ISDA Digital Asset Derivatives

The International Swaps and Derivatives Association, Inc. (“ISDA”) has recently published a digital asset derivatives definition (“Definitions”).

The Definitions are intended for documenting privately negotiated derivatives transactions to document non-deliverable digital assets based on the distributed ledger or similar technology using standard ISDA documentation architecture. The coverage of this initial version of the Definitions is limited to non-deliverable forwards and options on Bitcoin and Ether. It is expected that the Definitions would be expanded in future to cover additional product types, including tokenized securities. The Definitions provide greater clarity to this asset class, reducing credit and market risk by setting clear provisions for execution and settlement.

Given the novelty of this asset class and the legal issues involved, coupled with the collapse of FTX and others, ISDA published a whitepaper (“First Whitepaper”), titled “Navigating Bankruptcy in Digital Asset Markets: Netting and Collateral Enforceability” at the same time as it published the Definitions. The First Whitepaper highlights the challenges when it comes to bankruptcy proceedings due to the decentralized and often global nature of the digital asset markets. The First Whitepaper also argues that there are challenges in using digital assets as collateral, such as perfection, enforcement and documentation.

On 3 May 2023, ISDA published the second whitepaper (“Second Whitepaper”), titled “Navigating Bankruptcy in Digital Asset Markets: Digital Asset Intermediaries and Customer Asset Protection“. The Second Whitepaper examines how digital assets may be held by customers through intermediaries and considers how these assets can be protected following the insolvency of the intermediary. It argues that traditional and fundamental protections of clear legal terms and segregation of assets can be adopted to digital assets. To enhance protection to the parties, it recommends clearer rules (contractual and operational) in regulating the ownership of customer digital assets following insolvency of an intermediary. The Second Whitepaper also identifies a number of questions that the parties should consider when entering into custodial arrangement with custodians.

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