The world of collateral management was already a precarious balancing act. Now, with the rise of crypto assets in financial derivatives, that balance risks toppling under the weight of ambiguity.
The International Swaps and Derivatives Association’s (“ISDA”) 2023 Digital Assets Legal Group and its follow-up 2025 commentary have highlighted a pressing question: what happens to digital collateral posted under standard Credit Support Annexes if the intermediary fails?
Digital assets as collateral: A growing trend
This is far from an idle question. Under English law, parties have typically relied on the clarity of title transfer collateral arrangements for cash and securities. However, crypto assets blur these boundaries, raising knotty issues about how title is perfected, transferred, and recovered in the event of insolvency.
Cross-border complexity and regulatory uncertainty
In cross-border transactions, the complications multiply. The final phase of European Market Infrastructure Regulation Refit (UK version post Brexit) implementation earlier this year forces counterparties to consider whether posted crypto collateral meets equivalent risk‑mitigation standards.
Is digital collateral truly segregated?
Is a stablecoin genuinely segregated? Or is it simply an unsecured creditor’s hope dressed up in digital form?
The potential for legal black holes is real. As ISDA has warned, digital wallets and exchanges rarely match the robust segregation protections of traditional custodians. In a failure scenario, a counterparty might discover its collateral is as elusive as a vanishing Bitcoin wallet key, leaving it exposed just when its protections are needed most.
Risk management: What should practitioners do?
So, what is the practitioner to do?
Review and redefine “Eligible Collateral”
First, review collateral documentation with a sharp eye. Definitions of “Eligible Collateral” in existing ISDA Credit Support Annexes should expressly cover digital assets, their valuation, and control mechanics.
Demand proof of segregation
Second, parties should demand proof of robust segregation at any third-party wallet or exchange - akin to a trust arrangement.
Update insolvency risk clauses
Third, insolvency risk mitigation clauses deserve a thorough update, with clarity on how assets can be traced and recovered if the intermediary collapses.
Securing crypto collateral with legal certainty
In short, a digital collateral black hole is best avoided by using traditional legal rigour, albeit in a new technological wrapper. Or, to borrow the language of our times: your crypto collateral should be held on something better than hope and a password scribbled on a napkin.
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