Link to Why traditional principles of property, contracts, secured transactions, custody, and bankruptcy are essential to the future of digital finance Why traditional principles of property, contracts, secured transactions, custody, and bankruptcy are essential to the future of digital finance
As digital assets, stablecoins, and tokenized financial products continue to reshape financial markets, much of the legal and policy debate has focused on financial regulation. Congress, federal banking agencies, the SEC, the CFTC, and state regulators have devoted considerable attention to establishing the regulatory framework governing these emerging technologies. But are lawyers, regulators, and market participants paying enough attention to another critical part of the legal landscape: the principles of private law that determine who owns digital assets, what rights attach to them, and who bears the losses when a transaction or platform fails?
In this week’s episode of the Consumer Finance Monitor podcast, our host, Alan Kaplinsky (founder, practice group leader for 25 years and now Senior Counsel of the Consumer Financial Services Group) discuss these important questions with two leading commercial law scholars, Christopher Odinet, Professor at Texas A&M University School of Law, and Andrea Tosato, Professor at SMU Dedman School of Law. Chris and Andrea are the co-authors of the recently published book Digital Commercial Law: Private Law in the Age of Tokens, Platforms, and Automation, which examines how traditional commercial law principles apply to digital assets and why those principles remain indispensable in an increasingly digital economy.
The book makes a compelling case that the emphasis on public law regulation, while understandable, has obscured fundamental questions of private law. As Andrea explains during our discussion, private law governs the relationships among individuals and businesses, including their contractual obligations, property rights, and rights against third parties. These rules operate alongside financial regulation, not in opposition to it. Without a sound private law foundation, regulatory requirements alone cannot provide the legal certainty that digital financial markets need.
Our discussion explores several important implications of this thesis for financial institutions, fintech companies, digital asset platforms, investors, and their counsel.
Link to Property Rights Versus Contractual Rights Property Rights Versus Contractual Rights
One of the book’s central themes is the distinction between contractual rights and property rights. A contract generally binds the parties to the agreement, while property rights can have consequences against third parties. That distinction becomes critical when a digital token purports to represent ownership of an underlying asset, whether a work of art, real estate, or another financial instrument.
Chris and Andrea explain why creating a token and transferring it on a blockchain does not, by itself, transfer ownership of the underlying asset. The legal effect of tokenization depends on the applicable law and the legal structure connecting the token to the asset. A token issuer cannot necessarily accomplish through terms of service what the law requires to establish or transfer property rights.
Link to Digital Asset Custody and Bankruptcy Risk Digital Asset Custody and Bankruptcy Risk
We also examine the legal relationship between customers and digital asset platforms that hold assets on their behalf. Is that relationship a bailment, under which customers retain ownership of their assets, or a debtor-creditor relationship, under which customers may be left with claims against an insolvent platform?
Drawing on the crypto-platform bankruptcies of 2022 and 2023, Chris and Andrea explain how contractual language can determine whether customers retain a property interest or instead become unsecured creditors. They also discuss the shortcomings of platform agreements that contain inconsistent or ambiguous provisions and the risks consumers may face when the legal consequences of custody arrangements differ from their expectations.
The discussion highlights an important distinction between digital asset custody and the established legal framework governing securities held through intermediaries, including the protections provided by Article 8 of the Uniform Commercial Code. The absence of an equivalent default framework for digital assets can have significant consequences when a custodian becomes insolvent.
Link to Stablecoins and the GENIUS Act Stablecoins and the GENIUS Act
Stablecoins present another set of important private law questions. Although the GENIUS Act establishes a federal regulatory framework for payment stablecoins, Chris and Andrea explain why questions about redemption rights and insolvency remain critical.
For example, does the right to redeem a stablecoin for one U.S. dollar travel with the token when it is transferred to a subsequent holder? What happens if a stablecoin issuer becomes insolvent or its reserves prove insufficient? And do the GENIUS Act’s provisions adequately address the priority of stablecoin holders in bankruptcy?
Our guests argue that legislation focused primarily on licensing, reserves, supervision, and other regulatory requirements does not necessarily resolve the underlying private law issues. These questions matter directly to the legal rights and financial interests of stablecoin holders.
Link to Tokenization and Secured Transactions Tokenization and Secured Transactions
We also discuss what tokenization actually accomplishes as a legal matter and what it does not. Recording an asset or a claimed interest in an asset on a blockchain does not automatically create enforceable rights in the underlying property. The legal consequences depend on whether applicable law recognizes the arrangement and whether the transaction satisfies the requirements for establishing and transferring the relevant rights.
For banks and other lenders, the 2022 amendments to the Uniform Commercial Code are particularly important. Those amendments establish rules for certain digital assets, including a framework for perfecting security interests in controllable electronic records through control. Chris explains why these rules can affect lien priority and why lenders and their counsel must understand them when structuring secured transactions involving digital assets.
Link to The CLARITY Act and the Future of Digital Commercial Law The CLARITY Act and the Future of Digital Commercial Law
Looking ahead, we consider whether Congress is paying sufficient attention to private law principles as it considers comprehensive digital asset legislation, including the proposed CLARITY Act. Our guests discuss the bill’s treatment of custody and customer property rights, identify areas where the proposed framework could be improved, and explain why financial market structure legislation should be developed with a thorough understanding of commercial law.
We also explore whether digital assets should be governed by a new federal commercial law or remain principally subject to state commercial law, including the Uniform Commercial Code and established common law principles. Chris and Andrea explain the advantages of building on the existing state-law framework while ensuring that federal financial regulation rests on sound private law foundations.
Finally, we discuss practical steps that banks, fintech companies, payment companies, digital asset custodians, and their lawyers should take to address these issues. We consider the importance of nationwide adoption of the 2022 UCC amendments and look ahead to developments involving stablecoins, tokenized securities, and tokenized deposits.
The central takeaway from our conversation is straightforward: Digital finance cannot operate on regulation and technology alone. Clear rules governing property, contracts, custody, secured lending, and insolvency are essential to determining who owns digital assets, what rights attach to them, and who bears the risk when things go wrong. The book, Digital Commercial Law: Private Law in the Age of Tokens, Platforms, and Automation, is available on AMAZON.
Listen to the episode below.