Custody Services for Crypto Assets: Navigating Legal Frameworks
The provision of custody services for cryptoassets is facing increased scrutiny, especially in light of the recent insolvencies of certain crypto service providers. These cases have highlighted the importance of determining the type of claim clients have over their cryptoassets when using custodian wallet providers. However, the lack of a clear regulatory framework for custodial wallet services has led to significant variations in the services offered by different providers. This lack of consistency hinders market growth and creates obstacles for established institutions looking to enter the crypto custody space.
To address these challenges, Clifford Chance, in collaboration with Komainu and Carey Olsen, has written a guidance document to provide clarity and best practices for market participants while also drawing attention to areas of legal and regulatory uncertainty.
The paper focuses on custody offerings for cryptoassets where the custodian wallet provider safeguards and administers the assets on behalf of the client, with the client retaining a proprietary interest in the assets. The paper does not cover existing regulated investments or self-custody wallet services.
The guidance examines existing legal frameworks for custody services in various jurisdictions. Trust structures are commonly used in jurisdictions that recognize trusts, allowing assets to be held on behalf of beneficial owners without being included in the custodian's estate. Statutory and contractual arrangements can achieve similar outcomes in jurisdictions without a concept of trust. The analysis reveals both similarities and differences in regulatory frameworks across jurisdictions, with some jurisdictions exploring new supervisory frameworks for custodial wallet services while others regulate such services within existing financial services frameworks.
Whether cryptoassets can be held in a "bankruptcy remote" manner depends on each jurisdiction's legal and regulatory frameworks.
In jurisdictions recognizing trusts (Common law jurisdictions), bankruptcy remoteness is generally achieved by meeting the requirements for creating a valid trust.
In Civil law jurisdictions, custody arrangements and bankruptcy remoteness treatment vary.
Check out the jurisdiction analysis on page 19 (jurisdictions represented are the UK, Australia, Germany, Japan, Jersey, the Netherlands, Singapore, the UAE, and the USA). Although Switzerland and Liechtenstein also have very advanced crypto-asset regulations, unfortunately, these jurisdictions were not included in the guidelines.
Also on page 24 is the Spotlight on #MiCA.
To summarize, the introduction of the EU's MiCA aims to bring more consistency to the regulatory treatment of cryptoassets within the EU, but challenges remain in characterizing cryptoassets and confirming their treatment in many member states. For instance, one of the challenges with MiCA is the dependency on national civil, property, and insolvency laws for segregation. Additionally, the terminology used in financial regulatory, civil, property, and insolvency law regimes may not align, further complicating the implementation of MiCA. Clear contractual terms and reliable mechanisms are essential for identifying and segregating cryptoassets belonging to different clients.
MiCA was published in the Official Journal on June 9, 2023, and will come into force on June 29, 2023. Provisions related to stablecoins will apply from June 30, 2024, while the remaining provisions for issuers of other cryptoassets and cryptoasset service providers, including custodian wallet providers, will take effect from December 30, 2024.
The guidance emphasizes the need for well-considered and internationally consistent regulation for the custody of cryptoassets. Such regulation would clarify, enhance market growth, and protect client assets.