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The International Swaps and Derivatives Association (ISDA) is working on two papers to address fundamental legal risks in the crypto markets, such as the insolvency of crypto exchange firms, according to a statement released on Jan. 26.
The initiative was motivated by the collapse of crypto exchange FTX and previous insolvencies that "caused a cascade of liquidity and solvency problems in the crypto ecosystem." Along with other things, the materials will provide guidance to market participants on crypto ownership and the role of intermediaries in bankruptcy.
“The insolvency outlook of a major player in the market requires companies to examine how they manage counterparty risk, the most appropriate middle or guard structures, and whether the tools used can be reliably applied in the event of failure. The application of current bankruptcy rules to a new asset class inevitably raises legal and other issues that need to be addressed to provide the necessary certainty,' reads the announcement.
In addition, The organization said the principle often repeated "not your keys, not your crypto" appears to imply that the core issues addressed in traditional markets may still be evolving or may not exist in the crypto industry, like "what defines the owner of a property?" or "a party who is not the direct owner", but has an indirect asset through an intermediary, how does bankruptcy affect an intermediary?" Specifically, the statement says:
“The FTX collapse indicates that such norms are still evolving (or may not yet exist) in the cryptocurrency markets. Where these issues are not well understood by market participants or risks are not well managed, significant and unforeseen capital losses can occur."
The publications will deliver standards on close-out netting and collateral and address issues relating to customers’ digital assets held with intermediaries and how they may be held and treated in an insolvency scenario. The documents will also be used to support the laws and documentation necessary to establish ownership and use as collateral for digital assets.
Isda is a private commercial association made up mainly of banks that carry out transactions on the OTC derivatives market. The association's activities seek to identify and reduce market risks.
The USDA's last annual meeting, held in May 2022, had the presence of Sam Bankman-Fried, former CEO of FTX, representing the crypto industry. Gary Gensler, chair of the Securities and Exchange Commission in the United States, and Rostin Behnam, chair of the Commodity Futures Trading Commission.
