Non-Custodial Wallets v. Custodial Wallets: Considerations for Holding Digital Assets

Introduction: The FTX Collapse, Custodial Wallets, and Bankruptcy Concerns

The recent headlines regarding cryptocurrency exchange FTX’s collapse, and subsequent bankruptcy filing have put renewed focus on whether customers of a cryptocurrency exchange should hold digital assets through a custodial wallet. When a customer holds digital assets through a custodial wallet the service provider holds both the public key and the private key and effectively has control over the assets. The issue for cryptocurrency exchange customers is if a cryptocurrency exchange files for bankruptcy protection are the customers’ digital assets property of the exchange’s bankruptcy estate and available to be used to satisfy debts of other creditors? Bankruptcies involving cryptocurrency exchanges or cryptocurrency lending platforms is a developing area of the law and presents issues of first impression. Recent cryptocurrency bankruptcies include Voyager Digital LLC, Celsius Network LLC, and most recently FTX Trading Ltd. If customers of a cryptocurrency exchange or cryptocurrency lending platform hold their digital assets in a custodial wallet, rather than a non-custodial wallet (i.e., a private wallet), it may increase the risk that such assets are treated as corporate assets of the exchange or lending platform.

Risks of Holding Digital Assets in a Custodial Wallet

Read More