Likewise, German legislation needed to be enacted in 1989 to address the concerns raised by the 1970 German Federal Court decision. The new legislation needed to clearly state that contracts with financial derivatives are not subject to the provisions of the German civil code, which states that no obligations are created on the basis of gambling, which jeopardized the operation of all German derivatives laws.
The phenomenon is global. In Japan, where civil law based on both German and French methods applies, the judgment that bitcoin is not property in the context of the bankruptcy of Mt Gox, a bitcoin exchange, has created uncertainty that still persists despite regulatory legislation. After this decision was made in 2016. The Hangzhou Internet Court in China came to a different result, although the law in question is very similar, indicating that this approach is unpredictable.
Common law was able to resolve all of these issues through judicial decisions, creating a new precedent for new situations, as well as taking into account similar situations under previous case law. While in some cases decisions may be combined with one line of reasoning over another, the commercially sensitive judiciary has generally been pragmatic.
Financial business is safest under true common law. The unfolding blanket of EU legislation means that the only remaining pure common law system in the EU, the Irish legal system, is rapidly being eroded by an approach based on EU codes.
The UK, as part of the EU, has been able to pragmatically implement this code through its first-class regulators and supervisors, which have interpreted and applied common law rules. However, Ireland is in the euro area and its supervisors are supervised (and in some cases part of) the European Central Bank and supervisors across the EU, which continue to enact increasingly stringent financial codes.
The EU’s code-based legal architecture for the eurozone itself also illustrates the dangers of its more politicized approach. He shares sovereignty between monetary issues for the euro, treating them as federal, leaving fiscal issues largely to the discretion of member states. He then views each element as fully sovereign in the form of double counting. Ignoring the now sub-sovereign nature of member states’ debt, it introduces huge systemic risk into the EU and the global financial system.
The United Kingdom must now ensure that the global financial market continues to have a secure home under its English legal system. This means emphasizing the supreme safety of the common law method.
Attempts by the EU to take over financial businesses and put them in their own code regime are dangerous for financial markets. It is vital to global prosperity and growth that the vast majority of financial transactions continue to be conducted under common law systems.
Barnabas Reynolds is a partner at Shearman & Sterling LLP.