Crypto Custody and Crypto Wallets—An Empirical Assessment

Custodians provide a crucial cornerstone of the USD 500 billion digital asset markets to date. Our paper provides an overview of current custody practices by examining the rights and obligations on which custodians agree with their clients. For that purpose, we analyze the terms and conditions (T&Cs) of 110 entities providing crypto custody and wallet services, drawing on a hand-selected dataset which is, to the best of our knowledge, the most comprehensive dataset so far on the Terms & Conditions used by crypto custodians globally.

Focusing on contractual clauses used for crypto custody contracts, we scrutinize stipulations at the heart of several recent large-scale crypto insolvencies that potentially explain, in some cases at least, how large-scale asset misappropriations in the vicinity of the insolvency of crypto custodians and multi-service crypto-asset service providers could come about.

Our hand-selected dataset includes over 80 contracting terms from 49 jurisdictions which were made available in the period of May 2023 and March 2024. This allows us to identify trends, patterns, as well as potential contradictions and divergences across the crypto industry. We analyze our dataset to ascertain:

• whether the T&Cs of crypto custodians satisfactorily protect their clients’ assets;
• whether the size of the custodian correlates with client protection propensity; and
• whether regulation is necessary to provide a minimum level of protection for crypto clients.

We focus on clauses regarding safekeeping, the transparency of the key storage mechanisms, outsourcing of safekeeping service, the use of omnibus wallets, asset segregation, insolvency protection through clients’ entitlements to assets held in custody, the right of reuse of crypto assets, whether liability by providers is capped, and, finally, the choice of law, courts, and arbitration.

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; on the other, we encounter custodians providing T&Cs that preserve the self-interest of the crypto service provider and that are at odds with any meaningful client protection. Unfortunately, the former group is—in numbers—much smaller than the latter. At the same time, our sample data does not support the popular view that the size of the provider correlates with investor protection propensity; in fact, some of the (very) large providers’ T&Cs are particularly beneficial to the custodian.

We argue that, in such an environment, financial regulation can serve three purposes:

• it can promote a level playing field in the market for crypto custody services where merit-based competition can develop;
• it can ensure a desirable level of client protection, irrespective of retail and professional clients performing costly due diligence prior to entering into a custody contract; and  
• 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 and thus further the overall efficiency of the custody services market.

All in all, our dataset supports the view that financial regulation may be instrumental to furthering, or may even be a crucial precondition for, the development of a mature crypto industry with a sound level of investor protection and moderate transaction costs.

Dirk Zetzsche is a Professor of Financial Law (inclusive finance) and holder of the ADA Chair in Financial Law (inclusive finance) at the Faculty of Law, Economics and Finance at the University of Luxembourg.

Areti Nikolakopoulou is a Doctoral Researcher at the ADA Chair in Financial Law (inclusive finance), Faculty of Law, Economics and Finance at the University of Luxembourg.

Their complete working paper can be accessed here.