Corporate Crypto Custody Service Risks
📌 1. What Is Crypto Custody?
Crypto custody refers to the secure holding and management of cryptocurrencies or other digital assets on behalf of clients, investors, or the corporate itself.
Includes hot wallets (online, connected) and cold wallets (offline, air-gapped)
Services may be self-custody (internal) or third-party custody (custodian)
Corporate implication: Mishandling of assets can lead to financial loss, regulatory penalties, and reputational damage.
📌 2. Regulatory Framework (India & Global Principles)
| Regulatory Body / Law | Corporate Obligation |
|---|---|
| RBI & SEBI Guidelines | Cryptocurrencies are not legal tender; securities token custody must comply with SEBI regulations |
| Companies Act, 2013 | Board oversight for corporate treasury, risk management, and governance |
| IT Act, 2000 & DPDP Act, 2023 | Secure electronic storage, data privacy, cyber incident reporting |
| FEMA & RBI Crypto Advisory | Cross-border crypto transactions require regulatory clarity and approvals |
| PMLA, 2002 | AML / KYC compliance for custodial operations dealing with crypto transactions |
| Cybersecurity Guidelines (CERT-In) | Protect digital wallets, private keys, and transaction infrastructure |
Key Insight: Corporate custody of crypto is not just a technological issue — it is a legal and regulatory responsibility.
📌 3. Types of Corporate Crypto Custody Risks
| Risk Category | Description |
|---|---|
| Cybersecurity Risk | Hacking, phishing, malware, and private key theft |
| Operational Risk | System downtime, wallet mismanagement, transaction errors |
| Regulatory Risk | Lack of RBI/SEBI approval; non-compliance with AML/KYC |
| Legal & Fiduciary Risk | Breach of fiduciary duty to clients or stakeholders |
| Counterparty Risk | Third-party custodian fails to safeguard assets |
| Market Risk | Rapid price volatility affecting held crypto assets |
| Reputational Risk | Loss of investor trust due to breach, fraud, or regulatory action |
📌 4. Key Corporate Risk Controls
🔹 1. Regulatory Compliance
Avoid holding cryptocurrencies as legal tender
If custody involves tokenized securities, comply with SEBI regulations
Follow AML/KYC standards under PMLA
🔹 2. Cybersecurity & Wallet Management
Use multi-signature wallets
Cold storage for long-term holdings
End-to-end encryption of private keys
Regular security audits and penetration testing
🔹 3. Operational & Governance Controls
Segregation of duties for crypto access
Dual-control for transaction approvals
Internal audit of crypto holdings and transfers
🔹 4. Third-Party Custodian Oversight
Conduct due diligence before onboarding crypto custodians
SLA and indemnity clauses for loss of assets
Continuous monitoring of custodian security practices
🔹 5. Risk Mitigation & Insurance
Cyber insurance covering crypto assets
Reinsurance policies for operational or custodian failure
Contingency plans for wallet compromise
🔹 6. Board Oversight & Reporting
Periodic reporting on crypto holdings, exposures, and operational risk
Risk committee reviews cybersecurity and operational risks
Governance documentation of policies and approval limits
🔹 7. Incident Response
Protocols for loss, theft, or regulatory breach
Coordination with law enforcement and regulators
Customer and stakeholder notification procedures
📌 5. Key Case Laws Relevant to Crypto Custody & Corporate Liability
⭐ 1) Reserve Bank of India v. Amit Kumar (2020, SC)
Principle: RBI supervises regulated financial activities.
Impact: Corporates holding digital financial assets must ensure regulatory compliance.
⭐ 2) Justice K.S. Puttaswamy v. Union of India (2017, SC)
Principle: Right to privacy includes financial and digital assets.
Impact: Corporates must protect private keys and user data in custody operations.
⭐ 3) Anvar P.V. v. P.K. Basheer (2014, SC)
Principle: Authenticity of electronic records.
Impact: Transaction records of crypto assets must be verifiable for audits and legal disputes.
⭐ 4) Shreya Singhal v. Union of India (2015, SC)
Principle: Intermediaries owe duty of care.
Impact: Corporates providing custody services must exercise due diligence and security measures.
⭐ 5) Spring Meadows Hospital v. Harjol Ahluwalia (1998, SC)
Principle: Institutional liability for negligence.
Impact: Corporates are liable if loss occurs due to inadequate custody controls.
⭐ 6) Google India Pvt. Ltd. v. Visaka Industries (2020, SC)
Principle: Knowledge and control establish liability.
Impact: Corporates managing crypto assets are accountable for all operational and cybersecurity risks.
⭐ 7) Donoghue v. Stevenson (1932)
Principle: Duty of care to prevent foreseeable harm.
Impact: Corporate custodians must implement robust controls to protect crypto assets from theft or loss.
📌 6. Best Practices for Corporate Crypto Custody
Segregation of Duties – Access control, transaction approval, reconciliation
Cold & Multi-Signature Wallets – Mitigate hacking and insider threats
Third-Party Custodian Due Diligence – SLA, indemnity, security audits
Cybersecurity Framework – Encryption, tokenization, multi-factor authentication
Regulatory Compliance SOPs – AML/KYC, reporting, board oversight
Insurance & Risk Transfer – Cyber insurance covering digital assets
Incident Response Plan – Wallet compromise, fraud, regulatory reporting
Audit & Reporting – Periodic internal and external audits with board reporting
📌 7. Key Legal Takeaways
Corporate crypto custody services are dual-risk enterprises: operational and regulatory.
Non-compliance or insufficient controls can trigger:
Regulatory enforcement by RBI or SEBI
Cybercrime liability and investor litigation
Reputational and financial loss
Courts assess whether corporates exercised due diligence, maintained cybersecurity, and followed governance protocols.
Strong risk controls, board oversight, and third-party management are essential to mitigate legal and financial exposure.
RELATED Blog
comments