Zodia Digital Assets Custody Agreement, Kraken Custody Agreement, and Anchorage Digital Bank Standard Terms and Conditions have been confidentially reviewed by LlamaRisk. In compliance with the confidentiality restrictions imposed by both counterparties, the following analysis omits any disclosure of proprietary, confidential, or highly sensitive information pertaining to the specific structure, operational processes, or bilateral undertakings set out within the original documents. Instead, the primary purpose of this brief is to apprise the Risk Committee of the main legal constructs found in each custodial arrangement at a high level and to provide actionable, jurisdiction-focused recommendations to inform further diligence and guide the custodians’ approval process. Following the due dilligence, LlamaRisk supports this proposal.
Legal Brief: Kraken Custody
Custodial Relationship – Structural Overview
Kraken is engaged as custodian for Supported Digital Assets transferred by the client and is required to hold these assets in trust for the client’s exclusive benefit, in a manner aligned with Wyoming law and the custodial framework set out in Article 8 of the Wyoming Uniform Commercial Code (UCC). In legal terms, the relationship is framed not as a debtor–creditor exposure but as a custody and trust arrangement under which the client remains the beneficial owner and Kraken acts as a regulated safekeeper and “securities intermediary” for the purposes of Wyoming law and the UCC.
From a contractual standpoint, the Agreement is drafted as a genuine custody / trust structure with clear off-balance-sheet treatment and statutory reinforcement. Annex B provides that all Custodied Digital Assets “will be held by Prime Broker in trust for the benefit of Client”. The Services, including those performed under the custodial annex, are delivered by Payward Financial, Inc. (“Payward Financial”), a Wyoming Special Purpose Depository Institution, which is expressly designated as the entity providing the Digital Assets Custody services described in Annex B. Wyoming SPDIs operate under a fully reserved banking model, are subject to prudential oversight by the Wyoming Division of Banking, must maintain 100% reserves for fiat deposits, and are governed by bespoke digital-asset custody rules. Under W.S. 34-29-104, digital assets held in custody are explicitly “not liabilities or assets of the bank”, must remain at all times in the bank’s possession or control, and may not be rehypothecated or otherwise used for the bank’s own account.
Digital assets held under this arrangement are therefore not treated as Kraken’s property, are not recorded on Kraken’s balance sheet, and remain continuously identifiable as client property through account segregation. The Agreement imposes robust contractual guards against commingling, subject only to narrowly defined, short-term operational pooling necessary to process transfers. Segregation is not merely implied but expressly required: the Prime Broker must keep Custodied Digital Assets “in safe Custody for the benefit and on behalf of Client” and “not commingled with other Digital Assets held by Prime Broker”, save for temporary operational windows, and the structure is documented as a Wyoming “covered account” under W.S. 13-1-206 to reinforce that these assets are legally ring-fenced from the bank’s own estate.
Within this framework, Kraken’s function is that of a non-fiduciary custodian and “securities intermediary”, while the client is characterized as the “entitlement holder” under UCC Article 8. The Agreement expressly disclaims any fiduciary obligations arising under U.S. federal securities law or broker-dealer / investment adviser regimes.
Client Instruction, Access, and Security Controls
All movements of Custodied Digital Assets are conditioned on explicit client Instructions transmitted through vetted, authorized representatives and authenticated via designated security procedures. Both parties are held to elevated standards for the protection of credentials and access devices.
On the client side, all effective control over the account is exercised through “Authorized Representatives” formally designated in writing by the Client. An Instruction is defined as “a directive initiated by Client, acting through an Authorized Representative”. Instructions must be transmitted using a Prime Broker “Designated Security Procedure”. The purpose of the Security Procedure is expressly stated as being to “confirm the authenticity of any Instruction”, rather than to validate its commercial appropriateness or detect substantive errors.
The Agreement provides that the Client is “fully responsible for all activities taken on Client Accounts by Authorized Users” and must indemnify Kraken where third parties act on the basis of access or authority granted by the Client. In practice, this means that mis-Instructions, mis-use of credentials, or actions of third-party agents operating under client-granted access fall contractually on the Client, subject only to limited carve-outs for Prime Broker gross negligence, fraud or willful misconduct.
Withdrawals may be restricted to pre-approved, white-listed addresses and are subject to ongoing screening and review under Kraken’s internal compliance programs, including know-your-customer (KYC) and anti-money-laundering (AML) controls.
Principal Duties of Custodian
As custodian, Kraken is obligated to exercise reasonable care in safeguarding digital assets, to label and book them appropriately, to maintain detailed records for at least seven years, and to make such records available for inspection by competent regulatory authorities where required by Applicable Law. At the same time, the custodian expressly disclaims responsibility for the underlying legitimacy, title, or provenance of digital assets it receives, and does not guarantee settlement finality or successful execution of transactions once broadcast to the underlying blockchain networks.
The Agreement includes specific disclosures clarifying that digital asset balances are not eligible for U.S. Federal Deposit Insurance Corporation (FDIC) or Securities Investor Protection Corporation (SIPC) coverage.
No explicit private insurance or third-party coverage is granted or incorporated by reference in the Agreement.
Asset Control and Protections
Absent clear and specific Instructions from the client, Kraken is not permitted to pledge, lend, rehypothecate or otherwise use client assets, and the Agreement reiterates that the Prime Broker has “no right, interest, or title” in Custodied Digital Assets other than as custodian.
In addition, the Prime Broker undertakes a contractual obligation to resist third-party attachment, garnishment or other forms of encumbrance affecting client assets. All Custodied Digital Assets are contractually “deemed” to be located in the State of Wyoming, and all related transactions are deemed to occur in Wyoming. This deemed-situs provision is significant because it anchors the custody relationship firmly within the Wyoming SPDI and digital-asset statutory framework, and is intended to reduce conflict-of-laws uncertainty regarding property rights, perfection, and enforcement in stress scenarios.
In the context of insolvency or resolution, the Agreement contains an express covenant that “in the event of its insolvency or receivership, all Custodied Digital Assets shall pass to the Client, or its successor bank”. This clause codifies the parties’ intention that client assets held in custody remain client property and should not form part of the Prime Broker’s general insolvency estate. Annex B further specifies that Custodied Digital Assets are held “for the benefit of Client” and “do not constitute an asset on the balance sheet of Prime Broker” and that such assets are always identifiable in the Prime Broker’s systems as belonging to the Client Account.
Withdrawals
Withdrawals from custody are expressly subject to operational handling periods, typically allowing Kraken to impose a delay of up to twenty-four hours between client Instruction and the submission of the withdrawal transaction to the relevant blockchain. Additional delays may arise in practice for large, atypical, or potentially suspicious transactions that trigger cybersecurity, KYC/AML, or sanctions-screening escalations.
The Agreement is explicit that there is no guarantee of immediate or even predictable timing. The Prime Broker “makes no representations or warranties with respect to the availability and/or accessibility of (i) Custodied Digital Assets, (ii) a transaction involving Custodied Digital Assets, (iii) Client Account, and (iv) Services” and “makes no representations or warranties regarding the amount of time needed to complete processing”.
Furthermore, Prime Broker reserves a broad contractual right to refuse or cancel withdrawal requests and other transactions. It may “refuse to process or to cancel any pending Client transaction as required by law or in response to a subpoena, court order, or other binding government order or to enforce transaction, threshold, and condition limits or if Prime Broker reasonably believes that the Client transaction may violate or facilitate the violation of an applicable law”.
Zodia Digital Assets Custody Agreement
Regulatory Perimeter
Zodia’s registration with the UK Financial Conduct Authority (FCA) is for anti-money laundering (AML) compliance under the Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017. This does not equate to FCA authorisation for regulated custody under the Financial Services and Markets Act (FSMA) and the associated protections in the Client Assets Sourcebook (CASS). Consequently, clients do not benefit from statutory asset protections such as ring-fencing, mandatory audits, systematic reconciliations, or prompt asset return in insolvency available under the CASS regime. The absence of these protections is in line with current UK law, as cryptoasset custody is not (yet) a regulated activity under FSMA, though this might change with future legislation.
Exclusion from Statutory Compensation
Zodia’s clients are not covered by the UK Financial Services Compensation Scheme (FSCS), meaning they have no recourse for compensation from this fund if Zodia fails. Additionally, clients have no access to the UK Financial Ombudsman Service (FOS) for dispute resolution. This exclusion is contractually disclosed by Zodia and is consistent with the legal status of cryptoasset custody in the UK.
Absence of Statutory Custody Framework
There is currently no UK statutory regime for cryptoasset custody (akin to CASS for traditional finance) that mandates asset segregation, independent reconciliation, or insurance. Until a formal regime is enacted, client protection relies on the custody provider’s internal controls and the legal terms set by contract law, rather than regulatory compulsion.
Trust Law
A key protective feature of the Zodia agreement is the express establishment of a trust under English law—meaning Zodia holds clients’ cryptoassets on trust. This structure ring-fences client assets from Zodia’s own estate, providing proprietary claims for clients if Zodia enters insolvency: clients rank ahead of general creditors and can assert direct legal ownership rights defined by the trust structure. Trust law remedies apply (subject to proper asset identification and record keeping), offering robust legal recourse for asset recovery.
Operational Risks
Clients have no access to private keys and depend entirely on Zodia to action withdrawals or transfers. Instructions are limited to pre-approved (“whitelisted”) addresses, with all transfers subject to AML screening, compliance processes, and Zodia’s operational discretion. This introduces risks if Zodia fails to comply with proper client instructions, or if operational failures delay or prohibit withdrawal or movement of assets.
Liability and Insurance
Zodia’s financial liability is contractually confined to cases of gross negligence, wilful default, or fraud. The agreement anticipates the maintenance of professional insurance, but this can take the form of self-insurance and does not guarantee compensation for every adverse event, particularly for losses arising from business failure, cyber events, or misfeasance not amounting to gross negligence or fraud.
Withdrawal Rights
Clients’ withdrawal rights are not absolute: withdrawals are subject to compliance checks and Zodia’s processes. In insolvency situations, clients’ claims are proprietary under trust law rather than statutory entitlements to immediate asset return, which could create procedural or timing risk.
Anchorage Digital Bank Standard Terms and Conditions
Statutory and Regulatory Perimeter
Anchorage structures its custody relationship under U.S. law—principally by invoking Article 8 of the Uniform Commercial Code (UCC) and referencing the Hague Securities Convention. Under this legal framework:
- Client digital assets and fiat currency are expressly separated from Anchorage’s own assets and off its balance sheet.
- Clients are classified as “entitlement holders,” Anchorage as a “securities intermediary,” and South Dakota law is chosen as the governing law for the securities intermediary relationship.
- As a result, in the event of Anchorage’s insolvency, these assets should not be available for the satisfaction of Anchorage’s general creditors, strengthening customer protection against commingling or misapplication of client assets.
Anchorage also positions itself as a “qualified custodian” under the U.S. Advisers Act, which is notable for SEC-regulated activities.
Asset Segregation and Bankruptcy Protection
Digital assets and fiat are intended to be bankruptcy-remote—off Anchorage’s estate and unavailable to general creditors. This protection depends on correct asset segregation and recordkeeping practices, consistent with “entitlement” principles under Article 8 UCC.
The agreement includes a no-lien/no-hypothecation clause, which (outside specified exceptions) prevents Anchorage from encumbering or disposing of client assets. However, this is subject to a critical exception:
- Anchorage retains a first-priority lien and right of setoff over client assets to secure the client’s obligations to Anchorage (unpaid fees, obligations, etc.).
- In Anchorage’s insolvency scenario, while third-party creditors are blocked from making claims, Anchorage itself can apply the client’s own digital assets or fiat to settle unpaid obligations before returning any surplus to the client.
Limited Client Recourse
Anchorage contractually characterizes itself as an “excluded fiduciary” under South Dakota law, slashing implied fiduciary duties and binding its responsibilities strictly to those services expressly stated in the agreement. In addition, broad indemnity language means that Anchorage is insulated from many forms of liability, even including some conduct that could be considered gross negligence—if done while following the client’s direct written directions.
Client withdrawals are not unconditional and may be delayed or restricted under multiple scenarios, such as:
- Required quorum of “Authorized Persons” (multi-signal approval regime)
- Legal, AML/KYC, and sanctions screening
- Network/gas fee requirements, asset lock-ups, unsupported asset types
- Anchorage’s right of setoff for any client obligations
There is no hard service-level agreement (SLA) for timeliness of withdrawals, and Anchorage maintains operational discretion over exit flows, which is typical but creates practical risk if there is a sudden need to access client assets.
Insurance Coverage
Anchorage is explicit that neither digital assets nor fiat balances are covered by FDIC insurance, SIPC (Securities Investor Protection Corporation), or any other statutory investor protection. For fiat, deposits are held in omnibus FBO accounts at FDIC banks and may be eligible for pass-through insurance, but without any guarantee. There is no contractual reference to private insurance (crime, fidelity, specie) dedicated to client protection; thus, safeguarding is primarily structural via legal segregation, not insurance-backed.
Use Restrictions
Anchorage retains very broad discretion to refuse any client or transaction on compliance grounds. All clients and incoming assets are screened for AML, KYC, and sanctions compliance, and nested account structures (onboarding sub-custodians or other institutions) are strictly prohibited.
Multi-Signer Account Controls
Anchorage’s custody model centralizes transaction control through an “Authorized Persons” and quorum system, typically requiring at least three nominated persons with a minimum of two for valid withdrawal/authentication.
Recommendations
- Continued Regulatory Monitoring (Zodia): Ethena/Risk Committee should require periodic confirmation of any changes to Zodia’s regulatory status and be alert for new legislative or regulatory developments in the UK that may affect the legal treatment of cryptoasset custodians—particularly regarding the extension of statutory protections, trust law, or changes to client asset regimes.
- Ongoing Check-Ups (Anchorage): For Anchorage Digital, it is recommended that regular reviews be performed to track its regulatory status, particularly its standing as a “qualified custodian” under relevant US frameworks.
- Insurance-Related Expectations: It is advised that Ethena pose targeted inquiries to both Zodia and Anchorage regarding their current and prospective arrangements for insurance coverage. Private insurance, if sufficiently comprehensive in scope and limits, may meaningfully reduce client loss risk and should be prioritized in due diligence.
- For Kraken Custody, from a practical perspective, Ethena may wish to request a “soft SLA” or indicative performance standard for “ordinary course” withdrawals that are, first, directed to pre-approved addresses owned or controlled by Ethena and, second, not flagged by Kraken’s AML or sanctions tooling. Even if such a standard remains expressly “subject to network conditions” and legal constraints, a written commitment would materially clarify expectations and strengthen Ethena’s operational position.
- In addition, Ethena should seek disclosure of any insurance policies, bonds, trust accounts, or comparable financial safeguards that may indirectly benefit institutional customers, even if they do not create direct contractual rights under the Agreement.
