01Definition
The risk that an exchange, custodian, borrower or trading partner fails before completing its obligations.
02Bitcoin does not remove it automatically
Direct self-custody removes a specific intermediary, but an ETF, exchange, loan, wrapper or prime broker adds one back. The decisive questions are legal title, asset segregation, custody chain and insolvency treatment.
03What to verify
Review withdrawal terms, audit scope, segregation, subcustodians, lending permissions, insurance exclusions, jurisdiction and whether the client owns property or merely has an unsecured claim.
⌖Reference points
01
Self-custody exchanges counterparty for operational risk
02
Legal title and key control differ
03
Proof of reserves does not show all liabilities
04
Insolvency treatment is jurisdiction-specific