Crypto Lawyer

Introduction

The phrase “not your keys, not your coins” has become a mantra in the crypto community, underscoring the critical link between technical control of digital assets and legal ownership. When you store cryptocurrency, the type of wallet – hot or cold – determines who holds the private keys to your funds, which in turn can dictate your rights if a service provider goes bankrupt. Recent crypto exchange collapses have starkly illustrated that who controls the private keys can mean the difference between walking away with your assets or standing in line as an unsecured creditor. This article explores the technical differences between hot and cold wallets and analyzes their legal implications in insolvency. We will examine whether crypto assets are recoverable in a bankruptcy scenario (and under what conditions) and compare case law and regulatory guidance across the UK, US, and EU on ownership, asset segregation, and custodial responsibility.

Technical Differences: Hot vs. Cold Wallets and Key Custody

Hot wallets are cryptocurrency wallets connected to the internet – think of software wallets on your phone or an exchange’s online wallet. They are ideal for frequent transactions or trading because they allow quick access to funds. Hot wallets create the information needed to transact on the blockchain, including a public address (like your account number) and a private key (a secret “password” that authorizes spending). Because hot wallets are online, they offer convenience at the cost of security: if your private key is stored on an internet-connected device, it could be vulnerable to hacking. For example, a mobile app or web wallet stores your private keys online for ease of use, but once keys have been online, there’s always a risk they could be compromised.

Cold wallets, by contrast, are kept offline for maximum security. A typical cold wallet is a hardware device (like a USB stick or specialized hardware wallet) or even a paper with keys printed – any storage disconnected from the internet. Because the private keys never touch an online system, cold storage greatly reduces the risk of remote hacks. Cold wallets are favored for long-term holding of large crypto balances. The trade-off is convenience: to send funds from cold storage, you must connect the device or import the keys to an online environment (often transferring assets into a hot wallet for the actual transaction). In short, hot wallets prioritize accessibility, while cold wallets prioritize security.

Who holds the private keys? This is the crucial question that distinguishes custodial vs. non-custodial setups. In a non-custodial wallet, the user controls the private keys. Examples include using your own hardware wallet or a software wallet where you alone have the seed phrase. Here, you are effectively your own bank – no third party can access or freeze your crypto (though you also bear sole responsibility for safekeeping those keys). In a custodial wallet, a third party (such as a crypto exchange or custodian service) manages the wallet and holds the private keys on your behalf. For instance, if you keep coins on a major exchange like Binance, Coinbase, or Kraken, the exchange controls the keys to the wallet containing your funds. Custodial wallets are popular for their user-friendly experience – you can log in with a password and the service handles the blockchain interactions – but they require trust in the provider’s security and honesty. A useful analogy is that a custodial crypto wallet is more like a traditional bank account, whereas a non-custodial wallet is like holding cash in your own safe.

It’s important to note that “hot” and “cold” refer to connectivity, not necessarily custody. You can have a non-custodial hot wallet (e.g. a smartphone app where you hold your keys) or a custodial cold wallet (e.g. an exchange storing coins offline in a vault on your behalf). However, often hot wallets on exchanges are custodial (the exchange holds keys for many users in an online environment), while personal cold wallets are non-custodial (you hold your own keys offline). Ultimately, the private key holder has control: if you don’t hold your keys, you don’t truly hold your coins. This technical distinction sets the stage for very different legal outcomes if something goes wrong at the custodian’s end.

Legal Implications in an Insolvency Scenario

When a crypto exchange or custodian becomes insolvent, the question of who legally owns the assets in those wallets moves front and center. Insolvency law distinguishes between assets that are part of the company’s estate (available to pay general creditors) and assets that are held for someone else (which may be returned to customers outright). The technical setup – custodial vs. non-custodial – can determine which side of that line your crypto falls on.

If you hold your crypto in a non-custodial manner (your own cold wallet), insolvency of an exchange has no direct effect on your coins. Since you control the keys and the crypto is recorded on the blockchain at an address you control, those assets aren’t tied up in the exchange’s balance sheet at all. They are not the exchange’s property, and no liquidator can even access them without your keys. In this scenario, recoverability is straightforward: there is nothing to “recover” from the failed company – you already have your funds.

Contrast that with assets held in an exchange’s custodial wallet (hot or cold). Legally, two very different outcomes are possible, hinging on the nature of the custody arrangement:

Custodial as Trustee (Customer’s Property): In the best case for customers, the exchange is deemed to hold those crypto assets on trust for its users. The customers remain the beneficial owners, and the exchange is just a caretaker. If the exchange goes bankrupt, those trust assets should be ring-fenced and returned to customers, not used to pay the exchange’s debts. To achieve this, the relationship must be structured so that the equitable and beneficial interest in the crypto stays with the customer. In practical terms, that means clear terms of service and record-keeping that acknowledge the customer’s ownership, segregation of client assets from the firm’s own assets, and no unauthorized use of customer coins. Custodial as Debtor (Exchange’s Property): In a worse scenario, the exchange treats customer deposits like a bank treats depositors’ money – as an asset of the company with a corresponding liability owed to the customer. If the legal relationship is one of debtor-creditor (for example, the user lent the crypto to the platform or agreed the platform can use it), then upon insolvency the crypto in those wallets is considered property of the estate. Customers become mere unsecured creditors with only a claim for the value of their coins, rather than a right to the coins themselves. In modern corporate bankruptcies, unsecured creditors often recover only a small fraction of what they are owed (insolvency “quotas” are often pennies on the dollar or pence on the pound). Indeed, customers of several collapsed crypto platforms – from Voyager to Celsius – have faced the grim prospect of getting back only a small percentage of their deposits, if anything.

So what determines whether a custodial arrangement is a trust or a debtor-creditor relationship? Courts and regulators look at multiple factors: chiefly, the contractual terms between the user and platform, the platform’s actual practices in handling the assets, and how the assets are held (segregated or commingled). A recent analysis noted that courts focus on “(i) whether account agreements specify who owns the assets, (ii) whether the custodian can freely use the assets, (iii) whether the assets are maintained on a segregated or commingled basis, and (iv) who controls the private keys.” Each of these speaks to the core question of ownership. Let’s break them down:

Terms of Service – What do the contracts say? Many crypto platform user agreements explicitly address ownership of assets. If the terms grant the platform ownership or rights to use your crypto, that’s strong evidence of a debtor-creditor relationship. For example, in the Celsius Network bankruptcy, the court in early 2023 found that $4.2 billion of customer assets in Celsius’s interest-bearing “Earn” accounts belonged to the estate – largely because Celsius’s terms of use unambiguously stated that customers transferred “all right and title” in the coins to Celsius in exchange for yield. Customers were shocked by this outcome, but it was the direct result of what they had agreed to (likely buried in the fine print). By contrast, if the terms clearly state that title remains with the customer and the platform is just safeguarding on the customer’s behalf, that supports treating the assets as custodial property. A counter-example is BlockFi: in its 2023 bankruptcy, about $300 million of assets held in BlockFi’s “Custodial Omnibus Wallets” were deemed not property of the estate and were ordered to be returned to customers. The BlockFi terms of service had explicitly provided that “title to the cryptocurrency held in your BlockFi Wallet shall at all times remain with you and shall not transfer to BlockFi”. In other words, BlockFi’s contract treated those particular accounts as a storage/bailment service (a custodial relationship) rather than a loan to the platform – leading the New Jersey bankruptcy court to uphold customers’ ownership. Use of Assets – Does the platform leverage customer funds? If the custodian is free to deploy customer assets for its own purposes (for example, pooling and lending them out, as many crypto lenders did), it suggests the customers gave up ownership and only have an IOU. Traditional financial analogies apply: when you deposit cash in a bank, the bank can use it (lend it out) – you no longer own the specific dollars in the vault, you have a debt claim against the bank. Some crypto platforms operated similarly with customer funds, blurring the lines between custody and borrowing. If, however, the custodian cannot use the assets except to hold them for safekeeping, it looks much more like a trust or bailment. Regulatory guidance now strongly leans toward the view that a pure custodian should not be using customer coins for any purpose other than storage – to avoid even the appearance of a debtor-creditor relationship. For instance, the New York Department of Financial Services (NYDFS) stated in 2023 that a licensed custodian should only take possession of customer crypto “for custody and safekeeping purposes” and must not sell, lend, or hypothecate customer assets without instruction. Segregation – Are customer assets kept separate? Segregation (or lack thereof) is a powerful signal of how assets are held. If an exchange pools all customer coins in the same wallets (especially if commingled with the exchange’s own holdings), one might fear that the lines of ownership have been blurred. However, commingling doesn’t automatically defeat a trust – courts have recognized that even if assets are held in an omnibus wallet, they can be co-owned by customers or held in trust for them, provided the records are clear. For example, in Ruscoe v. Cryptopia (2020), a New Zealand High Court case, a crypto exchange had stored all of a given cryptocurrency in a single wallet for all customers (a pooled hot wallet). When that exchange went into liquidation (after a major hack), the court had to decide if the remaining crypto was property of the exchange or held for the users. The Cryptopia court concluded that the exchange’s crypto holdings were held on trust for the account holders, despite the pooled storage. Key to this decision were facts like: the exchange’s terms and conditions explicitly created a trust, the internal records tracked individual customer entitlements, and the exchange’s financial statements never treated those crypto assets as its own. In short, segregation can be achieved by meticulous accounting even if coins are in a common address. That said, clear segregation (separate wallets or accounts for each customer, or at least separating customer assets from the firm’s own assets) is the gold standard. Many jurisdictions are moving toward requiring this, as it provides clarity in insolvency. NYDFS’s guidance, for example, insists that custodians separately account for and segregate customer crypto from their own on either a per-customer or omnibus basis, and maintain detailed policies to enforce this. Similarly, proposed rules in the UK and EU mandate that client assets be held in segregated accounts to protect them if the custodian fails. Control of Keys – Who technically controls the wallet? This factor is somewhat intertwined with the above points. If the customer holds the private key (non-custodial scenario), there’s little doubt the asset is theirs – the platform never had dominion over it. But in a custodial scenario, the custodian controlling the keys does not automatically mean the custodian owns the assets (for example, Cryptopia held the keys but was deemed a trustee). However, courts do take note of who has the ability to unilaterally access or transfer the crypto. Exclusive control by the company, especially if combined with commingling and user permission for asset use, tilts toward the assets being considered company property. Conversely, if multi-signature setups or other arrangements limit a custodian’s unilateral control, or if control is only for the purpose of service to the customer, that can support a trust characterization. Ultimately, control of keys is often a practical question – if a liquidation happens, can the administrator even access separate wallets for each client? This is why regulators emphasize robust systems to ensure clients can retrieve their assets promptly in an insolvency scenario.

Recoverability of Crypto Assets in Bankruptcy

Whether crypto assets are recoverable in an exchange/custodian insolvency – and to what extent – depends on the above factors and how they are resolved legally. Broadly, we have two possible outcomes:

Assets are customer property (held in trust or bailment) – They should be returned 100% to the customers, outside the insolvency estate. In this scenario, customers effectively skip the creditor queue. For instance, where courts found a trust (Cryptopia) or where terms kept title with users (BlockFi Custody accounts), the administrators were directed to return the cryptocurrency to the users rather than liquidate it for the estate. Customers may still face delays to verify claims and match records, but they are made whole on those assets. It’s similar to how client funds in a stock brokerage are handled if the broker fails: the assets are segregated and simply distributed back to clients, not used to pay the broker’s creditors. Assets are part of the insolvent estate – They will be used to satisfy debts of the company, and customers become unsecured creditors sharing in what’s left. In a bankruptcy, secured and higher-priority claims (like taxes, employee wages, etc.) get paid first; unsecured customer claims typically rank alongside other unsecured liabilities. As noted, the average payout to unsecured creditors is often low (significantly below 100%). In the Celsius case, customers with Earn accounts are in this boat – their crypto turned into a claim for dollars, subject to whatever cents-on-the-dollar the bankruptcy plan delivers. Another infamous example is Mt. Gox, a Japanese exchange that collapsed in 2014: its users have been waiting for years and are expected to receive only a portion of their original bitcoin back (the Mt. Gox rehabilitation plan, still ongoing as of 2025, will return some coins and cash, but not the full amounts due to losses and appreciation of claims).

It’s worth noting that if fraud or mismanagement is involved (as alleged in cases like FTX), asset recovery can be even more complex. There might be a shortfall between what the exchange should have and what it actually has, due to hacking losses or misappropriation. Even if assets were supposed to be custodied for users, if the pot is missing funds, customers may not be made whole. Sometimes tracing and clawback actions can retrieve some value, but that goes beyond straightforward insolvency law into fraud litigation.

Also, unlike bank deposits or securities accounts, crypto holdings lack built-in insurance in many jurisdictions. In the UK, for example, bank balances are protected up to £85,000 by the Financial Services Compensation Scheme if a bank fails – but crypto is not (historically) a regulated financial product, so no such safety net applies. In the US, cash at banks has FDIC insurance and brokerage accounts have SIPC protection for securities, but digital assets on an exchange have no federal insurance if the exchange collapses. This makes the legal status of the assets in insolvency even more critical – there’s no backstop; the best hope is that the assets are legally yours and can be pulled out of the bankruptcy fire.

In summary, crypto assets are recoverable in an insolvency only if they are legally recognized as the customer’s property (often via a trust or custodial arrangement that survives bankruptcy). Otherwise, customers are at the mercy of the bankruptcy process and likely to incur significant losses. This stark reality has prompted both industry and regulators to sharpen their approach to custodial structures. Next, we’ll look at how different jurisdictions are responding, through courts and new rules, to clarify ownership and protect investors.

Jurisdictional Perspectives: UK, US, and EU

United States

The United States lacks a comprehensive federal law on crypto custody and insolvency, so court decisions and state-level guidance have been key in setting precedents. The recent “crypto winter” bankruptcies gave U.S. courts their first opportunities to directly address who owns custodial crypto assets in bankruptcy.

As discussed, two landmark bankruptcy rulings in 2023 – Celsius and BlockFi – reached opposite outcomes based on their terms of service. In Celsius (New York), the court held that assets in Celsius’s interest-bearing accounts were property of the estate, due to the contract language granting Celsius ownership of deposits. In BlockFi (New Jersey), the court decided that assets in certain custody accounts were not estate property and should be returned to customers, because BlockFi’s terms preserved customer title. These cases underscore that, under U.S. law, the intent expressed in the customer agreement is paramount – traditional trust principles will be applied if the contract and circumstances indicate a custodial (trustee) relationship, while normal contract and property law will treat it as a debt if that’s what the customer agreed to.

Another case often cited in the U.S. context is Ruscoe v. Cryptopia, but that was a New Zealand decision. Still, U.S. courts take note of such cases, especially because there is scant domestic precedent. Cryptopia’s outcome (finding a trust for customers despite a pooled wallet) signals that courts can uphold customer ownership if provided a legal basis. U.S. bankruptcy law in fact recognizes that property held in trust by the debtor is not part of the bankruptcy estate (per Bankruptcy Code Section 541(d)). The challenge is proving the trust exists. With crypto, that means digging into the platform’s terms, marketing promises, and accounting practices. For example, if an exchange’s terms are silent on ownership, courts may then look to default legal principles and the overall relationship. Were the coins merely held by the exchange for safekeeping (implying a bailment or trust), or were they an asset the exchange could use? This analysis can be fact-intensive.

On the regulatory side, because there is no single federal regulator for crypto exchanges, we’ve seen leadership from states like New York. The NYDFS, which regulates virtual currency businesses in New York, issued guidance in January 2023 explicitly to protect customers in insolvency. This guidance requires that custodial institutions segregate customer crypto assets and not commingle them with the firm’s own. It also urges clear customer disclosures that the relationship is custodial (not a loan to the company). The NYDFS emphasized that the beneficial interest remains with the customer at all times, meaning the exchange should not have any ownership claim on the assets. Essentially, New York is mandating the trust-like model: the custodian is a bailee/trustee holding the coins for the user’s benefit. While NY’s rules apply only to licensed entities and New York users, they often set a de facto standard. Other states (and even federal agencies) pay attention to NYDFS’s stance given New York’s prominence in finance.

The U.S. Securities and Exchange Commission (SEC) has also weighed in indirectly. In 2022, the SEC’s Staff Accounting Bulletin No. 121 (SAB 121) told companies to list crypto assets held for customers on their balance sheet with a corresponding liability – treating them a bit like customer deposits. This was accounting guidance, but it caused an uproar in the crypto industry because of concerns it implied the assets are legally the company’s (since on balance sheet) and could increase capital requirements. By early 2024, the SEC rolled back parts of SAB 121, which many saw as a positive sign that regulators do not want to inadvertently push custodians into treating customer assets as their own property. Still, the regulatory framework remains a patchwork. Unlike the highly-developed rules for, say, stockbrokers (where customer assets must be segregated and are protected by law), crypto in the US is catching up via a mix of enforcement, guidance, and the lessons of bankruptcy courts.

Looking forward, U.S. policymakers are debating new legislation to govern crypto exchanges and custodians. Any such framework is likely to include requirements for customer asset segregation and perhaps even insurance or guarantee funds. But until that emerges, the safest course for U.S. crypto users is to read the fine print of any custodial service and consider keeping long-term holdings in self-custody. The recent bankruptcies have been a wake-up call that the default in insolvency is not favorable to customers unless special arrangements (like a trust) are in place.

United Kingdom

The UK’s approach to crypto custody in insolvency has been evolving rapidly, especially in light of high-profile failures abroad. Historically, crypto assets in the UK were not explicitly regulated or covered by investor protection schemes, which meant general property and trust law principles governed who owns what in a collapse. Two key questions arise under UK law: (1) Are crypto assets recognized as property? and (2) If so, can they be held on trust for users?

On the first question, the answer is now clearly “yes.” English courts have declared cryptocurrencies to be property (starting with cases like AA v Persons Unknown (2019) and confirmed in later rulings), and the UK Law Commission in 2023 recommended legislative clarification by categorizing crypto and similar digital assets as a new form of personal property. This means crypto can be the subject of ownership, trust, and bailment just like any other property right. So, legally, there is no barrier to saying “these bitcoins belong to Customer A” or “Exchange X holds these assets in trust.”

Thus, the crux becomes the second question: did the exchange hold the assets on trust or as part of its own estate? UK courts, much like those in other common law jurisdictions, look at the contract and conduct. Although the UK hasn’t yet had a major domestic crypto exchange insolvency case litigated to conclusion on this issue, British judges would likely apply the same reasoning seen in the Cryptopia case (NZ) or others. In fact, UK practitioners often cite Ruscoe v Cryptopia as persuasive authority. If the exchange’s terms say it is holding assets for you and the internal treatment supports that, a trust can be found. If the relationship looks like a debtor-creditor (such as a user agreement that speaks of loans or transferring ownership to the platform), no trust will arise (as illustrated by the contrast in Wang v Darby [2021] EWHC 3054 (Comm), where a crypto transfer arrangement was found not to create a trust because it was more akin to a contractual loan/exchange arrangement).

One notable international example often discussed in UK context is Celsius. Celsius had a UK entity and many UK customers. While the main proceedings were in the U.S., UK regulators noted that Celsius’s terms were governed by English law. Those terms clearly stated that crypto in certain accounts was the company’s property – a clause that, under English contract law, would be upheld as effective in stripping customers of ownership during the term of the arrangement. In other words, an English court likely would have reached the same conclusion as the U.S. court did for those accounts, given the contractual clarity that no trust was intended. This underscores that in the UK, just as elsewhere, the contract is king for determining ownership in insolvency, unless statutory rules say otherwise.

The UK is, however, moving toward statutory regulation of crypto custodians. In 2023-2024, HM Treasury and the Financial Conduct Authority (FCA) have been developing a new regime for cryptoasset businesses, which will bring exchanges and custodians into the regulatory perimeter. A major focus of this is safeguarding customer assets. The FCA has proposed rules to require that client cryptoassets be held on trust for the benefit of clients, with clear segregation from the firm’s own assets. This mirrors the long-standing principles in the UK’s Client Assets Sourcebook (CASS) that apply to securities and money held by investment firms. Under the draft rules (which as of mid-2025 are in consultation), a UK crypto custodian would have to: keep customer coins in segregated wallets or accounts, maintain accurate records of individual holdings, and acknowledge that those assets are not part of the firm’s property. In effect, if these rules go through, any UK-authorized crypto custodian that became insolvent would have its customer assets ring-fenced and returned to customers, much like how a stockbroker must return client shares. The FCA explicitly notes that holding assets on trust means they are “legally ring-fenced and returnable to clients rather than claims in the bankruptcy estate.”

It’s also notable that UK regulators want to eliminate ambiguity in customer agreements. The proposed rules would require clear customer disclosures and terms that establish the custodial nature of the relationship (to avoid situations like Celsius where terms gave the firm ownership). Until these rules are finalized, the UK is in a transitional phase: unregulated exchanges operating in or serving the UK might have very different terms and practices. UK customers therefore should diligence the status of any platform – for now, a foreign exchange could potentially subject them to foreign insolvency law (as seen with many UK users of FTX or Celsius forced to join overseas court proceedings). But the trend is toward harmonizing with traditional finance protections, meaning the UK is likely to soon mandate that “hot wallet” providers legally treat customer crypto as client assets rather than their own.

One more point on the UK: Unlike the US, the UK does not have an equivalent of FDIC/SIPC for crypto and likely won’t until crypto is fully under financial regulation. So, the first line of defense is ensuring the legal structure protects you. The insolvency of a custodian like an exchange can be devastating without that protection – as the Gateley legal article aptly warned, if a custodian becomes insolvent and your assets aren’t held on trust, you may end up recovering only a small percentage of your investment or nothing at all. That reality is driving the UK’s current regulatory reforms.

European Union

In the EU, the landmark development is the new Markets in Crypto-Assets Regulation (MiCA), adopted in 2023. MiCA is an EU-wide regulation that, among many other things, establishes rules for cryptoasset service providers (CASPs) – including exchanges and custodial wallet providers – with a strong emphasis on investor protection and insolvency safety. Although MiCA will fully come into force in 2024-2025, its requirements are already shaping practices.

Asset segregation and ownership protection are explicitly required under MiCA. Article 63 of MiCA mandates that CASPs “make adequate arrangements to safeguard the ownership rights of clients, especially in the event of the crypto-asset service provider’s insolvency.” In practice, this means firms must structure their custody so that client assets would not get pulled into bankruptcy proceedings. More concretely, Article 67(7) requires that providers hold client crypto in separate addresses or accounts from the provider’s own assets. The goal is to ensure that if a crypto company goes bust, customers have a “right of segregation” – a right to recover their assets in full because those assets are identifiable and were never meant to be the firm’s property. In many European jurisdictions, if an asset held by a failed company can be identified as belonging to a third party, that asset can be segregated out and returned to its owner, rather than used to satisfy creditors. MiCA effectively forces crypto custodians to set things up so that this principle will apply to their clients’ coins.

By introducing these requirements, MiCA draws inspiration from the traditional EU rules for safeguarding client assets in finance. For example, EU brokers under MiFID must segregate client funds/instruments and typically hold them such that they’re bankruptcy-remote. MiCA extends similar concepts to crypto. Client holdings must be legally and operationally segregated from the firm’s own to “insulate clients insofar as possible from the insolvency risk of the custodian”. Firms have to keep a register of client positions and maintain internal controls to prevent loss or misuse of assets. There are also liability provisions: MiCA will hold custodians liable for losses of crypto-assets in their custody unless they can prove the loss was beyond their control – which further incentivizes proper handling and security.

Major EU economies are already aligning their laws with MiCA’s approach. Germany, for instance, introduced a draft Future Finance Act (Zukunftsfinanzierungsgesetz) in 2023 to preemptively implement MiCA’s custody rules. German law will explicitly require that even in omnibus wallets, customers have individual entitlement to their share, and that all custodied assets are kept for clients in a way that grants them an Aussonderungsrecht (right of segregation) in insolvency. One caveat in the German approach (mirroring a consideration in MiCA) is that if a customer consents to the use of their assets (for example, allowing the platform to stake or lend them), that portion might not be segregated because the nature of the asset changed (similar in spirit to how an Earn account in Celsius functioned). This is an important nuance: if you opt in to programs where the custodian can use your crypto (even in Europe), you may be waiving your segregation protection on those assets.

Overall, the EU’s clear stance via MiCA is a welcome development for legal certainty. It means that any compliant EU crypto custodian should operate much like a bank or securities custodian in keeping customer assets distinct and returnable to customers if the business fails. There is still the question of enforcement and supervision – EU member state regulators will need to ensure firms actually do what MiCA says. But the framework is set to avoid another FTX-like scenario where a lack of segregation and misuse of funds led to customer chaos. The French regulator (AMF), among others, has highlighted that MiCA will require robust recording of client positions and segregation between custodian’s own and client assets, which will greatly clarify ownership.

It’s worth noting that MiCA does not cover every scenario (for example, truly decentralized custody or personal wallets are outside scope since it targets service providers), but for the centralized players, it creates a uniform rulebook across the EU. That harmonization should give investors more confidence – and in the event of a CASP insolvency in, say, France or Germany, one would expect a process where customers can assert ownership and retrieve their crypto (assuming it was properly segregated and still exists).

Conclusion

The divide between hot and cold wallets is more than a matter of cybersecurity – it’s a dividing line between different regimes of control and, consequently, different legal outcomes if trouble strikes. Technically, a hot wallet (online) versus a cold wallet (offline) might just be about convenience versus safety, but underlying that is the crucial question of custody: who holds the keys? If you hold your own keys (often the case with personal cold wallets or certain hot software wallets), you maintain direct ownership and control of your digital assets. If you entrust your keys to a third-party custodian (common with exchange hot wallets or custodial services), you must rely on legal and regulatory frameworks to protect your ownership.

In an insolvency scenario, this difference is night and day. Self-custodied assets remain yours – a bankruptcy trustee cannot touch what they can’t access or what isn’t on the company’s books. Custodied assets, however, live or die by the terms of the relationship: either they’re segregated and held for you (in which case you should get them back), or they’re part of the company’s pool (in which case you’re just another creditor). Recent case law across jurisdictions illustrates both outcomes, from customers successfully reclaiming assets that were held in trust, to customers left empty-handed when an exchange’s fine print handed ownership to the exchange.

The good news is that legislators and regulators are learning from the string of crypto bankruptcies. Jurisdictions like the EU and UK are baking in protective measures (segregation, statutory trusts, fiduciary duties) for custodians, and even U.S. regulators at state level are reinforcing the principle that “customer assets are customer assets” and must be treated as such. These measures – akin to the safeguards long present in traditional finance – are designed to ensure that a future exchange insolvency would be a contained event rather than a catastrophe for users’ holdings. They focus on clear ownership, proper segregation, and robust custodial practices so that clients can reclaim their coins even if the custodian fails.

For crypto investors and legal professionals advising clients, the takeaways are clear. Understand who holds the keys and under what terms. Read user agreements of exchanges or wallet providers – do they explicitly state that your assets remain your property? Do they allow the platform to use your assets for lending or other purposes? Are there representations about segregation or insurance? If such details are absent or unfavorable, recognize the risk you’re taking on. Alternatively, consider non-custodial options or custodians in jurisdictions with strong client asset protections.

In the end, technology gives us the tools to be our own custodian (cold wallets, hardware keys, etc.), but not everyone will use them for every asset. Trusting third parties is a convenience and oftentimes a necessity in the crypto ecosystem. The key is to do so with eyes open and, where possible, under the umbrella of laws that shield your ownership. Hot or cold, what truly matters is that when the music stops, your crypto is legally recognized as yours – and that is achieved by the right custodial structure, mindful legal agreements, and, increasingly, the backing of law and regulation across major jurisdictions.

Sources:

Investopedia – “Hot vs. Cold Cryptocurrency Wallets: Key Differences Explained” Reuters (Westlaw Today) – “Crypto ownership and custodial wallets: Owning without owning?” Gateley (UK law firm) – “Crypto Winter: Recovering your crypto-assets when insolvency strikes” Ballard Spahr (US law) – “NYDFS to Virtual Currency Custodians: Segregate, Don’t Integrate” Ashurst – “FCA Unveils New Rules for Stablecoins and Crypto Custody” (UK, 2025 proposals) Taylor Wessing – “Digital assets in insolvency – MiCA and the German Future Finance Act” Coinbase – “Hot vs cold crypto wallet: What’s the difference?” (educational) New Zealand High Court – Ruscoe v. Cryptopia Limited [2020] NZHC 728 (via Gateley analysis) U.S. Bankruptcy Court SDNY – In re Celsius Network LLC (2023); U.S. Bankruptcy Court DNJ – In re BlockFi Inc. (2023).