Custody means a provider safekeeps a client’s crypto and the means to move it, the private keys, without taking ownership. True custody holds the asset for the client. It differs from a title transfer, where the client hands ownership to the provider and keeps only a claim to be paid back.
Crypto custody is new, but the existing legal tools are still applicable. Where a provider holds an asset for a client without owning it, the arrangement is usually in the nature of a trust or bailment under English law, or a securities-intermediary style account under New York’s Uniform Commercial Code.
Control of the private key is the crypto equivalent of holding the only key to a safe-deposit box. Whoever can sign a transaction can move the asset, so who holds the key, and how that control is split, decides who can act if the custodian fails.
In a growing list of markets, yes. A custodian’s insolvency is survivable only when the client’s coins are the client’s property, held for them, not a debt the custodian owes. A court can find that assets are held on trust for clients only if they are property capable of being held on trust. Segregation then does the practical work, keeping those assets identifiable so the trust can be proved and enforced. The position is set by statute in some places and by court rulings in others:
Note, property recognition protects ownership; it does not, by itself, decide how your specific assets are held. The contract, the records and the wallet structure still govern that.
In an insolvency, the first question is whether the assets belong to the custodian’s estate or to the client. The answer decides whether the custodian’s creditors can reach them.
In a true custody arrangement, the custodian holds assets for the customer. The customer has a proprietary entitlement or a statutory protection over specific assets, so the custodian’s general creditors have no recourse to them. In a title transfer arrangement, the assets pass to the intermediary in return for a promise to give back equivalent assets. The customer then holds a contractual claim and will likely rank with general unsecured creditors (ISDA, May 2023). Different legal systems reach the first outcome through different tools. In English law it is usually a trust. In New York law it depends on whether the assets sit on special deposit or general deposit.
Courts look at three things when they decide which arrangement applies: what the contract says about ownership, whether the custodian must keep customer assets segregated and may not reuse them, and how the custodian is paid. A fee for safekeeping points toward custody. Interest or rewards paid to the customer point toward title transfer.
On January 4, 2023, a US bankruptcy court held that crypto in Celsius’s Earn accounts became Celsius’s property when customers deposited it. The terms of use granted Celsius all right and title to the assets, including ownership rights. Earn customers became general unsecured creditors who recover through the claims process (Weil Restructuring).
Three points from that case matter for any buyer. The court treated ownership as a matter of contract law. The ruling covered only Earn accounts and does not bind other courts. The same court had earlier ordered Celsius to return about $44 million of assets held in its custody accounts to customers (PYMNTS). The terms decided the outcome, whatever the product was called.
In regulated markets, keeping client assets apart from the custodian’s own is a legal duty. The rules differ in wording but converge on the same core: segregate client assets, bar reuse without the client’s consent, and keep records that prove the split.
The global baseline comes from the Financial Action Task Force. FATF Recommendation 15 asks countries to license or register virtual asset service providers, including custodians, and to supervise them. One caution: FATF sets anti-money-laundering and supervisory standards; on its own text it does not mandate client-asset segregation, which comes from national rules (FATF, Recommendation 15).
National rules add the detail and are binding. Taiwan’s new law, covered below, is a current example.
Segregation means the custodian keeps customer assets apart from its own, and the degree of segregation affects how quickly and how cleanly a client can recover assets. A custodian can segregate at three levels, and the level it offers should be written into the contract and reflected in how its wallets are run (ISDA, May 2023).
| Level | What it means | What it means in an insolvency |
| No segregation | The custodian records customer balances in its books but holds the crypto in wallets mixed with its own. | Customer assets are hard to tell apart from the custodian’s assets. The customer’s claim may be weak. |
| Omnibus segregation | Customer assets sit in one or more wallets separate from the custodian’s own, shared by all customers. The books record each customer’s share. | Customer assets are separate from the custodian’s. Pooling can slow identification and recovery, especially if the wallet holds less than total customer claims. |
| Individual segregation | Each customer’s assets sit in wallets identified for that customer, with matching records. | Each customer’s assets are the easiest to identify and return. A loss in one wallet does not touch other customers’ wallets. |
Omnibus segregation is the common baseline and an appropriate starting point for most negotiations, according to ISDA. It also gives lower operating costs. Customers can negotiate higher or lower levels of protection based on what they do with the assets. A bank holding long-term client positions may choose individual segregation. A trading desk that moves assets all day may accept omnibus segregation in return for speed and lower cost.
The buyer’s practical test is to ensure that the contract, the books and the on-chain wallet structure should all describe the same arrangement. A contract that promises segregation while the wallets are pooled with the custodian’s own assets does not give the protection it describes.
Seven contract terms decide most of the outcome in an insolvency, so buyers should read them before they assess the technology.
No single clause protects a client on its own. The contract works when its ownership language, segregation duties, reuse limits and sub-custody terms are consistent with each other and with how the custodian operates.
In crypto, whoever controls the private keys controls the assets, so an insolvency administrator needs a way to reach the keys before anything can be returned. Clear ownership does not help a client if nobody can move the assets.
ISDA’s paper makes the point directly. An insolvency official cannot deal with digital assets unless they know the assets exist and can control the relevant keys. That can be difficult if senior managers are unavailable or uncooperative. It is harder again when keys are split or when approval is spread across several parties or devices.
Split key control is common and useful. Multi-party computation, or MPC, divides a key between parties so that no single device holds it in full. Multi-signature wallets require several approvals for each transaction. These designs reduce the risk of theft. They also mean the custodian needs a documented way to give an administrator access if the custodian fails.
A buyer can test this in three steps:
A valid custody arrangement is not a guarantee that a client gets every asset back. ISDA’s analysis lists fraud, hacking and negligent loss of assets as risks that remain even where the client has a property claim. A client may not recover the full loss from the custodian, and the amount recovered can depend on the contract’s liability terms.
The segregation model also affects who bears a loss. If one wallet is hacked under individual segregation, only the client whose assets sat in that wallet is affected. If a pooled wallet is hacked, the remaining assets may not cover all clients’ claims, and the allocation of the loss depends on the contract and the applicable rules.
Time is a second limit. Even where ownership is clear, identifying and locating client assets and settling who has claims over them can take a long while. ISDA points to the FTX, Celsius and BlockFi proceedings as examples. A client who needs access to assets quickly should ask how fast the custodian expects to identify and return them.
These limits are why legal protection, and security controls belong together. Our article on how attackers reach crypto wallets covers the security side.
Taiwan: what the new law adds
Statutes can add protection on top of the contract, and Taiwan’s new virtual asset law is a current example. Taiwan’s Virtual Asset Service Act passed the Legislative Yuan on June 30, 2026, and was promulgated on July 22, 2026. The Executive Yuan still has to set the effective date (Library of Congress Global Legal Monitor).
The Act lists custody providers as one of seven provider categories that need a license from the Financial Supervisory Commission. Licensed providers must keep customer assets segregated from company funds, run internal control and audit systems, manage cybersecurity, and carry civil liability to customers, including for outsourced work (Lexology summary). Providers already registered for anti-money laundering purposes have 12 months from the effective date to apply and 21 months to obtain a license. TRM Labs reports that the Commission expects the Act and its subordinate rules to take effect together, in the first quarter of 2027 at the earliest.
A statutory duty to segregate supports the checks in this article. It does not replace the contract terms, the records or the wallet structure. Our earlier post covers the Act in full: Taiwan’s Virtual Asset Service Act.
Twelve questions let a buyer test the legal and operational structure before signing, and each comes with the evidence to request. The questions draw on the practical steps in ISDA’s paper.
| Question | Why it matters | Evidence to request |
| 1. Are my assets held for me, or transferred to you? | This decides whether I hold a claim to specific assets or only a claim for equivalent assets. | The ownership clause and the custodian’s written description of the legal relationship |
| 2. What level of segregation applies: individual, omnibus or none? | The level affects how quickly assets can be identified and returned. | A description of the wallet structure and a sample reconciliation report |
| 3. May you lend, pledge or reuse my assets? | Reuse can undermine a custody characterization. | The reuse clause and written confirmation of the policy |
| 4. Do you pay me interest or rewards on assets you hold? | Payments of this kind can point toward title transfer. | The fee schedule and product terms |
| 5. Which law governs the contract, and which law would govern your insolvency? | The two can differ, and the insolvency jurisdiction may not be the place of incorporation. | The governing law clause and the custodian’s incorporation and license details |
| 6. Do you use sub-custodians, and what rights do you hold against them? | My protection depends on every link in the chain. | A list of sub-custodians and the terms showing the custodian’s rights against each |
| 7. Who controls the keys, and how would an administrator gain access? | Assets cannot be returned without key access. | A key control description and a written recovery and wind-down procedure |
| 8. Have you tested the wind-down procedure? | An untested plan may fail when it is needed. | The date and a summary of the result |
| 9. Do your records and your wallets match? | Books and on-chain balances should agree. | Reconciliation frequency, and any proof-of-reserve or independent assurance reports |
| 10. What liability limits apply, and which loss events are covered? | A cap can limit recovery after a hack or an error. | The liability clause and any insurance terms |
| 11. How can the terms change, and how will I be told? | Updated terms can alter ownership language. | The change notice clause and version history |
| 12. Are you licensed, and which segregation duties apply to you? | A statutory duty supports the contract. | License details and the rule that sets the duty |
Liminal’s Institutional Custody service addresses segregation, reuse of client assets and access to keys as follows. It uses segregated accounts and does not rehypothecate client assets, and clients can request on-demand proof of reserve. Key protection uses HSM-backed physical security, where a hardware security module is a tamper-resistant device that protects keys, together with MPC key management. Liminal runs a 24/7 security operations center and holds ISO 27001:2022, ISO 27701:2019 and SOC 2 Type II certifications. More detail is at security.liminalcustody.com.
The legal position of any one client depends on the agreement the client signs and the law that governs it. Use the twelve questions above with every provider, including Liminal. To review how segregation, key control and recovery procedures fit your bank or exchange, talk to the Liminal Custody team.
Anurag is General Counsel at Liminal, where he leads Legal, Compliance, fundraising, M&A, JVs and investor relations. Before Liminal, he spent over six years at OYO, most recently as Vice President and Head Legal for M&A across the USA and LATAM. Earlier, he was a Joint Partner at Lakshmikumaran and Sridharan and a Senior Consultant at Cyril Amarchand Mangaldas, advising on M&A and private equity.
It depends on how the custodian holds the assets. If the client has a claim to specific assets under a custody arrangement, the custodian’s general creditors generally cannot reach them. If the assets were transferred to the custodian in return for a promise to give back equivalent assets, the client likely ranks with general unsecured creditors.
Individual segregation makes a client’s assets easier to identify and return, and a loss in another client’s wallet does not affect them. Omnibus segregation still separates client assets from the custodian’s own. It is a common baseline with lower cost. The right choice depends on how the client uses the assets.
Bankruptcy remotely describes assets that sit outside the custodian’s insolvency estate, so the custodian’s general creditors cannot claim them. It is a legal outcome that depends on the contract, the records and the governing law. It does not mean the client can take the assets back immediately.
Only if the contract allows it. A custodian that may lend, pledge or reuse client assets weakens a custody characterization, and the client may end up with a claim for equivalent assets instead of specific assets. Check the reuse clause and ask for written confirmation of the policy.
In a custody account, the provider holds assets for the client against a safekeeping fee. In a yield account, the provider pays the client interest or rewards and may use the assets. The Celsius ruling shows that the terms of a yield product can transfer ownership to the provider.
Access depends on how key control is split and what the custodian has documented. An insolvency administrator needs to know the assets exist and be able to control the keys. Ask for a written recovery and wind-down procedure and evidence that it has been tested.
Not on its own. A valid custody arrangement protects ownership in an insolvency. Hacks, fraud and errors can still cause loss, and recovery depends on the contract’s liability terms. Security controls and clear liability terms matter as much as the legal structure.
Yes, and heavily. FATF sets a global baseline of licensing and supervision, and national frameworks add detailed custody duties: segregate client assets, do not reuse them without consent, and keep clean records. The rules converge on the same core duties.
