Jurisdiction and digital currency businesses


For the most part, digital currencies are by their very nature decentralised; meaning that they are not tied to a specific country unlike the British Pound or the US Dollar. However, this does not stop a country claiming jurisdiction over a business that uses digital currencies as a means of payment. In fact, due to the increasing trend of digital currencies being recognised as foreign currency, for either tax or business purposes, this simplifies the application of existing legal frameworks.

On the outset, it should be pointed out that claiming jurisdiction only happens if some form of illegal activity has been detected. At the same time, the applicability of current legal frameworks appear to be somewhat difficult to businesses which have a decentralised structure. In fact, the increasing trend is for decentralised business structures entering the market. That in itself presents numerous jurisdiction related issues which are best left to a future article. In the meantime, this article aims to illustrate the two main principles that countries may apply to a traditional business that uses digital currencies within its model when it comes to claiming such jurisdiction.

One of the most commonly used grounds to assert jurisdiction is the territoriality principle as it allows the State to manifest its sovereignty. In simple terms, this principle is based on the idea that the State will have jurisdiction over any act or conduct that happens within its borders. Furthermore, the territoriality principle is sub-divided into subjective and objective territoriality.

For those acts which take place solely within the borders of a country then the subjective territoriality principle will apply. For instance, if a digital currency exchange were to operate only within State A and illicit activities were detected there, then there would be no issue in terms of claiming jurisdiction using the territoriality principle. In practice, the case could be one where a digital currency exchange has its servers in State A and it is detected that a hack was conducted from State A. In this case, subjective territoriality would apply and the issue of jurisdiction settled.

Contrarily to the above, if an act occurs only partially within its borders, then the objective territoriality principle will be applied. One example of this is where a digital currency exchange had servers within State A but was subject to a multivector attack originating from State A and State B. As this example shows, there could be a conflict in terms of jurisdiction between State A and State B as the offence has been partly committed in both territories. This is known as a competing jurisdictional claim. In fact, if each of the two States were to assert their jurisdiction then there might be a competing claim. The primary issue  that would occur here is that international law  does not create a hierarchy which can resolve this.

Unlike the territoriality principle, the nationality principle focuses on a State claiming jurisdiction through its nationals; even if these are on foreign soil. Similarly to the territoriality principle, this ground of claiming jurisdiction is also divided into two parts; namely active and passive nationality.

Active nationality focuses on claiming jurisdiction in the case where the suspect is of that nationality. For example, if a hacker from State A, but located in State B, were to steal funds from a digital currency exchange in State B, then State A could still claim jurisdiction. In this instance State A could make a law that makes such an activity between its own nationals and foreign nationals illegal irrespective of their nationality. To this effect, extradition may be sought and in doing so it would be claiming jurisdiction.

When it comes to passive nationality, this focuses on claiming jurisdiction on the basis that the complainant is of that state’s nationality. Having said this, an example of passive nationality would be where State A creates a law that makes it illegal to commit fraud or theft towards a citizen from State A. In this instance, committing the offence can lead to that State claiming jurisdiction pursuant to that law.

As it can be seen, various principles can be applied for a state to claim jurisdiction over a case. Whether or not a state actually uses one principle or the other will depend on the circumstances of the case itself. It will invariably come down to the legislation and legal tradition of each state to decide which principle to apply as well. Having said this, whilst this article has aimed to be informative with respect to the interaction between jurisdiction and digital currency based businesses, the main notion laid down is that these businesses seem to be no different from traditional ones. In other words, whilst it has been claimed that digital currencies are by their very nature decentralised, until a decentralised business model appears in the market, current legal frameworks seem to be adequate to deal with issues linked to jurisdiction.