• CFRED CUHK Law

The Failed Hopes of Cryptocurrency Disintermediation

Matthias Haentjens – Leiden Law School, The Netherlands;

Tycho de Graaf – Leiden Law School, The Netherlands;

Ilya Kokorin – Leiden Law School, The Netherlands

-- The founding fathers of cryptocurrencies wished to free value transfers from the interference of governments, banks, brokers and other intermediaries. It was the control by, and frequent failure of such intermediaries, as well as the high transaction costs arising from their involvement, that created a fertile environment for bitcoin’s origins. In reality, however, disintermediation has not occurred. A large number of bitcoins and other cryptocurrencies are currently stored with crypto-custodians such as crypto-exchanges. While such custody may be attractive because it is (usually) free of charge and user-friendly, it creates significant risks related to the possible insolvency of crypto-custodians.


Recent years have witnessed the demise of crypto-exchanges such as Cryptopia (New Zealand), QuadrigaCX (Canada), BitGrail (Italy), MtGox (Japan) and a host of other crypto-exchanges around the world. These cases demonstrate that the qualification of contractual and property law rights of crypto-investors is problematic. In the insolvencies of MtGox, BitGrail and Cryptopia, customers of crypto-exchanges asserted property law claims in an effort to retrieve (revendicate) their deposited cryptocurrency. In the case of MtGox, the first major collapse of a crypto-exchange, the court dismissed the plaintiffs’ claims on the basis that bitcoin cannot be the object of ownership. In the insolvency proceedings of BitGrail it was held that revindication claims could not be satisfied due to the commingling of deposited crypto-assets, and the impossibility to identify and segregate them. The court reasoned that a relationship of irregular deposit was created, leading to the loss of ownership rights by crypto-investors. In contrast, in the more recent case of Cryptopia, the court concluded that cryptocurrency could qualify as property at common law and that the New Zealand-based exchange, Cryptopia, was a trustee for account holders on its platform. As a result, the deposited bitcoins did not form part of the debtor’s insolvency estate and customers preserved their rights in the crypto-asset pool.


The legal risks that the custody of crypto-currencies pose to investors, and the divergence of approaches taken by courts to determine (property) rights of crypto-investors motivated us to write our recent paper, “The Failed Hopes of Disintermediation: Crypto-custodian Insolvency, Legal Risks and How to Avoid Them”.


In this paper we discuss the rights that crypto-investors or customers of crypto-custodians can and should be able to assert in case of insolvency of a crypto-custodian. 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 assessed (do stored crypto-assets form a part of the crypto-custodian’s insolvency estate or can they be revendicated by customers?). To support our findings, we conduct a series of trials with transactions on blockchain, which clearly demonstrate the traceability of blockchain entries and the possibility to review transaction history. We also pay attention to private international law aspects (which court has jurisdiction to open insolvency proceedings against a crypto-exchange and hear crypto-investors’ claims, and what law applies to such claims?). A part of our analysis concerns the review of the terms and conditions of large crypto-exchanges such as Coinbase, Gemini, Kraken and Bitfinex, and the discussion of the prevalent forms of crypto-custody, i.e. by way of pooled (omnibus) blockchain address (Coinbase, Wirex, OKEx) and through segregated blockchain addresses (Gemini).


This paper was written in the context of the Oxford Digital Assets project, led by professors Louise Gullifer (now at Cambridge) and Jennifer Payne, and co-run by Guy Morton. It will be published in the upcoming issue of the Singapore Journal for Legal Studies and can be found in working paper form here. The authors presented their initial findings at a Digital Assets conference held at Harris Manchester College on 26 June 2019. The present paper benefitted greatly from the comments there received, and was subsequently revised for a conference organized by the Centre for Banking & Finance Law at the National University of Singapore, entitled 'The Future of Banking and Finance in the Digital Era'. Unfortunately, that conference did not take place in March 2020 as scheduled, due to measures related to Covid-19. The authors also thank professor Joost Visser of the Leiden Institute of Advanced Computer Science (LIACS) for his comments on an earlier version of this paper.

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