ISDA working on papers to address fundamental legal risks in crypto market
Recently the International Swaps and Derivatives Association (ISDA) published standardised terminology for derivatives on digital assets. Additionally, it published one of two whitepapers on what happens in a bankruptcy.
The original set of ISDA definitions includes forwards and options for Bitcoin and Ether that are not deliverable. The association views this as a starting point, while future additions may also include tokenized securities and other DLT-based assets. To facilitate integration with the Common Domain Model, the definitions apply not just to data but also to processes (CDM).
The common domain model (CDM), initially created by ISDA in 2018, defines the data and procedures for derivatives including interest rate swaps and credit default swaps. Although the CDM is not exclusively intended for DLT or smart contracts, it does offer a foundation for automating derivatives with DLT.
“The new definitions address the unique nature of digital assets settled on DLT and have been designed to be expandable over time,” said Katherine Tew Darras, General Counsel at ISDA. “This work will be relevant to a wide range of digital assets executed on DLT, including tokenized 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.”
ISDA advocated for the Basel standards to take into account hedging when evaluating bank risks when they were first suggested last year for operations involving crypto assets by banks. Hedging is encouraged by the final Basel regulations, albeit less so than with respect to traditional assets.
CBW - External Analyst