Risky Business: Professional Liability and Digital Assets

1.1                  
For the past decade, the legal and regulatory framework has been grappling with how to adapt to the advent of digital assets.[1] Over this period, significant progress has been made, with further milestone developments on the horizon. During the same period, investments and trading in digital assets have become more prevalent. Digital assets are no longer merely a speculative investment for a narrow pool of largely amateur, hobby investors, but have become an asset class of interest to institutional investors. A 2025 survey of over 350 institutional investors conducted by EY and Coinbase (which prioritised firms with more than USD$1bn assets under management) found that almost 60% of the survey respondents planned to allocate over 5% of their assets under management to digital assets. Further, the percentage of respondents that proposed to engage in decentralised finance ("DeFi")² was set to triple by early 2027, increasing from 24% to 75%.³  

1.2                  
In addition to adoption of digital assets as an asset class, the technology underlying digital assets is beginning to be adopted by institutional players for real-world use cases. One such example is the tokenisation of real-world assets – both tangible (e.g. precious metals and real estate) and intangible (e.g. bonds, fund interests and deposits) – on public blockchain networks.

1.3                  
As adoption continues to grow, market participants will increasingly turn to their professional advisors for assistance. While this means new and potentially remunerative mandates for these individuals and firms, it also means new and enhanced risks of professional liability. It will be imperative for professional advisors working in this space, including lawyers, accountants, auditors, tax specialists and insolvency professionals (to name a few), to have a proper grasp of the technology, and to keep on top of the latest developments – their clients will be entitled to expect that they do so. Where professionals fail to properly understand the nature and characteristics of the relevant digital assets, the rights and obligations which attach to them, and the technological frameworks which govern their operation, and these failings give rise to liabilities and/or losses for clients, these clients will no doubt seek recourse against their professional advisors via claims in negligence. In this article we examine the types of issues relating to digital assets and blockchain technology which may give rise to professional negligence claims against three types of professional advisor: lawyers, auditors and insolvency practitioners. 

2.1                 
An increasing number of mainstream financial institutions are accepting digital assets as security (collateral) for loans and other financial arrangements. For example, it has been almost four years since Goldman Sachs established a lending facility secured by Bitcoin,^[7] and last year, JPMorgan implemented systems allowing institutional clients to pledge Bitcoin (BTC) and Ethereum (ETH) directly as collateral for fiat credit lines.^[8] As this trend continues, clients will increasingly turn to legal advisors for support with transactions involving digital assets and they will (rightly) expect those lawyers to understand the details of the digital assets involved in order to ensure they are reflected properly in the security that is purported to be created. In papering these arrangements, clients will be entitled to expect their legal advisors to ensure that any rights or remedies which the security is intended to create are recognised by the law and capable of enforcement should the borrower default. Clients will no doubt look to claims in professional negligence to make up any losses, in the event that their lawyers fail to live up to these expectations. 

2.2                 
Albeit in a very different context, this issue arose in the recent case of Ping Fai Yuen v Fun Yung Li & Lai Yun Li [2026] EWHC 532 (KB) where, despite holding that Bitcoin was a "third category" of property, as allowed for by the Act (see our digital assets timeline above), the Claimant could not bring a claim in the tort of conversion in a bid to recover stolen Bitcoin as the Court found that digital assets are not tangible property which is capable of being possessed. This demonstrates the potential danger of proceeding on the basis that certain proprietary remedies which are available in respect of "things in possession" and "things in action" (the two conventional types of property) will necessarily be available in respect of digital assets.

2.3
Further potential pitfalls for legal advisors may arise when building on blockchain technology, for example, in tokenisation of real-world assets. As identified by the UK Jurisdictional Taskforce,[9] tokenised issuances of, for example, bonds on public blockchains will need to ensure, among other things, that the legal rights that are sought to be "tokenised" are appropriately transferred to the holder of the token from time to time (and, conversely, that any performance by the issuer of its obligations to that holder amounts to the full discharge of its obligations). Holders of the on-chain token from time to time must also be protected from a prior holder seeking to assert that they have superior title. While there are potential solutions to the challenge of marrying public blockchain technology with existing legal frameworks governing conventional, real-world assets, care needs to be taken by legal advisors to ensure that risks such as the de-coupling of the real-world asset and the digital token is minimised and any consequences thereof are adequately catered for. 

2.4
Legal uncertainty will remain until these kinds of issues are resolved by the Courts or through legislation. In the interim, legal advisors will need to tread carefully and suitably qualify and caveat their advice. One particularly critical area for legal advisors operating in this space will be advising on the precise perimeter of the new FCA regulations for crypto asset firms operating in the UK, in order to ensure their clients avoid regulatory (and even criminal) sanctions. The FCA's regulations are due to come into force in October 2027 (see our digital assets timeline above).

2.5
Clients will often expect (and, depending on the scope of the engagement, may well be entitled to expect) their lawyers to advise them as to where legal uncertainty exists and the risks to which they are exposed as a result of the uncertainty. In the event that these risks materialise, causing a loss to the client, the client will, understandably, consider pursuing a claim in negligence against their lawyer, in order to recover some/all of these losses.

3.1                 
At present, there are no comprehensive or dedicated accounting standards for crypto assets either at the UK (UK GAAP) or international level (IFRS). [10] As a result, existing standards are being applied by analogy. In the UK, crypto assets have generally been treated as intangible assets within the meaning of FRS102/IAS38 i.e. an identifiable, non-monetary asset without physical substance from which economic benefits are expected to flow to the holder.[11] Consequently, the fact an entity holds crypto assets may not be readily apparent to the market or investors as they may simply be recorded in the balance sheet as an "intangible asset".[12] Further, in circumstances where the value of crypto assets can fluctuate significantly, if an entity has a considerable holding of crypto assets, this may have implications for its overall financial stability – something which auditors will need to bear in mind when advising clients on their financial reporting obligations.[13] The fact there are no comprehensive accounting standards creates significant challenges for auditors in valuing crypto asset holdings and assessing the existence/completeness of those holdings.

3.2                 
Auditors will also need to grapple with the challenge of determining who "owns" digital assets. As digital assets (or at least, native assets on public blockchains, like Bitcoin) are not created by legal instruments, nor are they a "thing in possession" because they do not have a physical manifestation, it may be difficult to ascertain which person has title. This point was squarely in issue following the collapse of crypto asset exchange FTX at the end of 2022 where, after it filed for bankruptcy, its customers became creditors while billions of dollars in crypto assets remained with the exchange and were subject to market risks. 

3.3
The role of auditors in attesting to the financial health of FTX, including, the preparation of "Proof of Reserve" ("PoR") reports was at the heart of the scandal. A PoR report is a specialised point-in-time verification used by crypto asset exchanges to seek to prove that they actually hold the digital assets they claim to hold on behalf of their customers. Even if the PoR "snapshot" is executed correctly, it is a point-in-time verification only because, unlike traditional audits, it does not involve a "going concern" evaluation (i.e. there is no forward-looking assessment). A PoR report also does not involve a comprehensive verification of a company's liabilities – it only looks at one side of the balance sheet. Unsurprisingly, there are currently no professional audit standards for PoR reports. Armanino LLP (who audited FTX) no longer provide audit or PoR services to crypto clients. Similarly, while accounting firm Forvis Mazars also provided a PoR report for Binance in respect of its Bitcoin holdings in late 2022, it was quickly withdrawn. While PoRs are only one piece of the audit puzzle, they demonstrate the difficulties (and perils) involved in seeking to adapt conventional audit standards and procedures to digital assets.

4.1                 
Finally, the increasing adoption of digital assets may bring heightened risk for insolvency practitioners. This may range from something as basic as a failure to identify or pursue (as necessary) any valuable digital assets which an insolvent company or estate may have a claim to. The insolvency practitioner could also mishandle private keys so as to permanently lose control over the relevant digital assets.[15]

4.2               
Drawing on the case of D'Aloia v Persons Unknown [2024] EWHC 2342 (see our digital assets timeline above), insolvency practitioners will also need to ensure that any digital assets which they seek to recover through "following" or "tracing" are supported by expert evidence which advances a coherent methodology capable of establishing a proprietary claim. In D'Aloia, the expert failed to explain the details of his methodology and how it applied to the transfers in issue in the case.[16]

5.1                 
The increasing ubiquity of digital assets in mainstream finance and other applications is likely to lead to a rise in demand for professional advice and services. However, those opportunities for professional advisors come with risks, given the novel and continuously evolving nature of the technology itself and the law and regulations governing it. Further, clients of these professionals, who will often have held themselves out as experts in relation to digital assets, are entitled to expect a degree of protection from the relevant risks that are associated with these assets. Where professionals fail to deliver this to clients, clients will no doubt consider and pursue claims against these advisors in order to recover some or all of their losses and liabilities arising from the materialisation of these risks. Accordingly, as the space matures, we expect to see a growing number of professional negligence claims being brought against advisors operating in this space.