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

42 Pages Posted: 4 May 2020

See all articles by Matthias Haentjens

Matthias Haentjens

Leiden University - Leiden Law School

Tycho de Graaf

Leiden University - Leiden Law School

Ilya Kokorin

Leiden University - Hazelhoff Centre for Financial Law and the Department of Company Law

Date Written: April 30, 2020

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

Suggested Citation

Haentjens, Matthias and de Graaf, Tycho and Kokorin, Ilya, The Failed Hopes of Disintermediation: Crypto-Custodian Insolvency, Legal Risks and How to Avoid Them (April 30, 2020). Leiden Law School Research Paper, Hazelhoff Research Paper Series No. 9, Available at SSRN: https://ssrn.com/abstract=3589381 or http://dx.doi.org/10.2139/ssrn.3589381

Matthias Haentjens (Contact Author)

Leiden University - Leiden Law School ( email )

P.O. Box 9520
2300 RA Leiden, NL-2300RA
Netherlands

Tycho De Graaf

Leiden University - Leiden Law School ( email )

P.O. Box 9520
2300 RA Leiden, NL-2300RA
Netherlands

HOME PAGE: http://https://www.universiteitleiden.nl/en/staffmembers/tycho-de-graaf#tab-1

Ilya Kokorin

Leiden University - Hazelhoff Centre for Financial Law and the Department of Company Law ( email )

Steenschuur 25
Leiden, 2311 ES
Netherlands

HOME PAGE: http://https://www.universiteitleiden.nl/en/staffmembers/ilya-kokorin#tab-1

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