In our practice, there were cases when a client approached us quite late, having lost some of their clients’ cryptocurrency assets. What causes this to happen? In order to implement their projects, crypto-asset service providers (CASP) typically develop commercial ties with their partners, which include platform owners, various widgets, liquidity providers, IT developers, financial institutions, and so on. As a result, they frequently blindly trust their partners' contract templates without adequately reviewing and revising their terms and conditions. Many CASPs rarely seek lawyers to review and alter contract templates with such partners until nothing can be done. As it turns out, this is a huge mistake.

Business protection: key aspects in agreements with partners

Based on our experience of reviewing and altering a large number of contracts, many partners in their contracts:

  1. seek to avoid liability as much as possible, or identify broadly when they are not liable (limitation of liability), or limit it to a fixed minimum amount or the cost of their services, for example, for the previous three months,
  2. include as few warranties and representations as possible on their behalf (for example, covering platform operation, subcontractors, quality and technical continuity of service provision, timely performance of specified procedures, and so on).
  3. include terms and conditions to protect themself from liability if they engage third parties,
  4. do not reflect details of API integration and service implementation plans in contracts. In such circumstances, it is unclear which activities each party is responsible for throughout project implementation, therefore lifting or reducing the partner's liability,
  5. avoid responsibility to notify the CASP of planned platform updates or other substantial changes in partner processes and business operations, which could expose CASP to risks,
  6. reduce the amounts of fines and damages compensation, and require that any compensation amount be agreed upon by all parties (i.e., if the partner does not agree, the amount of compensation could become frozen),
  7. include additional beneficial arrangements for themselves.

Due to vulnerabilities in the crypto business and common fraud activities, CASPs found themselves alone with their problems due to a partner's mistake, omission, or carelessness. Furthermore, the issue may be frequently caused by technical glitches in the partner's systems. In such cases, CASP suffers enormous damages, including the loss of funds and crypto assets belonging to both, CASP and its clients.

In such cases, it is extremely difficult for CASPs to defend their position, especially if a contract is governed by a law that prohibits communication through messaging platforms like Telegram and other similar communication channels from being used as evidence in court.

CASP: the importance of legal analysis of contracts

Given the reality we have faced in our practice, we strongly advise CASPs to consult with lawyers before entering into contracts with partners. These lawyers can assist in review and effectively alteration of the terms and conditions of partners’ contracts, so preserving CASP's interests. It is far easier to predict a problem than to deal with its outcomes, especially when client funds are involved. If CASP has previously entered into contracts with partners, our clients engage us for review and alteration of the executed agreements, in the case of legal risks detection. Based on our experience, partners agree to include clauses that protect CASP's interests. We have been able to establish a balance and safeguard the client - CASP in many cases, but after the assets have been gone, it becomes incredibly difficult to defend the client.