As cryptocurrency adoption grows, the risk of crypto custody becomes increasingly significant and often misunderstood. Determining legal responsibility for lost, misappropriated, or inaccessible digital assets is often complex. Unlike traditional brokerage accounts, crypto holdings are often managed through multiple layers, including exchanges, third-party custodians, and intermediaries. This structure can create accountability gaps when issues arise.

What Is Crypto Custody?

Crypto custody involves holding and safeguarding digital assets, usually through private keys. Depending on the platform, custody may be managed by:

  • The exchange itself
  • A third-party custodian
  • A combination of internal and external systems

Major platforms such as Kraken may use external custodians in some cases, which can increase counterparty risk.

The Role of Third-Party Custodians

Custodians such as Etana Custody are responsible for:

  • Holding client assets
  • Processing transfers and withdrawals
  • Maintaining internal controls over fund security

If custodians fail to safeguard assets, investors may face losses, withdrawal delays, or total loss of access to funds.

Disputes such as the litigation between Kraken and Etana show how misappropriation, commingling, or operational failures can harm investors (U.S. District Court filing: https://dockets.justia.com/docket/colorado/codce/1:2025cv02829/247230).

Who May Be Liable for Crypto Custody Failures?

Liability in crypto custody cases depends on the transaction structure and representations to investors. Often, responsibility extends beyond a single party.

Custodians
Custodians may face liability where they:

  • Fail to segregate client assets
  • Misuse or misappropriate funds
  • Do not maintain adequate internal controls

Exchanges and Platforms
Exchanges may be liable if they:

  • Misrepresented how assets would be held
  • Failed to conduct due diligence on custodians
  • Continued to route funds through risky or unstable partners

Financial Advisors or Promoters
If advisors recommended crypto investments, they may be liable if they:

  • Failed to disclose custody risks
  • Overstated security or liquidity
  • Recommended unsuitable investments

How Crypto Differs From Traditional Custody

In traditional finance, client assets are held by regulated custodians under strict oversight. In contrast, crypto custody operates under evolving regulations, and protections can vary widely.

The U.S. Securities and Exchange Commission has proposed stronger custody rules to protect client assets, including digital assets (www.sec.gov/news/press-release/2023-30). However, regulatory coverage is still inconsistent across platforms and jurisdictions.

This lack of uniformity makes it essential to understand who controls assets and how they are held.

Common Legal Claims in Crypto Custody Cases

Investors affected by custody failures may have legal claims depending on the circumstances, including:

  • Misrepresentation or omission of material facts
  • Breach of fiduciary duty
  • Negligence or failure to safeguard assets
  • Conversion or misappropriation
  • Breach of contract

These claims may arise if investors were not fully informed about custody arrangements or if assets were not managed according to required standards.

What Investors Should Evaluate

When evaluating potential losses, investors should consider:

  • Who had custody of the assets at each stage
  • Whether funds were segregated or commingled
  • What disclosures were made regarding custody and risk
  • Whether withdrawal requests were delayed or denied

These factors are key to determining potential liability.

Sonn Law Group Is Investigating Crypto Custody Losses

Sonn Law Group represents investors in cases involving financial misconduct, including losses from crypto custody failures, platform misrepresentations, and third-party risk.

If you have experienced losses or cannot access your digital assets, you may have legal options for recovery.

Sonn Law Group is investigating claims regarding Joel Eziekel Blum (CRD #4905379, Goshen, New York). Blum recently submitted an AWC in which he was fined $10,000 and suspended from association with any FINRA member in any capacity for 20 days. See FINRA Case #2014040186601. Blum was associated with Merrill Lynch from May 2008 until his termination in February 2014. Blum has been associated with Ameriprise Financial Services, Inc., since February 2014. The Form U-5 filed by Merrill Lynch to terminate Blum's registration states that he was discharged for "conduct including failure to contact clients in advance of entering orders in non-discretionary accounts and mismarking order tickets as unsolicited." FINRA found that Blum executed discretionary transactions in customer accounts without written authorization to do so. In addition, Blum mismarked order tickets in connection with these transactions, inaccurately indicating that the trades were unsolicited, according to FINRA. In entering into the AWC, Blum neither admitted or denied FINRA's findings. Pursuant to FINRA Rules, member firms are responsible for supervising a broker's activities during the time the broker is registered with the firm. Therefore, Ameriprise or Merrill Lynch may be liable for investment or other losses suffered by Blum's customers. If you were a client of Ameriprise, Merrill Lynch, or Blum, and have suffered investment losses or financial irregularities, please contact Sonn Law Group to explore your legal options. Sonn Law Group is a nationally recognized law firm representing individuals, trusts, corporations and institutions in claims against brokerage firms, banks and insurance companies. To learn more, please call us at 844-689-5754 or complete our "contact form."
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