The International Swaps and Derivatives Association is working on two papers to address fundamental legal risks in the crypto markets.
The International Swaps and Derivatives Association( ISDA) is working on two papers to address beginning legal threats in the crypto markets, similar to the insolvency of crypto exchange houses, according to a statement released on Jan. 26.
The action was motivated by the collapse of the crypto exchange's previous failure cases that “ prompted a cascade of liquidity and solvency concerns across the crypto ecosystem. ” Along with other things, the papers will offer guidance for market participants regarding crypto power and the part of intermediates in the event of bankruptcy.
“ The prospect of insolvency of a major market participant requires companies to consider how they manage counterparty credit threat, which intermediated or custodial structures are most appropriate, and whether the tools employed can be reliably executed in a bankruptcy scenario. Applying bankruptcy rules to a new asset class inevitably raises legal characterization and other questions that must be dived to provide the necessary certainty, ” notes the announcement.
In addition, the association said that the oft-repeated principle “ not your keys, not your crypto ” seems to imply that fundamental questions settled in the traditional markets may still be evolving or may not exist in the crypto industry, similar to “ what defines the owner of an asset? ” or for “ a party that isn't the direct proprietor, but holds an asset indirectly via an intermediary, what's the impact of an intermediary’s bankruptcy ” Specifically, the statement says
“The FTX collapse indicates that such norms are still evolving (or may not yet exist) in the cryptocurrency markets. When these issues are not well understood by market participants or the risks are not properly managed, unanticipated and significant loss of capital can emerge.”
The publications will deliver norms on close-out netting and collateral and address issues relating to customers ’ digital assets held with intermediaries and how they may be stored and treated in an insolvency scenario. The papers will also inform legal and documentation needed to establish ownership of digital assets and their use as collateral.
The ISDA is a private trade association comprising primarily banks that transact in the over-the-counter derivatives market. As part of its work, the association seeks to identify and reduce request threats.
The USDA's last yearly meeting, held in May 2022, had the presence of Sam Bankman- Fried, former CEO of FTX, representing the crypto industry. Featured keynotes at the event included Gary Gensler, chair of the United States Securities and Exchange Commission, and Rostin Behnam, chair of the Commodity Futures Trading Commission.
(ANA PAULA PEREIRA, Cointelegraph, 2023)