A recent whitepaper by the International Swaps and Derivatives Association (ISDA), “Navigating Bankruptcy in Digital Asset Markets”, has outlined the key legal issues customers of digital asset intermediaries should be aware of to be better protected against events of insolvency. This has been a major point of concern for many investors following the collapse of exchanges in the second half of 2022.

With reference to the ISDA's paper, this article will outline where, how, and why Copper mitigates insolvency risk factors in line with the ISDA’s recommendations.  

Copper’s English law trust structure for ClearLoop meets a number of the recommendations outlined in ISDA’s recommendations, for example, clients and exchanges hold a beneficial interest in the trust in accordance with Copper’s books and records. 

Legal rights of clients in event of insolvency 

Following the exchange collapses in late 2022, such as FTX, there has been a renewed focus on assessing how exposure to insolvent intermediaries in the digital asset market are managed. 

The ISDA paper stresses the importance of market participants having an “understanding of the legal rights and obligations that result from their relationships with intermediaries for digital asset holdings. Copper’s English Law trust structure is clearly outlined in our legal documentation, which was put together by a leading Magic Circle law firm. This helps clients have a clear understanding of the relevant legal rights and obligations of Copper. In addition, Copper’s legal, product and risk teams are on hand to answer any questions clients may have. Read more on Copper’s trust structure here. 

Copper’s English law trust structure means clients have a predetermined legal standing to recover their assets in the event of insolvency. In legal terms, clients and exchanges will have a proprietary interest in their assets, which will not form part of Copper’s insolvent estate.  

Copper also acts as a security trustee for client assets and exchange collateral, thereby allowing it to recover assets on clients’ or exchanges’ behalf in the case of a partner exchange or client on ClearLoop going bankrupt. 

Omnibus structure versus individual customer segregation 

The two methods by which client assets can be held in custody arrangements can be broadly defined as using an omnibus structure or via individual customer segregation. Omnibus structures operate by keeping a record of all customer assets and then ensuring the omnibus account balance matches all assets owed to such customers on the books. 

Omnibus accounts offer key advantages in operational efficiencies and lower costs, making it a suitable account structure for Copper to fulfil off-exchange settlement.  

Copper acts not only as a custodian, but also as facilitator of off-exchange settlement. This makes an omnibus account structure preferable from an operational point of view to efficiently execute and settle trades across different exchanges and fulfil liquidity requirements for our range of clients.  

Clients looking to delegate their assets to exchanges perform this action off-chain, so no action is required on the part of Copper for day-to-day trading activities.  

Clients holds property rights to their share of the liquidity in the omnibus account, giving them legal reassurances on the recoverability of their assets in the case of Copper’s insolvency. 

In summary

The ISDA paper highlights that its key recommendation is that the governance rules for ownership of customer digital assets be made “as clear as possible to ensure customers have the expected levels of asset protection”. 

In the case of Copper’s ClearLoop, off-exchange settlement is the core function of the product offering. Our onboarding process for new clients ensures they are aware of our aim to balance customer asset safety with accessibility to ClearLoop partnered exchanges.  

Copper understands the requirements in the market for robust legal protections for institutions trading in digital assets. Having a mutual understanding of legal obligations from all parties helps to establish confidence in digital asset intermediaries in the case of insolvent partner exchanges. 

For example, the collapse of numerous exchanges in 2022 may have made recourse clear to the unencumbered assets should the assets been held in a trust under well-recognised legal governance, such as Copper’s English Law trust structure. 

For the avoidance of doubt, Copper does not hold assets that can be considered deposits from the public, as defined by the Swiss Banking Act.