I will be presenting my thoughts on the subject above in the upcoming Congress of the UNCITRAL for the celebration of its 50th anniversary (4-6 July 2017).

My paper currently on the Congress website is a version which I sent to the UNCITRAL Secretariat some months ago and which no longer represents my latest thinking in some significant respects. I am asking the Secretariat to replace it with the latest version, to which I make a link from here. 

The paper gives a particular emphasis on the topic of proprietary restitution of blockchain-based tokens as an area which calls for a globally unified solution.

Postscript: As from 16 June, the Congress website carries the latest version. Many thanks to the Secretariat for swiftly acting on my request. 

Since 2011, the UNCITRAL has been working on legal issues relating to the use of electronic transferable records. From the beginning, it envisages two approaches to establishing the identity of the person to whom an electronic transferable record is issued or transferred, namely the token model which identifies the person in the record itself and the registry model which identifies the person in a separate registry (A/CN.9/WG.IV/WP.115 (hereafter "the 2011 document") at para. 48). Like its previous works on electronic commerce, the UNCITRAL is adhering to the principle of technology neutrality (Id. at para. 35) and nowhere in the official documents published to date could I find any mention of blockchain, cryptocurrency or bitcoin. But I think the work should be pursued with the blockchain technology in mind so as to facilitate its applications to replace paper-based transferable documents such as bills of lading.
In the current draft of a model law (A/CN.9/WG.IV/WP.135/Add.1, August 2015), the exclusive control of an electronic transferable record is treated as functionally equivalent to the possession of a paper-based transferable document. Thus Draft Article 17(1) provides:

Where the law requires the possession of a paper-based transferable document or instrument, that requirement is met with respect to an electronic transferable record if:
(a) A method is used to establish exclusive control of that electronic transferable record by a person and to reliably [identify] [establish] that person as the person in control; and
(b) The method used is either:
(i) As reliable as appropriate for the purpose for which the electronic transferable record was generated, in light of all the relevant circumstances, including any relevant agreement; or
(ii) Proven in fact to have fulfilled the functions described in subparagraph (a) above, by itself or together with further evidence.

In the Remarks which accompany this provision, the Secretariat makes some noteworthy comments. It says, "the electronic transferable record in itself does not necessarily identify the person in control, but rather the method or system employed to establish control as a whole performs that function" (Id. at para. 22.). This understanding may simply be intended to cater for the registry model as described in the 2011 document. But it may also open the door to blockchain-based electronic records which may be seen as ill-fitted with the description in the 2011 document of the token model. 

The Secretariat goes on to say, "identification should not be understood as implying an obligation to name the person in control, as the draft Model Law allows for the issuance of electronic transferable records to bearer, which implies anonymity" (Ibid.). This view will also ease the way for the blockchain technology as the latter permits the holders of electronic records to remain anonymous. 

The Secretariat also notes, "reference to the person in control of the electronic transferable record does not imply that that person is also the rightful person in control of that record as this is for substantive law to determine" (Id. at para. 21). In other words, the exclusive control of an electronic transferable record is only equivalent to the possession of a paper-based transferable document. Put in the context of the blockchain technology, this view seems consistent with my opinion that the ownership of a blockchain-based electronic record cannot be determined simply by reference to who has the exclusive control of it (See my earlier post).

The Secretariat proceeds to say, "reference to the person in control does not exclude the possibility of having more than one person in control." It is not easy to see what this observation means for a blockchain-based electronic record. The latter is under the exclusive control of the person holding the private key for the address in which the record is kept. It is, on the other hand, possible for one private key to be known by a number of persons.

In my earlier post, I have suggested that one of the most promising use cases of the blockchain technology is electronic bill of lading: a token on a blockchain issued by the carrier of goods which represents the right to demand the delivery of the goods. As noted in another of my earlier post, I stressed the importance of the legal infrastructure supporting a blockchain-based electronic bill of lading. The Rotterdam Rules embrace electronic bill of lading, calling it a "negotiable electronic transport record" (See Articles 8, 50 and 51(4)). Though not yet in force, if the Rotterdam Rules come to form part of the legal infrastructure, the question will arise whether they are applicable to a blockchain-based electronic bill of lading as well as the existing registry-based electronic bill of lading. 

One of the underlying principles of the Rotterdam Rules is technology neutrality: the law should neither require nor assume the adoption of a particular technology. It follows that a blockchain-based electronic bill of lading is certainly not excluded a priori. But it does not mean that any technology can create a "negotiable electronic transport record" within the meaning of the Rotterdam Rules. According to Article 9, the use of a "negotiable electronic transport record" is subject to the procedure referred to in the contract of carriage which provides for:

• (a) the method for the issuance and the transfer of the record to an intended holder;
• (b) an assurance that the record retains its integrity;
• (c) the manner in which the holder is able to demonstrate that it is the holder; and
• (d) the manner of providing confirmation that delivery to the holder has been effected or that the record has ceased to have any effect or validity.

Is the blockchain technology capable of providing for all those elements? Article 9 is the manifestation of another principle underlying the Rotterdam Rules: the principle of functional equivalence which requires an electronic medium to fulfill the essential functions of the corresponding paper-based system. In this regard, implicit in the two concepts "issuance" and "transfer" in (a) is the "exclusive control" of the record. Article 1 provides their definitions in the following terms:
For the purposes of this Convention:

...

21. The “issuance” of a negotiable electronic transport record means the issuance of the record in accordance with procedures that ensure that the record is subject to exclusive control from its creation until it ceases to have any effect or validity.
22. The “transfer” of a negotiable electronic transport record means the transfer of exclusive control over the record.

The requirement of "exclusive control" fulfills the essential function of a bill of lading as a document of title. The blockchain technology satisfies this requirement since a token on a blockchain is subject to the exclusive control of the holder of the private key corresponding to the address in which the token is kept. Furthermore, since its algorithm makes a double spending impossible, no two persons could claim to hold the same token.
The blockchain technology is also capable of providing for (b), i.e. an assurance that the record retains its integrity. There can be no tampering with records locked in a well-maintained blockchain such as the one for bitcoin. The blockchain technology indeed has an edge over registry systems since the latter rely on the trustworthiness of the entity maintaining the registry: the registry may have to be equipped with, inter alia, activity logs, an offsite backup system and an adequate oversight on its management.

With respect to (c), Sturley et al. in their book, The Rotterdam Rules (2010), observe, "[t]he token system suffers the technical disadvantage that the required security is extremely difficult to achieve. Indeed, it appears that the technology needed for a reliable token system is still not available in the market place" (para. 3.039). It would be safe to say that things have now changed with the advent of the blockchain technology (See also my earlier post). A question remains, however, whether (c) requires the holder to be identified by its name. That would not be possible on an open, permissionless blockchain since the parties are anonymous. Logistically, it seems possible to build a system whereby goods are delivered without the name of the holder of the private key being revealed to the carrier by, for example, allowing the token to activate the key to the container. Then, a blockchain-based bill of lading may be seen as functionally equivalent to a bearer bill of lading and accordingly considered to be sufficient to provide for (c).

The point (d) would be deemed to be provided for if the system is configured in a way that causes the token to be transmitted to the carrier upon the delivery of the goods.

In my earlier post, I have suggested that one of the most promising use cases of the blockchain technology is electronic bill of lading: a token on a blockchain issued by the carrier of goods which represents the right to demand the delivery of the goods.

In another of my earlier post, I have pointed out that while many of the proposed applications of the blockchain technology seem to rest on the assumption that the participants could make effective arrangements themselves, they will produce their intended effects only in the sphere of party autonomy as recognised by the applicable law.

That also holds true with a blockchain-based bill of lading. Suppose that the parties to a sale contract have agreed on the use of a blockchain-based bill of lading and the seller has concluded a carriage contract under which the carrier has agreed to issue such a bill of lading. Their arrangement will work among themselves in accordance with their agreements (If not, remedies for breach of contract will be available). But their agreements are not sufficient to defeat the claims of third parties such as a creditor of the seller seizing the goods, the trustee of the seller's bankruptcy estate, another buyer who has bought the same goods from the seller and a person who has bought the goods in good faith from the person who had stolen them.

The applicable law might protect the (original) buyer if he holds a traditional paper bill of lading. Thus, under Japanese law, once a bill of lading has been issued, the disposal of the goods represented by it is not possible otherwise than by means of the bill of lading (Article 573 of the Commercial Code as referred to by Article 10 of the Carriage of Goods by Sea Act). Furthermore, the delivery of a bill of lading to its lawful holder has the same legal effect as the delivery of the goods represented by it (Article 575 of the Commercial Code as referred to by Article 10 of the Carriage of Goods by Sea Act), with the consequence that an erga omnes effect is bestowed on the holder's title in the goods (Article 178 of the Civil Code).

For electronic bill of lading to flourish, it is essential for it to be given a similar support from the legal infrastructure. The lack of it has long afflicted the various projects of electronic bill of lading. Thus, the banking industry has been reluctant to accept this type of bill of lading as adequate collateral. One laudable initiative for embracing electronic bill of lading is the Rotterdam Rules (United Nations Convention on Contracts for the International Carriage of Goods Wholly or Partly by Sea) which contain provisions for "negotiable electronic transport records." Adopted in 2008, the Convention has not entered into force yet.

For a blockchain-based bill of lading to take off, it is also important for it to be given a sufficient support from the legal infrastructure. To start the ball rolling, it may be worth asking whether a blockchain-based bill of lading constitutes a "negotiable electronic transport record" under the Rotterdam Rules, a question I intend to address in my future post.

The article written by José Angelo Estrella Faria, the secretary general of the UNIDROIT, entitled "Uniform Law And Functional Equivalence: Diverting Paths or Stops Along The Same Road? Thoughts on a New International Regime for Transport Documents" 2 Elon L. Rev. 1 is excellent. 

The author notes that in order to emulate the function of a bill of lading as a document of title in electronic environment, it is necessary to ensure that only the person recognized by a registry as the rightful "holder" is entitled to claim delivery of the goods. Here, he is only restating a widely supported proposition.

What is interesting, though, is that he goes on to observe, "[a]t least in theory, the same result could also be achieved if computer technology were able to create a 'unique' electronic record that could be exclusively held by a holder and transferred to another without replication at some point down the negotiating chain." Later in the same article, the author also states, "[o]ne conceivable model, for instance, might rely on a technical device that would assure the uniqueness of an electronic record to allow the record itself to be 'passed' down a negotiation chain." To this sentence, he attaches a footnote stating "[s]o far, however, computer technology has not yet been able to create such a 'unique' electronic record, which means that electronic negotiability systems continue to rely essentially on electronic registries." The author could hardly be blamed for not mentioning the blockchain technology since this article was published in February 2011, a few years before the technology has come to be widely known outside the circle of computer specialists. Now in 2015, the blockchain technology has been tested enough through the bitcoin to inspire confidence in saying that it is at least as secure as any registry based system (See also my earlier post).

In an earlier post, I have argued that the blockchain technology could finally herald a breakthrough in the digitization of bills of lading, which are a backbone of trade in goods.
Another backbone of trade in goods is a letter of credit. It may be replaced by a vastly cheaper alternative of escrow transactions using multi-signature accounts on blockchains. A letter of credit relies on the issuing bank checking conformity of documents with the terms of the credit. As a non-expert in goods, the bank is not concerned with the conformity of goods with the underlying sale contract (under the principle of independence as enshrined in the UCPs). Under the alternative model, an expert in goods will act as the holder of a third signature for the multi-signature account, who will be called upon to inspect the goods in case of any dispute between the seller and the buyer.
For both bills of lading and letters of credit, the blockchain technology may offer alternatives and thus has the potential of providing a spark for the world trade and economy. Are there any entrepreneurs willing to put these ideas into practice?

The first and most famous application of the blockchain technology is bitcoin. But the real innovation lies in its underlying technology and a number of proposals and trials have been made on its application in the past few years. I personally think that one of the most promising areas of application is trade in goods. 

Bills of lading, which form the backbone of trade in goods, have been the subject of a number of attempts for digitization since 1986. But they seem to have yielded only a limited success, with paper bills of lading still occupying a mainstream status. The only means to electronically emulate the function of bills of lading as a document of title is to effect an online registration. It, however, limits the possibility of the use of electronic bills of lading to trading among members of a registry. This limitation encumbers the spread of electronic bill of lading since trading often has to involve a number of parties such as consignors, banks, carriers, and consignees. 

With the advent of the blockchain technology, I think a breakthrough is finally on the horizon. A delivery order issued by the carrier may be registered on a blockchain and may be transferred to the seller and then to the subsequent buyers on the blockchain. The algorism of the blockchain ensures singularity, a function essential as documents of title. It does not rest on any memberships but allows everyone to take part in transactions. While putting sensitive trade-related information on blockchain may give rise to concern, it could be overcome by putting the hash values of such information instead.