What happens to my funds if a crypto exchange goes bankrupt?
Bankruptcy filings from Celsius and Voyager have raised questions about what happens to investors’ crypto when a platform fails.
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Traders hoping to recoup their funds from failed cryptocurrency exchanges anytime soon are likely to end up disappointed, legal experts tell CNBC.
Crypto trading and lending firms Celsius and Voyager Digital filed for bankruptcy this month, leaving users’ assets trapped inside their platforms. Both firms froze client accounts after an influx of withdrawals led to liquidity issues.
Celsius operated much like a bank, taking customer deposits and lending them out or making risky gambles on so-called decentralized finance products to generate high yields.
Voyager had a similar model. The company got caught up in the collapse of high-profile crypto hedge fund Three Arrows Capital, which itself went belly up after defaulting on a $660 million loan from Voyager.
Such interconnectedness has left the crypto market vulnerable to contagion, with major firms falling like dominoes as a plunge in token prices has unwound excessive leverage in the system.
Is my crypto safe?
Cryptocurrencies aren’t regulated, meaning they don’t offer people the same protections they would get with money held in a bank or shares in a brokerage firm.
For example, the U.S. Securities Investor Protection Corporation insures traders up to $500,000 in cash and securities if a member broker runs into financial difficulties.
The Federal Deposit Insurance Corporation, meanwhile, offers bank depositors protection of up to $250,000 if an insured lender fails.
There are similar schemes in place in the U.K. and European Union.
With no laws governing cryptoassets, there’s no guarantee investors would be able to recoup their funds if an exchange were to freeze someone’s account — or, worse yet, completely collapse.
“There isn’t such a scheme like that at this point” for crypto, said Daniel Besikof, partner at Loeb & Loeb.
“It wouldn’t surprise me if one happens down the line,” he added. “This will ramp up calls for enhanced regulation.”
What happens if an exchange fails?
For now, it’s still not entirely clear. While there are examples of crypto firms filing for bankruptcy overseas — Mt. Gox in Japan, for example — such an event is unprecedented in the U.S.
Creditors of Mt. Gox, which went offline in 2014, are still waiting to get repaid billions of dollars’ worth of the cryptocurrency.
The problem with centralized crypto platforms is they can mix different clients’ funds together to make risky bets, according to Daniel Saval, a lawyer with Kobre & Kim. Such commingling may lead to a ruling that the assets are the property of the exchange, not users.
“Users may be surprised to learn that, in a bankruptcy scenario, the crypto and funds held in their accounts may not be considered their own property,” Saval says.
“Exchanges will often pool different customers’ crypto and funds together in the same storage wallet or…
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