Hidden Risks of Foreign Custody: How Jurisdictional Issues Cost Canadians

As digital assets continue to gain prominence, Canada has maintained a focus on providing regulation for Crypto Trading Platforms (CTPs), ETFs and various issuers. Unfortunately, Canadian businesses have continued to be allowed (and sometimes required) to utilize foreign custodians to safeguard their assets. This approach may offer broader opportunities, but it exposes investors to jurisdictional risk—a hidden threat arising from the complexities of foreign legal frameworks that can jeopardize investments.

In this article, we examine high-profile collapses and bankruptcies of foreign entities, underscoring the severe consequences of this risk, as Canadian investors have found themselves entangled in legal battles, suffering significant delays, and even forfeiting their assets. These cases underscore why Canadian assets are safest when kept in Canada, under the protection of Canadian regulators.

What Is Jurisdictional Risk?

Jurisdictional risk occurs when assets held in foreign countries become subject to the laws and regulations of those jurisdictions. In insolvency or bankruptcy cases, this often results in Canadian investors being treated as secondary to local creditors—or, worse, losing their claims entirely.

While Canadian law offers robust protections, these safeguards end at the border. When foreign custodians face financial trouble, Canadians can find their interests secondary to local creditors, courts, or governments.

Lessons from High-Profile Failures

Lehman Brothers: Global Financial Fallout

The 2008 collapse of Lehman Brothers, a highly regulated and globally recognized U.S. financial institution, serves as a cautionary tale. Canadian investors who entrusted their funds to Lehman’s Canadian arm found themselves swept into the complex U.S. bankruptcy process. Even 14 years later, many were still awaiting resolutions or had only recovered a fraction of their investments.

This case highlights a critical point: even well-established foreign institutions are not immune to failure, and Canadian creditors can be left navigating unfamiliar and prolonged legal processes. More importantly, this issue is not unique to digital assets—it reflects structural vulnerabilities in cross-border financial relationships.

Celsius Network: Some Investors Left Empty-Handed

Celsius Network, a U.S.-based cryptocurrency lender, filed for bankruptcy in 2022, leaving creditors, including Canadians, in limbo. A U.S. court ruled that assets in Celsius’ “Earn” program belonged to the company, not investors—effectively wiping out their rights to recover funds.

Since then, Celsius has distributed over $2.53 billion to more than 251,000 creditors in its first round of payouts and announced a second distribution of $127 million. Eligible creditors will receive approximately 60.4% of their claims in bitcoin or USD, with some issued shares in a reorganized mining business.

While some creditors have seen partial recovery, the lengthy and complex proceedings highlight the difficulties faced by investors in navigating bankruptcy processes in global financial cases. With former executives facing fraud charges, the Celsius case remains a stark reminder of the risks inherent in poorly managed financial institutions operating outside of Canada’s regulatory framework.

FTX: A Crypto Catastrophe

The collapse of FTX in 2022 devastated the cryptocurrency market and left Canadian investors, including the Ontario Teachers’ Pension Plan (OTPP), grappling with uncertainty. OTPP, which had invested US$95 million in FTX, initially wrote off its entire investment following the exchange’s bankruptcy.

While a bankruptcy agreement approved in October 2024 will see 98% of creditors receive approximately 119% of their claims, the road to recovery has been long and fraught with challenges.

The process required navigating legal systems across more than 200 jurisdictions and recovering billions in mismanaged assets. Though creditors may ultimately benefit, the ordeal highlights the immense complexity, delays, and jurisdictional challenges that Canadian investors face when assets are held abroad. Even in cases where recovery is possible, such processes underscore the risks of engaging with foreign custodians.

Why Canadians Should Keep Assets in Canada

These examples emphasize a critical question every Canadian investor must ask: Where are my assets held, and by whom?

Foreign custodians, while sometimes offering convenience or perceived advantages, come with risks that are often underestimated:
Legal Complexity: Canadian court orders are not automatically enforceable abroad, leading to costly and time-consuming legal battles.
Foreign Bias: Foreign courts may prioritize local creditors over international investors, often leaving Canadians with diminished recoveries.
Regulatory Mismatches: Foreign jurisdictions operate under different and often inconsistent regulatory standards, which may fail to protect Canadian investors adequately.

A Better Alternative: Domestic Custody Solutions

By choosing Canadian custodians, investors can avoid these risks altogether. At Tetra Trust, we prioritize security, accessibility, and alignment with Canada’s regulatory standards. Our enterprise-grade custody solutions ensure that your assets remain within the Canadian legal framework, protected by the oversight of our financial regulators.

With Tetra Trust, Canadian investors benefit from:

Unmatched Security: Advanced digital asset storage technology to safeguard assets against theft and fraud.
Canadian Regulatory Oversight: Your assets are governed by laws designed to protect Canadian investors.
Simplified Recovery: Should insolvency occur, disputes are resolved within Canada, ensuring faster and fairer outcomes.

Protect What’s Yours

The collapse of Lehman Brothers, Celsius Network, FTX, and others reveals a hard truth: jurisdictional risk has devastating consequences for Canadians who entrust their assets to foreign entities.

It’s time for Canadian investors and service providers to rethink their strategies and prioritize the safety of their investments. By keeping assets in Canada, you’re not just protecting your wealth—you’re ensuring that your future remains firmly within a jurisdiction that works for you.

Trust Canadian Custody.
Trust Tetra Trust.

Sources:

1. “Lehman Brothers’ legacy: 10 years after the financial crisis” CBC News Staff. Lehman Brothers’ legacy: 10 years after the financial crisis. CBC News, September 14, 2018.
2. “Ontario Teachers’ Statement on FTX” Ontario Teachers’ Pension Plan. Ontario Teachers’ Statement on FTX. November 17, 2022.
3. “Canadian watchdogs join probe of Celsius’ multi-billion-dollar collapse, sources say” Financial Post Staff. Canadian watchdogs join probe of Celsius’ multi-billion-dollar collapse, sources say. Financial Post, November 25, 2022.
4. “Celsius Bankruptcy Application and the Bad Debt Rules” Miller Thomson LLP. Celsius Bankruptcy Application and the Bad Debt Rules. Miller Thomson, January 2023.
5. “Celsius to Make Second Payout to Creditors ‘Soon’ as Mashinsky Awaits Day in Court”
   Quinn, Callan. CoinDesk, November 28, 2024.
6. “CIBC to Pay $149.5 Million to Lehman, Ending Dispute” Reuters Staff. CIBC to Pay $149.5 Million to Lehman, Ending Dispute. Reuters, December 21, 2012.
7. “FTX Creditors Will Earn 119% Profit in Bankruptcy Settlement” PYMNTS Staff. FTX Creditors Will Earn 119% Profit in Bankruptcy Settlement. PYMNTS, October 7, 2024.