business Law regulation Digital Asset Bankruptcy

ISDA releases standard definitions for digital asset derivatives

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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 bankruptcy 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 ownership and the role of intermediates in the event of bankruptcy.“The prospect of insolvency of a major market participant requires firms to consider how they manage counterparty credit risk, which intermediated or custodial structures are most appropriate, and whether the tools employed can be reliably enforced in a bankruptcy scenario.

Applying existing bankruptcy rules to a new asset class inevitably raises legal characterization and other questions that must be tackled 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, such as “what defines the owner of an asset?” or for “a party that is not the direct owner, but holds an asset indirectly via an intermediary, what is the impact of an intermediary’s bankruptcy?” Specifically, the statement says: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

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