The Failed Hopes of Disintermediation: Crypto-Custodian Insolvency, Legal Risks and How to Avoid Them

Abstract

This paper explores the legal risks involved in depositing cryptocurrency with crypto-custodians such as crypto-exchanges. These risks materialize most acutely in case these crypto-custodians fall insolvent, which has happened over the last decade in several instances. Recent years have witnessed the demise of crypto-exchanges such as Cryptopia (New Zealand), QuadrigaCX (Canada), BitGrail (Italy), Cointed GmbH (Austria) and a host of other crypto-exchanges around the world. These cases reveal that the qualification of the contractual and property law rights of crypto-investors is problematic. This is why this article discusses which rights crypto-investors can and should be able to assert in case a crypto-custodian falls insolvent. To answer this question, the (legal) qualification of bitcoin is analysed (can it be owned and if so, how can such ownership be created and transferred?) and the status of deposited bitcoins is discussed (do stored crypto-assets form a part of the crypto-custodian’s insolvency estate or can they be revendicated by customers?). Private international law aspects form the starting point of the legal analysis (which court has jurisdiction to open insolvency proceedings and hear crypto-investors’ claims, and what law applies to such claims?) and the analysis is based on the current terms and conditions of major crypto-custodians.

Keywords: Cryptocurrency, bitcoin, custody, crypto-custodian, digital intermediation, crypto-exchange, blockchain, MtGox, BitGrail, omnibus address, segregated address, insolvency, Dutch law, qualification of bitcoin, documentary intangible, revendication, property law, private international law

JEL Classification: K10, K11, K12, K20, K22, K23, P14, O30