Issue link: https://digital.shearman.com/i/1479657
Cryptoassets & Insolvency 23 Similar considerations apply in relation to other pieces of legislation which, like the FCA Regs, seek to regulate the plumbing of financial markets by (among other things) disapplying certain provisions of insolvency law. As cryptoassets and the platforms and businesses that support them become increasingly intertwined with mainstream financial markets, we expect these questions to become increasingly pertinent. One example is Part VII of the Companies Act 1989 (Part VII) which is designed to ensure that English insolvency law does not disrupt the rules that regulate the operation of the financial markets. It does so by disapplying insolvency law where provisions would conflict with contractual remedies agreed between market participants and their counterparties. In particular, Part VII disapplies "the law relating to the distribution of assets" of an insolvent entity to the extent that it would render invalid any of the following: • market contracts (broadly, contracts entered into by a Recognized Investment Exchange (RIE), recognized central counterparty (CCP), recognized clearing house (RCH) or recognized central securities depository (CSD), or their members or designated non-members, with respect to transactions conducted on, cleared by, or settled by, those recognized bodies); • qualifying property transfers (certain transactions cleared through a recognized central counterparty); • the default rules of a RCH, a CCP, a RIE or a CSD; • transfers or settlements of contracts by a recognized CCP and the transfer or settlement of related trades and qualifying collateral arrangements; and • any other rules of an RCH, an RIE or a CSD relating to the settlement of market contracts. Similarly, the Financial Markets and Insolvency (Settlement Finality) Regulations 1999 (Settlement Finality Regs), aim to minimize systemic risk associated with, and to ensure the stability of, payment and securities settlement systems. Among other things, the Settlement Finality Regs provide that transfer orders entered into such systems cannot be revoked or invalidated, even if a system participant is subject to insolvency proceedings. The application of Part VII and/or the Settlement Finality Regs to certain crypto businesses or transactions would give greater legal certainty to transactions by those businesses and/or in those assets. However, for Part VII to apply, a crypto business would need to be recognized by the Financial Conduct Authority as an RIE, RCH, CCP or CSD and for the Settlement Finality Regs to apply, a crypto business would need to be declared a "designated system" by the Financial Conduct Authority or the Bank of England. While certain crypto exchanges are FCA registered, we are not aware of any such recognition orders or designations in relation to crypto businesses to date. Security, Netting and Enforcement (cont.)