Both arrangements hand your assets to a counterparty, and they fail in structurally different ways. A centralized lender turns you into a general unsecured creditor of a balance sheet you cannot inspect. A protocol turns you into a claimant against code and a governance process, usually with no forum to file in. In my experience the word that causes the most damage is “non-custodial”, which people hear as “no counterparty”.
The short version
- “Non-custodial” describes where the keys are. It says nothing about whether you have a counterparty; the counterparty is now a system with no legal personality.
- A deposit with a company often converts ownership into a claim, and the Bankruptcy Code pays general unsecured claims late under 11 U.S.C. § 726.
- A protocol failure usually has no forum. No trustee, no bar date, no discovery, and often no defendant able to accept service.
- Find out whether your assets are lent onward. With a firm that is a contract term you dig out. With a protocol it is the mechanism.
- Governance participation can move you from customer to member, a status the CFTC has argued carries joint and several liability.
What a deposit does to your ownership
The first question is legal, and the account agreement answers it. Handing an asset to a company can create a bailment, where the property stays yours, or a debt, where the company owns the units and owes you an equivalent quantity. The two read alike to a non-lawyer and behave in opposite ways once payments stop.
The SEC’s investor education office describes what such an arrangement does with the deposit:
Crypto assets held in an interest-bearing account may be used to invest in various crypto asset-related products, schemes or other activities, including lending programs in which the crypto assets are loaned to borrowers.
SEC Office of Investor Education and Advocacy, Investor Bulletin
The asset is working somewhere, among borrowers you did not choose and were never asked to approve.
If the company fails, whether the units sit inside the estate turns on 11 U.S.C. § 541, which sweeps in every legal or equitable interest the debtor holds in property. Where the deposit created a debt, the units are the estate’s and you hold a claim. Depositors assume the Code carves them out, and the provision that does repays reading:
Seventh, allowed unsecured claims of individuals, to the extent of $1,800 for each such individual, arising from the deposit … of money in connection with the purchase … of property, or the purchase of services, for the personal, family, or household use of such individuals, that were not delivered or provided.
A capped per-person figure, adjusted every three years under § 104, for consumer purchases that never arrived. It was written for a store that took a deposit and closed. Congress has since legislated a claim with “first priority over any other claim” for certain payment stablecoin holders against a permitted issuer’s estate, effective on a future date, which tells you what the default is for everyone outside its scope. Whether an estate’s records can identify what was yours is worked through in what happens if a crypto custodian fails.
When the counterparty is a codebase
Removing the company changes the subject of the diligence. Obligations a contract would have created are expressed as code, and whoever can alter that code is your counterparty.
The FBI’s Internet Crime Complaint Center set out the pattern in Alert I-082922-PSA, warning that criminals “are increasingly exploiting vulnerabilities in the smart contracts governing DeFi platforms to steal cryptocurrency”, including by manipulating price pairs through “the DeFi platform’s use of a single price oracle” (IC3). Three consequences follow.
Change control replaces the contract. Whoever holds the upgrade authority, whether an administrative key, a proxy contract, a signing quorum, or a governance vote, can alter the rules your assets sit under. The timelock delay is your entire warning.
Your exit is a condition. Deposit into a lending market and your assets go out to borrowers, because that is the product working as designed. Getting them back depends on repayments arriving, liquidations clearing at the prices the system reads, and enough of the pool sitting idle when you ask.
There is often nowhere to file. The CFTC’s customer advisory states it plainly: “There is no assurance of recourse if your virtual currency is stolen” (CFTC). A bankruptcy is a bad outcome with a docket, a trustee, a bar date, and discovery attached. An exploit settles on the block it happens.
Then the inversion few people price in. In a 2022 action the CFTC treated token holders who voted on governance proposals as members of an unincorporated association, on a doctrine that, as a dissenting commissioner noted, makes members “jointly and severally liable for the debts of that association”. A federal court later agreed the association was a “person” under the Commodity Exchange Act (CFTC Release 8715-23).
Two failure modes, two diligence files
The verification lists barely overlap, which is the practical point. For a firm you check which entity holds the account, what the agreement says about title and reuse, and whether readable financial statements exist. For a system you check who can upgrade the code, the length of the delay, how many independent sources stand behind the price feed, and what your exit depends on.
One question carries across both: who can move my assets without my signature, and what constrains them. Where the counterparty is code, no statement arrives at year end either, so whatever you recorded is the entire record against the IRS digital assets baseline, which is why record habits decide how long the cleanup takes.
What I actually see
The diligence gets done in the wrong language, borrowed from whichever arrangement the family encountered first.
The most common version is diversification by headcount. A family holds balances across three venues and calls that spread. Two of the three lend into the same borrower base, or all three read the same price feed and settle through the same bridge. The number of names went up and the number of ways to lose everything in one week stayed at one, the arithmetic that also shows up when founders diversify token wealth.
The second is that nobody can state the legal position in a sentence. I ask what you own if this stops responding on Monday and where you would file, and the room goes silent. The agreement was accepted with a checkbox, and the code was never read by anyone the family pays.
The third is assets committed by someone with no authority to commit them: a trustee moving trust property into an arrangement the instrument never contemplated, or a manager doing it with entity assets and nothing in writing. That exposure exists before anyone reaches a technical question, and trustee liability follows the process rather than the outcome.
The exercise takes an afternoon. Build one row for every place your assets sit that is not a key you personally hold, with six columns: the legal entity or contract address, the governing document, whether the assets are lent onward and to whom, who can move them without your signature, what your exit depends on, and where you would file a claim. Then run a real withdrawal at a size that would matter to you and time the whole path. On most rows two columns come back blank, and the blanks are your actual position.
Where this goes wrong
The loss rarely arrives through the door the depositor was watching.
The shapes repeat: an agreement that transferred title, read properly for the first time during a claims process. Assets onward-lent to borrowers the depositor could not have named under oath. A withdrawal request filed in the same hour as everyone else’s, into a queue with no ordering rule anyone can enforce. A price feed with a single source, moved for a handful of blocks by someone with capital enough to move it. And the one that ends these conversations worst, an exploit at three in the morning against a system incorporated nowhere, with no counsel to accept service.
The decision rule
- Name the counterparty in one sentence for every place your assets sit: a company, or a codebase plus whoever can change it.
- Read the title and reuse language before the marketing, looking for lend, pledge, rehypothecate, pool, and right of use.
- Get the onward-lending answer in writing from a firm, and read the utilization mechanics yourself where the counterparty is code.
- Identify who can change the rules: upgrade authority, signing quorum, timelock delay, governance threshold.
- Write down what your exit depends on, then test it with a withdrawal that would matter to you and time the path.
- Decide where you would file a claim, and treat “nowhere” as a finding you act on.
- Fix authority first where a trust or an LLC owns the assets, because no later diligence repairs a commitment made without it.
- Spread across failure modes instead of names, checking whether your venues share a price feed, a bridge, or a borrower base.
Where this sits
Lending assets out sits between two neighboring questions that behave differently. Borrowing against a position puts you on the opposite side of the table, where a crypto-backed loan and its liquidation clause govern the outcome. Handing assets to a firm that only holds them is a custody question. Committing them to a network for its own purposes runs through staking. Where the balance sits in an entity or a trust, this decision belongs in writing before anyone makes it.
This question is split across professions, and the seam is where it breaks. The attorney reads the account agreement and forms no view on the code. Whoever reviewed the code never sees the agreement. The accountant meets the arrangement the following spring as a list of transactions with nothing explaining them. Nobody owns the sentence that decides the outcome: what you hold, and against whom. Draft it yourself, then have your lawyer and your accountant review it side by side.
Sources
- SEC Office of Investor Education and Advocacy, Investor Bulletin: Crypto Asset Interest-bearing Accounts
- FBI Internet Crime Complaint Center, Alert I-082922-PSA
- CFTC, Customer Advisory on the risks of virtual currency trading
- CFTC Release 8715-23, Statement of Enforcement Director Ian McGinley
- 11 U.S.C. § 507, Priorities
- 11 U.S.C. § 726, Distribution of property of the estate
- 11 U.S.C. § 541, Property of the bankruptcy estate
Related
- Crypto-backed loans for high-net-worth investors
- Custody
- Can a Wyoming LLC stake crypto?
- Can an LLC hold stablecoins?
- Can a trustee be liable for crypto losses?
- Founder and token holder wealth
Last updated: 3 August 2026.
This article is general education, not legal, tax, or investment advice. It recommends no platform, protocol, or arrangement, and nothing here suggests lending or depositing digital assets. Diligence can reduce certain risks but does not eliminate them. Talk to a qualified attorney and CPA about your own situation.
