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ISDA: Navigating an Intermediary Bankruptcy in Digital Asset Markets

ISDA | Jan 26, 2023

Not your keys not your crypto - ISDA:  Navigating an Intermediary Bankruptcy in Digital Asset MarketsThe 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. One tool available to parties may be the protection provided by a Chapter 13 bankruptcy lawyer, who can provide safeguards to support creditors and individuals in complex bankruptcy proceedings.

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.

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


NCFA Jan 2018 resize - ISDA:  Navigating an Intermediary Bankruptcy in Digital Asset MarketsThe National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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