Staking Your Crypto: What are the Stakes?

Journal of Business & Technology Law Journal of Business & Technology Law

Volume 19 Issue 1 Article 3

Staking Your Crypto: What are the Stakes? Staking Your Crypto: What are the Stakes?

Matthias Lehmann

Amy Held

Felix Krysa

Emeric Prévost

Fabian Schinerl

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Follow this and additional works at: https://digitalcommons.law.umaryland.edu/jbtl

Recommended Citation Recommended Citation

Matthias Lehmann, Amy Held, Felix Krysa, Emeric Prévost, Fabian Schinerl, & Robert Vogelauer,

Staking

Your Crypto: What are the Stakes?

, 19 J. Bus. & Tech. L. (2023)

Available at: https://digitalcommons.law.umaryland.edu/jbtl/vol19/iss1/3

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Staking Your Crypto: What are the Stakes? Staking Your Crypto: What are the Stakes?

Authors Authors

Matthias Lehmann, Amy Held, Felix Krysa, Emeric Prévost, Fabian Schinerl, and Robert Vogelauer

This article is available in Journal of Business & Technology Law: https://digitalcommons.law.umaryland.edu/jbtl/

vol19/iss1/3

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Journal of Business & Technology Law 53

STAKING YOUR CRYPTO: WHAT

ARE THE STAKES?

MATTHIAS LEHMANN, AMY HELD, FELIX KRYSA, EMERIC PRÉVOST,

FABIAN SCHINERL, AND ROBERT VOGELAUER*

INTRODUCTION

The use of cryptoassets as an investment asset to generate passive income

has become steadily more popular since the implementation of smart con-

tracts on blockchains. Many of these ways of generating returns on cryp-

toassets are an integral part of Decentralized Finance (DeFi) applica-

tions. But there are also risks involved, in particular the bankruptcy of

the custodian or other intermediary that holds the asset for the customer.

The winding up or liquidation of a crypto business carries the great dan-

ger that crypto savers are left with cents on the dollar. If cryptoassets are

truly valuable, one might think about going to court. But what are the

rights the former cryptoasset holder has in the event of its investment

intermediary’s insolvency? This is the question this article seeks to ad-

dress. We examine not only staking and delegating, but also similar

transactions such as yield farming, liquidity mining, and crypto lending

to find out the particular rights of the customer in an insolvency of her

intermediary. Because the crypto-economy is global, we also analyze the

applicable law to these transactions.

I. THE PREMISE, THE PROBLEMS, AND THE STRUCTURE

OF THIS PAPER

A. The Premise

Cryptos are not capital assets and do not earn interest – or so one thought.

Although highly unlikely that ‘Satoshi Nakamoto’ ever contemplated the

use of Bitcoin as a traditional investment asset, the practice has steadily

been increasing in popularity. A wide range of terms are floated about,

but the basic underlying idea is the same: you give up at least partial

control over your cryptoassets

in favor of some other party who uses it in

gelauer 2023. All University of Vienna. We thank Dirk Zetzsche, University of Luxembourg, for

his valuable comment.

1. In the following, the term cryptoasset shall be used as a reference for any type of financial

value transferred by means of a blockchain. The concept of cryptoasset generally purports to refer

to a wide array of diverse coins or tokens that very often blur the distinctions between traditional

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54 Journal of Business & Technology Law

the crypto market to generate profits, of which you receive a share. In

common crypto parlance, you “stake” your cryptoassets to the other

party’s particular investment strategy, and you receive an “annual per-

centage yield.” Such returns sometimes reach hundreds or thousands of

percentage points and can, accordingly, be very attractive.

But equally high are the risks involved. Some are inherent in the block-

chain protocol itself, which are often known as “on-chain” risks. These

include, for example, losses caused by flaws in the underlying code. Other

risks arise from malicious behavior on the part of the developers or other

crypto users, which are also known as “off-chain” risks.

Of these, “rug

pulls” are perhaps the most harmful: such pure scams that siphon off

crypto-funds from unwary investors lured by promises of highly attractive

returns and undermine trust in the crypto economy and the blockchain

technology itself.

However, no risk lurks with such omnipresence as that classic risk

against which no commercial enterprise can ever wholly rest assured (and

which a great deal of commercial law is concerned to allocate ante ex):

counterparty insolvency. With significant macroeconomic headwinds and

the capital markets cooling down, key participants within the crypto

space are increasingly faced with a strain on their business liquidity.

Whilst such market players claim that all crypto-holdings are safe, their

clients and account holders feel rather differently and withdraw their as-

sets as confidence in the crypto-market continues to plummet. This only

worsens the situation for crypto businesses already struggling to

financial assets’ classes. It is however worth keeping in mind that, while the broader concept of

cryptoasset is used in this paper, it is coins (e.g. Bitcoin or Ether) and stablecoins (e.g. U.S.-Dollar

Coin (U.S.DC)) that are mostly used today for generating returns via staking, yield farming, or

liquidity mining.

2. Most crypto trading platforms offer rather moderate interest rates. Compare BINANCE

EARN, BINANCE, www.binance.com/en/earn (last visited July 10, 2023), COINBASE EARN,

COINBASE, www.coinbase.com/earn (last visited July 10, 2023); STAKE WITH KRAKEN, KRAKEN,

www.kraken.com/features/staking-coins (last visited July 10, 2023), and BITPANDA STAKING,

BITPANDA, www.bitpanda.com/de/staking (last visited July 10, 2023), with YIELD FARMING,

COINMARKETCAP, https://coinmarketcap.com/de/yield-farming/ (last visited July 10, 2023) (The

annual percentage yield of BCH-BNB of is approximately 1065871%).

3. See Raphael Auer et al., The Technology of Decentralized Finance (DeFi) 3 (BIS Working

Paper No. 1066, 2023), https://www.studocu.com/pe/document/universidad-de-lima/economia/cl1-

d-auer-et-al-the-technology-of-descentralized-finance-de-fi/55660328 (mentioning that the “rise of

DeFi has been accompanied by many incidents with an accumulated total loss exceeding 3 billion

USD”); see also Liyi Zhou et al., SoK: Decentralized Finance (DeFi) Attacks, 1 (Cryptology ePrint

Archive, Paper No. 2022/1773, 2022), https://epri nt.iacr.org/2022/1773.

4. Financial Security Board, Regulation, Supervision and Oversight of Crypto-Asset Activities

and Markets, at 5 (Oct. 11, 2022); see BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM,

FEDERAL RESERVE, FINANCIAL STABILITY REPORT 45-46 (2022); Auer, supra note 3, at 2-3.

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Vol. 19 No. 1 2023 55

maintain their viability. Hence many crypto intermediaries have already

been declared insolvent,

with market trends indicating that others are

likely to follow.

In this paper, we do not concern ourselves with the controversial ques-

tions as to the legal nature of the cryptoassets themselves; i.e., we do not

seek to answer how a Bitcoin or an Ether is best analyzed as a matter of

private law. Rather, we are concerned with the legal question of whether

a “staker” (as our crypto investor will henceforth be called, reflecting its

colloquial rather than technical use) can be said to have transferred prop-

erty or encumbered their property rights in cryptoassets in favor of other

parties, such as the staking intermediary or the network. In this, we pro-

ceed on the premise that all holders of cryptoassets enjoy proprietary

rights (rights in rem that are valid in relation to third parties, i.e. erga

omnes) in respect of their crypto holdings, which may not be true in all

jurisdictions.

Rather than dwelling on the latter countries, we focus on

5. The year 2022 was filled with the crash, insolvency, and bankruptcy of many crypto eco-

systems, brokers, companies, and exchanges. See Joshua Oliver et al., Luna Crash Sends a Chill

Through Decentralized Finance Market, FINANCIAL TIMES (June 6, 2022), https://www.ft.com/con-

tent/c10bc6f7-abbe-45dc-9367-042186c3336f (explaining Terra Network crashed at the start of

2022); Serena Ng et al., Crypto Hedge Fund Three Arrows Ordered by Court to Liquidate, WALL

ST. J. (June 29, 2022), www.wsj.com/articles/crypto-fund-three-arrows-ordered-to-liquidate-by-

court-11656506404 (explaining crypto hedge fund Three Arrows Capital was ordered to liquidate

in June 2022); Voyager Digital Commences Financial Restructuring Process to Maximize Value for

All Stakeholders, PRNEWSWIRE (Jul. 6, 2022),

www.prnewswire.com/news-releases/voyager-digital-commences-financial-restructuring-process-

to-maximize-value-for-all-stakeholders-301581177.html (explaining crypto broker Voyager Digi-

tal filed for bankruptcy); Important Client Update, BLOCKFI, https://blockfi.com/November28-Cli-

entUpdate (last visited July 10, 2023) (showing crypto lending platform BlockFi went bankrupt

in November 2022); Celsius Network Initiates Financial Restructuring to Stabilize Business and

Maximize Value for All Stakeholders, BUSINESS WIRE, (Jul. 6, 2022), www.business-

wire.com/news/home/20220713005911/en/Celsius-Network-Initiates-Financial-Restructuring-to-

Stabilize-Business-and-Maximize-Value-for-All-Stakeholders (last visited July 10, 2023) (explain-

ing Celsius filed for bankruptcy in July 2022); Paulina Okunyté, Crypto Exhchange Nuri Files for

Insolvency in Germany, Celsius Bankruptcy to Blame, DAILY COIN, (Aug. 10, 2022), https://dai-

lycoin.com/crypto-exchange-nuri-files-for-insolvency-in-germany-celsius-bankruptcy-to-

blame/(highlighting German crypto exchange Nuri’s insolvency); MacKenzie Sigalos, Sam Bank-

man-Fried steps down as FTX CEO as his crypto exchange files for bankruptcy, CNBC (Nov. 11,

2022), https://www.cnbc.com/2022/11/11/sam-bankman-frieds-cryptocurrency-exchange-ftx-files-

for-bankruptcy.html (describing the bankruptcy of crypto-exchange FTX).

6. Today’s Cryptocurrency Prices by Market Cap, COINMARKETCAP, https://coinmar-

ketcap.com (last visited July 10, 2023) (describing the fall of crypto-asset market capitalization by

more than 2/3 from September 2021 to December 2022).

7. For instance, under German law, proprietary rights to intangible cryptoassets such as

Bitcoin are not recognized unless they are created under the Act on Electronic Securities. See

BÜRGERLICHES GESETZBUCH [BGB] [Civil Code] § 90 (Ger.).

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56 Journal of Business & Technology Law

the question of whether and to what extent these rights, where they exist,

are transferred or encumbered when the holder commits their assets to

one of the practices that we examine. We do so through the lens of insol-

vency proceedings.

B. The Problems

This paper’s main focus is to examine the legal position a staker might

have on the insolvency of their staking intermediary. Are they entitled to

make a direct claim of ownership to their staked assets—notwithstanding

that they have conceded partial, or even full control over it in favor of the

intermediary—such that they are removed from the intermediary’s insol-

vent estate altogether? If not, are they to be treated as a secured creditor,

or at least even a preferential creditor? Or will they simply have no other

choice but to join the queue with the intermediary’s other unsecured cred-

itors for a pari passu share in whatever assets are left? Answering this

seemingly simple question is no easy task, for three main reasons.

First, the rights a staker has against its intermediary’s insolvency turn

on the legal basis of the transfer of control. For what purpose or reason

did the staker concede control over his cryptoassets in favor of the inter-

mediary in the first place, such that they are considered as “belonging” to

the intermediary and thus part of its insolvency estate? This requires an

examination of staking practices as a matter of fact to ascertain the basis

upon which the staker agreed to cede control over his cryptoassets. A

cursory view of the “staking” market reveals a wide range of diverse prac-

tices, and it would be erroneous to think that they would be treated alike

as a matter of law simply because they have the same economic objective

to generate passive returns on a cryptoasset holding. To the contrary, dif-

ferences in practices give rise to vast differences in the set of facts that

courts will deem as material, and from which legal inferences and find-

ings will be drawn when determining the rights of the staker in the inter-

mediary’s insolvency.

It is further not helpful that the promoters of staking schemes do not

generally take legal advice before devising and advertising their invest-

ment strategies. Some adhere to the “Code is Law”

philosophy and con-

sider that any problems arising from staking will be solved via the block-

chain itself. Others, whilst recognizing that their operations might be

8. PRIMAVERA DE FILIPPI AND AARON WRIGHT, BLOCKCHAIN AND THE LAW 193-94 (2018) (stat-

ing explicitly that Code is Law does not mean that software and legislation are equivalent; rather,

this pithy formulation is meant to indicate that code, much like the other forces, regulates behav-

ior.); see also LAWRENCE LESSING, CODE: AND OTHER LAWS OF THE CYBERSPACE: VOLUME 2, 324

(2006) (“Code is not law, any more than the design of an airplane is law.”).

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subject to legal processes, bandy about terms such as “property,” “trust,”

and “ownership”

without any consideration of what these mean or re-

quire in law. As every dispute lawyer will know, what the parties thought

they were doing or intended to do, as evidenced by their written agree-

ments and their conduct, and what they actually did in law, are often two

very different things. Nevertheless, what the parties thought they were

doing or intended to do remains the general starting point. The simple

transfer of some asset from A to B is merely a naked fact: it tells nothing

about the basis of the transfer itself; which is, in turn, indicative of the

rights of the parties in respect of the object once transferred.

For example, when A agrees to “sell” her Bitcoin to B, this generally

means that A is not only agreeing to transfer control or possession of the

Bitcoin to B, but is also agreeing to transfer her property right in the

Bitcoin too, for a price. The result of a successful sale is, therefore, that A

no longer has any rights to or in the Bitcoin, which are now owned by B

outright (assuming, as we do, that the relevant property law recognizes

Bitcoin as being the object of property rights). Instead, A has a personal

claim against B for the price; and if B is insolvent before it is paid, A has

no other choice but to line up as an unsecured creditor in B’s insolvency.

By contrast, if A wishes to “deposit” her Bitcoin with B under a regular

deposit, this means that A is agreeing to transfer control over the Bitcoin

to B for some period of time but not her right of “ownership.” A only gives

up the immediate right of control and fully expects this to be restored to

her at the end of the term. If B fails to do so, A may assert her right of

‘ownership’ in the Bitcoin against B to compel its return, as well as poten-

tially against any third parties, such as C, to whom B might have trans-

ferred the Bitcoin. In addition, A will also likely have a personal action

against B for breach of the deposit agreement. Again, if B is insolvent, the

personal action may well prove worthless; but, significantly, A’s property

claim will largely be effective against B’s insolvency estate should the

Bitcoin have fallen therein.

It is, therefore, not simply enough that the staker has conceded control

over his assets to the intermediary, it is also important to examine the

9. Gilead Cooper, Virtual Property as Trust Assets and Feature Investments, 36

BUTTERWORTH’S J. OF INT’L BANKING AND FIN. LAW, 751–52 (2021); Helmut Stix, Ownership and

Purchase Intention of Cryptoassets – Survey Results, 29-31 (Oesterreichische Nationalbank, Work-

ing Paper No. 226, 2019), www.ecb.europa.eu/pub/conferences/shared/pdf/20191126_pay-

ments_conference/academic_paper_stix.pdf; ZeMing M. Gao, Digital Assets are Subject to Property

Law, COINGEEK (Aug. 8, 2022), https://coingeek.com/digital-assets-are-subject-to-property-laws/;

Joseph Raczynski, Non-fungible Tokens: Asset Ownership via Blockchain Rockets into Legal,

THOMPSON REUTERS (Mar. 22, 2021), www.thomsonreuters.com/en-us/posts/legal/non-fungible-to-

kens-legal/; LAW COMMISSION, Digital Assets: Final Report, 412 LAW COM, vii- xvii (UK).

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basis for the transfer. The basis for these transfers is usually grounded in

the law of contract, with the precise purpose of the asset transfer, and the

parties’ rights following the transfer clearly set out in writing. Where the

contract is unclear, courts will consider a vast range of factors under the

rules of contractual construction,

such as the parties’ expectations, con-

duct, and pre-contractual negotiations, to determine their intentions.

Contract law accords primacy to parties’ intentions under the principle

of freedom of contract; however, this is not necessarily conclusive of what

the parties achieved in law. A contract may be held void or unenforceable

for failure to comply with any legal formalities, but the matter is rendered

even more complex in circumstances where a contract’s subject matter

relates to proprietary rights. These “holy grail” of rights on any insolvency

are of prime relevance in the staking context, but remain a mandatory

form of private law that places a significant limitation on the role of the

parties’ agreement. If, for example, the relevant property law provisions

hold that any asset delivery must create a perfected security interest by

public registration pursuant to an agreement, this is not a requirement

from which the parties can simply derogate by common intention and

agreement. Failure to comply will result in the invalidity of the security

interest and its ineffectiveness in insolvency. Thus, what the parties

achieved in law by the staker giving up control over his cryptoassets in

favor of the intermediary for ‘staking purposes’ depends, in the first in-

stance, on both the purpose and nature of the transaction underpinning

the concession of control; and secondly, on any relevant provisions of prop-

erty law. Only when these are identified and applied to the facts will the

parties’ rights become clear.

Second, the outcomes of subjecting the relevant facts to the relevant

legal provisions are complicated because property and contract laws differ

across legal systems around the world. As a result, it may well be the case

that the same set of facts leads to different conclusions as to the parties’

respective rights, depending on which law is held to be the applicable law

to their relationship and transaction. As a very simple example, the prop-

erty requirement outlined above that an agreement to create a security

interest, or any delivery of an asset pursuant to such agreement, must be

perfected by using public registration may be the rule under the property

10. LAWRENCE COLLINS & JONATHAN HARRIS, DICEY, MORRIS & COLLINS ON THE CONFLICT OF

LAWS, para. 32-143 (Sweet & Maxwell U.K. 15th ed. 2012) (1896); OLE LANDO,

INTERNATIONAL ENCYCLOPEDIA OF COMPARATIVE LAW (Kurt Lipstein ed., Mohr, Tübingen, Vol. 3,

1976). Also explicitly stated in the conflict-of-laws provisions, see e.g. Art 12(1)(a) Regulation (EU)

593/2008, of the European Parliament and of the Council of June 17, 2008 on the Law Applicable

to Contractual Obligations (Rome I), 2008 O.J. (L 177).

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Vol. 19 No. 1 2023 59

law of jurisdiction A. However, the property law of jurisdiction B might

require only an enforceable agreement plus delivery for the security in-

terest to be validly constituted. Suppose, then, that a staking agreement

purports to grant the staker a security interest in the intermediary’s pool

of staked assets, and obliges the intermediary to register the security “in

accordance with any applicable law” upon delivery by the staker of his

assets to the intermediary to be added to the pool. However, upon such

delivery by the staker, and in breach of their agreement, the intermediary

fails to take any steps to register the security interest.

Accordingly, the question of whether the security interest was validly

constituted in favor of the staker depends on whether the property law of

A or B (or some other jurisdiction) applies. In the same vein, if the terms

of the agreement itself were uncertain as to the parties’ mutual rights

and obligations, the contract law of jurisdiction C might permit recourse

to pre-contractual negotiations to ascertain what the parties had in-

tended; whereas such recourse to earlier drafts of the agreement might

be prohibited under the contract law of jurisdiction D. Finally, even in

simple transfers of property rights under a bilateral agreement becomes

difficult in the present context of insolvency, as questions of when prop-

erty rights pass under a valid agreement to transfer and the effect where

a purported differ from jurisdiction to jurisdiction. Thus, in both property

and contract matters, identifying the applicable law is paramount to iden-

tifying in the final instance what the staker and intermediary achieved

in law.

Third, identifying the applicable law in a bankruptcy case is a compli-

cated exercise. It is a well-established rule of private international law

that a bankruptcy court will generally apply the lex fori, i.e., its own do-

mestic law, which is often known in the bankruptcy context as the lex

concursus.

This principle is of paramount importance as it allows for the

centralization of the enforcement of all claims against the debtor—e.g.,

the insolvent staking intermediary—in a single tribunal. It is also a well-

established rule that the lex fori applies to the characterization of any

issue in dispute for the purpose of the conflict of laws. In our example of

a failure to register a security interest, is the real issue between the par-

ties a matter of breach of contract (and if so, what kind of contract), or

one of the property rights in rem? Courts in different jurisdictions will

come to different conclusions on this issue, and in our case, characteriza-

tion will be determined by the bankruptcy court in accordance with its

own domestic rules.

11. ANTONIO LEANDRO, INSOLVENCY, APPLICABLE LAW, in ENCYCLOPEDIA OF PRIVATE

INTERNATIONAL LAW 931-32 (Jürgen Basedow et al. eds., 2017).

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However, once the bankruptcy court has concluded on this initial char-

acterization, it does not necessarily mean it will apply its domestic law

when trying the issue to resolve the rights of the parties; the choice-of-

law rules of the bankruptcy court may well point to another law as gov-

erning the particular issue in dispute. In terms of our agreement to create

a security interest above, if the bankruptcy court has identified the issue

as one of a right in rem, it will apply its own conflict-of-laws rules for

property matters to identify whether it is Property Law A or Property

Law B, or some other law to determine whether registration was required

(Law A) or a valid agreement and delivery were enough (Law B) to create

the security interest that will render the staker’s position in the interme-

diary’s insolvency far more advantageous than if it only had personal

rights for breach of the security agreement. These applicable laws may

well be different from those of the bankruptcy court: thus, the importance

of the lex fori concursus in insolvency matters does not mean that a bank-

ruptcy court will never apply a foreign law.

The exact outcomes of this process of identifying the applicable law is

further complicated by the diversity of conflict-of-laws rules around the

world. For example, the conflict rules of State X might state that, in the

absence of choice between the parties, contractual matters are governed

by the law having the closest connection with the contract, whereas the

conflict rules of State Y state that, in the absence of a choice, contractual

matters are governed by the law of the place where the contract was con-

cluded. Although there is a degree of harmonization within the EU, the

general rule remains that each jurisdiction around the world has its own

conflict-of-laws rules. Even within a single political nation-state such as

the UK or the US, each legal jurisdiction within these states follows its

own domestic approach to the conflict of laws.

Accordingly, the question

of the law applicable to our staker’s rights will depend, to a large extent,

on where our staking intermediary’s insolvency is opened and adminis-

tered, as bankruptcy courts will always, and without exception, follow the

conflict-of-laws rules of the forum. Complicating these issues further is

that, in the context of proprietary rights in rem, the nature and basis of

any transfer of an asset remains only the first step of the analysis. If the

purpose is to pass property rights, the actions taken by the parties will be

assessed according to the relevant jurisdiction’s property law.

12. For an overview, see PETER HAY ET AL., CONFLICT OF LAWS (2018); John F. Coyle, et al.,

Choice of Law in the American Courts in 2021: Thirty-fifth Annual Survey, THE AM. J. OF COMPAR.

LAW 318, 319-363 (Jan. 22, 2022).

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C. The Structure of this Paper

In accordance with this overview of the legal problems, to answer the

seemingly simple question of a staker’s rights on its intermediary’s insol-

vency, Section B starts with a review of the various crypto investment

strategies currently seen in the market. Section C will then examine the

potential legal analysis to arrive at possibilities for characterizing the un-

derlying transaction. Next, Section D, explores the absence of any firm

legal guidance at present on characterization, and outlines how our con-

clusions can be used as a tentative basis for determining the applicable

law, at least in the abstract. Finally, Section E is where we draw some

broader conclusions.

II. EMPIRICAL DISTINCTIONS

The ways in which cryptoassets may be used as an investment asset is

limited only by the creativity and ingenuity of those decentralized finan-

ciers at the forefront of the cryptoasset and Decentralized Finance

(DeFi)

spheres. Although there is no consistent use of terms, distin-

guishing between the various practices as a matter of empirical substance

is crucial, as this ultimately feeds into the set of facts a court will be asked

to consider and from which legal conclusions will be drawn. In this re-

spect, there is a considerable difference between, for example, an outright

transfer of the staked asset from the staker to intermediary to be applied

to the intermediary’s investment strategy, and the exercise by the inter-

mediary of certain rights associated with the staked asset without any

transfer of the asset itself. Accordingly, this section sets out some of the

various practices seen in the crypto investment context.

A. Staking

Staking in a precise technical sense refers to a process peculiar to “proof

of stake” consensus mechanisms.

Blockchain networks function on the

13. Decentralized Finance (DeFi) can be defined as follows: DeFi is a competitive, contestable,

composable and non-custodial financial ecosystem build on technology that does not require a

central organization to operate and that has no safety net. See Auer, supra note 3, at 3.

14. These are increasingly being adopted by blockchain networks to replace the energy-inten-

sive ‘proof of work’ mechanism. See e.g. THE MERGE, ETHREUM, https://ethereum.org/en/up-

grades/merge/ (last visited July 10, 2023) (discussing the efforts to replace the proof-of-work mech-

anism of the Ethereum network by a proof-of-stake consensus mechanism, which led on Sept. 15,

2022 to what became known as The Merge). On the debate about the sustainability of the proof-

of-work mechanism, see also Felix Irresberger et al., The Public Blockchain Ecosystem: An Empir-

ical Analysis, N.Y.U. STERN SCH. OF BUS., 1, 4-5 (Apr. 18, 2021). On different consensus protocols,

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basis of consensus

and such consensus is achieved by one participant in

the network—the so-called “validator” or “validating node” —collating

proposed transfers broadcast to the network into a proposed new block,

then propagating that block for acceptance by the other participants, or

nodes, as the next block to be added to the chain. In most networks, any

node can act as a validator, but as this process is open to abuse by mali-

cious nodes, any validating node seeking to propagate a new block on the

blockchain is required to ‘prove’ its trustworthiness. In the original “proof

of work” consensus mechanism, proving trustworthiness is done by solv-

ing a mathematical puzzle.

By contrast, in the newer proof of stake

mechanism, the validating node must both (1) prove it holds a stake in

the network (i.e., a quantity of the blockchain’s native cryptoassets);

and

(2) be willing to forfeit that stake in the event that it has been deemed by

the other nodes as fraudulent or as having otherwise acted in bad faith

in a process referred to as “slashing.”

see Auer, supra note 3, at 8. Shijie Zhang & Jong-Hyouk Lee, Analysis of the Main Consensus

Protocols of Blockchain, 6 ICT EXPRESS 93, 93-97 (2020).

15. A very good introduction to blockchain technology is found in ARVIND NARAYANAN ET AL.,

BITCOIN AND CRYPTOCURRENCY TECHNOLOGIES. A COMPREHENSIVE INTRODUCTION (Princeton Uni-

versity Press, 2016). See also ANDREAS ANTONOPOULOS, MASTERING BITCOIN: UNLOCKING DIGITAL

CRYPTOCURRENCIES (O’Reilly Media, Jan. 13, 2015); AARON WRIGHT & PRIMAVERA DE FILIPPI,

DECENTRALIZED BLOCKCHAIN TECHNOLOGY AND THE RISE OF LEX CRYPTOGRAPHIA (2017); IRIS H-Y

CHIU, REGULATING THE CRYPTO ECONOMY: BUS. TRANSFORMATIONS AND FINANCILISATION 1–44

(2021); CAROL GOFORTH, REGULATION OF CRYPTOTRANSACTION 1–10 (2020); COLLEEN BAKER &

KEVIN WERBACH IN, FINTECH LAW AND REGUL. 148-164 (Jelena Madir ed., 2021).

16. See ARVIND NARAYANAN ET AL., BITCOIN AND CRYPTOCURRENCY TECHNOLOGIES. A

COMPREHENSIVE INTRODUCTION 131–164 (2016); see also DANIEL STABILE, ET AL. DIGITAL ASSETS

AND BLOCKCHAIN TECHNOLOGY 20–22 (2020); Auer, supra note 3, at 8.

17. STABILE, supra note 16, at 22.

18. See infra Section C.1.

19. Such slashing takes place, for example, with Polkadot, Tezos, and Ethereum. See, e.g.,

POLKADOT SLASHING, POLKADOT, https://wiki.polkadot.network/docs/learn-staking#slashing (last

visited July 10, 2023); EVERSTAKE, How Does Slashing Work in Tezos and Why is it Important to

Delegate Only to Reliable Bakers Like Everstake, MEDIUM, https://medium.com/everstake/how-

does-slashing-work-in-tezos-and-why-is-it-important-to-delegate-only-to-reliable-bakers-like-

a6c931e93c56 (last visited July 10, 2023); Understanding Eth2 Slashing and Preventative

Measures, BLOXSTAKING, https://www.bloxstaking.com/blog/ethereum-2-0/understanding-eth2-

slashing-preventative-measures/(last visited July 10, 2023). In contrast, Avalanche and Cardano

refuse to reward the staker in such cases and the cryptoassets themselves are not withdrawn. See

AVALANCHE, https://www.avax.network/validators (last visited July 10, 2023); see also Why Car-

dano Does Not Need Slashing, CARDANIANS, https://cardanians.io/en/why-cardano-does-not-need-

slashing-152 (last visited July 10, 2023). Solana also provides a similar mechanism in principle,

but it has not yet been activated. See SOLANA, SLASHING RULES https://docs.solana.com/de/pro-

posals/slashing (last visited July 10, 2023). On the general functioning of slashing, see Giulia

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Cryptoassets thus offered up as proof of a validating node’s stake in the

next block are known as “staked,” and the risk of losing staked assets

through the sanction of slashing works to deter any validating node from

impairing the smooth functioning of a blockchain network. Backed by a

slashing mechanism, staking thus ensures the integrity of any new block

added to the blockchain. For its validation efforts, the validating node

earns rewards in the form of the transaction fees paid by users of the

network and/or cryptoassets newly created with each propagated block.

Nodes, therefore, compete for their proposed blocks to be accepted onto

the blockchain. The exact selection process varies across proof-of-stake

algorithms. However, two models of staking are worth distinguishing: di-

rect staking and staking by delegation.

1. Direct Staking

A node can directly stake cryptoassets it holds to the network by partici-

pating in the proof of stake consensus mechanism. In this case, it is the

node itself that suffers the loss if its stake is slashed due to fraudulent

transactions or inactivity.

2. Staking via an Intermediary (“Delegation”)

Staking can also be done via an intermediary. In practice, this is the most

common form of staking.

Many crypto intermediaries—notably crypto

exchanges—offer staking services to their account holders. They can do

so by either acting as a validator or by mediating the staking of the cryp-

toassets to a third party (the intermediary) who will act as a validator.

There are important commercial incentives for doing the latter: broadly

speaking, the greater the quantity of cryptoasset a validating node can

stake, the more returns it can generate from the validation process.

Fanti, et al., Economics of Proof-of-Stake Payment Systems 21 (M.I.T. Sloan Working Paper No.

5845-19, 2021).

20. Currently, the following platforms offer staking by delegation: Coinbase, Binance, Kraken,

Bitpanda. Coinbase User Agreement, COINBASE, 6 (2023), www.coinbase.com/legal/user_agree-

ment/ireland_germany; Binance Terms of Use, BINANCE (2023), www.binance.com/en/terms;

ingungen [General Terms and Conditions

Bitpanda GmbH & BAM], BITPANDA, Annex IIA, IIB, (2023), www.bitpanda.com/de/legal/bit-

panda-general-terms-conditions.

21. Coinbase User Agreement, COINBASE (2023), www.coinbase.com/legal/user_agreement/ire-

land_germany (explaining digital assets can be staked in a third party proof of stake network via

staking services provided by Coinbase or an affiliate or a third party); Terms of Service, Annex B,

KRAKEN (2023), www.kraken.com/legal (“Payward Trading may perform any or all of the PSA

Services directly or through one or more service provider(s).”).

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Hence, it makes sense to collect cryptoassets from those willing to stake,

use them in the validation process and share the rewards with those that

have contributed to the staking of the intermediary.

Staking via an intermediary is often called “delegation,” even though

the terminology varies. Two types must be distinguished. In the first,

cryptoassets are contributed to the pool of assets staked by the validator

itself or by a third party acting as the validating node. In the second type

of delegation, cryptoassets are not transferred themselves, but rather, a

“right” to propagate the next block is transferred. This method of staking

via delegation is associated with particular types of blockchain net-

works,

where each unit of the blockchain’s native cryptoasset inherently

carries such right. The right to propagate the next block is allocated at

random but many holders of the native cryptocurrency are uninterested

in exercising the right. It therefore “delegates” this right to a node able

and wishing to exercise it, usually in return for a fee. Crucially, only the

“protocol right to propagate the next block” associated with the cryp-

toasset is delegated, not the asset itself.

B. Yield Farming

The term “yield farming” is associated with DeFi; in particular, with de-

centralized crypto exchanges (DEXs). DEXs are algorithms through

which cryptoassets can directly be exchanged without the intervention of

any intermediary.

Although the term is used in various ways, in prac-

tice, yield farming is, for the purposes of this paper, used to denote the

process whereby the DEX incentivizes its users to stabilize the value of

certain cryptoassets—usually the DEX’s own native token/cryptocur-

rency—by refraining from trading in those assets.

This commercial objective of reducing the volatility of the relevant

cryptoasset is affected by the user committing assets of that type to a

smart contract, with returns paid by the DEX in exchange. Assets com-

mitted in yield farming operations are held passively in the smart con-

tract and are not traded on the exchange or used for any other purpose.

22. L.M. Goodman, TEZOS – A SELF-AMENDING CRYPTO-LEDGER WHITE PAPER 10-14 (Sept. 2,

2014), https://tezos.com/position-paper.pdf; Amy Held, Baking, Staking, Tezos and Trusts: Crypto

Sale and Repurchase Transactions Analysed by the High Court, 37.2 BUTTERWORTH’S J. OF INT’L

BANKING AND FIN. LAW 96 (2022); Seyed Mojtaba Hosseini Bamakan, et. al., A Survey of Block-

chain Consensus Algorithms Performance Evaluation Criteria 154 SCIENCE DIRECT 1, 4-5 (2020);

Nicola Dimitri, Liquid Proof-of-Stake in Tezos: An Economic Analysis, 13 INFO. 556, 557 (2022).

23. Auer, supra note 3, at 18-20.

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The user is given a receipt to acknowledge the deposit, usually in token

form, and is usually permitted to withdraw the cryptoassets at will.

C. Liquidity Mining

Liquidity mining also involves a DEX, but differs in that a cryptoasset

holder will provide a pair of cryptoassets to a DEX, and will receive in

return cryptoassets issued by the DEX as “interest.”

To understand the process of liquidity mining, it is important to under-

stand a little more about how DEXs operate. In general, trading of cryp-

toassets on a DEX takes place via Automated Market Makers (“AMM”),

which are smart contracts that provide much-needed liquidity to the mar-

ket.

In order to fulfill their task, AMM themselves need liquidity in the

form of cryptoassets. This is necessary for the DEX to function continu-

ously and smoothly, which is particularly important for the trading of dig-

ital assets with a low trading volume. On a DEX, the liquidity will be

provided by a so-called Liquidity Provider (“LP”), i.e., a holder of cryp-

toassets, by putting them into a so-called Liquidity Pool. Technically, this

will be implemented by the LP exchanging a pair of—at least two—cryp-

toassets against an LP token. As a rule, the possible pairs are predefined

and presuppose a certain ratio between the cryptoassets provided. The

LP token is not a mere receipt of a deposit but represents the share of the

liquidity pool that the contributed cryptoassets make up.

The process of

liquidity mining is, thus, quite similar to yield farming. However, it is

distinct from yield farming operations in several key ways.

First, the commercial objective of the offeror of such a transaction dif-

fers. Whereas yield farming aims at reducing the circulation of certain

cryptoassets, liquidity mining serves to provide additional liquidity for

certain types of assets. Unlike deposits of cryptoassets provided in yield

24. See e.g., Syrup Pool FAQ and Troubleshooting, PANCAKESWAP (last visited July 10, 2023)

https://docs.pancakeswap.finance/products/syrup-pool/syrup-pool-guide/syrup-pool-faq; Yield

Farming, SUSHISWAP (last visited Jan. 23, 2023), https://docs.sushi.com/docs/Products/Con-

cepts/Yield%20Farming; Yield Farming, TRADER JOE (last visited Jan. 23, 2023), https://sup-

port.traderjoexyz.com/en/articles/6708479-yield-farming; Staking Your CRV, CURVE FINANCE

(last visited July 10, 2023) https://resources.curve.fi/crv-token/staking-your-crv.

25. See Alfred Lehar & Christine A. Parlour, Decentralized Exchange: The Uniswap Auto-

mated Market Maker, J. FIN. (forthcoming); Lindsay X. Lin, Deconstructing Decentralized Ex-

changes, 2.1 STAN. J. BLOCKCHAIN L. AND POL’Y 58, 74 (2019); Auer, supra note 3, at 11-13.

26. Auer, supra note 3, at 10 (quoting “ETH/USDC LP is an example of an equity token, rep-

resenting claims on shares of underlying assets, in this specific case being a claim on the amount

of ETH and USDC deposited as liquidity provision (LP) in the Uniswap DEX.”). See UNISWAP,

https://uniswap.org/blog/uniswap-v3 (last visited July 10, 2023) (highlighting the V3 version of the

Uniswap DEX implemented an NFT representing fractional ownership of the protocol liquidity.).

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farming operations, contributions in liquidity mining do not remain pas-

sive but are actively used in the market by the DEX. The DEX uses the

liquidity so that market participants can exchange the respective cryp-

toassets in the liquidity pool against each other. The exact combinations

of cryptoassets to be contributed are usually predefined by the DEX, but

there generally are no caps on the number of cryptoassets a DEX will

accept into a Liquidity Pool.

Second, Liquidity Providers may “cash out” their share of the Liquidity

Pool for the contributed cryptoassets at any time by redeeming the LP

Token. There is, however, no guarantee that the Liquidity Provider will

receive the same amount of each cryptoasset as they had originally con-

tributed; it all depends on the composition of the Liquidity Pool at the

time of redemption. For this reason, and because of the fluctuating value

of cryptoassets, LPs endure the risk of impermanent loss (or “divergence

loss,” as it is sometimes called), which occurs when one provides liquidity

to a pool that contains more than one asset and then the market price of

at least one of the assets in the pool changes.

An impermanent loss thus

derives from the fact that the returned assets upon redemption might be

of a lesser total value than if they had simply been held onto and not used

for liquidity mining.

D. Crypto Lending

Crypto lending enables users to lend and borrow cryptoassets for a fee or

interest. These transactions can be offered by centralized

or decentral-

ized

platforms, or by other operators. Under such a lending model, the

holder transfers cryptoassets to another address for the payment of re-

muneration. The recipient can then freely deal with those cryptoassets

until it receives a withdrawal order from the address depositing the cryp-

toassets. This withdrawal order can often be placed at any time. Higher

27. Doncho Karaivanov, Impermanent Loss Explained With Examples & Math, THE CHAIN

BULLETIN, https://chainbulletin.com/impermanent-loss-explained-with-examples-math/ (May 3,

2021).

28. For example, see Simple Earn, BINANCE, www.binance.com/en/savings#lendinl-de-

mandDeposits (last visited July 10, 2023); BITFINEX, www.bitfinex.com/lending-products-start/

(last visited July 10, 2023); BLOCKFI, www.blockfi.com (last visited July 10, 2023); CIRCLE,

www.circle.com/en/products/yield (last visited July 10, 2023); CRYPTO, https://crypto.com/eea/earn

(last visited July 10, 2023); GEMINI, www.gemini.com/earn (last visited July 10, 2023).

29. For example, see AAVA, https://aave.com (last visited July 10, 2023); COMPOUND,

https://compound.finance (last visited July 10, 2023); MAKERDAO, https://makerdao.com/en/ (last

visited July 10, 2023). See Auer, supra note 3, at 13-15; Daniel Perez et al., Liquidations: Defi on

a Knife-Edge, in INT’L CONF. ON FIN. CRYPTOGRAPHY AND DATA SECURITY 457–476 (2021).

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interest rates may, however, be achieved if cryptoassets are invested for

a fixed period of time.

Decentralized platforms offer lending transactions via lending pools.

Cryptoassets are contributed to a pool to be lent onwards to third parties

against collateral and interests. This is realized through a smart contract,

by which a cryptoasset is transferred to a DeFi platform in exchange for

a corresponding cryptoasset issued by the platform.

Each borrowed

cryptoasset thus matches its token counterpart of the DeFi platform. The

token issued by the DeFi platform can—possibly after a certain period of

time—be redeemed for the cryptoasset originally provided, with an addi-

tional remuneration. This makes crypto lending look very similar to li-

quidity mining. The difference, however, is that in crypto lending, assets

are not provided in pre-defined pairs. Also, the lent assets can be used for

a wider range of purposes.

E. Summary

As has been demonstrated by this brief survey, whilst staking is generally

used in a flexible way by market participants, the use of cryptoassets to

generate passive income encompasses a wide range of practices. For rea-

sons that will become apparent, we consider that it is imperative to dis-

tinguish between various staking models when trying to ascertain the

staker’s rights upon its intermediary’s insolvency.

III. LEGAL CHARACTERIZATION

As noted in Section A-2, characterization is a matter undertaken by the

forum as a preliminary step in determining the law applicable to any is-

sue in dispute before it. In the case of the rights of a staker in the event

of its intermediary’s insolvency, the most pressing issue in dispute will

usually be whether the staker has a vested proprietary interest, acquired

before the insolvency proceedings were opened, in an asset that has come

30. Auer, supra note 3, at 13-15 (highlighting that an “essential difference to loans issued by

traditional financial institutions is that interest rates are set automatically.”). See Jiahua Xu &

Nikhil Vadgama, From Banks to DeFi: The Evolution of the Lending Market, Univ. Coll. London

Centre for Blockchain Technologies 1, 53-66 (Dec. 20, 2022).

31. One example is the platform Compound issuing their cToken against the deposit of an

eligible cryptoassets. See ROBERT LESHNER & GEOFFREY HAYES, COMPOUND: THE MONEY MARKET

PROTOCOL 3-4 (2019), https://compound.finance/documents/Compound.Whitepaper.pdf; see also

AAVE, PROTOCOL WHITEPAPER 8–16 (2020), https://github.com/aave/aave-protocol/blob/mas-

ter/docs/Aave_Protocol_Whitepaper_v1_0.pdf (Aave issuing aToken).

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to fall within the insolvent estate, or whether his rights are merely per-

sonal.

Though bankruptcy proceedings are generally governed by the law of

the bankruptcy court (the lex fori concursus), there are two key areas in

which the bankruptcy court will apply another law, using its own conflict

of law rules. First, proprietary issues will generally be determined by the

general rule, consistent across all systems of private international law,

that such matters are governed by the law of the place where the asset is

located (the lex rei sitae). Second, when determining the legal basis upon

which the staker conceded control over the asset in favor of the interme-

diary (which is why the asset now, prima facie, has fallen into the inter-

mediary’s insolvency estate), the bankruptcy court will apply the proper

law of that agreement to ascertain the validity of the agreement and the

consequences that follow.

Given that various legal bases for transfer

give rise to different governing laws, we consider now some of the ways

in which the practices in Section B could be characterized as a matter of

law and the legal consequences that follow.

Before doing so, we must draw attention to several points as to our

methodology. We rely to a considerable extent on the written representa-

tions of the staking intermediary (i.e., the way in which the staking oper-

ation has been described or marketed to potential stakers); and, where

available, any written staking agreement pursuant to which the staker

conceded control over the relevant assets. We are mindful that these are

neither conclusive as to what the parties achieved in law, nor are they

necessarily an accurate reflection of what technically happens at the pro-

tocol level. Nevertheless, such representations and agreements between

the parties hold legal significance as giving some indication of what the

parties had intended to do. As such, they will likely be considered by the

courts. To account for as many legal systems as possible, we do not com-

mit ourselves to a single characterization or to the private law techniques

of a single jurisdiction, given that the blockchain is a global mechanism

for the storage and transfer of value, which is not governed by the law of

one state alone, but by a plurality of laws. Whilst a multi-jurisdictional

characterization raises obvious challenges, to the extent possible, we try

to adopt a broad perspective by referring to “transnational” principles of

private law; whether by reference to international conventions, or to com-

mon foundations in, for example, Roman law or the common law. Finally,

we emphasize that we are concerned with private law, not regulatory law.

Nevertheless, given that there are significant overlaps, especially be-

tween staking operations and regulatory definitions of certain investment

32. See infra Section D.

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practices, we briefly address the reasons why we do not discuss two mat-

ters that, prima facie, might be thought to be directly relevant to our ob-

jectives in characterizing staking, loosely defined as the use of cryp-

toassets as a capital asset for investment purposes.

First, we are aware that some regulatory authorities, most notably the

Securities and Exchange Commission (“SEC”) in the United States

(“U.S.”), have characterized staking transactions as “investment con-

tracts” and hence as “securities,” submitting those who offer them to the

registration requirements of the Securities Act 1933.

Useful as such def-

initions are, these are exclusively valid in the realm of supervision and

regulation; they do not determine the rights and obligations between pri-

vate individuals, such as crypto holders and crypto exchanges, and do not

apply in litigation between them. They also do not deprive our analysis of

its sense as they are still challenged in court. Should the SEC’s position

prevail in these litigations, staking services could still be offered by those

intermediaries who register with the authority. Furthermore, many, if

not most, countries of the world do not share the SEC’s view that staking

is a “security.”

Second, given the common commercial objective between traditional

investment practices and staking, it may seem apt in many cases to char-

acterize a pool of cryptoassets applied towards a particular investment

strategy as a fund of some sort (e.g., a mutual fund, alternative invest-

ment fund, or collective investment scheme). The problem, however, re-

mains that these are regulatory classifications that define the substance

of a particular investment practice. Such practices, however, are carried

out via a wide range of legal constructs that give rise to different private

law consequences.

For example, in the U.S. alone “mutual funds” are regulated by federal

law in the Investment Company Act of 1940,

which focuses on the reg-

ulation and supervision of the fund but is a misnomer insofar as it says

very little, if anything, as to the private rights of the investors in an “in-

vestment company.”

Rather, these private rights are generally governed

by the laws of the federal states, where a basic distinction can be made

33. See e.g., Complaint at 89, SEC v. Coinbase, Inc., 23 Civ. 4738 (S.D.N.Y. filed June 6, 2023)

(No. 1:23-cv-04738); Complaint, SEC v. Binance Holdings Ltd., No. 1:23-cv-01599 (D.D.C. filed

June 5, 2023); Complaint, SEC v. Payward Ventures Inc., No. 23-cv-588 (N.D. Cal. filed Feb. 9,

2023).

34. 15 U.S.C. §§ 80a-1 to 80a-64.

35. Charles E. Jr. Rounds & Andreas Dehio, Comment, Publicly-Traded Open End Mutual

Funds in Common Law and Civil Law Jurisdictions: A Comparison of Legal Structures, 3 N.Y.U.

J.L. & BUS. 473, 478 (2006) (calling the terminology of the Investment Company Act of 1940 “un-

fortunate”).

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70 Journal of Business & Technology Law

between the trust

and corporate models

commonly used to structure

the practice of investment via a mutual fund. In turn, these two models

give rise to different rights between the fund manager and the investor.

In Europe, the private law rights that arise from investment in invest-

ment funds are even more complex. European Union (“EU”) legislation

contains two texts, the Undertakings for Collective Investment in Trans-

ferable Securities Directive

and the Alternative Investment Fund Man-

agers Directive,

but, again, these are regulatory definitions that say

nothing as to how such investment funds are structured as a matter of

private law. Various models can be identified under the private law of the

constituent (and former) Member States, which may range between trust-

like regimes comparable to those seen in the U.S., corporate models, mod-

els based on partnerships, and co-proprietary models.

As such, regulatory definitions are generally not helpful in the present

context as they encompass a wide range of private law structures. As we

are only concerned with the private law rights that arise from these pri-

vate law structures, we do not address regulatory regimes separately, but

discuss them under the relevant private law categories.

A. Secured Transaction

When looking at staking (in the technological sense) from a legal perspec-

tive, the notion of “secured transactions” comes to mind.

To create a se-

curity interest, the owner of an asset, the “security provider,” usually

gives up possession or control over the asset.

The security right is

36. In this model, managers have certain fiduciary duties towards investors, who enjoy certain

rights in the assets of the fund. See id. at 478-83.

37. Id at 478-83. A model involves a corporation run by directors that has title to the assets.

The investors, in turn, are the shareholders of the corporation. Despite the separate corporate

personality, the directors have trustee-like duties that run directly to the investors.

38. Id. at 478–79. It has, nevertheless, been argued that both models essentially reflect a

trusts relationship, such that they even the corporate models are “trusts in disguise”.

39. Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on

the coordination of laws, regulations and administrative provisions relating to undertakings for

collective investment in transferable securities (UCITS), 2009 O.J. (L 302).

40. Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on

Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC

and Regulations (EC) No 1060/2009 and (EU) No 1095/2010 (AIFMD), 2011 O.J. (L 174).

41. See generally U.C.C. § 9 (AM. L. INST. 2010); U.N. Commis on Int’l Trade Law, Model Law

on Secured Transactions, U.N. Doc. E.17.V.1 (2019).

42. U.C.C. § 9-203(b) (AM. L. INST. 2010); STEVEN L. HARRIS & CHARLES W. MOONEY, SECURITY

INTERESTS IN PERSONAL PROPERTY 91 (5th ed. 2011) (mentioning three conditions UCC 9-203(b)

sets forth to enforceability, and thus attachment: First, value must be given; second, the debtor

must have rights in the collateral, and this the debtor must agree that a security interest will

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“perfected” when the other party, termed the “secured party,” obtains pos-

session over the asset or when a financing statement is filed.

The secu-

rity interest or collateral right is a limited property right, protecting the

security taker in case the security provider fails to perform his obliga-

tions, e.g. repaying a loan. The security right allows the security taker to

obtain control over the asset if he does not yet have it (i.e., in case a fi-

nancing statement has been filed). He may then sell the asset and apply

the net proceeds of the sale to the secured obligation.

Ignoring for one moment the differences between tangible and intangi-

ble assets, the simple form of staking bears some striking resemblances

with a secured transaction: typically, the asset will be locked during the

time it is staked, meaning that the staker is prevented from exercising

control over them.

During the whole process, the asset can be accessed

only by the staker; the providers of staking services are at pains to un-

derline that the staker retains ownership despite the staking.

Finally,

if the staker or the validator has violated the rules of the network, e.g. by

engaging in malicious validation or by refusing to validate, the assets may

be “slashed,” which essentially means that they will be transferred to the

network.

attach and either the collateral must be in the secured party’s possession or control or the debtor

must have signed a security agreement); see Auer, supra note 3, at 4. (“Customers that interact

with such platforms […] give up custody of their assets”).

43. U.C.C. § 9-201 (AM. L. INST. 2010); HARRIS & MOONEY, supra note 42, at 92–93 (calling

UCC 9-201 a “baseline rule”, which is generally understood to mean that an attached security

interest will be senior to conflicting claims unless the UCC provides otherwise).

44. HARRIS & MOONEY, supra note 42, at 617 (“Taking possession of collateral following a

debtor’s default only begins the process of enforcing a security interest in collateral. A secured

party in possession of tangible collateral following a default typically wishes to sell the collateral

and then to apply the net proceeds of the sale to the secured obligation.”).

45. See, e.g., Coinbase User Agreement App. 4, Sec. 3, Subsec. 1.4, COINBASE, https://www.coin-

base.com/legal/user_agreement/united_states (last updated Nov. 8, 2023) (“Some Digital Asset

networks require that a certain amount of staked assets be locked (restricted from sale or transfer)

for a certain period of time while staking.”). Another example is from an older August 30, 2022,

version of the Coinbase User Agreement that stated, “If you choose to stake your ETH, your ETH

will be pledged for staking and will become locked on the Ethereum protocol until Phase 1.5 of the

Ethereum network upgrade is completed.” Coinbase User Agreement Sec. 3, Subsec. 1.5, COINBASE,

https://www.coinbase.com/legal/user_agreement/united_states (last visited August 30, 2020).

46. See Terms of Service Annex C, Sec.1.2, KRAKEN, https://www.kraken.com/legal (last up-

dated June 19, 2023) (“You retain ownership of the Supported Tokens and such Supported Tokens

shall remain property of you when staked under the terms of this Addendum.”); Id. at App. 4, Sec.

3(1.1) (“This instruction to stake your digital assets does not affect the ownership of your digital

assets in any way.”); General Terms and Conditions Bitpanda GmbH & BAM Sec. 7.2, BITPANDA,

https://www.bitpanda.com/en/legal/bitpanda-general-terms-conditions (last updated Aug. 23,

2023) (“Bitpanda clients are the beneficial owners of Stakes Assets at all times, . . .”).

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All of these points make staking seem similar to a secured transaction.

A further indication supporting this characterization is the use of the

word “pledge” by some staking agreements;

a pledge is a typical secured

transaction. There can hardly be a stronger indication of the parties’ in-

tentions than the use of this word, which is understandable even to lay-

men.

Yet, there are also some glaring differences between staking and clas-

sic secured transactions. First, the staker can usually “unstake” the as-

sets at any time and thereby immediately terminate the staking agree-

ment; in this case, the assets will be returned to her subject to the non-

occurrence of a slashing event.

Second, the security interest does not

secure the repayment of a loan, but rather the proper performance of the

validation functions on the network; in other words, the assets will be

taken away as a punishment for not behaving properly on the network

rather than for not fulfilling a monetary obligation. It does not serve to

mitigate credit risk but gives incentives for “good” behavior.

One may reasonably debate whether these two particularities exclude

characterizing staking as a secured transaction. The first point, it is sug-

gested, does not necessarily justify such an exclusion, as a security pro-

vider and security taker are free to determine the length of their agree-

ment and can also include a right to terminate it at any time. The second

particularity is perhaps not as great if one considers that collateral also

incentivizes “good” behavior in the sense of a loan. Still, it must be admit-

ted that there is no underlying obligation to repay a loan and the associ-

ated credit risk mitigation. However, it is not completely excluded that a

secured transaction may serve to enforce some other obligation; just think

of a bail cost that is deposited with a court or the police or security as

collateral to incentivize future involvement in the judicial process. In

these cases, the asset may be lost if some other event than the non-

47. See Coinbase User Agreement 1.7(d), COINBASE, https://www.coinbase.com/le-

gal/user_agreement/united_states (last updated Aug. 24, 2023) (“Staked ETH and associated re-

wards that have been wrapped as cbETH are held by Coinbase on behalf of holders of cbETH, and

ownership of these assets shall not transfer to Coinbase.”).

48. See General Terms and Conditions Bitpanda GmbH & BAM Annex II A, Sec. 1, Subsec.

2.7, BITPANDA, https://www.bitpanda.com/en/legal/bitpanda-general-terms-conditions (last up-

dated Aug. 23, 2023) (“The Flexible Staked Asset can be unstaked at any time with immediate

effect at the sole discretion of the Bitpanda Client (no lock-up). In this case the Bitpanda Client

receives his Flexible Staked Assets, subject to the non-realization of the Slashing Risk outlined in

point 7, back in their Wallet and all Rewards accrued on such Flexble Staked Assets until the

relevant Final Offer Click Unstaking.”).

49. See James Burnie et al., What’s at Stake? The Legal Treatment of Staking, 37.9

BUTTERWORTH’S J. OF INT’L BANKING AND FIN. LAW 596 (2022).

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Vol. 19 No. 1 2023 73

repayment of the loan occurs. Still, one may speak of a “secured transac-

tion,” at least in a loose sense of the word.

Other types of transactions that are common in the field of generating

revenue from cryptoassets do not bear this similarity to secured transac-

tions. While the token holder also relinquishes possession or control over

the asset in the case of yield farming, liquidity mining, and crypto lend-

ing, these cases lack a legal obligation to be collateralized. We therefore

consider it highly unlikely that these transaction types will be considered

to fall into the category of secured transactions.

The effect of characterizing an operation as a “secured transaction” de-

pends on the type of the secured transaction. In the case of a “pledge” or

“lien,” the operation would not touch upon the initial distribution of own-

ership. There would merely be the creation of a new right in rem. The

insolvency risks of the person providing the security right would thus be

limited. If, on the other hand, the secured transaction results in an “out-

right transfer” then the collateral provider would bear the full risk of in-

solvency of the collateral taker. Which of these two types of characteriza-

tions will be retained in a particular case is not entirely sure and will

depend on the applicable terms and conditions. Yet, our informed belief

is that without any contrary indications, it is more likely that a court will

lean in favor of a more restricted transfer (i.e., the creation of a pledge or

lien). That is because this category strikes an appropriate balance be-

tween the interests of the staker and those of his counterparty: the staker

does not lose his rights completely, while the counterparty gets as many

rights as it needs for its particular purpose, i.e., slashing.

Table 1: secured transaction

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74 Journal of Business & Technology Law

B. Deposit

The deposit has its origins in the Roman concept of depositum, which sur-

vives in both modern common law and civil law jurisdictions alike and

has a particular influence on the law of banking. This characterization

seems particularly important for our analysis, given e.g., the comparisons

that have been drawn between crypto lending to DEXs with depositing

money with a bank.

To test the validity of this characterization, it is

necessary to distinguish between two types of deposits.

The first type of deposit—called in Latin depositum regulare—serves

the commercial objective of safekeeping the assets in the interests of the

depositor. A typical example is a deposit box stored in the vault of a bank,

of which the depositor has exclusive use for depositing his assets. Under

this model, the assets deposited remain in the vault and are recovered in

specie upon withdrawal by the depositor. Throughout the term of the de-

posit, the depositor does not lose his right of ownership in the assets de-

posited.

However, commercial banking has long discarded this model of deposit;

and has adopted, instead, what is known in many civilian jurisdictions as

depositum irregulare.

This follows the model of fractional reserve bank-

ing, under which a bank uses the assets of the depositors for its own com-

mercial purposes, e.g., to provide credit to third parties on terms that gen-

erate profits (i.e., interest), and only keeps a fraction of the assets to pay

out depositors that ask for withdrawals in the short term. In this model,

the custodian acquires ownership of the asset held in custody and has all

the rights of the owner to dispose of the fungible assets held in custody;

his obligation to the depositor is simply to return goods of the same quan-

tity and quality.

This model was described by Lord Cottenham in Foley

v. Hill:

50. See Andrew R. Sorkin et al., The New “Shadow” Banks, N.Y. TIMES: DEALBOOK

NEWSLETTER (Sept. 8, 2021), www.nytimes.com/2021/09/08/business/dealbook/crypto-bitcoin-reg-

ulation.html.

51. BÜRGERLICHES GESETZBUCH [BGB] [CIVIL CODE], § 700, https://www.gesetze-im-inter-

net.de/englisch_bgb/englisch_bgb.html (Ger.); OBLIGATIONENRECHT [OR] [CODE OF OBLIGATIONS]

Mar. 30, 1911, SR 220, RS 220, art. 481 (Switz.); CODICE CIVILE [C. C.] [CIVIL CODE] art. 1782 (It.);

CIVILKODEKSS [C.C] [CIVIL CODE] art. 1992 (Lat.); CODE CIVIL [C. CIV.] [CIVIL CODE] art. 1932 (Fr.);

see also Cour de cassation [Cass.] [supreme court for judicial matters] 1e civ., Nov. 29, 1983, Bull.

civ. I, No. 280 (Fr.); Cour de cassation [Cass.] [supreme court for judicial matters] com., July 9,

1979, Bull. civ. IV, No. 230 (Fr.).

52. Timo Fest, MÜNCHENER KOMMENTAR ZUM HGB [MUNICH COMMENTARY ON THE HGB, VOL.

6] Einlagengesch. . .ft para 193–94 (Carsten Herresthal ed., 4th ed. 2019); Martin Henssler,

MÜNCHENER KOMMENTAR ZUM BGB [MUNICH COMMENTARY ON THE BGB, VOL. 6] § 700 BGB para

3 (Martin Henssler ed., 9th ed. 2023).

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The money paid into the banker’s, is money known by the prin-

cipal to be placed there for the purpose of being under the control

of the banker; it is then the banker’s money; he is known to deal

with it as his own; he makes what profit he can, which profit he

retains to himself […]

Characterization as an irregular deposit may seem appropriate for

some of the operations analyzed and can be applied where the following

two conditions are met: first, the depositor can recall the assets at any

time; and second, the custodian need not return the same assets he re-

ceived. This is the case, in particular, for yield farming and liquidity min-

ing, but also for crypto lending. It is therefore possible that a court may

consider any of these three operations as an irregular deposit.

However, such characterization would not correspond to the commer-

cial purpose of the operations and the intentions of the parties that un-

derpin them. Typically, the underlying cryptoassets are held by a custo-

dian. Since they are already in custody, there is no reason for an

additional deposit with the same or another intermediary. Instead, the

commercial reasoning behind the operations described is to obtain profits,

and this is not only on the side of the recipient of the asset, but also on

the part of the transferor. However, it is not inconceivable that for certain

actors the purpose of safekeeping is of overriding importance. In this case,

a characterization as a deposit may be apposite.While the answer to

whether a platform is taking deposits ultimately depends on the parties’

intentions and on how the services offered are structured, the risk analy-

sis remains the same as in the case of crypto lending: the initial holder of

the cryptoasset bears the counterparty risk, i.e., the risk that the other

party to the contract does not perform (see above section C-2). It is there-

fore not significant for the distribution of insolvency risks whether one

characterizes crypto lending as a loan or as an irregular deposit.

53. Foley v. Hill [1848] 9 Eng. Rep. 1002 (HL) (appeal taken from Eng.); see also PETER

ELLINGER ET AL., MODERN BANKING LAW 93–94 (3d ed. 2002); Joachimson v. Swiss Bank Corp.

[1921] 3 KB 110; Busher v. Fulton, 191 N.E. 752 (Ohio 1934).

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C. Loan

The legal concept of a loan is, perhaps, particularly apt for crypto lending.

Broadly defined, a loan is a transaction whereby one party—the lender—

makes funds available to another party—the borrower—against an obli-

gation to repay the nominal amount, with or without interest. Crypto

lending seems consonant with this definition because it implies the full

title transfer of the relevant assets to another party with an obligation to

return goods of the same quality and quantity plus remuneration. At least

at first blush, lending cryptoassets to a DEX may therefore be legally

characterized as a loan. Loans in law, however, require that several other

criteria be met, and whilst each jurisdiction differs, some broad principles

are common to all.

The first criterion is that the economic purpose of a loan agreement

must be to provide capital to the borrower. The debtor is permitted to use

the capital for a certain period of time, e.g., to make investments or grant

loans itself. There must not be any restrictions on how the cryptoassets

are used by the platform. From the lender’s perspective, this means he

must renounce the right to claim back the exact same assets in specie; he

54. Matthias Lehmann, INSOLVENCY, APPLICABLE LAW ENCYCLOPEDIA OF PRIVATE

INTERNATIONAL LAW 215–219 (Jürgen Basedow et al. eds., 2017).

Table 2: irregular deposit

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Vol. 19 No. 1 2023 77

must, therefore, be willing to give up his title to the assets against the

promise to receive goods of the same quantity and quality.

The second condition is that the borrower must be obliged to repay the

funds. This is generally the case. Crypto lending services provide for the

reimbursement of the deployed funds, generally including interest.

This

is not surprising—after all, hardly anyone is willing to donate their as-

sets. Typically, the parties to crypto lending stipulate that the repayment

is made upon the lender’s request at any time. Traditionally, loan repay-

ments are, however, only accelerated under specific and limited condi-

tions. Of course, the determination of the due date is generally in the

hands of the parties, and loan agreements come in different kinds; bullet

loans, for instance, are loans in which the principal is repaid in full at the

end of the loan term, but here again, repayment is made by the borrower

and not upon simple and unconditioned recall by the lender. This not-

withstanding, the qualification of a loan seems a good fit for crypto lend-

ing schemes.

While the characterization as a loan is particularly apt for crypto lend-

ing, other transactions are less likely to fall into this category. Whereas

in staking, yield farming, or liquidity mining the initial token holder may

also result in an outright transfer of funds, their economic purpose is not

to provide capital to the borrower. Staking serves to secure a position of

a network. Yield farming aims at reducing the amount of tokens in circu-

lation. Liquidity mining is perhaps closest to a loan, yet the liquidity

miner receives as counter-performance an interest in the LP, which is

unusual for a lender. We therefore consider it rather unlikely that any of

these other three operations will be qualified as a loan in any jurisdiction.

The key point of the characterization as a loan is its repercussion on

the distribution of risks, especially insolvency risks. Like a loan of fiat

currencies or other movable assets, the loan entails the transfer of cryp-

toassets from the lender to the borrower. The initial token holder is losing

any right she had in the asset and will have only a claim—i.e., an obliga-

tion—against the borrower. In the insolvency of the borrower, the initial

token holder will therefore rank as unsecured and may then be left only

with a part (quota) of the amount he or she has lent or suffer a complete

loss. This shows the importance of distinguishing crypto lending from

staking.

55. See e.g. Blockchain.com User Agreement Sec. 5.1, BLOCKCHAIN.COM, https://ex-

change.blockchain.com/lega/terms (last updated Sept. 7, 2023).

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D. Partnership

Partnerships exist in many jurisdictions. They come in very different

shapes and forms, but generally, are characterized by two or more per-

sons carrying out a business for profit.

As such, they are popular vehi-

cles for the conduct of fund business. It is, however, important to note at

the outset that the term partnership is used to denote a wide variety of

vehicles that differ considerably in private law terms. Broadly, two sepa-

rate distinctions need be drawn between: (1) partnerships that are unreg-

istered and in which partners are jointly and severally liable for all obli-

gations of the partnership and each of the other partners; and (2)

partnerships that are registered, take the form of a separate legal entity

and in which partners may limit their liability.

English law provides a good example of what we will refer to as “gen-

eral partnerships.” Notwithstanding the use of the term “firm” in some

contexts to refer to the partnership as a quasi-separate entity,

56. See e.g. Partnership Act 1890, 63 Vict. c. 39, § 1 (UK); UNIF. P’SHIP ACT (UNIF. L. COMM’N

2013) (demonstrating that in the United States, partnership legislation belongs to the states’

sphere of competence but is harmonized via the Uniform Law Commission (ULC)).

57. The term is used, for example, where a partnership is a party in civil litigation. See O’Neil

v. Philips [1999] UKHL 24, [1999] 1 WLR 1092 (appeal taken from Eng).

Table 3: loan

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Vol. 19 No. 1 2023 79

traditional partnerships under English law

are constructed entirely as

a matter of contract between the partners, who conduct business in their

individual names both as principal for himself, and as an agent of all

other partners. As such, the key private law consequences that follow are

that each partner is jointly and severally liable for all debts and other

obligations of all other partners; and own partnership assets in common

with each other. Comparable unregistered vehicles also exist under a va-

riety of names in civil law jurisdictions.

As a result of these onerous

duties placed on partners in an unregistered partnership, a modified form

of partnership, known as the “limited partnership,” was introduced in

England, under which certain classes of partners, the “limited partner,”

undertakes only to contribute capital or property to the firm, and is not

liable for the debts or obligations of the firm beyond the amount contrib-

uted.

It is, however, critical to note that all limited partnerships in Eng-

land operate only in private law to modify the obligations between part-

ners inter se—between or among themselves. As a matter of form,

although there is a duty to register a limited partnership, limited part-

nerships remain construed in private law entirely as a matter of contract,

where prime importance is placed on the written partnership agreement.

Civilian jurisdictions often also recognize two forms of partnership, one

consisting merely of a nexus of contracts, with unlimited liability of the

partners, and another that is registered and in which the liability of the

partners is typically limited.

Although these partnerships fall short of

having separate legal personalities, the legal provisions for incorporated

bodies often are applied by analogy. Partnerships lend themselves partic-

ularly well as a characterization of the relationship between stakers, as

58. The 1890 Partnership Act placed traditional partnerships on statutory footing after long

development at common law. See generally, Partnership Act 1890, 63 Vict. c. 39, § 1 (UK).

59. See e.g. CODE CIVIL [C. CIV.] [CIVIL CODE] art. 1871-1873 (Fr.) (setting out the legal regime

of the unregistered “société en participation” that applies also to de facto partnerships (“sociétés

créées de fait”)); ALLGEMEINES BÜRGERLICHES GESETZBUCH [ABGB] [CIVIL CODE] § 1175,

https://www.ris.bka.gv.at/eli/jgs/1811/946/P1175/NOR40165222 (Austria); BÜRGERLICHES

GESETZBUCH [BGB] [CIVIL CODE], § 705, https://www.gesetze-im-internet.de/englisch_bgb/ (Ger.)

(stating that if two or more persons pursue a joint (business) activity they form a civil-law part-

nership unless choosing another legal personality; the Austrian civil-law partnership, however,

has no legal capacity and therefore cannot be a subject of its own rights and obligations).

60. See generally Limited Partnerships Act 1907, 9 Edw. 7 c. 24 (Eng.).

61. See e.g. ALLGEMEINES BÜRGERLICHES GESETZBUCH [ABGB] [CIVIL CODE] § 1175,

https://www.ris.bka.gv.at/eli/jgs/1811/946/P1175/NOR40165222 (Austria);

UNTERNEHMENSGESETZBUCH [UGB] [CORP. CODE] §§ 105, 161, https://www.corporate-gover-

nance.at/code/ (Austria); BÜRGERLICHES GESETZBUCH [BGB] [CIVIL CODE], § 705, https://www.ge-

setze-im-internet.de/englisch_bgb/englisch_bgb.html (Ger.); CODE DE COMMERCE [C. COM]

[COMMERCIAL CODE] art. L221-1–L222-1 (Fr.).

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this involves a common pooling of assets. Absent any registration or in-

corporation, crypto holders staking their cryptoassets may at first sight

qualify as partners of a general partnership, where all other crypto hold-

ers contributing assets are partners. As described in the empirical sec-

tion,

all stakers indeed undertake to add and validate new blocks of a

blockchain with the common goal of processing and timestamping trans-

actions or supporting validators by contributing assets to the validation

process in exchange for rewards. The prospect of profit may be seen as

consonant with the broad definition of partnership. Stakers also submit

and agree upon the proof of stake mechanism being a kind of randomized

scheme of distribution of profits.

The characterization as a general part-

nership is particularly relevant when stakers pool together their cryp-

toassets for the purpose of staking, as they clearly partner up (albeit not

knowing each other personally) to profit from the addition of a new block.

However, in some staking agreements, the allocation of profits is random-

ized and upon the intermediary’s discretion, which does not square well

with the traditional concept of general partnerships.

In this case, stak-

ers also jointly bear the risks of, inter alia, slashing.

The partnership characterization also seems to stand independently of

whether stakers act directly or indirectly via an agent, i.e., a validating

node that will act on their behalf. In that sense, delegation is very much

akin to a principal-agent relationship, irrespective of whether it entails

an outright transfer of cryptoassets or a mere transfer of “staking

rights.”

In such use case scenarios, stakers (as principals) remain the

partners. This characterization seemingly also fits rather well liquidity

mining and certain types of crypto lending, namely those operating with

pools of cryptoassets. Both types of DeFi applications generally rely on at

least two people collectively committing their cryptoassets to a common

pool. In the case of liquidity mining, token holders provide liquidity to the

market by transferring their cryptoassets to a common pool often in ex-

change for a token representing their share in the pool. In doing so, they

pursue the common aim of generating returns. The same line of argumen-

tation can be extended to yield farming. Similar concepts may also be

62. See supra Section B.

63. See, e.g., Terms and Conditions, 5.2: Staking Services, BLOCKCHAIN, https://ex-

change.blockchain.com/legal/terms (last updated July 1, 2023).

64. See, e.g., Coinbase User Agreement, supra note 21; Terms of Service, C: On-Chain Staking

Services, D.3: Rewards, KRAKEN, www.kraken.com/legal (last updated June 19, 2023); Allgemeine

Gesch. . .ftsbedingungen [General Terms and Conditions], II A.3: Rewards, Commission, and Pay-

out Interval, BITPANDA, www.bitpanda.com/de/legal/bitpanda-general-terms-conditions (last up-

dated Aug. 23, 2023).

65. See supra Section B.1.b for further details on the different delegation models.

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found in the case of crypto lending. Token holders provide capital to a

third party (a DEX or another operator) to generate returns. Such a third

party may be a smart contract pool offered by a DEX. In this case, one

might assume a partnership between all cryptoassets holders contrib-

uting to such a lending pool. The holders of the cryptoassets also bear a

certain risk, namely that the borrower may not be able to repay the bor-

rowed cryptoassets. There are, however, also a number of counterargu-

ments against the partnership characterization. First, it seems generally

inapposite for mere bilateral relationships in which a crypto holder trans-

fers outright its cryptoassets to another operator, without of common will

to partner up with the recipient for profit. This point is likely to speak

against the partnership characterization of most crypto lending opera-

tions. Second, and even more importantly, the parties to the operations

analyzed here will generally not be ready to assume the liability of the

partners for all debts and obligations of the venture. Typically, crypto-

holders that partner up in a pool generally do not intend to assume any

risk of liability beyond the loss of the asset(s) they committed and trans-

ferred.

A possible exception would be a case where pooled cryptoassets are

used as collateral in leverage transactions for which liabilities might ex-

ceed the total asset value of the pool, but this scenario is very rare. In

general, no staker, yield farmer, liquidity provider or crypto lender wants

to incur any liability for the other persons contributing to the pool or for

the pool itself. Such commercial considerations, however, may be ad-

dressed by reference to the possibility of limiting liability. Given that for-

mal registration is virtually non-existent for the operations analyzed

here, characterizations based on the limited liability of partners seems

unplausible for most cases. Accordingly, it does not seem plausible to

characterize any of the staking operations considered above as carried out

as a partnership.

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E. Trusts

Trusts are an institution with ancient origins in English private law and

are used today for a wide range of purposes: succession, family estates,

company law, and, notably, investment purposes. In the U.S., mutual

funds are organized as trusts under state law, and many investment ve-

hicles in the U.K., e.g., pension funds and “unit trusts,” are structured in

trust-like forms. In many cases, managers of such “investment trusts”

have certain fiduciary duties towards investors, who enjoy certain rights

in the assets of the fund.

However, in line with the purpose of this paper, we eschew references

to national trusts laws, but instead refer primarily to the Hague Trusts

Convention,

as it aims to build bridges between common law and civil

law countries, and to “establish common provisions on the law applicable

to trusts and to deal with the most important issues concerning the recog-

nition of trusts.” As such, we defer to Article 2 of the Hague Trusts Con-

vention, under which a trust refers to the legal relationships created

when assets have been placed under the control of a trustee for the benefit

of a beneficiary or a specified purpose; and which has the following char-

acteristics: (a) the assets constitute a separate fund and are not a part of

66. Rounds, supra note 35, at 483.

67. Signatories include Australia, Canada, China, Cyprus, France, Italy, Liechtenstein, Lux-

embourg, Malta, Monaco, the Netherlands, Panama, San Marino, Switzerland, the United King-

dom of Great Britain and Northern Ireland, and the United States. Convention on the Law Appli-

cable to Trusts and on their Recognition, opened for signature July 1, 1985,

https://www.hcch.net/en/instruments/conventions/status-table/?cid=59 (last visited Sept. 6, 2023).

Table 4: general partnership

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the trustee’s own estate; (b) title to the trust assets stands in the name of

the trustee or in the name of another person on behalf of the trustee; (c)

the trustee has the power and the duty, in respect of which he is account-

able, to manage, employ or dispose of the assets in accordance with the

terms of the trust and the special duties imposed upon him by law.

Taking stock of the above, it should be noted that the word “trust” is

not definitive. Substance should prevail over form: the characteristics

outlined in the Hague Trusts Convention reflect its ambition to fit trust-

like arrangements that might exist outside the common law world.

This

is not to say, however, that stricter criteria as regards the form or sub-

stance of trusts beyond what the Hague Trusts Convention provides may

not be set under national law.

It is also worth noting that the Hague Trusts Convention applies only

to trusts created voluntarily and evidenced in writing.

Such conditions

call for some brief comments. First, the expression “trusts created volun-

tarily” is to be understood in contradistinction with trusts created by the

operation of law or following a judicial decision.

The intent to create a

trust does not, however, necessarily need to be expressed, as it may be

inferred from the relevant factual circumstances.

Second, the require-

ment of a written instrument reflects the fact that most express trusts

are created by a deed, but it also serves evidentiary purposes.

A trust

may well exist, even if it is formed orally or tacitly, under national law.

Moreover, the written form is not restricted to paper. It is commonly ad-

mitted today by the law of various legal systems that electronic docu-

ments fulfill the written form requirement insofar as they are stored du-

rably. Under the arrangements scrutinized in this paper, the evidence of

a trust may therefore be sought after in the general terms and conditions

of platforms, and possibly even in the code and meta-data of the smart

contracts used if these are humanly readable and understandable.

68. Emmanuel Gaillard, Hague Convention on Private International Law: Explanatory Report

by Alfred von Overbeck on the Hague Convention on the Law Applicable to Trusts and on Their

Recognition, 25 INT’L LEGAL MATERIALS 593, 601 (1986).

69. Id. at 598. See for instance the case of the “fiducie” under French law, as set out in CODE

CIVIL [C. CIV.] [CIVIL CODE] art. 2011-2030 (Fr.).

70. Gaillard, supra note 68, at 605.

71. Convention on the Law Applicable to Trusts and on Their Recognition art. 3, July 1, 1985,

23 I.L.M. 1389; on the interpretation of international treaties see see also RICHARD K. GARDINER,

TREATY INTERPRETATION (2d ed. 2017) (describing the interpretation of international treaties).

72. Gaillard, supra note 68, at 601.

73. Id.

74. Id.

75. Id.

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One particular obstacle to the qualification of the arrangements de-

scribed above in Section A as trusts may stem, however, from the difficul-

ties in distinguishing between settlors, trustees, and beneficiaries. In the

case of direct staking, for instance, crypto holders would tend to be set-

tlors, trustees, and beneficiaries at the same time. Even if the roles may

be mingled to some extent,

such an overlap of statuses would in all like-

lihood defeat the trust qualification. The same cannot be said of the stak-

ing-with-an-intermediary model, where the intermediary would play the

role of a trustee. The difficulty arises here, however, from the fact that

crypto holders would qualify as both settlors and beneficiaries. Neverthe-

less, it is undisputed that the intermediary would manage and stake the

cryptoassets for the benefit of the former. The remaining question would

then be whether the cryptoassets of the holders are comingled with the

platform’s own assets. If yes, the qualification of trust must fail. If, how-

ever, the cryptoassets received by the platform are held separately, the

trust qualification might apply. In other words, where staking arrange-

ments involve an intermediary as described in Section A above, the trust

qualification cannot be discarded without further detailed analysis.

Yield farming may prima facie present itself as a complex case since

the platform intermediary would simultaneously be the trustee and the

ultimate beneficiary of the arrangement. Indeed, we must remember that

yield farming arrangements purport to stabilize the value of the cryp-

toassets issued and managed by the platform itself, and this is for its own

benefit. The broad transnational notion of trust enshrined in the Hague

Trusts Convention can nevertheless accommodate such a situation, as its

Article 2(3) expressly states that the fact that the trustee may himself

have rights as a beneficiary is not necessarily inconsistent with the exist-

ence of a trust. Additionally, it is worth recalling that the transnational

notion of trust under the Hague Trusts Convention entails that trustees

may act for a specific purpose.

Thus, even if the yield farming platform

ultimately fends for itself as the main beneficiary of the arrangement, it

still arguably acts in accordance with and for the fulfillment of the specific

purpose of the yield farming arrangement, which is principally the stabi-

lization of its cryptoasset protocol. Moreover, it can be argued that a pro-

tocol with stable tokens also ultimately benefits their holders, who receive

interest payments and have a right to reclaim assets whose value they

helped to stabilize. Therefore, the very nature of yield farming arrange-

ments does not irremediably defeat the trust qualification. Also, yield

76. Id.

77. Convention on the Law Applicable to Trusts and on Their Recognition art. 2, July 1, 1985,

23 I.L.M. 1389.

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farming arrangements imply that cryptoassets are transferred outright.

Yet, as for the case of staking-with-an-intermediary arrangements, the

crucial question that a case-by-case analysis must answer is whether the

cryptoassets received by the platform are comingled or not with its own

assets.

A similar line of reasoning applies to liquidity mining, where similar

conclusions can be drawn. In the case of crypto lending, however, a spec-

ificity should be underlined: As described in Section A above, initial hold-

ers’ cryptoassets are generally not segregated from the platform’s. As al-

ready mentioned, such characteristics would defeat the trust

qualification, which leads to the conclusion that crypto lending arrange-

ments are likely to fail to qualify as trusts.

The consequence of a trust characterization for risk-bearing is the fol-

lowing: The customer (staker) as the settlor of the trust completely trans-

fers any legal rights in the assets to the trustee who is, nevertheless, con-

strained by the trust to exercise legal powers in accordance with the trust.

Critically, if the trustee goes bankrupt, the assets provided to the trust

will not form part of his insolvency estate, as the beneficiaries will gener-

ally be able to require that they be removed from the insolvent trustee’s

estate and transferred to a new trustee. Thus, the particular attraction

to a trust characterization in any insolvency is because it tends to make

the assets at least seem “insolvency-proof.”

Table 5: trusts

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F. Summary

All things considered, there are some legal categories that lend them-

selves better than others for the characterization of the operations ana-

lyzed here. The crypto-market is, however, rapidly evolving, and the char-

acteristics of the operations may change accordingly. Also, legal doctrine

and case law vary significantly around the globe. Therefore, we refrain

from specifying a definite legal category for each operation, but merely

suggest various options which might be open for discussion. Rather, we

focus on the distribution of risks that will result from the different char-

acterizations, assuming the underlying transaction is valid and the par-

ties have achieved their intentions regarding the basis of the transfer un-

der the relevant applicable laws.

If the characterization as a secured transaction creating a limited right

in rem—as opposed to an outright transfer—is adopted, the customer who

engages in such an operation remains the owner of the cryptoassets. In

case of insolvency of the intermediary, he could thus ask for the return of

his assets or their transfer to another intermediary. In contrast, if a

transaction is characterized as a loan or as an irregular deposit, then the

customer transfers property to the intermediary. Should the latter go

bankrupt, he is merely a creditor who must register his claim in the in-

solvency proceedings. Where a transaction is seen as a (general) partner-

ship, the assets would be jointly held between the intermediary and all

participating customers. At the same time, however, all parties involved

would assume full liability for the debt of the enterprise. Finally, in the

case of a trust characterization, the customer would no longer be the legal

owner of the assets that are now held by the trust. At the same time, he

would generally not run the risk of insolvency of the trustee.

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Drawing these strands together, two broad conclusions may be drawn.

First, the protection of the customer depends on the transaction he was

engaged in. If this transaction amounts to a transfer of assets, his risk in

the event of insolvency of the intermediary is likely to be much higher.

Second, the precise risk cannot be predicted because it is subject to the

legal characterization of the transaction by a court. The same operation

may be viewed very differently, with the consequence of diverging risk

profiles. For example, even if the lex fori concursus concludes that the

issue in dispute is, say, a loan contract, it will still be the law to which the

conflicts rule points that ultimately determines whether the parties have

concluded a valid contract of loan. In this sense, a conclusive determina-

tion of what the parties intended to achieve in law can only be made once

the applicable law is known.

Summary Table: probability scale 0 = min; 4 = max.

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IV. THE LAW APPLICABLE TO CRYPTOASSET

TRANSACTIONS

The traditional approach of the “conflict of laws,” sometimes known as

“private international law,”

in determining the applicable law is to look

for the “most significant” or “closest” connection between the facts and a

particular legal system. Possible connecting factors include, for example:

for property matters, the location of the property at the time of the dis-

puted acquisition; for tort, the place where the damage was sustained; or

in contract, the place of the characteristic performance of the contract.

Different connecting factors are used thus for different substantive areas

of law,

which makes it necessary to characterize—again—the opera-

tions analyzed, this time, however, not for substantive law, but for con-

flict-of-laws purposes.

Even if this is done, finding a connecting factor is particularly difficult

not only for staking transactions, but for any application of Distributed

Ledger Technology (“DLT”) as originally conceived of as a decentralized

network based purely on peer-to-peer trust.

Such phenomena are delib-

erately designed to avoid any centralization of power or trust in a partic-

ular participant; as a result, they have no significant connection with any

one specific jurisdiction through any one “significant” actor. Accordingly,

the usual method of recourse to auxiliary connecting factors—such as the

jurisdiction in which the majority of the servers hosting nodes of the re-

spective blockchain are located, the core team of software developers

maintaining the protocol, or the location of the parties involved in a block-

chain transaction—does not always assist. As these are often equally dif-

ficult to localize in a single jurisdiction or have only limited relevance to

the legal issue in question, they will mostly be a somewhat contrived or

arbitrary choice.

These problems are compounded in the Decentralized Finance (“DeFi”)

environment, where actors mostly are—and wish to remain—anonymous.

Notwithstanding the fact that it is possible in some jurisdictions for

78. See COLLINS, supra note 10, at 1-088 et seq.; PAUL TORREMANS ET AL., CHESHIRE, NORTH

& FAWCETT: PRIVATE INTERNATIONAL LAW 15–16 (2017).

79. For an overview, see generally Michael Wilderspin, Contractual Obligations, in

ENCYCLOPEDIA OF PRIVATE INTERNATIONAL LAW supra note 11, at 473; Thomas Kadner Graziano,

Torts, in ENCYCLOPEDIA OF PRIVATE INTERNATIONAL LAW, supra note 11, at 1710; Louis d’Avout,

Property and Propriety Rights, in ENCYCLOPEDIA OF PRIVATE INTERNATIONAL LAW, supra note 11,

at 1429.

80. Matthias Lehmann, National Blockchain Laws as a Threat to Capital Markets Integration,

26 UNIF. L. REV. 148, 168 (2021); Florence Guillaume, Aspects of Private International Law Related

to Blockchain Transactions, in BLOCKCHAINS, SMART CONTRACTS, DECENTRALISED AUTONOMOUS

ORGANISATIONS AND THE LAW (Daniel Kraus et al. eds., 2019).

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Decentralized Autonomous Organizations (“DAOs”) to register or acquire

corporate personality under dedicated legal provisions, this remains a

rarely utilized option. Very few DeFi platforms are hosted or operated by

an entity with legal personality; instead, the typical DeFi enterprise op-

erates through a suite of smart contracts stored on a blockchain. Such

enterprises are, thus, neither legal persons nor amenable to any localiza-

tion exercise. Accordingly, it will often be near impossible to find any sat-

isfactory connecting factor to link a staking transaction to a particular

legal system. Nevertheless, in the absence of a lex cryptographica or other

autonomous legal system, the reality is that disputes will be brought be-

fore national courts, which will apply the existing law of a recognized le-

gal jurisdiction. As such, notwithstanding the difficulties surrounding the

selection of an appropriate connecting factor, a choice must be made. Con-

sequently, in this section, we consider the conflict-of-laws rules applicable

to the transactions and legal relationships outlined in Section C above.

A. Contracts

According to the characterizations outlined in Section C, the vast major-

ity of crypto operations considered here fall under the broad umbrella of

contract. For contracts, the general rule for the applicable law reflects the

near-universally accepted principle of party autonomy:

contractual mat-

ters are governed by the law chosen by the parties. In the absence of a

choice of law or the choice is not clear, different approaches are taken.

In the U.S., many states apply a multi-factorial test, which utilizes a

variety of connecting factors. These include the domicile of either of the

contracting parties, the place where the contract is concluded, or the place

of performance of the contractual obligations.

In the EU and the UK,

Article 4 of the Rome I Regulation provides for the applicable law in the

absence of a choice. If the contract does not fall within the special provi-

sions for specified types of contract in Article 4(1), or aspects of the con-

tract would fall within several of those special provisions, Article 4(2) pro-

vides that the law of the place where the party rendering the

“characteristic performance”

of the contract—usually the non-monetary

81. SYMEON SYMEONIDES, CODIFYING CHOICE OF LAW AROUND THE WORLD: AN INTERNATIONAL

COMPARATIVE ANALYSIS 113–15 (2017); GILLES CUNIBERTI, CONFLICT OF LAWS: A COMPARATIVE

APPROACH 390 (2d ed. 2022).

82. RESTATEMENT (SECOND) ON THE CONFLICT OF LAWS § 188(2) (AM. L. INST. 1971).

83. The UK has retained the application of the Rome I Regulation after Brexit. See The Law

Applicable to Contractual Obligations and Noncontractual Obligations 2018, SI 2018/0000, art. 2

(UK).

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obligation—has her habitual residence will apply.

Under Article 4(3),

however, these provisions give way if it is clear from the all circumstances

of the case that there is another country with which the contract is clearly

“manifestly more closely connected” in favor of that country. Article 4(4)

is the final fallback provision, which provides, essentially, that if all else

fails, the law of the country with the “closest connection” with the contract

applies.

Given that it remains rare for DeFi agreements to contain governing

law clauses, the following analyses focus on the applicable law in the ab-

sence of a choice by the parties. In this regard, the broader difficulty ex-

plicated above of identifying and then localizing actors in the DeFi envi-

ronment is present in varying degrees, depending on whether the

relevant choice of law rule refers to the customer, or his intermediary

and/or DeFi construct. Hence, it is worth noting that characterization as

either a secured transaction, loan, or a deposit has consequences, not only

for the substantive question of who bears the risk of the intermediary’s

insolvency, but also for the question of private international law as to who

the relevant party is when determining the applicable law.

1. Secured Transactions

Very few jurisdictions have specific conflict-of-laws rules for secured

transactions in cryptoassets. One example is Switzerland, which submits

pledge agreements to the law chosen by the parties or, in the absence of

a choice, to the law of the state in which the pledgee has her habitual

residence.

This rule, which traditionally applied to negotiable instru-

ments, was recently extended to “similar right”, with the intention of plac-

ing digital tokens on an equal footing with their paper equivalents.

Whilst the Swiss rule remains an outlier, it is, in principle, sound. Theo-

retical and practical considerations suggest that other legislators may fol-

low suit.

The Swiss provision, however, also aptly serves as an illustration of

why it is important to distinguish contractual and property matters in

84. Art 4(2) Regulation (EU) 593/2008, of the European Parliament and of the Council of June

17, 2008 on the Law Applicable to Contractual Obligations (Rome I), 2008 O.J. (L 177). For an

overview, see SYMEONIDES, supra note 81, at 178–81.

85. Bundesgesetz über das Internationale Privatrecht [Swiss Federal Private International

Law Act] SR 291, art. 105, para. 2 (Switz.).

86. See FF 2020 223, 234 (2019).

87. See generally Matthias Haentjens & Matthias Lehman, The Law Governing Secured

Transactions in Digital Assets, in BLOCKCHAIN AND PRIVATE INTERNATIONAL LAW 456-478(Andrea

Bonomi et al. eds., 2023).

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private international law. Given that the Swiss choice of law provision

applies broadly to secured transactions, it might be thought to apply to

property disputes relating to the underlying security itself. However, it is

important to note that the provision remains purely contractual: it ex-

pressly provides that the choice of law made according to that provision

cannot be asserted against third parties;

and where the underlying

thing pledged is a claim against a debtor, the only law that may be as-

serted against the debtor is the law applicable to the underlying claim

itself.

This means that the proprietary effects of the pledge agreement—

e.g., where the validity of the pledge is to be determined relative to third-

party claims to the underlying object of the pledge, the question of

whether the security interest was validly constituted, or the question of

when the property passed—cannot be determined by the law as agreed

between the pledgor and pledgee pursuant to the Swiss rule.

Thus, the choice of law is valid only as between the pledgor and pledgee

in disputes regarding the contractual aspects of their agreement, e.g.,

whether there was a default on the secured obligation and the intention

that property rights should not pass with possession or control unless

there has been a default.

2. Loan

Determining the law applicable to crypto-loan agreements in the absence

of a choice of law has a striking precedent in the U.S. Here, courts have

faced difficulties in applying the multifactorial test to loan agreements

concluded and performed online,

and it seems likely that similar diffi-

culties will arise in applying the test to crypto loans. Nevertheless, there

is some indication of how the courts may decide the issue as some U.S.

courts have favored the law of the lender, particularly for larger transac-

tions.

In the EU, where the parties have not indicated a choice of law, the

law of the place where the lender has his habitual residence will be

88. Bundesgesetz über das Internationale Privatrecht [Swiss Federal Private International

Law Act] art. 105, para. 1 (Switz.).

89. Bundesgesetz über das Internationale Privatrecht [Swiss Federal Private International

Law Act] art. 105, para. 3 (Switz.).

90. See supra Section B.4.

91. See, e.g., Gainer Bank, N.A. v. Jenkins, 672 N.E.2d 317, 319 (Ill. App. Ct. 1996); Tuition

Plan, Inc. v. Zicari, 70 Misc.2d 918, 922 (Sup. Ct. N.Y. Cnty. 1972); Bowmer v. Dettelbach, 672

N.E.2d 1081, 1085-86 (Ohio Ct. App. 1996); Pac. Gamble Robinson Co. v. Lapp, 622 P.2d 850, 855-

56 (Wash. 1980). However, a part of the literature assumes the location of the debtor to be decisive

when determining the applicable law. But see HAY, supra note 12, at 1163.

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applied under Article 4(2) of the Rome I Regulation. Under the Court of

Justice of the European Union (“CJEU”) case law, it is the lender, not the

borrower, who renders the characteristic performance of the contract.

This, however, is without prejudice to Article 6, which provides that

where one party to the contract is a consumer, the law of the place of the

consumer’s habitual residence applies.

Accordingly, if the customer is

characterized as the lender, or is treated as a consumer, identifying the

law applicable to a crypto lending agreement under the EU rules might

be relatively simpler than where it is the DeFi staking intermediary who

falls to be characterized as the lender.

Finally, it is important to note that crypto lending activities may well

be structured as chains of loan contracts, which must be considered sep-

arately in any conflict-of-laws analysis. For example, the contract by

which the customer transfers his cryptoassets to the crypto lending plat-

form’s pool is very likely to be a separate one from that entered into by

the crypto lending platform when lending out the assets in its pool. These

contracts will be governed by their own laws, which will not necessarily

be the same.

3. Deposit

Characterization of a staking operation as taking effect via a deposit

agreement, on the other hand, yields a contrary result. Here, the charac-

teristic performance of the contract centers around the receipt of the asset

deposited, which falls upon the person receiving the asset, i.e., the custo-

dian. Thus, it is this person who provides the characteristic performance

and to whose habitual residence the contract is most closely connected.

This result is sensible for yield farming, and possibly also for crypto lend-

ing, but is not easy to defend in the case of staking.

Given that this re-

mains the staking intermediary, identifying the applicable law will likely

face all the difficulties of identifying and localizing an actor in the DeFi

space.

92. Case C-249/16, Kareda v. Benkö, ECLI:EU:C:2017:472, ¶ 41 (June 15, 2017); see also Mat-

thias Lehmann, Bonds and Loans, in ENCYCLOPEDIA OF PRIVATE INTERNATIONAL LAW, supra note

11, at 215, 217.

93. Art 6 Regulation (EU) 593/2008, of the European Parliament and of the Council of 17 June

2008 on the Law Applicable to Contractual Obligations (Rome I), 2008 O.J. (L 177).

94. See supra Section C.3.

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B. Partnerships

Where it is asserted that a staking operation has been carried out as a

partnership, the first, and only real, question in the insolvency context

will be whether a partnership has been validly formed or entered into.

There are, however, two main prevailing approaches to determining the

law applicable to the question of whether a partnership, corporation, or

other entity has been validly formed (or, conversely, has been validly dis-

solved). Usually, the questions with which an insolvency practitioner will

be concerned in these circumstances—i.e., the legal consequences as to

the intended property rights in partnership assets, and any limitations of

liability—are governed by the same law. The first approach looks to the

place where the entity was founded (or purportedly founded), which is

known in some jurisdictions as the “incorporation theory.”

The second

approach looks to the place where the entity has its effective place of man-

agement, which is sometimes known as the “seat theory.” Both theories,

however, are difficult to apply in the staking environment.

For the incorporation theory, it will not generally be possible to localize

the foundational act — whatever may be said — to create the entity used

for staking purposes. Save for those DAOs and other associations that

have opted for incorporation in those jurisdictions where this is a possi-

bility,

the vast majority of DeFi platforms do not incorporate or register

as a legal entity in any formally recognized sense. Rather, the platform

“entity” comes into existence with some “foundational” act that takes

place under online and decentralized circumstances, such as the launch

of a blockchain or Initial Coin Offering of the native cryptoassets of the

newly founded platform. Insofar as the foundational act remains rooted

in contract—i.e., for any partnership that takes legal form entirely as a

nexus of contracts—it may be possible to apply the conflicts of law rules

for contract. Such analysis will likely lead to the application of the law of

the state with which the general partnership is most significantly con-

nected.

Seat theory faces different considerations. Although DeFi entities gen-

erally have no centralized method of governance, but instead rely on di-

rect voting by participants holding relevant cryptoassets, there are nev-

ertheless several candidates for the place of an effective seat of

95. From a European perspective, see STEPHAN RAMMELOO, CORPORATIONS IN PRIVATE

INTERNATIONAL LAW: A EUROPEAN PERSPECTIVE 95–96 (2006). from a U.S. perspective, see HAY,

supra note 12, at 1339–44 (2018); Marc-Philippe & Chris Thomale, Companies, in ENCYCLOPEDIA

OF PRIVATE INTERNATIONAL LAW, supra note 11, at 405–06.

96. For example, see VT. STAT. ANN. tit. 11, § 4173 (2018); WYO. STAT. ANN. §§ 17-31-101–116

(2021).

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management. First, management could be localized by reference to the

decentralized method of governance itself, such that the effective place of

management is the place where the majority of the voting participants

have their habitual residence or registered office. A second approach

could be to look to the “core team” of software developers who, as approved

by the voting participants, are responsible for programming and main-

taining the underlying algorithms and front-end aspects of the platform,

such as the website. As noted above, the common difficulty, however, re-

mains that although these persons, particularly the core team, can be

identified to some extent, in many cases their physical locations are dis-

persed across the world in a vast range of jurisdictions, or their place of

residence is simply unknown. This does not change even if the focus shifts

from the persons to their activities, such as where the core team might

coordinate maintenance of the algorithms because regular and consistent

use of specific premises is highly unlikely for the vast majority of DeFi

platforms.

In sum, the characterization of staking and similar operations being

carried out as partnership businesses pose difficulty not only for charac-

terization itself but also for private international law. This is somewhat

ironic, given the extent to which these operations, considered from the

commercial perspective of investment funds, are amenable to the part-

nership analysis. It may well be, therefore, that modifications to the rules

on registration may be forthcoming to accommodate some forms of stak-

ing activity.

C. Trusts

Specific rules of private international law for trusts are comparatively

rare. Perhaps unsurprisingly, they are practically unknown in those, typ-

ically civil law, jurisdictions where the trust institution is neither known

nor recognized.

Courts in these jurisdictions tend to look to the context

in which the trust has been used, and then apply the most appropriate

rule in the circumstances, e.g., those for inheritance, family, debt, or prop-

erty law.

Even in common law jurisdictions or where the Hague Trusts Conven-

tion applies, the applicable rules are difficult to state with complete cer-

tainty, given the complexity of the trust institution and the vast range of

97. Anatol Dutta, Trust, in ENCYCLOPEDIA OF PRIVATE INTERNATIONAL LAW, supra note 11, at

1753.

98. Id. at 1757.

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legal issues that may arise in a trust dispute.

As with the partnership’s

analysis, however, the present insolvency context calls only for a broad

examination of the law applicable to the validity, construction, effects,

and administration of a trust. In this respect, the Hague Convention pro-

vides two rules. The primary rule is that these matters are governed by

the law chosen by the settlor, express or implied, in the instrument cre-

ating or writing evidencing the trust, interpreted if necessary in the cir-

cumstances of the case.

100

In the absence of such choice, the law of the

place with which the trust has its closest connection will be applied; with

particular regard to be had to: (a) the place of administration of the trust

designated by the settlor,

101

(b) the situs of the assets of the trust,

102

(c)

the place of residence or business of the trustee,

103

(d) the objects of the

trust and the places where they are to be fulfilled.

104

Given the rarity of express choices of law, the question of whether a

staking operation gave rise to a trust will be determined by a law either

impliedly chosen or the law with which the alleged trust has its closest

connection. Hence, it is worth noting several differences and similarities

with contracts and partnerships.

First, an implied choice of law by reference to the instrument creating

or evidencing the trust may play a greater role than for outright contracts.

Depending on the purported written instrument evidencing the alleged

trust and the circumstances in which the trust was created, this may be

of significant assistance in determining the law governing the trust.

Second, similar challenges of identifying and locating the parties seen

in the contexts of contracts and partnerships arise in the trust context:

the factors prescribed by the Hague Convention tend to focus on the in-

termediary or DeFi construct as the trustee and/or person administering

99. These include, for example, the capacity of all parties involved, the validity of the act trans-

ferring the trust assets, the question of resulting and constructive trusts.

100. See Hague Convention on the Law Applicable to Trusts and on Their Recognition art. 6,

July 1, 1985, 1664 U.N.T.S 331; RESTATEMENT (SECOND) OF CONFLICT OF LAWS §§ 269(b)(i), 270(a),

271(a), 272(a) (AM. L. INST. 1971); Loi portant le Code de droit international privé [Private Inter-

national Law Act], M.B., July 27, 2004, art. 124, § 1(1), https://www.ejus-

tice.just.fgov.be/cgi_loi/change_lg.pl?language=fr&la=F&cn=2004071631&table_name=loi.

101. Hague Convention on the Law Applicable to Trusts and on Their Recognition art. 7(2)(a),

July 1, 1985, 1664 U.N.T.S 331.

102. From a U.S. perspective, see HAY, supra note 12, at 1275, 1278; Hague Convention on the

Law Applicable to Trusts and on Their Recognition art. 7(2)(b), July 1, 1985, 1664 U.N.T.S 331.

103. Hague Convention on the Law Applicable to Trusts and on Their Recognition art. 7(2)(c),

July 1, 1985, 1664 U.N.T.S 331.

104. Hague Convention on the Law Applicable to Trusts and on Their Recognition art. 7(2)(d),

July 1, 1985, 1664 U.N.T.S 331.

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the trust. Identifying these persons and their location, or the location

where they carry out “trust business” will therefore be problematic.

Third, recourse to the situs of the assets and the objects of the trust

raises further considerations that are specific to the trust context. Situs

will be treated in greater depth below in the context of the law applicable

to proprietary issues; for present purposes, it suffices to state that this

connecting factor remains problematic. The objects of a trust, on the other

hand, is interesting in the present context; not only because it is a factor

to be considered only in the trust context, but also because it provides a

direct link between connecting factors for the purpose of private interna-

tional law, and the ultimate objective of the parties to the transaction.

The object of a purported “staking trust” can be analyzed in various ways,

but the best analysis probably is that the broad objective is to generate

profits, which is carried out by the trustee applying the staked assets to

a particular staking operation in accordance with the terms of the trust.

Accordingly, some connecting factors relating to the object of the trust are

more problematic than others. The blockchain itself, or the location of

notes, faces the broad issues set out above, whereas localizing the broad

objective of profits may well find some common ground, however with the

familiar issue of localizing financial loss.

Finally, in the present broader context of insolvency rights, it remains

important to stress that the Hague Convention does not prevent the ap-

plication of mandatory provisions of the law designated by the conflict of

law rules of the forum relating to, inter alia, the transfer of title to prop-

erty and security interests in property;

105

the protection of creditors in

matters of insolvency;

106

and the protection of third parties acting in good

faith.

107

The latter is particularly important to note, given that the tradi-

tional approach in English private law is that a beneficiary’s rights under

a trust are not effective against a third party bona fide purchaser for the

value of the trust asset without notice of the beneficiary’s interest.

In sum, the overall position under the Hague Convention remains that,

once the validity or invalidity of an alleged trust has been established by

the relevant governing law, identified using the conflict of laws rules of

the Convention; questions of property rights in the trust assets—includ-

ing claims by third parties and creditors in insolvency—will be governed

105. Hague Convention on the Law Applicable to Trusts and on Their Recognition art. 15(d),

July 1, 1985, 1664 U.N.T.S 331.

106. Hague Convention on the Law Applicable to Trusts and on Their Recognition art. 15(2),

July 1, 1985, 1664 U.N.T.S 331.

107. Hague Convention on the Law Applicable to Trusts and on Their Recognition art. 15(f),

July 1, 1985, 1664 U.N.T.S 331.

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by the mandatory provisions of the law that applies to the specific matter

arising under the conflicts rule of the forum.

D. Proprietary Issues

Determining the law applicable to cryptoassets’ proprietary issues is ar-

guably the most difficult issue of conflict of laws.

108

However, this ques-

tion is of prime importance in the context of the customer rights of those

engaged in staking or a similar operation with an intermediary in the

latter’s insolvency.

As noted above, when determining the legal consequences that flow

from any transfer of assets from one person to another, the first question

is to ascertain the basis for the transfer itself. In the insolvency context,

however, this is only the first step; the key question will ultimately be

whether or not property rights have passed from the transferor to the

(now insolvent) transferee or have otherwise been validly created be-

tween the parties. As illustrated above, concerns about security interest

creation are not a simple matter of the parties’ intentions but also depend

on the validity of the agreement and any applicable mandatory require-

ments.

First, even in the case where parties intend that the transferee be-

comes the owner of the asset being transferred (i.e., a sales contract), dif-

ferent jurisdictions take different approaches as to when the buyer be-

comes the owner of the asset transferred. This takes on prime importance

in cases where either party becomes insolvent before the transaction has

been properly completed. Where the dispute has cross-border dimensions

such that the rules of private international law are engaged, the general

rule, consistent across jurisdictions, that remains is that property mat-

ters are governed by the lex situs, i.e., the law of the place where the object

of the property rights is situated at the time of the relevant acquisition.

Thus, if two citizens of State A enter into a contract governed by Law A

for the sale of a horse situated in State X, Law A will govern the contrac-

tual aspects of the contract; but the question of when the buyer becomes

the owner of the horse will be determined by the law of State X. This

question is of prime importance as it determines what rights both parties

have should one become insolvent before the price has been paid and/or

property has been passed.

108. See, e.g., Andrew Dickinson, Cryptocurrencies and the Conflict of Laws, in

CRYPTOCURRENCIES IN PUBLIC AND PRIVATE LAW para. 5.93–5.94 (David Fox & Sarah Green eds.,

2019); see generally Michael Ng, Choice of Law for Property Issues Regarding Bitcoin Under Eng-

lish Law, 15 J. PRIV. INT’L L. 315–38 (2019).

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Second, different jurisdictions take different approaches to determin-

ing property rights where there has been a transfer of the asset in fact,

but the underlying basis for the transfer is held to be invalid under its

applicable law. Assume, for example, that pursuant to the contract for the

sale of a horse governed by Law B the seller delivered the horse to the

possession of the buyer, which is sufficient to transfer property, and the

buyer has paid the price. If, however, that contract for sale is held, under

Law B, to be for some reason invalid—say on formal grounds of capacity—

the seller’s ownership of the horse does not change, and he may therefore

bring a claim as owner for recovery of the horse as against the buyer. By

contrast, Law C may provide that, in the same circumstances, property

in the horse remains in the buyer, and the seller only has a personal claim

against the buyer for unjustified enrichment.

109

Again, the question of

what the transferor has will be of prime importance in an insolvency;

should any of the transactions considered above be held invalid under the

applicable governing law, the question of what rights the parties have in

the assets undeniably in control of the intermediary will fall to be deter-

mined by the lex situs.

Third, if, according to the proper law of the relevant transaction iden-

tified in Section D(1-4), the legal basis underpinning the transfer is inva-

lid—i.e., the contract is invalid, or a partnership or trust has not been

validly constituted—the ultimate question of who has proprietary rights

in relation to which assets will be determined by the lex situs. As noted,

the general rule of private international law, consistent across jurisdic-

tions, is that such proprietary issues are governed by the lex situs. These

rules, however, are extremely problematic for cryptoassets for two main

reasons. First, such assets are essentially intangible data objects without

any physical situation at all; as such, they cannot sensibly be said to be

“situated” anywhere in any meaningful sense for the purpose of the rules

based on situs. This is not inherently problematic: the general approach

of private international law for such intangible assets lacking a physical

existence, notably claims and intermediated securities, is to ascribe to

them an artificial location to which the situs rules can then be applied.

Thus, a debt is often held for the purpose of conflict of laws to be located

at the place where it can be enforced; intermediated securities held with

an intermediary are located at the place of the relevant intermediary ac-

count.

110

A closer analysis of the fictitious “situs” of such intangible

109. Such is the case under German property law. See Jürgen Oechsler, in Münchener Kom-

mentar zum Bürgerlichen Gesetzbuch § 929, para 5 (Reinhard Gaier ed., 9th ed., 2023).

110. See Hague Convention on the Law Applicable to Certain Rights in Respect of Securities

Held with an Intermediary art. 4, July 5, 2006, T.I.A.S. 17-401, 46 I.L.M. 649.

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objects reveals that all that is really being done is using an alternate con-

necting factor. As such, it may well be possible to localize a cryptoasset

by reference to a variety of other factors, such as the location of the pri-

vate key, the blockchain, or the habitual residence of the programmer of

the smart contract or blockchain protocol.

111

This leads to the second reason why cryptoassets pose such a challenge

to the traditional approach of private international law to property issues:

none of these alternative connecting factors are particularly compelling.

Each provides only a very tenuous connection to the object, may point to

several places at a time, and may involve a choice of law that has nothing

to do with the parties or the issues in the dispute. This is, furthermore,

hardly surprising: as noted at the outset of Section D, the ideology pur-

sued by the original decentralized ledger and cryptoasset results in a

thing that exists, quite literally, not just “nowhere” but “nowhere and eve-

rywhere at once.” In these circumstances, isolating one connecting factor

over another results in a choice that can only feel unsatisfactorily arbi-

trary.

The situation is further complicated by the various degrees of central-

ization and intermediation which, although running counter to this orig-

inal ideal of decentralized trust, tends to be by far the norm in commercial

practice. Hence, generally the greater the degree of centralization or in-

termediation, the easier it is to justify a choice of connecting factor based

on the entities that facilitate centralization and/or intermediation. Thus,

for networks run by a central operator who, furthermore, grants or denies

access to the participants permitted to join the network and trade in its

cryptoassets, such central operator might be said to be able to choose the

law applicable to the network as a whole.

112

In the absence of such a

choice, the central operator itself can be taken as the relevant connecting

factor, giving rise to possibilities such as its registered office or habitual

residence. Similarly, for cryptoassets that have an issuer or are held with

an intermediary, such as a custodian or exchange, it may be sufficient to

apply the law chosen by the issuer or in the intermediary’s terms and

conditions.

113

111. FIN. MKT. L. COMM., DISTRIBUTED LEDGER TECHNOLOGY AND GOVERNING LAW: ISSUES OF

LEGAL UNCERTAINTY (2018).

112. For example, see ASX SETTLEMENT CORP., CHESS: CLEARING HOUSE ELECTRONIC

SUBREGISTER SYSTEM (2011).

113. See UNIDROIT, Principles on Digital Assets and Private Law, Study LXXXII – W.G.8 –

Doc. 2, Principles 5(1)(c), (6) (Mar. 9, 2023).

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E. The Applicable Law to Torts

For the sake of completeness, we will also address the question of the law

applicable to torts committed regarding staked cryptos, like “rug pulls” or

similar delicts. It is possible for the parties to a tort claim to choose the

applicable law. However, such a choice is much more limited than a choice

made in a contract.

114

Typically, a distinction in torts is made between a

choice made prior to the occurrence of the event giving rise to the claim

and a choice made after this event. The latter is largely uncontroversial

and permissible without restriction. By contrast, a choice of law prior to

the arising of the claim resulting from a tort is only possible under certain

conditions or is otherwise completely excluded.

115

However, since the par-

ties will often not be able to agree on a law to be chosen in the event of a

dispute, the choice of law for torts is only of very minor importance. In the

absence of a choice of law, the determination of the applicable law for a

tort claim is typically linked to a pre-existing relationship,

116

to the com-

mon domicile of the parties of the tort,

117

or the place of the tort—the lex

loci delicti.

118

This comprises both the place where the tort was committed

and the place where the damage resulting from the tort occurred.

Due to the large number of tort claims potentially arising in connection

with DeFi, it is not possible to address all potential situations on a case-

by-case basis. Instead, the following is intended to describe in abstract

terms the connecting factors potentially relevant in these cases, as well

as the difficulties in determining those factors. In doing so, it is necessary

to consider, as a starting point, the typical factual circumstances in which

tort claims may arise in connection with DeFi. Torts involving cryp-

toassets typically have at least three factual reference points that can be

used to determine the applicable law: each of the two parties to the tort,

and the smart contract into which the cryptoassets at issue are intro-

duced. These points of reference provide a multitude of connecting factors,

which in turn raise the question of localization. If the traditional connect-

ing factors for non-contractual obligations arising in connection with DeFi

described above are taken as a basis, identifying the applicable law is

straightforward insofar as a legal relationship, like a staking agreement

114. Graziano, supra note 79, at 1710–11; CUNIBERTI, supra note 81, at 436; SYMEONIDES, supra

note 81, at 40–42, 51–53.

115. SYMEON SYMEONIDES, CODIFYING CHOICE OF LAW AROUND THE WORLD: AN INTERNATIONAL

COMPARATIVE ANALYSIS 99–102 (2017).

116. Graziano, supra note 79, at 1712–13; see HAY, supra note 12, at 806–07.

117. Graziano, supra note 79, at 1712–13; see HAY, supra note 12, at 794–800, 801–04.

118. Graziano, supra note 79, at 1710–11; CUNIBERTI, supra note 81, at 436; SYMEONIDES, supra

note 81, at 40–42, 51–53.

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or an agreement on the deposit of cryptoassets, exists to which the deter-

mination of the applicable law can be linked. In these cases, the law ap-

plicable to this legal relationship is also decisive for the tort.

The place where the tort was committed may be helpful where it can

actually be identified (e.g., where a hacker has intruded into a DeFi con-

struct from his home). However, in other cases, it will be impossible to

determine. The question of determining the place where the damage oc-

curred is even trickier. From a legal point of view, it is already question-

able how precisely this place is to be determined. For instance, one could

refer to the location of the cryptoassets, the location of one of the parties,

the location of an intermediary, or the location of the smart contracts by

means of which the DeFi construct is realized. From a factual point of

view, these places often cannot be located. For example, what criteria

should be used to determine the location of cryptoassets recorded on a

decentralized blockchain? How can an intermediary be geographically lo-

cated if it has no legal personality and no physical presence? Insofar as

the place where the damage occurred depends on the DeFi location, it has

already been shown that this is possible in some cases under certain con-

ditions, but as a rule, one is confronted with almost insurmountable hur-

dles based on DeFi functionality.

119

Realistically, using the connecting factors described above, a court will

often not be in a position to determine the applicable law to a tort in the

DeFi context. Instead, a court could apply the law of the forum. However,

this would incentivize claimants to shop for the forum that has the law

most favorable to their claim. A preferable approach would be to follow

the law at the place of domicile of the victim. This will result in the appli-

cation of the same law regardless of where a claim is brought. Such an

approach can be justified under the traditional prevailing European ap-

proach where the victim’s domicile is the “place where the damage oc-

curs.” There are some cases in which such a view has been accepted by

the European Court of Justice, specifically with regard to torts committed

online.

120

This could provide the basis for a larger acceptance in other

cases as well.

121

The advantage of this view is that it protects the victim

of rug pulls and other scams.

119. See supra Section D.

120. Case C-375/13, Kolassa v. Barclays Bank, ECLI:EU:C:2015:37, para 55 (Jan. 28, 2015);

Case C-509/09, eDate Advert. GmbH v. X v. MGN Ltd., 2011 E.C.R. I-10269, paras 49 and 52.

121. See Matthias Lehmann & Emeric Prévost, Table Ronde sur la Methode de la Localisation

dans L’espace Digital [Roundtable on the Method of Localisation in Digital Space], 2022 INT’L BUS.

L.J. 725, 736 (2022).

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The determination of the applicable law for torts is therefore fraught

with considerable difficulties in legal and factual terms, insofar as these

cannot be linked to an existing contractual relationship. In view of the

limited admissibility of a choice of law, such a choice also offers an ade-

quate possibility for a legally secure determination of the applicable law

only in the rarest of cases. Unless the law cannot be determined other-

wise, the law of the victim’s domicile should be applied.

CONCLUSION

This contribution has sought to explore the insolvency risks customers

run when using cryptoassets to generate passive income through an in-

termediary. As has been demonstrated, there is considerable legal uncer-

tainty on the rights a customer has on the intermediary’s insolvency,

which, absent legislation or authoritative case law, cannot be mitigated.

Some general points can however be made.

First, it is important to recognize that, whilst the term staking is

loosely understood in practice to mean using cryptoassets as an invest-

ment asset, it is not a term of art. This paper has demonstrated that there

are a wide range of practices that resemble staking in the proper sense of

the word but must be distinguished from it. This is primarily because,

from a legal perspective, they give rise to a very different set of legally

relevant facts—such as an outright transfer of the asset—and different

legal inferences as to the parties’ intentions with respect to those facts.

Second, the rights of the customer who has engaged in such transac-

tions on the intermediary’s insolvency will depend, in the first instance,

on how a court will characterize the asset transfer transactions. This is

relevant for the conflict-of-laws rule that will ultimately be followed by

the forum to determine the law governing those transfer transactions.

This governing law will, then, have the final say on whether the parties

have agreed on a transfer.

Third, the ultimate question of whether a transfer of ownership has

taken place, e.g., from the staker to the intermediary, with the result that

the former will only have a personal right against the latter, will fall to

be determined by reference to the relevant property law. This law will set

out the conditions for the transfer, besides a valid agreement.

Finally, it is important to note that since the conflicts of law rules are

different from court to court, the law applied ultimately depends on where

the intermediary’s insolvency is opened, i.e., the location of the bank-

ruptcy court. As this cannot always be predicted, an element of uncer-

tainty remains. Nevertheless, it is possible to draw a spectrum of risks. It

can be safely predicted, for instance, that a direct staking agreement is

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likely to involve the least risks for the customer in the event of insolvency

of the intermediary, whereas a crypto lending arrangement carries high

risks for him. All other transactions are situated between these two ex-

tremes. Which risks are actually incurred can be said only after the na-

tional law applicable to the operation and the underlying cryptoasset as

an object of property rights has been identified.

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