The International Swaps and Derivatives Association (ISDA) is working on two papers to inform crypto market participants of legal risks pertinent to the cryptocurrency market and offer guidance
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The International Swaps and Derivatives Association (ISDA) released a statement on the two upcoming papers regarding the digital asset market. The guidelines will focus on close-out netting and collateral, as well as issues relating to customer digital assets held with intermediaries.
ISDA is responsible for industry standards for derivatives and legal definitions of terms used in contracts. The documents currently under development were motivated by the recent series of collapses affecting high-profile crypto market players. The trade organization believes it has to “provide clarity on the regulatory status of cryptoassets and accelerate implementation of an appropriate regulatory framework.”
The main legal issue that arose when the FTX exchange became bankrupt was the problem of defining ownership. The regulator highlights there are no legal explanations of who can reliably be considered the owner of digital assets when intermediaries are involved. Therefore, the parties which are not the direct owners, but hold a crypto asset via an intermediary, are unprotected in case of the intermediary’s bankruptcy.
ISDA realises that the crypto market lacks developed standards present in other financial markets. Moreover, it is disturbed by the lack of proper scenarios following the insolvency of a major market participant. Thus, the new guidelines will also address how crypto-related firms should manage counterparty credit risks.
One of the papers deals with relevant digital asset documentation and due diligence measures needed to achieve the intended level of customer asset protection in an insolvency scenario. It will also clarify the legal uncertainties for intermediaries holding customer digital assets. The clarification is scheduled to be published in the first quarter of 2023.
Another paper will address close-out netting and collateral terms. Together, the two publications will cover the full scope of the legal and documentation questions regarding ownership of digital assets, the posting of those assets as collateral and the enforceability of netting.
