The International Swaps and Derivatives Association (ISDA) is working on two papers to address fundamental legal risks in the crypto market, such as the insolvency of crypto exchange companies, according to a statement released on January 26.
The initiative was prompted by the collapse of crypto exchange FTX and previous bankruptcy cases that “caused liquidity and solvency concerns in the crypto ecosystem.” Among other things, the paper will provide guidance to market participants on crypto holdings and the role of intermediaries in bankruptcy.
“The prospect of insolvency of the main market participants requires the company to consider how to manage the counterparty’s credit risk, the most appropriate intermediation or custodian structure, and whether the tools used can be implemented reliably in a bankruptcy scenario. Applying the existing bankruptcy rules to the new asset class will certainly increase legal characterization and other questions that must be resolved to provide the necessary certainty,” the announcement said.
In addition, the association said that the oft-repeated principle “not your key, not your crypto” seems to explain whether the basic questions asked in the traditional market can still develop or not in the crypto industry, such as “what determines the owner of an asset? ” or for “a party that is not a direct owner, but holds assets indirectly through an intermediary, what is the effect of the intermediary’s bankruptcy?” Specifically, the statement said:
“The collapse of FTX shows that the norm is still developing (or maybe not yet) in the cryptocurrency market. When the problem is not well understood by market participants or the risk is not managed correctly, unexpected and significant capital losses can arise.
The publication will provide standards on netting and close collateral and address issues related to customer digital assets held with intermediaries and how they are held and handled in insolvency scenarios. The paper will also address the law and documentation required to establish ownership of digital assets and their use as collateral.
ISDA is a private trade association consisting mainly of banks that deal in the over-the-counter derivatives market. As part of its work, the association seeks to identify and reduce risks in the market.
The USDA’s last annual meeting, held in May 2022, was attended by Sam Bankman-Fried, former CEO of FTX, who represented the crypto industry. Keynote speakers at the event included Gary Gensler, chairman of the United States Securities and Exchange Commission, and Rostin Behnam, chairman of the Commodity Futures Trading Commission.