Lloyd's Maritime and Commercial Law Quarterly

Edited by Professor Francis D Rose

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Taking security over crypto-assets in English law

Duncan Sheehan*

This article examines the means by which a lender can take security over crypto-assets in English law. It examines the proper characterisation of security interests taken by centralised finance institutions as well as the legal characterisation of arrangements with decentralised platforms such as Aave. It examines what difference it makes whether the borrower is an individual (individual borrowers make up most of the market) or a corporate borrower, whether security interests should be (or feasibly can be) registered and what other perfection mechanisms might be appropriate, drawing on comparisons with the Uniform Commercial Code.

I. INTRODUCTION

Crypto-assets have become increasingly important in recent years, and lenders have begun using such assets as collateral for lending, allowing borrowers to put up crypto-currency and other crypto-tokens as collateral. Lenders and platforms which accept collateral in this form include Aave, Youhodler, Nexo, Unchained Capital and Bitcoin Suisse. Crypto-lending is big business, with some players managing billions of pounds in assets. For example, Nexo, based in London, managed $12bn in assets in 2022 and there was $180bn locked in decentralised finance applications in March 2022, a fivefold increase over 2021. The three biggest centralised platforms grew by over 700 per cent in 2020. Such growth carries risks. The players may be unregulated—or at least not regulated as banks—and there may be doubts therefore as to the amount of capital they hold at any one time.

* Professor of Business Law, University of Leeds. This paper was presented at the Digital Assets: Private Law, Regulation and Practice conference held at the University of Leeds in May 2024. Many thanks to the participants and also to the anonymous referee. All remaining daft errors are mine.

The following abbreviations are used:

Auer, Technology: R Auer et al, The Technology of Decentralised Finance (BIS Working Paper no 1066, 2023); DAO: decentralised autonomous organisation;

Goode & Gullifer: L Gullifer (ed), Goode and Gullifer on Legal Problems of Credit and Security, 7th edn (London, 2023);

Beale et al, Law of Security: H Beale, M Bridge and L Gullifer (eds), The Law of Security and Title-Based Financing, 3rd edn (Oxford, 2018);

CER: controllable electronic record;

FCARs: Financial Collateral Arrangements (No.2) Regulations 2003;LC 412: Law Commission, Digital Assets (Law Com 412, 2023);

LCCP 256: Law Commission, Digital Assets (LCCP 256, 2022);

NFT: non-fungible token;

PPSA: Personal Property Securities Act;

Sheehan Principles: D Sheehan, The Principles of Personal Property Law, 2nd edn (Oxford, 2017); UCC: Uniform Commercial Code;

UNCITRAL, Legislative Guide: UNCITRAL, Legislative Guide on Secured Transactions (2007);

Yeowart & Parsons; G Yeowart and R Parsons (eds), Yeowart and Parsons on the Law of Financial Collateral (London, 2016).

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