Crypto Bankruptcy & Customer Property: Ensuring Assets Are Not "Unsecured Debt"
The Executive Verdict
1. The Core Definition: "Estate Property" vs. "Customer Property"
The Celsius Ruling precedent: Users who earned interest transferred title to the exchange (Estate Property). Users in pure Custody retained title (Customer Property).
Legal Partition Diagram. Left Room (The Estate): Chaos/Creditors. Right Room (The Vault): Locked Steel Door (Trust Custody). The Wall: "Bankruptcy Remote Partition".
2. The Legal Mechanism: Bailment vs. Debt
Bailment (Valet Parking): They hold YOUR asset. Return specific asset. Debt (Bank Deposit): You lend them asset. They owe you an IOU. Red Flag Clause: "Right to rehypothecate, sell, or lend attributes..."
Bailment vs. Debt. Left: Coat Check (Property). Right: Casino Chip (IOU).
3. Custody Architecture: The Safety Hierarchy
Tier 1: Multi-Sig Self-Custody (Sovereign - No Counterparty Risk). Tier 2: Qualified Custodian (Trust - Bankruptcy Remote). Tier 3: Exchange Omnibus (Commingled - High Risk).
4. Understanding UCC Article 8: The "Securities" Defense
Designating assets as "Financial Assets" under UCC Art 8 makes you an "Entitlement Holder" with priority over general creditors. Ensure your agreement cites this.
5. The "Set-Off" Trap: Interconnected Liability
Exchanges can seize your Custody assets to cover Trading losses. Solution: Entity Isolation. Entity A (Treasury) holds assets. Entity B (Trading) takes risks. Never cross-collateralize.
6. Stablecoin Issuer Bankruptcy: The Unseen Risk
If Circle/Tether fails, you are an unsecured creditor. 2026 Trend: Tokenized Treasuries (BUIDL) or ETFs are safer because assets are ring-fenced by regulation.
7. Due Diligence Protocol: The "Proof of Life" Check
Demand SOC 1 Type 2 reports. Proof of Solvency (Assets - Liabilities), not just Proof of Reserves. Insurance: Must name Client as Loss Payee, not the Custodian.
8. Summary Checklist: The Insolvency Survival Guide
1. Structure (Segregated Trust). 2. TOS Review (No Rehypothecation). 3. UCC Article 8 Clause. 4. Insurance (Client Named). 5. Diversification (<20% per custodian).
đ¨ The "Terms of Service" Audit
F.A.Q // Logical Clarification
Is crypto covered by SIPC?
"Generally No. SIPC covers securities at broker-dealers. Most crypto is not yet classified as such for SIPC purposes."
Is crypto covered by FDIC?
"No. FDIC only covers USD in the bank. "Pass-through" insurance does not protect the crypto asset itself."
Can Self-Custody be seized?
"If the Company fails, yes (it's company asset). If the Wallet Manufacturer (Ledger) fails, no (assets are on-chain)."
Module ActionsCW-MA-2026
Institutional Context
"This module has been cross-referenced with Legal & Regulatory / Insolvency Law standards for maximum operational reliability."