The new HCCH Project focused on an extensive study of digital tokens.
After the conclusion and decision at its 2024 meeting by the governing body of the HCCH, the Council on General Affairs and Policy (CGAP), the Permanent Bureau has recently begun its work that should examine, in partnership with subject-matters professionals and Observers, the private international law guidelines relating to so-called digital tokens (the Digital Tokens Project).
The Digital Tokens Project should comprise a research study as explained in Preliminary Document No. 5B REV of March 2024.
This initiative is to be commenced with assistance from qualified subject-matter specialists identified by HCCH Members and Observers.
Realizing the significance of preventing/avoiding fragmentation among legal instruments created by various intergovernmental entities on related subject matters such as the UNIDROIT Principles on Digital Assets and Private Law, the Digital Tokens Project will commence with a broad, unbiased taxonomic research study of various/current global as well as regional instruments, and previous and current work on the said topic.
The Digital Tokens Project may reportedly include consultations with the subject-matter professionals as well as Observers throughout the coming year, such as sessions/meetings and the provision of written feedback to enquiries from the PB.
The PB is to report on the Digital Tokens Project to CGAP at its 2025 meeting, which should include proposals for upcoming steps.
Further information/details regarding the Digital Tokens Project may be accessed in Preliminary Document No. 5B REV of March 2024.
As explained in the official document, digital tokenization “allows tangible and intangible objects, rights and claims to be virtually represented and stored electronically, usually in decentralised or distributed storage mechanisms.”
The paper added that there is currently no universal uniform definition of “digital tokenization” or “digital tokens”.
While recognizing the lack of such a definition, the Bank for International Settlements (BIS) notes that tokenization “refers to the digital representation of value or rights.1 Tokenisation can be an enabler of fast and secure transactions, including transfers, tracking and management of tokenized value or rights across borders.”
According to the BIS, tokenization streamlines transactions, while also “reducing the need for intermediaries and increasing the transparency and security of these transactions.”
Consequently, digital tokenization has reportedly started to “become one of the most prominent use cases of decentralized and distributed storage mechanisms in financial and capital markets in many
jurisdictions.”
The digital nature of these tokens, “compounded by their storage on decentralized or distributed storage mechanisms, necessarily raises issues of localization which, in turn, have an impact on the PIL analysis.”
An examination of whether the traditional objective “connecting factors could continue to apply for the various cross-border use cases of digital tokenization is timely and desirable, given their growing adoption.”
The document added that the “variety of actors and participants in transactions involving digital tokens may also challenge the application of traditional connecting factors, as there may be several objective connecting factors to a number of jurisdictions.”
The digital nature of this field also means “that transactions may occur, and participants may be located, in different jurisdictions and locations.”
PIL questions regarding which law “would be applicable and which forum would have jurisdiction would necessarily arise.”
An additional complexity arises “as the development of domestic substantive law relating to the various use cases of digital tokens has not been coordinated or uniform.”
This leads to a fragmented, “possibly multi-jurisdictional, and multi-stakeholder arena, which may differ across the different use cases of digital tokenisation.”