Not your keys, not your justice: how self-custody is breaking traditional asset recovery

Written by James Ramsden KC and Senior Partner at Astraea

The ownership of digital assets is no longer niche, since it is estimated that 559 million people, (almost 10% of the world’s population) own a cryptocurrency. Digital asset exposure, therefore, needs to find a secure way to hold your digital assets is set to expand as we witness more and more assets available in a tokenised format. Individuals are increasingly recognising the advantages of dedicated hardware wallets and software solutions that place full control of private keys in their hands. In addition, rather than leaving assets on centralised platforms such as Coinbase, Kraken or Revolut, users now transfer their holdings to self-custody environments immediately after acquisition. This practice eliminates reliance on third-party custodians and removes the ability of those platforms to freeze, seize or facilitate the recovery of assets upon legal request. Simultaneously, the proliferation of non-KYC decentralised exchanges (DEX), including major ones such Pancakeswap and Uniswap, has enabled seamless swapping between asset pairs without identity verification or intermediary involvement. Users can convert Bitcoin to Tether, or Circle to other tokens (directly on chain) so bypassing regulated gateways entirely. Unsurprisingly, this combination of self-custody and non-custodial trading has rendered many traditional recovery mechanisms obsolete. Moreover, illicit cryptocurrency activity had surged to a record estimated USD 158 billion in 2025, representing an increase of almost 145% compared with 2024.

However, despite the sharp rise in absolute volumes, illicit activity had actually declined slightly as a proportion of total crypto transaction volume, falling from 1.3% in 2024 to 1.2% in 2025. And more recently, courts and law enforcement agencies have experienced a “downward trend” involving the recovery of digital assets. Where previously disputes over stolen funds, hacked accounts or matrimonial division frequently targeted centralised exchanges, such actions have diminished as assets have moved ‘off platform’. When private keys are held solely by an individual, exchanges hold no custodial responsibility or relevant and current information and cannot compel transfers, even under court order. This trend is particularly evident in civil litigation with the number of successful recoveries through court-mandated orders having fallen sharply. Judges and legal practitioners now encounter situations where defendants assert that assets are inaccessible due to lost or forgotten private keys. Such claims, while sometimes genuine, have also become a convenient defence in contentious proceedings, especially when digital assets are held by one of the parties.

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A striking illustration of this phenomenon appears in divorce proceedings in California, a jurisdiction with community property laws that typically require equitable division of marital assets. In several high-profile and unreported cases, husbands facing court orders to transfer Bitcoin or USD stablecoins to their former spouses have responded by declaring that they no longer possess access to the relevant private keys. These claims create significant enforcement challenges for the courts since, unlike traditional bank accounts or brokerage holdings where institutions can be ordered to freeze and disburse funds, self-custodied digital assets leave judges with limited practical recourse. Attempts to compel key disclosure often fail when the defendant maintains that the keys were misplaced, forgotten, or never recorded. Forensic blockchain analysis can trace transaction history but cannot recover inaccessible private keys. Consequently, many such cases result in incomplete asset division or protracted legal battles with reduced success rates for the claiming party. This pattern has contributed directly to the overall decline in viable legal recovery actions. Family law practitioners now routinely advise clients on the difficulties of tracing and enforcing claims over self-custodied cryptocurrencies, leading to fewer filings or settlements that exclude digital assets altogether. ⁠

Why self-custody reduces recovery success rates

The technical architecture of blockchain technology underpins this shift. Once assets leave a centralised exchange, control resides exclusively with the holder of the private keys. Centralised platforms can comply with court orders only whilst they maintain custody. As self-custody becomes ubiquitous, the pool of recoverable assets held by intermediaries shrinks dramatically. Moreover, non-custodial DEXs leave no central entity with compliance obligations. Transactions occur pseudonymously on public blockchains, further complicating identification and enforcement. Even when a court identifies a wallet address, without the private key, enforcement remains impossible. This reality has led to a measurable decrease in both the initiation and successful conclusion of digital asset recovery litigation. Meanwhile, the decline in successful recovery for victims of fraud or judgment creditors carries significant consequences. For law enforcement, it complicates efforts to trace proceeds of crime, ransomware payments, or fraud. Regulatory bodies face challenges in supervising a financial ecosystem where assets increasingly exist outside traditional intermediaries. Banks, payment processors and regulated exchanges experience reduced relevance in the digital asset space, prompting strategic adjustments in their business models. As we see more real-world assets such as equities, bonds, funds even the home you reside in being tokenised, the problem of not being able to track and trace an individual or a corporates digital assets is increasingly set to become a challenge and relevant for many.

For owners of digital assets, self-custody offers enhanced privacy and autonomy but introduces personal responsibility for security and key management. The risk of permanent loss through forgotten keys or theft without recourse represents a trade-off that many users now willingly accept. However, legal systems worldwide are adapting slowly - some jurisdictions have introduced legislation requiring disclosure of digital asset holdings in divorce or insolvency proceeding, yet, as observed, enforcement remains problematic with a recalcitrant key holder. Courts have begun considering creative remedies, such as ordering defendants to assist in recovery to the best of their ability, but these measures often prove ineffective against determined self-custody users. Several factors have accelerated the move toward self-custody. Improved user interfaces for hardware wallets, educational campaigns on “not your keys, not your coins” and growing distrust of centralised platforms following high-profile failures have all played a role. The maturation of layer-two solutions and cross-chain bridges has further simplified non-custodial trading whereby reducing friction for everyday users. However, as DEX liquidity deepens and transaction fees decrease, the economic incentive to remain on centralised platforms diminishes. Users now enjoy greater flexibility, lower costs and enhanced privacy - all whilst removing intermediaries from the recovery equation. However, regulators confront a difficult balancing act; encouraging responsible self-custody whilst maintaining effective oversight requires innovative approaches. Proposals include mandatory key escrow for certain high-value holdings or enhanced blockchain analytics tools, yet such measures risk undermining the core principles of decentralisation and individual sovereignty that drive adoption. Ultimately, the decrease in legal recovery may force a revaluation of how jurisdictions define and treat digital assets in civil and criminal proceedings. Traditional property law concepts struggle to accommodate assets that exist as cryptographic keys rather than entries in institutional ledgers.

Strategic outlook and recommendations

It would be prudent for individuals to weigh the benefits of self-custody against the responsibilities it entails; robust key management practices, multi-signature setups and inheritance planning become essential. For legal practitioners, early identification of digital assets and creative use of forensic tools remain critical, even as recovery success rates decline. Exchanges and intermediaries must innovate by offering hybrid services that combine convenience with greater user control, such as optional self-custody bridges or insured key recovery mechanisms. Policymakers should focus on education and clear disclosure requirements rather than attempting to reverse the irreversible trend toward decentralisation. The rise of self-custody marks one of the most profound transfers of financial power from institutions to individuals in modern history, yet it also exposes a growing legal and regulatory vacuum. Courts can freeze bank accounts, seize property and compel intermediaries but they cannot recover cryptographic keys that no longer exist, or are claimed to be lost. As trillions of dollars of value migrate into self-custodied wallets and decentralised systems, the traditional assumptions underpinning asset recovery, inheritance, divorce law, fraud enforcement and financial supervision are beginning to fracture.

The solution is unlikely to be a reversal of decentralisation. Instead, the future may require new legal frameworks, programmable identity systems, insured recovery mechanisms, multi-signature governance and optional “lawyer in the loop” digital escrow models that preserve sovereignty whilst enabling enforceability. The challenge is no longer technological - it is whether legal systems can evolve quickly enough to remain relevant in a cryptographic financial world.