Ownership Doesn’t Require Possession
One of the great features of bitcoin is that, by using a private key to sign a transaction, you do not need to trust an intermediary to transfer value to any address on the network. However, you don’t need to hold the private keys to own the bitcoin. Surrendering possession of a thing does not inherently mean relinquishing ownership of it.
My favorite way to think about this is to look at what happens when I take my car to have its oil changed. Each time I do this, I hand the keys over to the mechanic and leave my car parked on the mechanic’s property (let’s name my mechanic “Marty”). Until I decide to return and pay for the oil change, Marty holds possession of both my car and its keys. To possess an asset means to have control or custody or to detain that asset.
Ownership, however, means more than mere possession, and includes “the complete dominion, title, or proprietary right in a thing or claim.” Marty may have possession of my car and its keys, and Marty likely even has a superior right or claim to those items when compared to almost anyone else. However, Marty cannot lawfully sell my vehicle to an interested buyer, and Marty cannot lawfully take my car for a joy ride. As custodian or as the possessor of my car and its keys, Marty may only lawfully take actions involving my keys if I — as the owner — have authorized those actions.
Marty’s mere possession of my car and its keys does not deprive me of my lawful ownership of those items.
Now let’s suppose Marty decides to do something I have not authorized. Marty takes my vehicle for a spin, gets in a fender bender, and now the bumper on my car needs to be replaced. Next suppose I sue Marty to recover the cost of a replacement bumper, and Marty’s only defense is “she gave me her keys!” This defense will fail, and Marty will be ordered to pay for my bumper, because although I gave possession of my keys to Marty, I did not authorize him to do anything more than change the oil.
While the laws specific to bitcoin are less developed than the laws on car accidents, vast precedent exists on the topics of custody, possession, authorization, and ownership. As a result, you can do a number of things to minimize risks associated with custodial relationships (does the custodian have insurance? how does the custodian approach security? does a contract appropriately scope authorizations?), but I will save those things for later discussion.
I know from firsthand experience that there are pros and cons to holding your own bitcoin keys versus trusting another to do so, just as there are pros and cons to changing your car’s oil yourself rather than trusting a mechanic with that job. So keep possession of your keys, or don’t (another discussion for a later day), but rest assured that possession of your keys by someone else does not, in the eyes of the law, negate your ownership of those keys.