Crypto bankruptcy chaos spurs new derivatives standards
A new legal standard for crypto derivatives will give investors greater certainty over when or if they will get their money back.
The new template from the International Swaps and Derivatives Association will set rules on execution and settlement for over-the-counter digital assets transactions.
It will initially cover non-deliverable futures and options for bitcoin and ether, but ISDA said the agreement could be further expanded to cover other tokenised assets.
“Recent failures in the crypto market have emphasised the importance of having a clear, consistent contractual framework that spells out the rights and obligations of both parties following a default,” said Scott O’Malia, chief executive of ISDA.
ISDA, the trade association representing the OTC derivatives market, publishes “master agreements” used by the industry as the basis for contracts. Its members include most large banks and asset managers.
Previously, institutions who were trading crypto derivatives used amended ISDA agreements.
“All customers, whether retail or institutional, should know their assets are protected and understand their rights in the event of a default,” O’Malia said. “This latest work to establish legal definitions and recommend improved customer protection in bankruptcy through the application of a consistent set of global contractual standards adds to the extensive work ISDA has already published to bring greater legal and operational certainty to digital assets executed on both centralised and decentralised platforms.”
The collapse of FTX in November left many investors waiting for bankruptcy proceedings before potentially getting their money back.
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While few traditional finance firms hold crypto directly or trade on the spot market, ISDA’s master agreement could further extend their interest in crypto derivatives. For trading on-exchange, the CME last year expanded its crypto product offering to include futures and options in both bitcoin and ether.
Along with the new standards, ISDA published a whitepaper on the law around crypto bankruptcies. It noted that while traditional finance has settled the issue of what happens to indirectly-held customer assets in the event of an intermediary going under, FTX’s collapse indicated “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,” it said.
Unlike equities or bonds, which are usually held by a custodian bank, it is not the industry standard for digital assets to be. Traditional finance has recently begun offering custodian services for crypto.
“While [distributed ledger] protocols and platforms will likely reflect common notions of ownership and transfer of assets that may be recognised by legal systems, they may in some cases operate in ways that are inconsistent with the laws and regulations that apply to traditional financial assets,” the ISDA paper said.
It recommended standard settlers and legislators move to develop laws that would make digital assets fall under the category of collateral.
To contact the author of this story with feedback or news, email Jeremy Chan
