How Swiss Law Approaches Bitcoin Custody
The treatment of crypto assets under civil law raises questions, particularly with regard to the distinction between self-custody and third-party custody.
Ownership of crypto assets
Cryptocurrencies such as Bitcoin and other digital assets are not considered an object (Sache) in the legal sense. However, the rules on ownership and possession contained in Swiss law on rights in rem can be applied accordingly to crypto assets.
Possession and the power to make dispositions are exercised via the private key.
Anyone who has access to this key is de facto able to make dispositions over the assets in question. The loss of the private key typically leads to the irreversible loss of the digital assets.
Distinction between self-custody and third-party custody
With self-custody, owners store the private keys of their crypto assets themselves, for example by using a hardware wallet. This requires a high degree of personal responsibility. The owner bears the full risk of loss or theft of the keys. On the positive side, in the case of self-custody owners have complete control over their assets.
In the case of third-party custody, an external service provider assumes custody of the private keys. Third-party custody is based on a custody agreement, which governs the rights and obligations of both parties, including liability issues and safety measures.
However, this does not mean that the custodian is automatically liable in the event of a loss. Given that it is usually the service provider who draws up the contractual provisions regarding the custody in the form of general terms and conditions, customers must expect limitations of liability. In the case of third-party custody there is the added risk that the service provider may be obliged by regulatory interventions to restrict its customers’ access to the crypto assets held in custody.
Bankruptcy of the custodian
Another risk associated with third-party custody is that the custodian might go bankrupt. In the event of bankruptcy, the critical factor is whether the crypto assets held in custody form part of the custodian’s estate in bankruptcy or are treated as special assets and are therefore protected from access by other creditors of the custodian.
Under Swiss law, crypto assets do not generally form part of the custodian’s estate in bankruptcy if a third party asserts rights of ownership to them. In this case, owners may demand that their crypto assets are separated out from the estate in bankruptcy (Article 242a Federal Act on Debt Enforcement and Bankruptcy).
One condition for such separation is that the custodian has made a contractual commitment to the owner to keep the crypto-based assets available to the owner at all times. Furthermore, it is necessary that the assets held in custody can be clearly allocated to individual owners or as a share in a collective asset (for example, through segregated wallets).
On the other hand, a separation is ruled out if the deposited assets have been mixed with the custodian’s assets and the contract between the parties is structured in such a way that the custodian is only obliged to repay or retransfer an equivalent asset. In bankruptcy proceedings such claims are treated in the same way as the claims of other creditors in the proceedings, and any remaining assets are included in the bankruptcy estate.