Digital currencies can offer numerous advantages over traditional currencies (on the subject of accessibility, security, transaction costs and transaction speed), especially in cross-border contexts. Unsurprisingly, digital currencies already constitute a trillion-dollar asset class. Moreover, given the ongoing global efforts regarding the issuance of central bank digital currencies (like the digital euro initiative), the proliferation of digital currencies is far from having reached the limits of its potential. However, the enormous (future) value of digital currencies cannot be fully realized as long as they cannot be leveraged effectively in the context of finance, and, in particular, as collateral for credit. Consequently, the (prohibitive) plethora of legal challenges that still surround digital currency collateralisation is no longer tenable and ought to be resolved. This blog post will provide a short overview of the current state of affairs on this topic, serving as a foundational stepping stone for my upcoming research that aims to enable digital currency collateralisation (DCC) under Belgian (and EU) law.
Knowledge gaps hinder DCC in Belgium and the EU
Though a few legal instruments have emerged that partially regulate specific subsets of digital currencies (e.g., in terms of market integrity and anti-money laundering (AML)/ countering the financial terrorism (CFT)), both the Belgian and European legislature are yet to offer a comprehensive regulatory response to the rise of digital currencies. For instance, with regard to property law, intangible assets such as digital currencies still often find themselves in a legal vacuum under Belgian law. Indeed, even assuming digital currencies can legally be qualified as a potential subject to security rights, which seemingly is a point of contention, they are mostly trapped in a grey area between tangible assets and claims (e.g., on the subject of possession and asset tokenisation).
This grey area also spans the field of secured transactions law. On the one hand, the European Financial Collateral Directive has (so far) not been amended to explicitly enable the use of digital financial collateral. As a result, it is unclear to what extent both the scope and the substantive requirements of the Financial Collateral Directive (and the Belgian Financial Collateral Act transposing this directive) are in alignment with the diverging characteristics of digital intangible assets. On the other hand, the general Belgian legislation governing security rights in rem over movable assets only provides for specific rules regarding tangible assets and claims, but it is not adapted to intangible assets that do not constitute a claim (e.g., in relation to the creation and perfection requirements).
Further adding to the legal uncertainty surrounding digital currencies, the current European and Belgian insolvency laws are not geared towards digital assets either. Hence, in the context of both attachment and insolvency proceedings, it has already been shown that the rights and obligations of the parties involved are not well aligned with the enforcement of digital currencies (inter alia in relation to tracking and retrieving them).
As a result of this multifaceted legislative vacuum surrounding DCC, it remains unclear under which conditions one can (effectively) assert valid and enforceable security rights over (different kinds of) digital currencies. While there is already some academic research that sheds light on DCC in Belgium and the EU, it is rather limited, both in scope and in depth. Additionally, relevant (published) case law in this area proves even more difficult to find.
DCC in a global perspective
The lack of legal apprehension of DCC in the Belgian and European context contrasts sharply with the initiatives taken in other countries. For example, in the United Kingdom, the UK Law Commission has been publishing reports on digital assets since 2021 and has recently released a comprehensive final report, which includes recommendations for statutory law reforms on collateral arrangements. Furthermore, in the United States, the Uniform Commercial Code was amended in 2022 to facilitate security rights in ‘electronic money’ and (assets evidenced by) ‘controllable electronic records’.
In addition, a variety of (soft law) instruments relating to the collateralisation of digital assets have recently been developed at the international level, most notably by the International Institute for the Unification of Private Law (UNIDROIT) and the European Law Institute. Although these initiatives are conceptualized from different perspectives and differ in substance, they unanimously agree that digital assets should (effectively) be eligible for collateralisation.
Improving the legal framework for DCC in Belgium and the EU
Building on the same premise, my upcoming research project focuses on two interrelated objectives. Firstly, the project seeks to draft a detailed description of the legal treatment of DCC under current Belgian law. This will require addressing the legal nature of digital currencies as well as the actual creation, third- party effectiveness, and enforcement of the security rights to which they can be the subject. In turn, this will allow to identify all relevant problem areas and to ascertain all of the challenges that presently hinder the (effective) use of digital currencies as collateral in Belgium.
Secondly, the proposed research also aims to examine how the identified challenges can be remedied. On the one hand, it aspires to encompass digital currencies in Belgian secured transactions law in a way which respects its internal consistency and ensures legal certainty. On the other hand, the project also intends to harness the findings regarding the Belgian legal framework as a case study to formulate recommendations for improving (the harmonization of) DCC at the EU level. Taking into account the principle of subsidiarity and the largely unharmonized nature of secured transaction laws within the EU, the goal is not a ready-to- use legal instrument, but rather a list of concerns to be considered when developing an EU strategy on DCC.
As such, my research can be instrumental in enabling the future use of digital currencies as the subject to security rights in rem. Looking forward, this will not only facilitate economic growth and help to ensure financial stability but will also stimulate future (financial) innovation.
*This research blog was written by Frederic Polis PhD researcher at the University of Antwerp.
About BWILC and the PhD Workshop
This research was presented and discussed at the last PhD Workshop on European and International Insolvency law, organised by the Stichting Bob Wessels Insolvency Law Collection (BWILC). Since 2018, BWILC maintains the private insolvency law book collections of Prof. em. Bob Wessels, extended with the collections of the late Prof. Ian Fletcher and the late Gabriel Moss QC, in addition to books that have been kindly donated by scholars and practitioners from around the world. To browse or visit this unique collection, click here.
Since 2019, BWILC organises an annual PhD Workshop for PhD students from Europe and beyond. At this workshop, PhD candidates can present their ideas, but also the challenges and questions they are confronted with in a two-day workshop attended by their peers and senior academics. At the end of the workshop, organised in alternately in Leiden and another city, prizes are awarded for the best presentations. For information about the next PhD Workshop, click here.