Free lesson · Crypto markets

Custody claims and recovery scenarios

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An exchange balance is a claim on an intermediary. Its displayed value and recoverable cash under stress can differ.

Identify who controls keys, whether assets are segregated, withdrawal restrictions and claim seniority from the relevant agreements. A wrapped or bridged asset adds another redemption dependency.

Use scenario haircuts to understand exposure rather than presenting a made-up default probability as measured fact. Expected loss is only one summary; complete inaccessibility during a hedge deadline may be more damaging than eventual recovery loss.

Apply it in a strategy

• Compare concentration limits and collateral placement under explicitly assumed custody scenarios.
• Record the input timestamp, executable quantity, currency and horizon. Reconcile the result with a cash-flow or state table.
• Stress this failure condition: Recovery can be delayed for years and depend on correlated market stress; simple expected loss understates liquidity needs.

Research deliverable

Build and explain a custody claims and recovery scenarios worksheet. Compare concentration limits and collateral placement under explicitly assumed custody scenarios.

Evidence boundary: Synthetic arithmetic and scenarios illustrate mechanics. They are not historical returns, a paper replication, or evidence of an executable edge. Research sources and their access limitations are recorded at the end of this module.

# Python 3.10+; standard library unless NumPy is imported below.
# Inputs and outputs use the units defined in this lesson. Synthetic teaching example.
def custody_loss(exposure,probability,recovery):
    if exposure<0 or not 0<=probability<=1 or not 0<=recovery<=1: raise ValueError("Invalid scenario")
    conditional=exposure*(1-recovery)
    return conditional,probability*conditional

print(custody_loss(10000,.02,.40))