Inherent technical risks
Crypto is a new technology with no central auditing system. The technology is moving very fast and attracts many of the world’s most sophisticated hackers. Some platforms use no or very low security measures or checks and are the cause of their own downfall, so it is important to be able to carry out or have a partner who can carry out technical checks to see which platforms can be safely used. However, even the best intentioned of platforms do occasionally experience faults or technical vulnerabilities. Cryptoasset transactions can freeze mid transaction, wallets can stop working, and even many of the best regarded exchanges have been exploited. There are now institutional-grade solutions designed to offer the optimum safety.
How is crypto held by exchanges?
Are terms and conditions clear? If so, how do they describe the customers’ ownership rights? Where the exchange is international, are ownership rights as described consistent with English law? Fundamentally, are customers of an exchange or custodian any more than unsecured creditors if it fails?
Bitcoin and other cryptocurrency mixers
Tornado Cash is an example. These are prime money obscuring and money laundering tools. While normally bitcoin and most other cryptocurrencies can be uniquely traced, mixers obscure and muddle coins so that what goes in doesn’t go out! There is a risk to using mixers for their users (there’s very little stopping the mixers from running off with the crypto) but there is very little we (lawyers, law enforcement or crypto analytics tools) can do about them.
Some decentralised (DeFi) wallets and exchanges – and uncooperative exchanges and wallets
Some cryptocurrency exchanges and wallets are operated on a decentralised basis, meaning that there is apparently no single individual or entity that is responsible. It is uncertain how insolvency law would apply to such a DEX or Defi wallet that failed; liability might in theory attach to the numerous participants, but if so, it could be difficult to enforce against them in practice. Other cryptocurrency exchanges, wallets and platforms simply won’t cooperate with an insolvency procedure or will not have sufficient security and operational measures in place to do so. There is no guarantee that, if law enforcement reaches out to them regarding stolen cryptocurrency, they will act. This is especially true for platforms operating out of certain jurisdictions.
Crypto platforms are “distributed” firms
Some crypto firms do not disclose the jurisdiction of the entity that customers contract with because they believe that crypto should be a borderless technology. Some are incorporated in onshore jurisdictions, some offshore. Some are licensed and regulated, some not. Some operate in grey markets, some don’t. The traditional point – know your counterparty – is critically relevant in crypto. Get support from service providers that answer these questions for you.
The intent of project founders
Some projects - crypto exchanges, wallets, initial coin offerings, companies – may look appealing from the outside but the founder or founding team might be building up to make enough money to run away with. This has happened several times and will happen again. There are tools that can identify technical failings and most of these risks. Some crypto projects have been successful at deceiving many intelligent people and companies, so you can’t take too much care. Not all websites, claims and whitepapers are honest.
