Abstract
The UNIDROIT Principle on Digital Assets and Private Law was adopted by the UNIDROIT Governing Council at its 102nd session (10-12 May 2023). These comprise guidance and best practices for legislators in developing the private law framework for transactions involving digital assets. These ideas stand for one of the seven guidelines are one of UNIDROIT’s many efforts to simplify how developing technologies are treated under private law internationally. The principles do not address the regulatory framework that should be applied to digital assets or other related private law matters because they were meant to be drafted in an organizationally neutral and technology jurisdictional matters of UNIDROIT projects to simplify global private law approaches to emerging technology treatment. The principles do not address the regulatory framework that should be applied to digital assets or other related private law matters because they were meant to be drafted in an organizationally neutral and technology jurisdictional manner.
Introduction
The International Institute for the Unification of Private Law (‘UNIDROIT’) is an independent intergovernmental organization that works towards the harmonization and modernization of private law between states.[1]We are restricted in this article to discussing the definition of “digital asset.” The exercise of proprietary rights over such assets is significantly affected by this definition, which serves as the foundation for the principles.[2] The concept is applicable to “digital assets,” which are defined as any “electronic record” that can be put under “control.”
“Electronic record” means information which is:
- stored in an electronic medium and,
- capable of being retrieved.
Control is the key concept under the principles, as it also forms the basis of the other legal consequences (as discussed below). A person is generally considered to have control if they have:
The exclusive ability to prevent others from obtaining substantially all of the benefit from the digital asset (i.e ., negative control):
- The ability to obtain substantially all benefits from the digital asset (i.e. positive control);
- The exclusive ability to transfer that positive and negative control to another person:
- The ability to identify themselves as having the powers listed above.
- There are also additional nuances included, for example, to address the situation where a person has contested to share control.[3]
This definition has the potential to include a range of scenarios that are not typically digital assets. For instance, it might apply to an email, loyalty points within the video game, or a domain name, since these are all electronic records that can be controlled. Moreover, the breadth and specifics of this definition are crucial because they will shape how easily member states can adopt and put into practice.
Scrutiny
Indeed, UNIDROIT has put forth a comprehensive definition of digital assets, but implementing this definition presents significant challenges. In our opinion, these challenges can be categorized into two paradigms. The first set of challenges is global, and not dependent on any specific jurisdiction. It seems necessary for the Digital Assets Working Group to make revisions to the Principles document to address concerns in this category.
The second set of challenges pertains to local jurisdictions. These issues arise for two primary reasons. First, local laws, referred to as “other law” in the Principles, have previously adopted their definitions of digital assets that may conflict with the Principles’ definition. Second, the structure of existing local laws does not readily allow individuals to incorporate these new definitions into their framework.
Challenges of Implementation
It is explicitly stated in Principle 3(3) that digital assets are subject to all other laws, that is, any laws within a given State that are not “Principle Laws” as described in Principle 2(3). Principle 3(3) provides a number of examples of both contract law and property law concerns for this reason. It is not intended for the list to be exhaustive or limiting. It is emphasised once more that these principles only address private law concerns pertaining to digital assets; they do not address rules that must be upheld by public authorities, which could be referred to as “regulation” or “regulated power” in any given jurisdiction. Furthermore, these guidelines only address a narrow portion of jurisdiction.[4]
Indian laws concerning digital assets combine both public and private law principles. Unlike the UNIDROIT Principles, which mainly apply to private law, it is challenging for these laws to adopt a definition of digital assets that solely suits private law.
For instance, the Information Technology Act, 2000, regulates private law aspects of electronic records but also contains public law provisions for virtual assets. Trying to incorporate the UNIDROIT Principle’s definition of digital assets into this framework is impractical and could lead to over-regulation and compliance burdens.
The UNIDROIT principles don’t address the challenges of incorporation in such mixed legal systems. They offer three implementation strategies but don’t account for scenarios where laws contain both public and private law provisions, as seen in India.
A thorough study of incorporation is needed to understand how these principles can be effectively integrated into domestic law. The flexibility for incorporating these principles is limited in mixed law jurisdictions like India, where regulators face the challenge of choosing a suitable method of incorporation, differentiating between public and private law, and educating judicial authorities on these principles and digital asset definition.
Regardless of the representation or purpose of the parties dealing in these assets, any proprietary elements of an asset linked to a digital asset may be governed by the rules of the other legislation already in force. As an illustration, a person (vita) may produce a digital asset (V-AFT) that is kept and managed via a distributed, public, permission less blockchain ledger. Alpha may represent in writing and/or verbally that she wants VNFT to uphold all of her copyrights with regard to a musical piece that she has created. Furthermore, Vita may deal with others (beta) in which they consent that Vita will assign her copyright to Beta by transferring the VNFT, and that Vita may then reassign the copyrights to other parties by transferring to them.Regardless of Vita’s intention to tokenize her copyrights, the applicable copyright law will determine whether transferring the A-NFT constitutes a valid assignment of the copyrights in question, as well as whether Beta can subsequently re-assign these copyrights by re-transferring the VNFT.
CONFLICTING DEFINITION WITH OTHER LAWS
In India, there’s an issue related to conflicting definitions of digital assets in the legal framework. While Indian Law does not provide a specific definition for digital assets, the Income Tax Act of 1961 was amended in 2022 to tax virtual digital assets, introducing its definition. This definition is narrower than the one found in the UNIDROIT Principles, excluding Indian and foreign currency, which notably excludes foreign Sovereign Digital Currencies like the Digital Yuan.
The 1961 Act allows the Central Government to exclude certain asset classes from this definition, while they have exercised. The exclusions follow a dynamic, incremental approach with ongoing modifications by the Central Government. While this approach is rooted in public law, it holds significance for private law as well. A well-defined digital asset framework incentivizes regulators to adopt similar definitions in private law, promoting legal certainty and reducing regulatory conflicts.
From a design perspective, this approach allows the state to flexibly include or exclude assets from the scope of digital assets based on specific policy goals. This design choice contradicts the UNDROIT principles, which don’t grant states the authority to comprehensively exempt assets from relevant laws and limit states’ ability to impose unique control and transfer paradigms on digital assets. This limitation is understudied within the principles and the greater clarity on how municipal governments can modify the definition of digital assets would be helpful.
CONCLUSION
The article highlights the intricate landscape surrounding the definition and implementation of digital asset principles, as presented by UNIDROIT. It focuses on the unique challenges faced by countries that combine both private and public law principles, with India serving as a case study. The central issue revolves around the expansive definition of “digital assets” proposed by UNIDROIT, which has the potential to encompass a wide range of scenarios, creating complexities in its practical application.
These challenges can be broadly categorized into global and local issues. Global challenges, which transcend specific jurisdictions, require revisions to the UNIDROIT principles to address concerns on an international scale. Local jurisdiction challenges are more intricate and stem from conflicts between the UNIDROIT principles and existing local laws. The article underscores that the UNIDROIT principles do not adequately address the challenges faced by mixed legal systems like India, where both public and private law principles coexist. It emphasizes the necessity for a comprehensive study to determine how these principles can be effectively integrated into the domestic legal framework. Furthermore, the article highlights the conflicting definitions of digital assets within the Indian legal framework and the implications of this inconsistency.
The flexibility and exclusions allowed by the Indian Income Tax Act present a unique approach that contradicts the UNIDROIT principles, potentially creating legal uncertainties and regulatory conflicts. Clarity is required regarding the applicability of the principles in countries where both private and public law principles are in place. In essence, the article underscores the need for a harmonized and adaptable approach in the development and application of digital asset principles. It advocates for further engagement, in-depth study, and collaboration between international organizations, legal experts, and domestic regulators to address the complex challenges arising in this evolving legal landscape. Ultimately, achieving a balance between global harmonization and local specificity is crucial for the successful implementation of digital asset principles in diverse legal environments.
Author : Ananya Nandwana, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at IIPRD.
[1] Sohini Banerjee, KS Roshan Menon, ‘Defining digital assets for private law: Perspectives from the global south’, (Shardul Amarchand Mangaldas, 10 October 2023, <https://www.amsshardul.com/insight/defining-digital-assets-for-private-law-perspectives-from-the-global-south/>,accessed 26th October 2023
[2] Ibid.
[3] ‘International harmonisation of digital asset law and regulation: a series of meaningful steps, but a long road ahead’,(Linklaters, 6 June 2023), <https://www.linklaters.com/en-us/insights/blogs/fintechlinks/2023/june/international-harmonisation-of-digital-asset-law-and-regulation> accessed 27th October 2023
[4] ‘Overview’ (UNIDROIT), <https://www.unidroit.org/wp-content/uploads/2023/04/C.D.-102-6-Principles-on-Digital-Assets-and-Private-Law.pdf> accessed 27th October 2023
