In a recent decision (11 W 15/24), the Cologne Higher Regional Court clarified that a debtor must exhaust all technically possible means to comply with the court order when surrendering cryptocurrencies held in trust. The ruling underlines the increasing involvement of the courts in legal issues relating to cryptocurrencies. It also shows how complex the enforcement of claims in the digital world can be. Those affected should therefore not hesitate to seek legal assistance. This can be crucial, especially in the event of crypto fraud, problems with tax authorities or trading platforms.

The case: Trust agreement for cryptocurrencies

This case concerned the enforcement of a judgment according to which the debtor was to hand over cryptocurrencies from two escrow wallets to the creditor. Specifically, the parties had concluded a trust agreement in 2018 in which the debtor undertook to hold cryptocurrencies for the creditor in so-called wallets.

The trust agreement provided for the debtor as trustee to hold and manage the cryptocurrencies for the creditor as trustor. The creditor remained the beneficial owner of the crypto assets, while the debtor merely exercised actual control over the wallets. However, he was contractually obliged to use and surrender the cryptocurrencies in accordance with the creditor’s instructions.

In the course of the contractual relationship, disputes then arose between the parties regarding the exact conditions for the payment of the cryptocurrencies held in custody to the creditor. The creditor then terminated the trust agreement for cause and demanded the complete surrender of the digital assets held in custody for her, but the debtor refused to comply with this request and transfer the cryptocurrencies to the creditor. He contested an effective termination of the trust agreement and claimed that the conditions for disbursement were not met. The creditor then brought an action and obtained a judgment before the regional court, which ordered the debtor to surrender the cryptocurrencies. She now wanted to enforce this judgment by way of compulsory enforcement. However, the debtor lodged an appeal against the enforcement measures, so that the Higher Regional Court of Cologne now had to deal with the case.

Debtor invokes loss of access data

The debtor did not comply with the obligation to surrender. He argued that the access data (private keys) to the wallets were no longer available to him. The regional court nevertheless ordered him to surrender the data and imposed a penalty payment. The debtor lodged an appeal against this and applied for an expert opinion to be obtained in order to prove that it was impossible to surrender the data. He argued that he could no longer technically access the cryptocurrencies without the private keys.

Of course, this raises an interesting question: What actually happens if you lose your private key or access data to a wallet or if it is irretrievably encrypted? After all, the loss of private keys is not uncommon in the crypto world. It is estimated that up to 20% of all bitcoins ever generated are irretrievably lost due to lost private keys, and the loss of the private key is tantamount to the loss of the cryptocurrencies themselves, as no more transactions can be carried out without it. Although the coins still exist in the blockchain, they can no longer be used by anyone without access to the private key – they become a part of the blockchain that no one can control or transfer.

From a legal perspective, the question arises as to whether the debtor can invoke an objective impossibility of performance if it can be proven that it no longer has access to the keys. Or must he be accused of having negligently lost the keys and therefore being responsible for the impossibility himself? And what role does it play if the debtor has deliberately “lost” the keys in order to evade the obligation to surrender them? all these questions show that the law still needs to find answers here in order to keep pace with the technical conditions and risks of the crypto world. The OLG ruling is an important step towards creating more clarity.

OLG sets high requirements for impossibility

The Higher Regional Court of Cologne has now rejected the complaint and clarified that the mere reference to the loss of the private keys is not sufficient. Rather, the debtor must provide substantiated and plausible evidence that it is actually impossible for him to surrender the cryptocurrencies. To this end, he must take all reasonable measures to obtain the necessary access data. The court stated:

“This also includes the use of specialized service providers to restore access to the wallets.”

As the debtor had not done this, a further penalty payment of 25,000 euros was imposed. The court reserved the right to order coercive detention as a last resort. The ruling makes it clear that debtors cannot simply invoke the loss of access data to evade their obligation to surrender the data.

Signal effect of the ruling

The ruling is part of a trend towards greater legal certainty and clarity in the crypto sector. The EU MiCAR regulation will create a uniform legal framework for crypto-assets from 2024. The regulation is intended to promote innovation and at the same time protect investors and financial stability. The financial supervisory authority BaFin is stepping up its action against unauthorized transactions with crypto-financial instruments. Since 2020, companies that provide crypto custody services require a license from BaFin. And authorities such as the Dresden public prosecutor’s office are becoming important market players through crypto seizures. All this shows: Jurisdiction and regulation are slowly catching up in the crypto sector. Nevertheless, many questions remain unanswered, for example regarding tax treatment or the tracing of transactions.

Lawyers remain indispensable

Despite this progress, many legal issues in the crypto sector remain unresolved. There are pitfalls lurking in the custody and release of cryptocurrencies in particular. Companies and private individuals are therefore well advised to seek advice from specialized lawyers with expertise in IT law, corporate law and contract law. This is the only way to minimize legal risks and assert your own claims in the best possible way in the event of a dispute. The judgment of the Higher Regional Court of Cologne is an example of how complex the judicial enforcement of claims can be in the crypto world. Those affected should therefore not hesitate to seek legal assistance. This can be crucial, especially in the event of crypto fraud, problems with tax authorities or trading platforms. Because one thing is clear: blockchain technology is constantly raising new legal issues that will continue to occupy the courts in the future.