ISDA, in collaboration with certain other entities, published four whitepapers analyzing the legal issues associated with using smart derivatives contracts using the distributed ledger technology or DLT. The papers consider the private international law, or conflict-of-law, aspects of derivatives contracts involving DLT, commonly known as the blockchain technology. The four papers consider these issues from the perspective of the laws in France, Ireland, Japan, and New York. The analysis in each of these jurisdictions concludes that it is unlikely a local court would reject an express choice of law by the contracting parties, whether under ISDA documentation or in any other agreement between the parties and a platform provider. ISDA also published a comparative table that presents high-level responses to the various conflict-of-law issues raised in these papers.
The papers highlight potential challenges in identifying the precise location of digital assets, which could lead to uncertainty over which jurisdiction’s laws would apply. In response, it is recommended that parties agree on a uniform choice of law that will govern all transactions conducted on the DLT platform. Specifically, the papers cover:
- Whether the introduction of DLT or a DLT platform provider to a traditional trading relationship might have implications for the resolution of contractual disputes.
- How to identify the legal situs of digital assets for effecting payments or exchanging collateral on certain DLT platforms.
Through this analysis, ISDA hopes to support the work of international standard-setting bodies, regulators, judiciaries, market participants, and other key stakeholders in examining these issues. The papers are also intended to provide more certainty to participants incorporating DLT into derivatives transactions, thus strengthening the ability of the industry to realize the operational and cost efficiencies provided by greater automation.
The development and implementation of new technologies, such as DLT, within the derivatives industry have the potential to create a more robust financial markets infrastructure, achieve operational efficiencies through increased automation, and reduce costs for market participants. As these technologies mature, it is important to understand the evolving legal treatment of derivatives traded on DLT platforms. Given the novel complications over where data, assets, and even counterparties are located in a DLT environment, it is useful to examine key questions on how to determine which law applies and how to evaluate conflicts of governing law. While some jurisdictions have produced analysis on areas of perceived legal uncertainty, these issues remain untested in many of the jurisdictions and cross-border environments important to the derivatives industry.
- Press Release
- Paper on French Law (PDF)
- Paper on Irish Law (PDF)
- Paper on Japanese Law (PDF)
- Paper on New York Law (PDF)
- Comparative Table (PDF)
Keywords: International, Banking, Securities, Blockchain, Fintech, Regtech, Distributed Ledger Technology, Smart Contracts, Derivatives
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