Search
Close this search box.

Growing Up: Crypto Derivatives – Finance and Banking – United States – Mondaq News Alerts

United States: Growing Up: Crypto Derivatives

To print this article, all you need is to be registered or login on Mondaq.com.

In terms of exponential growth, surely the only recent
phenomenon to match the spread of COVID-19 around the world is the
explosive growth of cryptocurrencies and their spread into the
established financial markets. Central banks, regulators and public
authorities worldwide are grappling with how cryptocurrencies fit
into existing legal and regulatory frameworks, from the tax
treatment of gains (or losses) on trading in cryptocurrencies to
the marketing of cryptocurrencies to members of the public.

The derivative market is in the midst of the same exercise, with
ISDA naturally taking the lead. There are two important work
streams: (i) identifying and managing legal issues which may arise
from derivative contracts referencing cryptocurrencies and (ii)
developing contractual standards and template documentation for
cryptocurrency derivatives. The ultimate aim of both endeavours is
to promote market access, liquidity and risk management in
cryptocurrency derivatives.

In December 2021, ISDA published a paper on the key legal issues that arise from
integrating digital assets (i.e. cryptocurrencies and other assets
relying on blockchain or distributed ledger technology) into the
legal infrastructure of derivative markets. The paper identified
three leading issues:

  • Disruption Events: digital assets have their
    own universe of events which may interrupt or disrupt the operation
    of the asset or its valuation, such as forks (changes to the
    underlying technology which result in amendments or completely new
    versions of the relevant asset), airdrops or cyberattacks. ISDA is
    considering whether existing disruption or adjustment events can be
    applied to digital asset derivatives or whether amended or
    completely new standards are required.
  • Valuation: market participants will need to
    determine which valuation sources and valuation methodologies are
    appropriate for digital assets. ISDA note that, due to lack of
    liquidity or manipulation, the price of certain digital assets on
    certain exchanges might not be accurate and suggest that it may be
    prudent to rely on valuations from more than one exchange or
    exclude exchanges with insufficient volumes. Given the nascent
    nature of the technology and the supporting market infrastructure,
    consideration should be given to the role of calculation agent
    discretion in valuations.
  • Interaction with ISDA documentation: given the
    ISDA Master Agreements were written before the founding of digital
    assets, trading in digital asset derivatives raises the question of
    whether the existing master agreements can accommodate such assets.
    Potential interpretative issues include: where is the location of
    performance of a payment or delivery of a digital asset, whether
    transfers of digital assets are payments or how they could be
    delivered and how interest is calculated on digital assets.

On 18 January 2022, ISDA published a blog stating that developing legal standards
to support the crypto derivatives market is a priority for it this
year. ISDA has noted the need for such contractual framework to
facilitate greater automation, allow for interoperability between
different technologies and integrate into existing and emerging
market infrastructure. In 2022 ISDA expect to focus on
documentation (such as long-form confirmations) for cash settled
products in native digital assets such as Bitcoin, and any updated
documentation will be available on the ISDA MyLibrary platform.

As COVID-19 is (hopefully) moving to an endemic phase,
cryptocurrencies and their derivatives will surely become a more
day-to-day feature of global markets. Please speak to your Mayer
Brown derivatives contact if you require any assistance with such
products.

Visit us at
mayerbrown.com

Mayer Brown is a global legal services provider
comprising legal practices that are separate entities (the “Mayer Brown Practices”). The Mayer Brown Practices are:
Mayer Brown LLP and Mayer Brown Europe – Brussels LLP, both limited
liability partnerships established in Illinois USA; Mayer Brown
International LLP, a limited liability partnership incorporated in
England and Wales (authorized and regulated by the Solicitors
Regulation Authority and registered in England and Wales number OC
303359); Mayer Brown, a SELAS established in France; Mayer Brown
JSM, a Hong Kong partnership and its associated entities in Asia;
and Tauil & Chequer Advogados, a Brazilian law partnership with
which Mayer Brown is associated. “Mayer Brown” and the
Mayer Brown logo are the trademarks of the Mayer Brown Practices in
their respective jurisdictions.

© Copyright 2020. The Mayer Brown Practices. All rights
reserved.

This
Mayer Brown
article provides information and comments on legal
issues and developments of interest. The foregoing is not a
comprehensive treatment of the subject matter covered and is not
intended to provide legal advice. Readers should seek specific
legal advice before taking any action with respect to the matters
discussed herein.

POPULAR ARTICLES ON: Finance and Banking from United States

Crypto Regulation By Any Other Name

Bryan Cave Leighton Paisner LLP

2022 was billed as the year regulation will descend on the cryptocurrency (“crypto”) and decentralized finance (“DeFi”) spaces.

Proposed Regs Affect PFIC Elections

Cadwalader, Wickersham & Taft LLP

On January 25, 2022, the IRS and Treasury proposed regulations that would treat U.S. partners, instead of their partnerships, as PFIC shareholders for making qualified electing fund…

FDIC Acting Chair Gruenberg Highlights Priorities For 2022

Cadwalader, Wickersham & Taft LLP

Newly named Acting Chair of the FDIC Martin J. Gruenberg highlighted the agency’s priorities for 2022. Mr. Gruenberg previously served as Chair of the FDIC (2012 to 2017) and as Acting Chair from July 2011 to November 2012 and again from November 2005 to June 2006.