private Law. The 19 Principles provide high-level guidelines with which States (including UNIDROIT Member States) would be encouraged to align their own legislation on digital assets. The U.K., U.S. and EU Member States are among the members of UNIDROIT. The Principles have been designed to be neutral as to jurisdiction, technology and their manner of implementation, making them flexible and easy to incorporate into national legal systems. If the draft Principles are accepted by UNIDROIT's Governing Council, they are expected to be finalized and published in 2023.

"Digital assets" are defined very broadly for these purposes as electronic records which are capable of being subject to control. This includes digital assets that are linked to another asset. It would be up to individual States to determine whether digital assets fit within an existing asset class within their own jurisdictions, or whether a new asset class should be recognized. The Principles detail what constitutes "control" and when a change of control would occur. An "innocent acquirer" would take a digital asset free of any conflicting proprietary claims—States would have some freedom to determine exactly what constitutes an "innocent" acquirer under their national laws. Proprietary rights in digital assets would also be effective against parties in insolvency-related proceedings.

The Principles define the parameters of custody services for digital assets, the duties that custodians owe to their clients and what should be done in the event of an insolvency of a custodian. Digital assets would be capable of being the subject of security rights—enforcement of security over a digital asset would be subject to national laws on enforcement. Once adopted by a State, the Principles should take precedence over State laws in instances where they conflict.

The U.K. Law Commission is an observer on the UNIDROIT working group responsible for the Principles and has set out its own proposals for English law reform on digital assets in a consultation paper published in July 2022. The consultation paper takes account of the proposed UNIDROIT Principles and describes where English law may adhere to or diverge from the UNIDROIT proposals. The Law Commission is planning to publish a final report on English law reform for digital assets in 2023. The UNIDROIT Principles are not intended to interfere with regulatory laws in national jurisdictions, so the EU's upcoming Regulation on Markets in Crypto-Assets and the U.K.'s proposed rules for crypto-assets (under the Financial Services and Markets Bill and the U.K. government's recent consultation on crypto-asset regulation) could operate in tandem with implementation of the Principles.

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