Over the past decade, digital assets have experienced enormous adoption and growth – reaching almost $3 trillion in market value. According to a report ‘Contractual Standards for Digital Asset Derivatives’ by ISDA, cryptocurrency’s growth is more than the GDP of developed countries like Italy and Canada.
This has been driven by growth in the number and diversity of market participants. The report acknowledges the significant increase in institutional adoption and investment in digital assets in recent years, including efforts by companies such as PayPal2 and Mastercard3 to integrate digital assets within their existing payment and market infrastructure.
ISDA believes that digital assets when used in conjunction with smart contract code, have the potential to transform the way in which financial markets operate. It can also change the way investors interact within the financial system.
The adoption and implementation of digital assets within the traditional financial market infrastructure could offer considerable benefits. It includes real-time settlement, lower transaction and maintenance costs, and greater automation within the front-to-end trade lifecycle.
The report highlights that the digital assets market and underlying technology are evolving at a rapid pace. “As such, it is challenging to establish a precise definition of what a digital asset is. Indeed, given the pace of change, any such definition is likely to quickly become obsolete,” it said.
In regards to regulation, the report said there is a lack of clarity over how existing regulatory frameworks apply in the context of certain digital assets. It noted that the legal and regulatory landscape continues to evolve. In certain cases, there are novel conflicts-of-laws issues to consider.
Digital assets remain particularly vulnerable to changes in the law that could potentially impact a derivatives transaction, including restrictions on the ability of derivatives market participants to invest. Even if this is not prohibited, prudential regulation of exposures may result in increased costs that make the hedging of these transactions uneconomic.
