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Counterparty risk

In IcelandicMótaðilaáhætta

The risk that whoever you deal with, or trust with your assets, fails to keep their side of the deal, for example because of bankruptcy or fraud.

Counterparty risk is the risk that the counterparty, meaning whoever you are dealing with or trusting with your assets, fails to meet its obligations. The counterparty could be a bank, a securities firm, the issuer of a bond or a CustodianCustodianA company that holds crypto and the keys to it on behalf of customers, such as a licensed crypto exchange. holding your crypto. If it goes bankrupt, is defrauded or simply doesn't pay, you can lose money even if the asset itself keeps its value.

Examples

  • A bank deposit. You are really lending the money to the bank. If it fails, you are one of its creditors, but deposit insuranceDeposit insuranceProtection for bank deposits if a bank fails, in Iceland up to the equivalent of EUR 100,000 per person per bank. It doesn't cover crypto. protects deposits up to a limit.
  • A bond. If the issuer can't pay, you lose part or all of it.
  • Crypto at an exchange. The crypto is held by the company. When FTX collapsed in November 2022, customers lost access to their assets, even though the Bitcoin network itself carried on as normal.
  • A stablecoin. Its value depends on the issuer holding the assets behind it and redeeming the coin.

Why does it matter in crypto?

Bitcoin was designed to remove the middleman. If you keep bitcoin in Self-custodySelf-custodyHolding the private keys to your crypto in your own wallet, so nobody else controls it but all the responsibility for the keys is yours., nobody owes you anything: you own the crypto itself, and it isn't a claim on anyone. That is the core of the saying "not your keys, not your coins".

When you keep crypto with a service provider, counterparty risk comes on top of price swings. On the other hand, self-custody moves the responsibility to you. If you lose your keys, nobody can help.

How is it reduced?

  • Rules. MiCA requires segregation of client assetsSegregation of client assetsWhen clients' assets are kept separate from a company's own, so its creditors can't claim them if it goes bankrupt.: clients' assets must be kept apart from the company's own, so its creditors can't claim them.
  • Supervision. Licensed firms are supervised, which lowers the risk of misuse.
  • Spreading. You can spread assets across more than one provider, or keep part in self-custody.

Everything in Myntkaup Learn is written and regularly reviewed by the Myntkaup editorial team. It is for education and is not investment advice. Editorial policy. Updated 2 November 2026.