ISDA Launches Standard Definitions for Digital Asset Derivatives

On 26 January 2023, the International Swaps and Derivatives Association (ISDA) published ISDA Digital Asset Derivatives Definitions (behind a paywall), alongside a freely accessible whitepaper entitled “Navigating Bankruptcy in Digital Asset Markets: Netting and Collateral Enforceability“, which addresses some of the legal issues raised by the recent bankruptcies of major crypto exchanges and market participants.
The ISDA Digital Asset Derivatives Definitions are designed for use by participants in privately negotiated transactions to document non-deliverable digital asset forwards and options referencing Bitcoin (BTC) or Ether (ETH). The Digital Asset Definitions are intended for use in confirmations of individual transactions governed by the ISDA Master Agreement. The Digital Asset Definitions use a controlled language structure to identify operational processes, facilitating implementation within a DLT-based infrastructure, including within a smart contract. These Definitions are available only by one-year subscription in the ISDA MyLibrary.
The first ISDA whitepaper bearing the title “Navigating Bankruptcy in Digital Asset Markets: Netting and Collateral Enforceability“ explores 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.
The second upcoming ISDA whitepaper will address issues relating to customer digital assets held with intermediaries, exploring specific questions on how they may be held, how those holdings might be treated in an insolvency scenario, and the relevant documentation and due diligence issues that would need to be addressed to achieve the intended level of customer asset protection. This second paper will be published in the first quarter of 2023. Together, the two publications will inform market participants of the legal and documentation questions that need to be addressed to establish ownership of digital assets, the posting of those assets as collateral and the enforceability of netting, which will enhance certainty and reduce risk.