Crypto Custody and Crypto Wallets – An Empirical Assessment –

29 Pages Posted: 15 Apr 2024

See all articles by Dirk A. Zetzsche

Dirk A. Zetzsche

Universite du Luxembourg - Faculty of Law, Economics and Finance; European Banking Institute

Areti Nikolakopoulou

Universite du Luxembourg - Faculty of Law, Economics and Finance

Date Written: March 22, 2024

Abstract

This paper provides an empirical analysis of the terms and conditions (T&Cs) set by prominent providers of crypto custody and wallet services. It presents an overview of current crypto custody practice by analyzing the rights and obligations on which custodians agree with their clients.

Our sample reveals that significant differences exist within the crypto custody industry: on one side of the spectrum, we find crypto custodians seeking to protect their clients’ rights and interests; and, on the other, we encounter custodians providing T&Cs at odds with any meaningful client protection. At the same time, our sample data do not support the popular view that the size of provider correlates with investor protection propensity; in fact, some of the larger providers’ T&Cs are particularly beneficial to the custodian.

In such an environment, financial regulation can serve three purposes. First, it can promote a level playing field for crypto custodians where merit-based competition can develop. Second, financial regulation can ensure a desirable level of client protection, irrespective of the intensive due diligence required of clients. Third, regulatory minimum standards of organization and conduct for custodians will reduce the likelihood of costly disputes, which in turn may reduce both information asymmetry and transaction costs. All in all, we argue herein that financial regulation may be instrumental to furthering, or may even be a crucial precondition for, a mature crypto industry.

Pt. II provides a high-level overview of how crypto-assets are held in custody via the safekeeping or controlling of private cryptographic keys in so-called “crypto wallets”; Pt. III introduces the sample for our empirical research analysis; Pt. IV presents our results on crypto custody practices regarding safekeeping, the transparency of the key storage mechanism, the possibility of outsourcing safekeeping, omnibus wallets, asset segregation, insolvency protection through clients’ entitlements to assets in custody, the right of reuse, the liability cap, and, finally, the choice of law, courts, and arbitration; and Pt. V concludes.

Keywords: FinTech, crypto-assets, ETHER, BITCOIN, blockchain, distributed ledger technology, MiCA, crypto custody, crypto wallet, private key, public key, financial intermediary, custody chain, centralized exchange (CEX), custodian, safekeeping, omnibus account, collective custody, segregation, record-keeping

Suggested Citation

Zetzsche, Dirk Andreas and Nikolakopoulou, Areti, Crypto Custody and Crypto Wallets – An Empirical Assessment – (March 22, 2024). Available at SSRN: https://ssrn.com/abstract=4769396 or http://dx.doi.org/10.2139/ssrn.4769396

Dirk Andreas Zetzsche (Contact Author)

Universite du Luxembourg - Faculty of Law, Economics and Finance ( email )

Luxembourg, L-1511
Luxembourg

HOME PAGE: http://wwwen.uni.lu/recherche/fdef/research_unit_in_law/equipe/dirk_andreas_zetzsche

European Banking Institute ( email )

Frankfurt
Germany

Areti Nikolakopoulou

Universite du Luxembourg - Faculty of Law, Economics and Finance ( email )

162a, avenue de la Faïencerie
Luxembourg-Limpertsberg, L-1511
Luxembourg

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
390
Abstract Views
548
Rank
144,714
PlumX Metrics