The collateralisation of digital assets: why the world needs a unified road map for cross-border digital finance

Digital assets have moved from the fringes of finance to the core of institutional portfolios. The immediate challenge is how to unlock balance sheet value by way of cross-border collateralisation of these assets in the absence of a global baseline standard, without introducing unacceptable levels of legal and operational risk.  

At the recent United Nations Commission on International Trade Law (UNCITRAL) Colloquium on "Harmonizing law in the age of digital trade and finance", Ogier partner Racheal Muldoon set out a bold case for why the world needs to move collectively and urgently towards coherent cross-border rules for the collateralisation of digital assets. As a delegate of the International Women in Restructuring Confederation (IWIRC), Racheal presented a threefold blueprint that cuts through today’s fragmentation and points the way toward a workable global standard.  

This article builds on that UN address and explores the opportunity ahead. 

The problem: a digital finance system built on analogue rules 

Despite a decade of evolution in digital finance, one surprising fact remains: lenders cannot rely on consistent legal treatment of digital assets as collateral across borders. Consider this scenario: 

• a trade-finance bank wants to lend against a company’s digital warehouse receipts and electronic invoices, both recorded as tokens on an online platform
• those digital records are maintained in a system operated from one country
• the company is incorporated in a second
• related physical goods are stored in a third

In this scenario, the bank must ask whether, if the borrower defaults, its security rights over those digital records will be recognised and, if so, whether it will have priority above all other lenders and creditors in all concerned jurisdictions. Often, we simply do not know.  This is because there is no universally accepted framework for: 

• classifying those digital assets
• the perfection of security over them
• which law and which registry, if any, governs competing claims

The result is higher pricing, extra intermediaries and longer delays for that company. A large institution may absorb this friction, but a small to medium enterprise (SME) often cannot. At the micro level, this is a private struggle for access to credit. At scale, it becomes a public problem. The question therefore is: how do we bring coherence to secured transactions when collateral, and the platforms and registries that hold it, are digital and cross-border? 

The UNCITRAL Model Law on Secured Transactions  

The UNCITRAL Model Law on Secured Transactions (the Model Law) is a document consisting of model provisions that can be implemented in a statue or other type of legal instrument. They address security interests in all types of tangible and intangible movable property, such as goods, receivables, bank accounts, negotiable instruments, negotiable documents, non-intermediated securities and intellectual property. In a world of multiplicity of regimes, and the gaps and inconsistencies this creates, the Model Law therefore aims to achieve, in so far as possible, harmonisation of secured transactions law.  

Why the Model Law needs an upgrade for the digital age

The Model Law goes a long way to meeting modern secured finance needs. However, when we apply it to digital assets used as collateral, three overarching tensions arise. 

Classification and scope

Many digital assets defy established taxonomies, and many platforms combine features of payment systems, securities infrastructures and trade registries. Without clear guidance as to the application of digital assets to the Model Law, adopting states are at risk of classifying the same digital asset in different ways. This undermines the Model Law's principal objective by fragmenting legal treatment and undermining cross-border certainty. 

The concept of control

Control, that is who can (i) exclude others from (ii) modify and (iii) direct transfers of an asset plays a central role in how one meaningfully engages with the digital asset class. Yet the Model Law construes control very narrowly, which is out of step with how modern platforms function. 

Registry framework and conflict-of-laws rules

The Model Law does not set out a design for interoperability between the general state registry and other digital registries, such as distributed ledgers, platform specific records or asset-based registries embedded in digital trade systems. Nor does it provide a clear solution for determining the applicable law when perfection happens through a cross border digital system. 

What needs to change?: A three-part roadmap 

Against this backdrop, three specific developments are necessary to address these tensions and bring coherence to the treatment of digital assets as collateral under the Model Law. Individually, and together, they speak directly to the role of digital platforms and asset-based registries. 

Proposal 1: A dedicated Digital Assets Practice Guide 

There ought to be a companion Digital Assets Practice Guide to the Model Law. This would set a global baseline standard for digital asset collateral and for the platforms and registries that support it.  

It would define “digital asset” in functional terms, as an electronically recorded thing that can be the object of property rights, that is capable of being controlled and transferred within a system. 

This guide would map common types of digital assets into the Model Law’s existing asset categories, based on economic function: 

• tokenised receivables would be treated as receivables
• electronic trade documents and electronic bills of lading treated as negotiable documents
• investment type tokens that meet agreed criteria would be treated as securities
• system native positions that do not fit elsewhere could be treated as other intangibles

Proposal 2: A control-centric approach

Within that framework, control should be the primary method of third-party effectiveness and, where justified, the primary route to priority for clearly defined classes of digital assets held on platforms and registries. 

For system-based assets such as tokens on ledgers, the only practical and meaningful way to make a security right effective is to ensure that the secured party has system level control. In short, this means the legally effective ability, under the system’s rules, to block unauthorised dispositions or direct transfers and use.  

Proposal 3: Interoperable registries and an optional system-centric track 

The Model Law should allow the registry to be a network of interoperable digital registries, rather than a single filing office, subject to minimum governance and integrity standards. It should also provide rules for interaction between the general registry and asset or system specific registries and platforms. 

Those rules should include: 

• cross references in search results
• one stop filing
• clear priority rules, while maintaining the general registry as the universal index against the grantor

Within this framework, states may optionally adopt a system centric track for qualifying digital asset systems, where the applicable law and control-based perfection under the system’s rulebook would be recognised across adopting states. 

The Model Law as a framework fit for our digital age

The rise of digital assets across global markets is now so pervasive that simply adding a footnote to the Model Law will not be enough.  

Taken together, a Digital Assets Practice Guide, a control‑centric approach and interoperable registries would help ensure that the Model Law and future registry design can operate as a secured transactions framework fit for our digital age.

How Ogier can help

For advice on your Technology and Web3 project, contact one of Ogier's multi-disciplinary Technology and Web3 team. Ogier assists clients with creating, launching, funding and evolving their digital asset-related projects and implementing blockchain and cryptocurrency products. With experts across our jurisdictions, we bring a global perspective to our work with clients, which includes providing advice on digital asset collateral arrangements for lenders, borrowers and custodians, as well as providing advice on cryptocurrency and blockchain related funds, hedge and venture capital, private sales, airdrops and grants of tokens and non-fungible tokens and a variety of fundraising. 

Recognised as leaders in legal and regulatory matters concerning crypto, blockchain, Web3 and virtual assets, our team has contributed to major projects and cases, including those involving leading stablecoin issuers.

You can watch Racheal's speech on the UN's website. Her address starts at 13 minutes, 20 seconds.

Recording courtesy of UNTV. All rights reserved by UNTV. Shared here for informational and educational purposes only.

About Ogier

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Disclaimer

This client briefing has been prepared for clients and professional associates of Ogier. The information and expressions of opinion which it contains are not intended to be a comprehensive study or to provide legal advice and should not be treated as a substitute for specific advice concerning individual situations.

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