The Solution

The Solution

Summary: Utilizing crypto-commodity is the only way to make certain that CDS holders will get their hands on any posted collateral immediately in case of a default and complex resolution.

In most jurisdictions contracts have the binding force of a law for the contracting parties[1].  If one of the parties forfeits its obligations the state law enforcement machinery (court, bailiffs and compelled cooperation of the payment system) may be used to force the said party to honor its obligations under the contract[2]. A null and void contract would not produce legal consequences and the aggrieved party won’t be able to use the power of the state to enforce its rights.

Let’s take an example for an unenforceable contract. If two people have an arrangement for illegal drug sale, the first person pays the agreed amount of money, but the second provides lower quality than agreed in the contract. The aggrieved party may not take the other one to court as the latter will refuse to force the second person to return part of the money or change the substance with higher quality one – the contract scope is outside the law[3].

Which contract is enforceable or not is a decision taken by the legislator of the concerned jurisdiction. However there are certain legal provisions in place. One of them addresses bankruptcy of the counterparty[4]. No amount of state sanctioned force may help the aggrieved party, because the ability to perform no longer lies with the bankrupt party.

A smart contract register of ownership is quite different as it makes unenforceability inconsequential; which is the main point of using Deriveum as collateral for CDS. The CDS holders will be certain that the contract with the counterparty will be executed and ownership of the commodity will be transferred from one party to the other.

[1] In all cases contracts are binding, however in some jurisdictions the instruments for dispute resolutions are administrative, rather than judicial and the parties may choose binding arbitration (usually in cross-border scenarios). The legal instruments used to make the arbitration decisions binding are a bit more complex and are not going to be discussed in this note.

[2] And to pay for the enforcement actions

[3] Both parties will be criminally liable, of course, but this is outside of the contract law

[4] Warran, E. (2018) Bankruptcy and Article 9; Glesson, S. and R. Guynn (2016) Bank Resolution and Crisis Management

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