ISDA: Navigating an Intermediary Bankruptcy in Digital Asset Markets

ISDA | Jan 26, 2023

The oft-repeated aphorism ‘not your keys, not your crypto’ suggests that only a party running an on-chain node and possessing the private key associated with a cryptocurrency holding can reliably be considered the owner.

• What defines the owner of an asset? And 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?
  • These questions are generally settled in other financial markets, which have developed standards to protect indirectly-held customer assets by making them bankruptcy remote from the intermediary.
  • 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 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.

See:  Goldman Sachs Report: Future of Digital Assets and Crypto Winter’s Discontent

• ISDA is producing two papers that will help market participants achieve greater certainty on the application of these foundational principles to the nascent digital asset derivatives market.
  • This first paper will focus on close-out netting and collateral.
  • The second will address issues relating to customer digital assets held with intermediaries, exploring specific questions on how they may be held, how those holdings might be treated in an insolvency scenario, and the relevant documentation and due diligence issues that would need to be addressed to achieve the intended level of customer asset protection.

Continue to the full article –> here

Download the 25 page PDF 1 of 2 report –> here

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