Derivatives Body ISDA to release 2 papers addressing crypto risks

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Key takeaways:

  • To address the underlying legal risks in the cryptocurrency markets, the ISDA is working on two papers.
  • A private trade organization called the ISDA principally consists of banks participating in the over-the-counter derivatives market.

The International Swaps and Derivatives Association (ISDA), according to a statement on January 26, is working on two papers to address crucial legal concerns in the cryptocurrency markets, such as the insolvency of crypto exchange companies.

The FTX cryptocurrency exchange’s demise and earlier bankruptcy cases, which raised questions about liquidity and solvency throughout the ecosystem, served as the impetus for the project. The papers will provide recommendations for market participants addressing crypto ownership and the function of intermediaries in the event of insolvency, among other things. In a statement, ISDA CEO Scott O’Malia said:

“Recent failures in the crypto market have emphasized the importance of having a clear, consistent contractual framework that spells out the rights and obligations of both parties following a default,”

Firms are compelled to think about how they manage counterparty credit risk, the best intermediated or custodial arrangements, and if the instruments they use can be consistently enforced in a bankruptcy scenario due to the possibility of a critical market participant going bankrupt. 

The announcement emphasizes that to offer essential clarity, applying current bankruptcy laws to a new asset class necessarily generates legal categorization and other issues that must be addressed.

Additionally, the association claimed that the oft-repeated maxim “not your keys, not your crypto” suggests that the issues resolved in the traditional markets, including “what identifies the owner of an asset,” may still be developing or may not exist in the crypto industry. or “What is the impact of an intermediary’s bankruptcy on a party that is not the direct owner but holds an asset indirectly?” In more detail, the statement reads:

“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 documents will include rules for close-out netting and collateral and information on holding and handling customers’ digital assets held by intermediaries in the event of insolvency.

The papers will also provide the legal and supporting evidence required to prove ownership of digital assets and their usage as security. A private trade organization called the ISDA principally consists of banks participating in the over-the-counter derivatives market. The association’s mission includes identifying and minimizing market risks.

Sam Bankman-Fried, the former CEO of FTX, attended the USDA’s most recent annual meeting in May 2022 as a representative of the cryptocurrency sector. The event featured keynote speeches by Rostin Behnam, chair of the Commodity Futures Trading Commission, and chairman of the US Securities and Exchange Commission, Gary Gensler.

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