Concerning the collapse of a popular crypto exchange, FTX and other previous bankruptcy cases have prompted the need to address the crypto ecosystem’s liquidity and solvency concerns. As a result, the International Swaps and Derivatives Association (ISDA) is working on releasing two papers to address the fundamental legal risks associated with crypto markets.
The ISDA is a private trade association that basically banks the instruments that transact in the over – the counter-derivative market. Thus, as part of its core functionality, the association identifies and mitigates risks in the crypto markets.
According to the statement released on January 26, the ISDA work–in–progress papers are addressing the legal risks which majorly include the insolvency of crypto exchange firms. The paper is expected to contour the prospect of insolvency for the major market participants and consider how they manage counterparty credit risks. The application of existing bankruptcy rules to the new asset class and the ways to tackle the necessary certainties.
Focusing on the oft – the repeated principle that states. “not your keys, not your cryptos” the association implies that there still exist fundamental questions to settle in the traditional markets. These phenomena seem to exist in the crypto industry too, where the definition of the owner of assets, holder of assets, their impacts, and other things seem to be unclear.
Additionally, the market participants themselves do not understand the existence of these issues in cryptocurrency markets. As a result, the risks are not adequately managed, remain unanticipated, and lead to significant capital loss.
More precisely, the publication will deliver standards on collateral, close-out netting, and addressing the issues relating to customers’ digital assets. The paper would also comprise legal details and documentation needed for establishing the ownership of digital assets and their use case as collateral.