ELI Principles on the Use of Digital Assets as Security
36 Pages Posted: 7 Jan 2023
Date Written: October 5, 2022
The Principles address the use, by private parties, whether natural or legal persons, of digital assets as security for credit. In particular, the Principles are intended to focus on situations where the parties contractually agree to create a security interest in a digital asset, within the meaning of the Principles, so as to secure the performance by the security provider or another debtor of its secured obligation(s) vis-à-vis the secured creditor. The Principles treat the creation of a security interest in a digital asset as the creation, by contract, of a limited right in that asset, entitling the secured creditor to satisfaction of its claims vis-à-vis the security provider or another debtor. The right so created is to be construed as a right in rem or a functionally equivalent right, insofar as it entitles the secured creditor to enjoy priority over the security provider’s other creditors. The Principles present definitions of key concepts in the use of digital assets as security, including one for ‘digital asset’, building on the core attributes of assets within the intended scope of the Principles. The creation of a security interest through a security agreement will typically be covered by a conflict rule built on some objective connecting factor. The Principles propose that the law applicable to the creation of security interests in digital assets be identified by reference to the place of business or central administration or habitual residence of the security provider. In those cases where a clear, readily identifiable connection exists between the digital asset under consideration and one particular jurisdiction, on account of the characteristics of that asset and the environment of its creation and holding, the Principles propose that the law governing the creation of a valid security interest in that digital asset should be the law of that jurisdiction, ie, the law of the digital asset itself. Additionally, the Principles address the issue of determining the applicable law in cases where the digital asset to be used as security represents a real-world asset, tangible or intangible. Regarding the third-party effectiveness of security interests, including their priority against competing claims, the Principles propose determining the applicable law similarly to that for the creation of a security interest in digital assets. For the purposes of both creation and third-party effectiveness, the Principles presuppose compliance with the requirements of the applicable law. However, where those requirements reflect the characteristics of more conventional assets and cannot be meaningfully applied to digital assets, the Principles cater for the necessary adaptations. Finally, under the Principles, a security interest is to be extinguished once there is full payment or other satisfaction of all secured obligations.
Keywords: Digital assets, use as security, EU
JEL Classification: K11, K12, K22
Suggested Citation: Suggested Citation