The rise of digital assets has opened up unprecedented investment and financing opportunities, but it has also created considerable legal challenges. For companies and investors, the ability to use these new forms of value as a medium for credit or to transfer them securely is fundamental. Setting up collateral or arranging for it to be made available, such as a loan, raises complex technical and legal issues that require careful analysis. This article is part of our exploration of legal challenges and practical solutions relating to digital assetsby focusing on security and loan mechanisms.
Guarantees on digital assets
Using a digital asset to secure a debt is becoming increasingly common. However, its effectiveness depends on mastering both the applicable legal concepts and the underlying technology. The main challenge is to ensure that the creditor has a real and enforceable guarantee, which means neutralising the initial holder's ability to dispose of the asset.
Transferring or paralysing the "de facto power" of the constituent
The purpose of guarantees is twofold. It may be to transfer the debtor's prerogatives to the creditor, as in an assignment of a claim as security, or, more frequently, to limit the debtor's power over his own asset. What is unique about digital assets is the notion of "de facto power" or "control", which is directly linked to the control of private cryptographic keys. Whoever holds the private key can initiate transactions. Consequently, a security interest will only be effective if it deprives the grantor (the debtor) of this exclusive power.
Dispossession, a classic condition of certain securities such as pledges, takes on a purely digital form here. It is not a question of physically handing over a thing, but of organising a transfer of control. In practical terms, the grantor must be prevented from being able to move the digital assets pledged without the creditor's consent. It is this virtual dispossession that makes the security effective and protects it against the risk of the debtor dissipating the asset or encumbering it with several competing security interests.
Combining ordinary law and special rights (pledge, collateral, security trust)
The choice of appropriate security depends on the legal status of the digital asset concerned. Positive law offers several tools that need to be adapted.
For assets classified as financial instruments, such as *security tokens* (financial tokens), the pledge of financial securities regime set out in the French Monetary and Financial Code applies. This classification entails the application of a specific regime, particularly with regard to the registration in an account which materialises the dispossession.
The majority of other assets, such as crypto-currencies (Bitcoin, Ether), utility tokens (*utility tokens*) or non-fungible tokens (NFT) that have a value to assets, are considered to be intangible movable property. The most appropriate mechanism is a pledge with dispossession under article 2355 of the French Civil Code. The implementation of this "dispossession" is at the heart of the arrangement and is based on technical solutions, which clearly demonstrate the following the impact of technology on the legal status of digital assets.
Finally, the security trust, although less common in practice, represents a highly flexible solution. It involves transferring ownership of digital assets to a trustee (who may be the creditor or a third party) as security. Coupled with a *smart contract*, it can automate the unwinding of the transaction, offering greater security and predictability for both parties.
Combating asset volatility: the watering clause
One of the major challenges when setting up collateral for assets such as virtual currencies is their high volatility. The value of the collateral can fall drastically, leaving insufficient cover for the debt. To counter this risk, it is essential to include a "margin call" clause in the security agreement.
This clause is explicitly provided for by law for pledges of financial instruments (article L. 211-20 of the French Monetary and Financial Code). It authorises the creditor to require the pledgor to supplement the collateral if its value falls below a predefined threshold. Although the legislation restricts it to a specific framework, contractual freedom allows it to be extended by agreement to other types of collateral, such as a cryptocurrency pledge. It must be precisely drafted, clearly defining the triggering threshold, the methods for valuing the assets and the time allowed for the debtor to reconstitute the collateral.
Supporting technology: multisignatures and smart contracts
The effectiveness of digital asset guarantees depends on robust technological solutions. A simple contractual commitment is insufficient if the grantor retains technical control of the assets.
Multisignature (*multisig*) technology is the main tool for achieving effective digital dispossession. It involves configuring a digital wallet in such a way that several private keys are required to authorise a transaction. As part of a guarantee, the signature of the debtor and that of the creditor (or a trusted third party) may be required. The debtor can therefore no longer dispose of the assets alone, which are effectively paralysed as collateral.
Smart contracts" can also enhance assembly security. These autonomous programmes execute predefined actions when certain conditions are met. A *smart contract* can be programmed to, for example, automatically release the assets to the debtor once the debt has been repaid in full, or to allow the creditor to activate the guarantee in the event of a proven default, in compliance with the legal conditions of the commissory agreement (which requires, in particular, a valuation of the assets on the day of transfer).
Making digital assets available
In addition to guarantees, digital assets can be made available in a number of ways, the most common of which is through loans. Here again, the applicable legal regime is closely linked to the nature of the asset loaned, which requires prior qualification.
The nature of the loan of digital assets (non-fungible tokens, e-mts, virtual currencies)
The classification of the loan contract depends directly on the fungibility and consumptibility of the asset concerned. This stage is decisive because it determines the obligations of the parties, particularly with regard to restitution. For further information on this point, please refer to the analysis on the legal status of digital assets and their special regimes.
As this is a non-fungible token (NFT), which is by definition unique, the loan can only be a loan for use (or commodat) if the transaction is free of charge. The borrower must return the same unique NFT at the end of the contract. If the loan is for consideration, it will be classified as a lease or rental agreement.
Conversely, virtual currencies such as Bitcoin are fungible (interchangeable) and consumable goods (their normal use causes them to disappear from the user's assets). A loan involving such assets will therefore be classified as a consumer loan, governed by articles 1892 et seq. of the French Civil Code. The borrower is not obliged to return the same units of cryptocurrency, but an equivalent quantity of the same type and quality.
The case of electronic money tokens (*e-money tokens* or e-MTs), defined by the European MiCA regulation, is special. Intended to maintain a stable value by reference to an official currency, they are similar to electronic money. A loan of e-MTs could therefore be analysed as a loan of a sum of money, with the consequences that this implies in terms of monetary nominalism.
Consumer lending of virtual currencies (case law analysis)
The classification of cryptocurrencies as consumer loans was confirmed by a decision of the Nanterre Commercial Court on 26 February 2020. In this case, the court ruled that Bitcoin, being fungible and consumable, was the subject of a consumer loan. This classification has important legal consequences.
The main one is the transfer of ownership of the assets to the borrower, who therefore bears the risks. If the value of the cryptocurrencies loaned collapses, the borrower is still obliged to return the same quantity of assets, even if their equivalent value in euros has become much lower. Conversely, if their value soars, he profits from the capital gain. The court also ruled on the issue of assets resulting from a fork (*fork*), such as *Bitcoin Cash* derived from *Bitcoin*. It held that these new tokens constituted 'fruits' which, unless otherwise stipulated, belonged to the borrower in his capacity as owner of the loaned assets.
Crypto-asset lending platforms and the associated risks
Many centralised platforms have specialised in lending crypto-assets, offering attractive returns to depositors. The model involves collecting assets from users and lending them to other players (traders, investment funds). However, the resounding bankruptcies of companies such as Celsius and Voyager have highlighted the considerable risks of this system.
The main danger for users lies in the legal re-characterisation of their relationship with the platform. Although the user interface suggests a simple deposit where the user retains ownership of their assets, the terms and conditions of service often provide for a transfer of ownership to the platform. In the event of the platform's bankruptcy, the customer is no longer an owner with a claim to his assets, but a mere unsecured creditor with very little hope of recovering his funds. It is therefore essential to analyse the terms of the contract in detail before entrusting your assets to an intermediary.
Precautions to be taken by legal professionals
The assistance of a lawyer with expertise in this area is essential to ensure the security of digital asset guarantee or loan transactions. A number of checks are required. The first is to check the intermediary's status, in particular whether it is registered as a Digital Asset Service Provider (DASP) with the AMF. Analysing the terms and conditions is another critical step in understanding the true legal nature of the transaction and the allocation of risks.
Finally, drafting tailor-made contracts is the best protection. A well-drafted pledge or loan agreement must precisely define its purpose, the classification chosen, the arrangements for managing volatility (watering clause), the allocation of the benefits (in the event of *fork* or *staking*), and the technical control mechanisms (multi-signature, key escrow). Only an approach combining legal expertise and technical understanding will enable you to navigate safely in this complex environment.
The structuring of guarantees and loans on digital assets is an area where there is no room for approximation. A rigorous analysis of the legal and technical aspects is necessary to protect the interests of the parties and ensure the validity of the transactions. For advice tailored to your project in commercial law and digital assets, our firm is at your disposal.
Sources
- Civil Code
- Monetary and Financial Code
- Regulation (EU) 2023/1114 of 31 May 2023 on markets in crypto-assets (MiCA)
- Regulation (EU) 2023/1113 of 31 May 2023 on information accompanying transfers of funds and certain crypto-assets (TFR)
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