Rethinking State Sovereignty for Sustainable Digital Asset Governance

Abstract

The rapid expansion of digital assets presents challenges that extend beyond regulatory fragmentation and technological disruption, raising fundamental questions about the operation of state sovereignty in international law. This study examines the limitations of territorial sovereignty in governing decentralized digital assets and develops a functional framework for allocating regulatory authority across borders. It employs doctrinal legal research combined with a functional comparative approach to regulatory models in China, the United States, the European Union, Singapore, and Switzerland. The findings reveal two principal issues. First, traditional jurisdictional doctrines based on territoriality, nationality, and the effects principle are increasingly inadequate for decentralized blockchain infrastructures, creating a widening gap between territorially grounded legal doctrine and contemporary regulatory practice. Second, the jurisdictions examined employ divergent models of sovereign authority, ranging from prohibition-based regulation and extraterritorial enforcement to supranational harmonization and intermediary-centered governance, demonstrating the absence of a coherent framework for allocating regulatory authority over cross-border digital assets. To address these deficiencies, the study develops the Functional Sovereignty model, which reconceptualizes sovereign authority according to effective regulatory capacity rather than exclusive territorial control. The model operates through five interrelated principles: effective regulatory capacity, intermediary nexus, jurisdictional restraint, regulatory proportionality, and international coordination. The study concludes that Functional Sovereignty provides a more coherent framework for cross-border digital asset governance while preserving state regulatory authority and facilitating international regulatory coordination.