The Value of your Crypto Investment may Become Zero if Exchange goes Bankrupt
Cryptocurrency exchanges Customers of Coinbase Exchange have been advised that if the company goes bankrupt, their bitcoin investments would be lost. It claimed in a filing with the US Securities and Exchange Commission (SEC) that the crypto assets it holds for its clients may be vulnerable to bankruptcy procedures.
When a bitcoin exchange goes bankrupt, can customers get their money back?
If an exchange becomes bankrupt, Chapter 11 debtors’ laws on creditor recovery will very probably apply. Secured creditors are often paid first, with unsecured creditors following.
A crypto exchange is unlikely to have measures in place to protect cryptocurrency investors, however, it may have insurance policies in place for particular covered occurrences, such as cybersecurity disasters. An investor is likely to be an unsecured creditor who may not be able to collect what is due to them unless the user terms specify differently.
Courts haven’t given much attention to what happens to cryptocurrency owners’ assets if their exchange goes bankrupt in the US.
Customers may argue that their funds were held in a constructive trust, which is a trust created to repair a mistake. This may assist customers in prioritizing their rehabilitation, but it is not guaranteed.
What other issues could arise?
In a crypto exchange bankruptcy, the wording and conditions of the agreement between the crypto customer and the broker may be used to determine if crypto or other alternative assets are property of the debtor’s estate.
How the underlying crypto assets are commingled, the crypto exchange’s ability to use the underlying customer’s unique assets, and state-specific trust regulations would all likely be factors in the case of an exchange bankruptcy.
Non-customer creditors may refuse to accept client accounts as exchange property in order to maintain their faith in the industry.
Even if customers may reclaim their property quickly, there is no clear system for recovering their assets or funds without going through the complete bankruptcy process, which includes claims reconciliation.
So, what are the options for customers?
“Not your keys, not your money,” Chandra says, recommending keeping crypto assets in self-hosted or non-custodial offline wallets. “Having access to digital asset private keys is critical.” Investors who store their funds in self-hosted or non-custodial wallets, he claims, do not have to worry about exchanges going out of business because they have custody of their funds.
Holding crypto in hardware wallets or decentralized exchanges, which are not overseen by central authorities, is always secure, according to Seinberg. “If you held LUNA in your wallet, for example, it would not be delisted; the value would simply be zero.” “However, it persists. If Luna returns to its system, you’ll be able to replace it or access it without anyone’s consent,” he explains.