Crypto and Bankruptcy
With cryptocurrencies all the rage these days, consumers may be dismayed to learn that, although their assets are protected from some dangers by using external wallets or crypto wallets, when it comes to a cryptocurrency platform going bankrupt, their crypto may be at risk.
Did You Know?
When it comes to crypto platforms, there are real issues for customers when bankruptcy becomes an issue:
- A number of these crypto platforms have experienced bankruptcy in recent years, including Genesis, Celsius, FTX, BlockFi, and Voyager;
- Some of the bankruptcies were allegedly due to a “run on the bank” where customers engaged in significant withdrawals in a short time span;
- In some cases insider mismanagement led to the bankruptcy—including when millions were withdrawn by insiders at Celsius and when FTX insiders misappropriated, misused, or comingled billions in crypto deposits;
- These exchanges are often used to pay legal fees and debts in a bankruptcy, meaning customers are the last to collect in most cases;
- Using a decentralized wallet, decentralized custody, or having non-custodial wallets alongside custodial wallets can improve customers’ ability to control their crypto.
Impacts When Crypto Exchanges Go Bankrupt
For those with custodial accounts, getting payment could be doubtful, because they will be last in line after creditors and attorneys. Alternatively, if customers have kept their currencies in self- or non-custodial wallets, they won’t be impacted at all by the bankruptcy. Obviously, spreading cryptocurrencies among multiple wallets allows consumers to reduce risk while giving one the flexibility to transfer currency balances as needed.
The Downside of Self- or Non-Custodial Wallets
If these wallets are so much better, why doesn’t everyone in the crypto world use them? As with all things, there are drawbacks to managing your crypto yourself:
- Setting up and using the exchange will be a bit more complicated, often times requiring pretty substantial technical proficiency;
- It will definitely be more work for you to manage the wallet on your own;
- If you lose or forget your password, it may be a challenge to retrieve it—resulting in financial losses that could be significant.
The Bottom Line
Holding cryptocurrencies through an investment platform and/or an exchange could put you at risk should the platform experience a bankruptcy. There’s simply no guarantee of a payback, and if you are lucky enough to recover your funds, it could take a very long time.
A Complicated Business
Crypto dealings can be challenging to the novice, and, when combined with issues related to a platform’s bankruptcy, it can be a nightmare to make sense of. The experienced and dedicated Miami bankruptcy attorneys at The Law Office of Julia Kefalinos are here to answer your questions and advocate for you. To discuss your concerns, schedule a confidential consultation in our Miami office today.
Source:
businessinsider.com/personal-finance/investing/what-happens-when-a-crypto-exchange-goes-bankrupt
