Featured Product

    ISDA Paper Examines Legal Aspects of Smart Contracts Using Blockchain

    January 13, 2020

    ISDA published a paper that discusses legal aspects of smart derivatives contracts that use the distributed ledger technology (DLT), which is also commonly known as the blockchain technology. The paper identifies specific private international law issues with respect to contract law that may arise when trading derivatives in a DLT environment. Where appropriate, the paper proposes recommendations on potential ways to clarify or resolve these issues.

    DLT systems are often borderless, allowing multiple users or participants to modify records in a shared database that may be based in several jurisdictions without necessarily needing to use a central validation system that imposes its own standards and processes. This type of system may leave participants vulnerable to multiple—and potentially inconsistent—assertions of the governing law. The cross-border nature of derivatives transactions requires certainty in the application of law to avoid conflict-of-law issues from arising. The introduction of new parties (that is, a platform provider) to the trading relationship creates additional legal rights and obligations, some of which may be governed by laws that are different from those by which the trading documentation is governed. Understanding the precise situs (that is, where property is treated as being located for legal purposes) of assets delivered or exchanged is important when determining the enforceability of netting or collateral arrangements. To assist with practical discussion of the relevant issues, this paper discusses two different examples of derivatives transactions, both of which use ISDA documentation and are implemented on Corda, an open-source blockchain and smart contract platform developed by R3.

    The paper has considered a number of private international law, or conflict-of-law, aspects of derivatives contracts governed by the laws of Singapore and England and Wales and involving DLT. Considering the most straightforward implementations of both an uncollateralized and collateralized DLT transaction, it is not thought likely that either implementation would result in an English or Singaporean court disapplying an express choice of law, whether in the ISDA Master Agreement or any agreement between the parties and a platform provider. The paper recommends that it would provide for greater clarity for all parties if they agree that their transactions should be subject to a common "law of the platform," "law of the system," or elective situs—that is, a uniform choice of law that the parties agree will govern all on-ledger transactions. Such common law of the platform could then be used as the situs of any tokens that are native to that DLT system.

    Where national authorities and regulators are concerned that allowing parties an unfettered choice of a governing law of the platform is undesirable, the choice of law could be restricted to the laws of countries where parties such as the issuer of assets, the system administrator, and market participants are subject to sufficient legal and regulatory oversight. Were this approach to be adopted, the primary concern of the parties would then be whether a court order requiring one party to compensate another could be obtained and whether it would be enforced. As considered earlier in this paper, the functionality of DLT platforms such as Corda could assist with the practical enforcement of judgments. Establishing this system will require national governments, judiciaries, regulators, and international standards-setting bodies to work on adapting or developing global legal standards aimed at ensuring the safe, transparent, and consistent regulation of DLT-based financial transactions and to ensure that parties are unable to elect for their relationships to be governed by the laws of countries with inadequate policy, legal, or regulatory oversight.


    Related Links

    Keywords: International, Banking, Insurance, Securities, Distributed Ledger Technology, Blockchain, Fintech, Regtech, Smart Contracts, Derivatives, ISDA

    Related Articles
    News

    EBA Issues Erratum for Phase 2 Package of Reporting Framework 3.0

    EBA published an erratum for the technical package on phase 2 of the reporting framework 3.0.

    April 08, 2021 WebPage Regulatory News
    News

    MAS Amends Notice on Related Party Transactions of Banks

    MAS amended Notice 643A that addresses requirements for banks to prepare statements of exposures and credit facilities to related concerns or parties.

    April 08, 2021 WebPage Regulatory News
    News

    ECB Amends Guideline on Euro Short-Term Rate

    ECB has published, in the Official Journal of the European Union, the Guideline 2021/565 on the euro short-term rate (€STR) and this guideline amends the previous ECB Guideline 2019/1265.

    April 07, 2021 WebPage Regulatory News
    News

    EBA Consults on Standards Related to FRTB-SA

    EBA launched a consultation on the draft regulatory technical standards on the list of countries with an advanced economy for calculating the equity risk under the alternative standardized approach (FRTB-SA).

    April 07, 2021 WebPage Regulatory News
    News

    PRA Proposes Rules Related to IRB Approach for Credit Risk

    PRA is proposing, via CP7/21, the approach to implementing new requirements related to the specification of the nature, severity, and duration of an economic downturn in the internal ratings-based (IRB) approach to credit risk.

    April 07, 2021 WebPage Regulatory News
    News

    BoE Outlines Regulatory Treatment of Recovery Loan Scheme of UK

    The UK government launched the Recovery Loan Scheme (RLS) as part of its continued COVID-19 support for UK businesses, as announced by HM Treasury on March 03, 2021.

    April 06, 2021 WebPage Regulatory News
    News

    FSB Addresses G20 on COVID Measures, TBTF Reforms, and Climate Risks

    FSB published a letter, from its Chair Randal K. Quarles, to the G20 Finance Ministers and Central Bank Governors, ahead of their virtual meeting on April 07, 2021.

    April 06, 2021 WebPage Regulatory News
    News

    OSFI Unwinds Temporary Increase to Covered Bond Limit for Banks

    OSFI issued a letter to the deposit-taking institutions issuing covered bonds and announced the unwinding of the temporary increase to the covered bond limit for deposit-taking institutions, effective immediately.

    April 06, 2021 WebPage Regulatory News
    News

    EU Amends CRR and Securitization Regulation in Response to Pandemic

    To support recovery from the COVID-19 crisis, EU has published two regulations to amend the securitization framework, as set out in the Securitization Regulation (2017/2402) and the Capital Requirements Regulation or CRR (575/2013).

    April 06, 2021 WebPage Regulatory News
    News

    HM Treasury Announces G7 Agreement on Green Agenda Ahead of COP26

    HM Treasury announced that G7 Finance Ministers and Central Bank Governors met ahead of COP 26, the 2021 UN Climate Change Conference, and agreed on green agenda.

    April 06, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 6821