In a white paper, ISDA sought to identify the key issues that need to be addressed in order to create common contractual standards for use by market participants transacting in digital asset derivatives.

Among other things, the white paper:

  • identifies certain key characteristics and features exhibited by the two different types of digital assets: (i) native digital assets (which exist solely as a digital record on a specific technology platform, such as Bitcoin or Ether) and (ii) asset-referencing digital assets (which reference an underlying asset or right, such as a central bank digital currency);
  • identifies potential market disruption events that could occur with respect to a digital asset that is the subject of a derivative transaction, such as:
    • technology-related events, including cyberattacks, technological disruptions, or modifications in respect of the software of the specific platform through which the digital asset holder "holds" the digital asset, and
    • market-related events, including changes in law or regulation, disruptions to core technological infrastructure or service providers, and market abuse in the underlying digital asset market;
  • provides general principles for market participants to consider when contemplating the consequences that may result from the occurrence of specific market disruption events (e.g., defining the circumstances in which a specific technology- or market-related event will give rise to a fallback provision or a termination right);
  • identifies issues relating to the mechanics used in the valuation of digital assets and the derivatives that reference them, with a specific focus on:
    • valuation sources, since many trading venues are subject to market manipulation, and valuing a digital asset derivative can be complicated by the fact that trading of a specific digital asset occurs across many (often unregulated) decentralized platforms,
    • valuation methodologies, since in the absence of reliable valuation sources it may be necessary for parties to permit a degree of discretion by a calculation agent, thereby limiting the utility and scalability of standardized automated technology solutions for digital asset derivatives, and
    • the volatility that is inherent in the observed prices of digital assets;
  • identifies certain terms of the ISDA Master Agreement that may pose interpretative issues in the context of digital asset transactions, such as those with implications for the application of payment netting provisions under the ISDA;
  • highlights certain issues to consider when collateralizing digital asset derivatives, including:
    • regulatory barriers that parties will encounter if seeking to use digital assets as collateral for derivative transactions, and
    • the nature of any security interest granted over digital assets which are used as collateral, which depends on a variety of factors (e.g., the location of the asset and the forms of security that can be granted under the applicable law); and
  • seeks to promote discussion among traditional market participants, the digital asset community and other relevant stakeholders to achieve common contractual standards for digital asset derivatives.

Commentary - James Goodall

ISDA recognizes the imperative for common contractual standards in order to provide a solid foundation for the development of a robust, liquid market in digital asset derivatives. While much work remains, this white paper represents a good first step in facilitating collaboration between traditional market participants and the crypto community in order to produce contractual standards that are responsive to the needs of active participants in the digital assets market.

Given the novelty and rapid pace of development within digital asset markets, new issues will continuously emerge that market participants will have to consider. To ensure that a robust foundation underpins the digital asset derivatives market, it is important that common contractual standards strike the right balance between standardization and customization. Product templates must be sufficiently uniform to enable market participants to transact in confidence using clearly established provisions, and flexible enough to be adaptive in response to product and market developments.

In the near term, further consideration should also be given by market participants to: (1) how standardized, deterministic valuation sources and methodologies can be developed for digital assets, in order to improve efficiency in valuation mechanics used for digital asset derivatives; and (2) establishing contractual standards for identifying and mitigating the impact of market disruption events that could occur with respect to digital assets that are the subject of derivative transactions.

Primary Sources

  1. ISDA White Paper: Contractual Standards for Digital Asset Derivatives
  2. ISDA Supplement: Analysis of Existing ISDA Definitional Booklets

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