Clifford Chance

Private International Law Aspects of Smart Derivatives Contracts Utilizing Distributed Ledger Technology

29 October 2020

In this paper, jointly published with ISDA and R3, we consider the private international law aspects of smart derivatives contracts governed by the laws of New York involving distributed ledger technology (DLT). 

Use of new technologies has the potential to significantly increase efficiency and reduce costs for derivatives market participants, but the trading of derivatives on a DLT platform raises a number of questions from a private international law perspective. In particular, uncertainty about where data, assets and counterparties are located in a DLT environment means it is necessary to understand which law would apply in each case, as well as what would happen if there are conflicts of law.

Specifically, the paper covers:

• 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.

The analysis 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. This largely mirrors the earlier analysis under English and Singaporean law which was published in January 2020.

The paper also highlights 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.

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