ISDA Publishes Digital Asset Definitions
Posted by Colin Lambert. Last updated: January 27, 2023
ISDA has published new standard documentation for the trading of digital asset derivatives, alongside a whitepaper that addresses some of the legal issues raised by the recent bankruptcies of major crypto exchanges and market participants.
The association says the documentation is intended to bring greater clarity to a nascent asset class by creating an unambiguous contractual framework for digital asset derivatives under the umbrella of the ISDA Master Agreement. This will, ISDA says, reduce credit and market risk by setting clear provisions for execution and settlement.
The definitions initially cover non-deliverable forwards and options on Bitcoin and Ether, however ISDA says they could be expanded in future to cover additional product types, including tokenised securities and other digital assets executed on distributed ledger technology (DLT). Importantly, ISDAS asserts, the definitions have been drafted using a controlled language structure to define the processes contained in the document, facilitating integration with the Common Domain Model and automation within smart contracts.
The accompanying whitepaper is the first of two publications that explore legal questions raised by the collapse of FTX and others, including ownership and intermediation of customer assets in the crypto space. The first paper focuses on the importance of close-out netting and collateral arrangements for derivatives referencing digital assets and identifies several areas of focus for policymakers and market participants to ensure greater certainty. This includes use of standardized contractual frameworks like the ISDA Digital Asset Derivatives Definitions and further legal clarity from national authorities on the property status of digital assets.
ISDA says the second paper, due for publication later in the first quarter of 2023, will focus on issues related to customer assets held with intermediaries.
“Recent failures in the crypto market have emphasised the importance of having a clear, consistent contractual framework that spells out the rights and obligations of both parties following a default,” says Scott O’Malia, chief executive of ISDA. “All customers, whether retail or institutional, should know their assets are protected and understand their rights in the event of a default. This latest work to establish legal definitions and recommend improved customer protection in bankruptcy through the application of a consistent set of global contractual standards adds to the extensive work ISDA has already published to bring greater legal and operational certainty to digital assets executed on both centralised and decentralised platforms.”
Katherne Tew Darras, general counsel at ISDA, adds, “The new definitions address the unique nature of digital assets settled on DLT and have been designed to be expandable over time. This work will be relevant to a wide range of digital assets executed on DLT, including tokenised securities, which potentially have wide utility across the financial system. The innovative drafting style, which uses conditional statements that can be translated into code, means the definitions can be used more easily in DLT-based applications, creating significant efficiencies for market participants.”