Lack of legal clarity poses investor risks if crypto custodians go bankrupt: study

Quick Take

  • There remains a lack of clarity surrounding the legal proceedings and rights of investors if crypto custodians enter a state of insolvency, according to a group of researchers from the Leiden Law School
  • To study this problem, the group analyzed how bitcoin is held and how its ownership can be created and transferred

There remains a lack of clarity surrounding the legal proceedings and rights of investors if crypto custodians enter a state of insolvency, according to a group of researchers from the Leiden Law School.

The researchers — Matthias Haentjens, Tycho de Graaf and Ilya Kokorin — published a study last month entitled "The Failed Hopes of Disintermediation: Crypto-custodian Insolvency, Legal Risks and How to Avoid Them," where they discussed which rights investors have if a crypto custodian falls insolvent.

The group analyzed how bitcoin is held and how its ownership can be created and transferred. They looked into the status of deposited bitcoins by analyzing whether stored crypto assets are a part of the crypto custodian's insolvent estate or if customers can reclaim them. The group's study was based on the current terms and conditions of major crypto exchanges like Coinbase, Gemini and Kraken.

One of their key findings was that the rights of customers in insolvency proceedings depend on insolvency and property law, but that this is "complicated by a lack of harmonized private international law rules that are appropriate for the specific nature of cryptocurrencies and the relations between customers and crypto-custodians." The paper referenced the Hague Securities Convention as a means of determining the applicable property law. This would give priority to the contractually agreed-upon law between the customer and crypto custodian.

According to the study, this can be easily verified by the parties involved, guaranteeing legal certainty and predictability.

The study found that courts have denied customers' revendication claims by referencing the cases of MtGox and BitGr