ISDA Explores Legal Implications of Tokenized Collateral

The International Swaps and Derivatives Association (ISDA) has released new guidance examining tokenized collateral enforceability. The note examines the nature of tokenized collateral and addresses jurisdictional issues and high-level legal questions.
Tokenized Collateral Structures
In traditional finance, securities are generally categorized into three types. 
Bearer securities involve the transfer of physical paper representing ownership. 
Registered securities contain ownership records maintained by the issuer or its agent. 
Dematerialized securities rely on a central depository to update ownership records.
According to ISDA, tokenized collateral can be structured in three ways: bearer, registry, or callable. In bearer structures, the token itself serves as an intangible asset, and the legal transfer of the token changes the ownership of the collateral. In Registered and Claims structures, the token is not an intangible asset, necessitating ownership records to be updated even with automation. This distinction has significant practical implications.
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Notably, unlike Registered and Claims structures, the bearer structure does not provide any remedies in case of a problem, which typically involves a central operator providing remedies.
Conclusion
While the guidance is not jurisdiction-specific, it describes how to determine the relevant jurisdiction and presents a number of private international law issues applicable to different jurisdictions.
This latest guidance builds on ISDA's January update, which included amendments to the Master Derivatives Agreement to accommodate the use of tokenized collateral.