Cryptocurrency With Crypto is Blowups, Traditional Finance Boasts Its Legal Rigor


Crypto finance is intended to be about bucking existing financial market norms and breaking free of the grip of existing bankers.


But those established market players are now pushing back, arguing that their way of doing business adds rigor that is missing in Cryptocurrency.


For example, take bankrupt cryptocurrency lender Celsius Network, which last year received a $1 billion loan from stablecoin issuer Tether that was backed by bitcoin. In the U.S., legal bodies are now riveting over the exact legal status of that loan.


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Celsius creditors, and maybe the Crypto lender itself, may be wondering now if they should not have ironed out those kinds of legal issues in advance rather than leaving a small fortune at the mercy of judges and lawyers.


Standard-setters for traditional financial markets certainly think so. They have mentioned that the Cryptocurrency world should adopt the existing standards that govern securities lending in conventional finance markets to avoid messed up situations in the future.


Daniel Franks, a partner at the law firm of Ashurst in London, said in an interview, one of the issues for Crypto lender, Celsius is whether it properly considered the legal rights to the bitcoin that backed its loan from Tether.


Taking financial instruments as collateral for loans, as Tether apparently did, is commonplace in traditional financial markets, and some say a secondary market fueled by lending is a prerequisite for liquidity for a given security. But those kinds of transactions often take place under standard “master” contracts developed by the likes of the International Securities Lending Association (ISLA), a not-for-profit industry association that covers Europe, the Middle East and Africa.


Crypto Extension


In August – after requests from both traditional financial players and new entrants in the market – ISLA asked Daniel Franks to look into how to extend existing legal norms to cover Digital Assets and currencies such as bitcoin, as well conventional shares and bonds that take on virtual form with distributed ledger technology.


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That will be much more than just a find-and-replace task. Adapting the Global Master Securities Lending Agreement, some 40 pages of legal text, for the Cryptocurrency age is not just about replacing the word “securities” with “cryptocurrency,” Daniel Franks says.



Some features of Cryptocurrency – such as airdrops, the free coins that are provided as an incentive – do not have an exact analog in traditional financial contracts, he said. There can also be differences or vagueness about how Digital Currencies are treated under property law, which is a question for legal expert in jurisdictions such as the U.K. are already engaged with.


Daniel Franks recommends that there could also be new Cryptocurrency-enabled innovations, such as rules that allow for “dual control,” where a Virtual Asset changes hands only if instructions are given by two different parties.


But, Daniel said, the crypto lender Celsius case has shown that some contracts used in Cryptocurrency Markets just are not up to snuff.


“There is certainly range in terms of the robustness of, and level of detail in, those documents, particularly when used amongst new age market participants who are not traditional finance providers and who do not have the advantage of experience with using loan documentation in other industries,” Daniel Franks said.


Will cryptocurrency have a say?


Daniels legal advice – he has already privately provided a first draft to ISLA – will aim to offer financiers “as much comfort as possible” in handling Cryptocurrency, he said. Now the next steps could come in as soon as September, Tina Baker, ISLA’s head of legal services, mentioned.


“In the coming weeks, we look forward to announcing the findings of our initial analysis to the members for them to review,” Tina said.


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The risk is that the Cryptocurrency world will not get much of a look in during the ensuing consultation. ISLAs 183 members are mainly traditional banks – popular names include JPMorgan Chase, HSBC and UBS among them – as well as financial infrastructure entities such as Depository Trust & Clearing Corp., which processes basically all transactions in the U.S. stock market, and European exchange giant Eurex. But, Tina notes, the Cryptocurrency Industry does have a voice there. Digital Asset lobby group Global Digital Finance is also a participant, and others are also welcome to join.


Baker says “tried and tested” standards still remain popular, but ultimately no one – be they from cryptocurrency or traditional finance – is obliged to use her favored contracts.


This may not be a smooth journey. Adapting present practices to fit the fast-developing world of Cryptocurrency is already tricky: And, Daniel notes, thats just the half of it. Cryptocurrency technologies may also need to align toward existing models in order to access the securities lending markets, he says.


Both Daniel and Tina seem confident that is possible. The big question is whether Web3 market players will see it the same way.


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