Industry body clarifies what happens when crypto derivatives crash

Representative image

An industry body set out a global framework on Thursday for trading derivatives linked to cryptoassets to avoid FTX-style collapses sowing confusion over ownership.

The International Swaps and Derivatives Association (ISDA) published guidance for trading digital asset derivatives to clarify what happens when things go wrong in an underlying market, such as the collapse of crypto exchange FTX.

While most of the recent problems have occurred in the spot cryptocurrency market, many of the legal uncertainties could affect digital asset derivatives too.

ISDA already oversees the 'master agreement' or template used by banks to trade trillions of dollars in derivatives globally.

It will now include the body's first standard documentation for trading digital asset derivatives, initially covering non-deliverable forwards and options on Bitcoin and Ether.

It could be expanded in future to cover additional product types, including tokenized securities and other digital assets executed on distributed ledger technology (DLT), ISDA said.

The framework sets out the rights and obligations of both sides to a derivatives trade following market disruption, and ISDA also published discussion papers exploring legal questions raised by the bankruptcy of FTX.

The collapse of FTX led to the loss of billions of dollars of customer assets raising questions about who owns assets held by a crypto exchange or intermediary.

"Recent failures in the crypto market have emphasized the importance of having a clear, consistent contractual framework that spells out the rights and obligations of both parties following a default," said ISDA chief executive Scott O'Malia.

"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.