A distributed ledger often referred to as blockchain or distributed ledger technology (“DLT”), has a wide variety of potential uses and is currently being touted as a helpful tool for tracking financial transactions such as issuing and trading stock. Nonetheless, the nature of DLT raises some interesting jurisdictional questions and concerns.
At its core, a distributed ledger is a digital transaction record that is shared with multiple computers (also known as nodes) on a decentralized network. Distributed ledgers are often promoted as being almost immutable because the contents of each ledger are verified by each node on the ledger’s network. In order for the ledger to be altered, the nodes on the network must reach a consensus that the proposed change is, in fact, a valid change. Thus no centralized entity must be responsible for the contents of the ledger. The lack of centralized control purportedly makes DLT more difficult for hackers to compromise and, therefore, safer than traditional record-keeping methods. However, this lack of centralization may create jurisdictional issues for DLT.
The very definition of a distributed ledger requires that it not be located in a specific physical place. Instead, to be a distributed ledger, the ledger must be located on multiple nodes. Those nodes can, in turn, be physically located anywhere. As there is currently no uniform method for determining where a distributed ledger is located, there are likely to be disagreements about which jurisdiction governs a distributed ledger in the future.
For example, if a distributed ledger is maintained on nodes that are located in different states or different countries, each of those governments could attempt to assert jurisdiction over the ledger based on the node’s physical presence. If multiple governments assert jurisdiction and attempt to force the ledger to comply with their laws and regulations, the ledger could be subjected to a multitude of differing and even conflicting legal requirements. The difficulties and complications associated with attempting to comply with the laws of multiple jurisdictions would likely decrease the efficiency of the distributed ledger or, worse, render it completely useless. Of course, a distributed ledger may be able to avoid such jurisdictional issues by being maintained only on nodes located within the same jurisdiction. Alternatively, the creator of the distributed ledger may be able to establish a choice of law provision that applies to all of the nodes on the ledger’s network. The expansive and cross-jurisdictional nature of DLT, however, suggests jurisdictional disputes regarding the governance of distributed ledgers will emerge as the use of DLT increases. Therefore, anyone creating a distributed ledger or utilizing DLT should be cognizant of the jurisdictional issues that may arise if the distributed ledger is maintained by nodes in multiple jurisdictions.
Further, it may be difficult to determine where a dispute involving a distributed ledger should be adjudicated. For a court to have the authority to adjudicate a dispute, the court must have both subject matter jurisdiction and personal jurisdiction. Because distributed ledgers do not have a specific physical location and a consistent procedure has not been established for determining where they are located, it may be unclear whether the court has jurisdiction over the dispute. For example, when federal jurisdiction is based on diversity jurisdiction, the parties must establish that the amount in controversy exceeds $75,000 and that the parties are diverse because they reside in different states or the federal court will not have jurisdiction. If a plaintiff were to sue a distributed ledger that was maintained on multiple nodes, including a node located in the plaintiff’s state, would the node’s presence in the plaintiff’s state destroy diversity jurisdiction? What if multiple nodes, or even the majority of the nodes, maintaining the distributed ledger were located in the same state as the plaintiff? Moreover, if the nodes are located in multiple states or countries, it may be unclear which court(s) has personal jurisdiction over the distributed ledger. In other words, is the presence of a single node sufficient to create personal jurisdiction for over the entire distributed ledger? What about multiple nodes? If multiple nodes are required to establish presence in a state, how many nodes must be present? These questions and many others have not yet been answered. As a result, jurisdictional issues will arise in DLT litigation until there is a clear mechanism for determining where a distributed ledger “resides” for jurisdictional purposes. Therefore, creators and users of distributed ledgers should be aware that they may face lawsuits in multiple jurisdictions along with disputes as to which court(s) has jurisdiction over the suit.
While a procedure will likely be established for determining the jurisdiction of a distributed ledger, the use of DLT is still in its early stages and it is unclear where a distributed ledger will be located for jurisdictional purposes. Multiple governments may, therefore, attempt to enforce their laws on distributed ledgers maintained on nodes within their borders. Additionally, courts may struggle to determine whether they have jurisdiction over a distributed ledger. These are just a few of the jurisdictional issues that may affect DLT and those who use it. As the use of DLT increases, it is likely that additional jurisdictional issues will become apparent.