Why these five defenses matter more than flashy marketing promises
Are you building hardware wallets, mining rigs, tokenized custody devices, or any IoT device that interacts with private keys and funds? If so, you are not just making a product - you are potentially making someone else responsible for holding or moving digital value. That raises product liability exposure unlike most consumer electronics. What if firmware bugs drain a wallet? What if a connector fails and causes a fire? What if a compromised supply chain lets an attacker exfiltrate keys? Legal exposure can destroy a business and follow founders personally if corporate protections are weak.
This list focuses on five practical, legally grounded defenses you can implement now. Each item explains legal mechanics, real-world examples, and easy-to-follow tactics. No hype, no canned sales-speak - just what lawyers really look for when assessing risk. What will you change after reading this? Which defense can you implement this month?
Defense #1: Rigid entity structure and operational walls - don’t mix the risky parts with the safe parts
An entity is only as strong as the corporate habits that support it. If your manufacturing, R&D, firmware development, and distribution live under one roof with no formal distinctions, a court has an easier time reaching more assets. What should you do?
- Separate functions into different entities. Put manufacturing operations in one company, IP and design in another, and sales/distribution in a third. If a product liability claim arises against the manufacturer, the plaintiff has a narrower target. Fund each entity properly. Thin capitalization is a red flag. Maintain realistic equity and intercompany loan documentation. Use formal board minutes and bank accounts for each entity. Execute clear contracts between entities. Service agreements, supply agreements, and licensing deals should be written, arm’s length, and priced like market transactions. Avoid informal cost-sharing that blurs boundaries. Keep operational separation in practice. Different offices, separate payroll, and distinct vendors make it harder to argue the entities are alter egos.
Example: A hardware wallet manufacturer created its prototype inside the same company that sold the devices. After a firmware bug caused loss of funds, plaintiffs sought to pierce the corporate veil to reach founders' personal assets because capitalization was thin and records were sloppy. Strong separation could have limited recovery to the manufacturing company alone.
Defense #2: Contracts that actually reduce litigation risk - stop assuming clickwrap saves you
Do your terms and warranties read like a legal novel no one can understand? Are your distributors or assembly partners operating with vague verbal promises? Contracts are your first line of defense if drafted and enforced correctly. What clauses matter most for a crypto product?
- Clear limitation of liability and warranty language. Spell out exactly what you warrant, for how long, and what remedies buyers receive. For crypto devices, carve out warranty limits around software-modifiable components and offer firmware update programs instead of blanket guarantees. Indemnity and flow-down obligations. If you use a contract manufacturer, require them to indemnify you for manufacturing defects, warranty breaches, and supply chain compromises. Make sure your indemnity flows down to subcontractors. Choice of law and forum selection. Make disputes subject to a favorable jurisdiction and require arbitration where appropriate. Will that hold up if the claimant is a consumer in another country? Consider consumer protection constraints. Express allocation of responsibility for crypto-specific risks. Say who is responsible if private keys are lost, if firmware updates break functionality, or if connector failures cause losses. Ambiguity invites litigation.
Practical tip: Don’t rely solely on clickwrap for safety. Get signed resale or distribution agreements with large buyers, and require vendors to carry insurance and provide certificates of insurance before production starts.
Defense #3: Engineering controls, testing protocols, and documentation - make the product legally defensible
Courts and juries look at what you did to prevent harm. Often, the strongest defense is a clear paper trail showing you designed, tested, and monitored the product responsibly. What does that record look like?
- Design for safety and security. Employ secure-by-design practices for firmware and electronics. Use independent code audits and threat models. Document design decisions and why certain trade-offs were made. Third-party testing and certifications. Use accredited labs for electrical safety, electromagnetic compatibility, and where relevant, cryptographic module certification. Certificates like UL or CE are persuasive evidence of reasonable care. Maintain rigorous QA logs. Track component lot numbers, test results, firmware versions shipped, and failure rates. If a problem arises, you can narrow scope to specific lots rather than recalling everything. Build an incident response and recall playbook. If devices are compromised, you need to show prompt, proportional action. Keep communication templates and legal hold procedures ready.
Scenario: A supplier shipped microcontrollers from a suspect lot that later failed in heat. The company with solid lot tracking isolated the issue, issued a targeted recall, and avoided major suits. Which path would you prefer?
Defense #4: Insurance and risk layering - buy what courts won’t take away
Even well-run companies get sued. Insurance is not a magic shield but it transfers risk and signals to courts and counterparties that you take liability seriously. Which policies and structures are most relevant for crypto manufacturing?
- Product liability insurance with cyber add-ons. Traditional product liability covers physical injuries and property damage, but for crypto products you need cyber liability to cover data breaches, key compromises, and third-party losses tied to software defects. Professional liability for firmware/service failures. If you provide firmware updates, custodial services, or managed telemetry, consider errors and omissions coverage that covers financial losses from professional lapses. Layered excess and captive options. For high-risk, high-revenue operations, layering an umbrella policy or using a captive insurer can fill gaps. Work with brokers who understand crypto tech - standard forms often exclude digital asset losses. Insure supply chain partners. Require manufacturers and vendors to name you as an additional insured where possible and to provide certificates showing current coverage before production starts.
Question to ask your broker: Does the policy explicitly cover losses arising from private key compromise, firmware vulnerabilities, or smart-contract-linked defects? If not, negotiate tailored endorsements or look for specialty insurers.
Defense #5: Offshore trusts, asset protection, and international structuring - practical limits, not magic
Many founders are tempted to "put assets offshore" and assume they are untouchable. Asset protection matters, but the law has real tools to unwind transfers that are fraudulent. How can offshore structures help, and where do they fall short?
- Use trusts and international entities as part of a documented plan. Properly drafted offshore trusts or family holding companies can add friction and time to plaintiffs seeking recovery. But these must be set up well before a claim is foreseeable and with independent trustees. Understand fraudulent transfer laws. Transfers made to avoid known creditors can be reversed. Courts in many jurisdictions have broad powers to unwind transfers made with intent to hinder creditors. Consider domestic alternatives. Some U.S. states offer asset protection trusts with strong creditor protections and more predictable court outcomes compared to overseas options. Evaluate privacy, enforcement, and reporting requirements. Mind compliance and tax. Offshore structures carry reporting obligations, tax considerations, and banking friction. Poorly executed structures create new legal exposures and reputational harm.
Practical scenario: A founder moved revenues into an offshore trust after getting a pre-suit letter. A court later found the transfer fraudulent and ordered turnover plus sanctions. Contrast that with a plan executed years earlier with independent trustees that required a court to litigate complex jurisdictional issues before reaching assets. Which outcome is better for the business and its stakeholders?
Your 30-Day Action Plan: Concrete steps to harden your crypto manufacturing business against product liability
Ready for action? This plan breaks down immediate steps into three 10-day sprints so you can build momentum. Can you commit a week to each sprint and regular legal review?
Days 1-10 - Stabilize contracts and insurance
- Have your core customer, distributor, and supply contracts reviewed and tightened around warranty limits, indemnities, and forum clauses. Prioritize contracts with high-volume customers and contract manufacturers. Call your insurance broker and request a review for product and cyber exposures specific to hardware wallets and connected devices. Get written coverage gap analysis within 48 hours. Require certificates of insurance from your manufacturers and key suppliers before the next production run.
Days 11-20 - Lock down engineering practices and documentation
- Run a short-form audit of your firmware release process: who signs off, how you version, how you test updates. Fix any single points-of-failure. Start third-party code review for critical modules. If budget is tight, prioritize the crypto stack and update mechanisms. Create an incident response checklist and recall playbook. Run a tabletop exercise with operations, legal, and PR in the room.
Days 21-30 - Corporate housekeeping and asset protection review
- Map your entity structure and operational boundaries. Where will plaintiffs realistically sue? Strengthen separations where possible. Consult a qualified asset protection attorney about whether onshore asset protection trusts or international structures make sense, given your risk profile and timing. Document capitalization, intercompany agreements, and board minutes for the last two years to reduce veil-piercing risk.
After day 30, schedule quarterly legal and security reviews. Which of these steps feels most urgent for you right now?
Comprehensive summary and final counsel
Product liability in the crypto manufacturing space is complex because it blends physical product risk with software, cryptography, and custody issues. There is no single fix. The five defenses here operate together: entity structure limits exposure, contracts allocate responsibility, engineering controls reduce defects, insurance transfers financial risk, and asset protection provides an extra layer when properly executed.
Ask practical questions: Are your entities properly funded and separated? Do your contracts www.thestreet.com clearly assign crypto-specific risks? Can you show contemporaneous testing and firmware version trails? Does your insurance actually cover key compromises? Were asset moves made before any hint of a claim?
What you start this month will matter in court years from now. The best protection is visible, consistent practice - not a single document you create at the last minute. If you need a prioritized checklist tailored to your business model, consider a short engagement with counsel who understands hardware, crypto, and manufacturer litigation.
Which defense will you tackle first? If you want, give a short description of your product and I will suggest the top three immediate moves you should make.