What Happens To Investors’ Money When A Cryptocurrency Exchange Goes Bankrupt

New Jersey-based Celsius Network is the latest to announce voluntary bankruptcy due to illiquid balance sheet. Celsius has filed Chapter 11 cases that would provide the best opportunity to stabilize its business and complete a comprehensive restructuring operation that maximizes value for all stakeholders.

Last week, when filing for bankruptcy in court, the exchange said: “Celsius’ early successes were not without hitches. The amount of digital assets on the company’s platform grew more quickly than the company was ready to deploy. As a result, the company made what, in retrospect, turned out to be some poor asset deployment decisions.”

Highlighting some negative factors for crypto exchanges, Celsius pointed to the implosion of Terra LUNA (“Luna”) and its stablecoin TerraUSD (UST) (“UST”) as the cause – as it accelerated the start of a “crypto winter” and an industry-wide sell-off in 2022.

Notably, as of July 13, 2022, Celsius’ liabilities were approximately $5.5 billion and assets were valued at approximately $4.31 billion. Thus, the company has a deficit of $1.19 billion on its balance sheet.

Another would be Voyager Digital in bankruptcy proceedings after suffering heavy losses in the collapse of 3AC and the stock market crash. Recently, FTX offered to offer liquidity to Voyager customers as part of a proceeding.

It is not just the crypto market crash that has left crypto exchanges vulnerable. In fact, even investors can cause a severe shortage of liquidity for exchanges. At least, in the case of CoinFlex, it was only one investor who pushed the exchange to halt trading.

On July 9, CoinFlex explained that it halted withdrawals after a large investor failed to pay $47 million in margin calls. CoinFlex expects to recover $84 million through legal action against this individual. In addition, the exchange plans to create temporary liquidity for its depositors soon. Meanwhile, in the long term, it is also in talks to form a joint venture with a major US-based exchange/ATS.

Asia’s leading crypto exchange, Zipmex has joined the movement to disable trading until further notice. Although the exchange allowed withdrawals to the trading portfolio of investors. Other crypto exchanges like Binance, Voyager CoinFlex, Celsius, Vauld, and Skybridge Capital are among the platforms that have halted withdrawals since June.

These crypto exchange struggles are alarming for investors as they are likely to impact their hard-earned money. When investors invest in the crypto markets or any other capital market instrument, everyone wants to earn a substantial return on their investment. But what if your money is also entangled in the bankruptcy of your crypto trading platform. This is unfortunately true!

Vinit Khandare, CEO and Founder of MyFundBazaar, said limited market liquidity can trigger a stock price crash that triggers a new financial crisis, surviving the shortage of liquidity involves – increasing cash allocations, avoiding undue positions warning of a global risk of congestion and to develop a broad strategy to exploit the negative impacts of liquidity.

In May this year, the largest US-based crypto exchange, Coinbase, in its filing with the Securities and Exchange Commission (SEC), explained that “the supported crypto assets are not insured or guaranteed by any government or government agency”.

Coinbase in the filing said any failure by the crypto platform or its partners to maintain necessary controls or manage customer crypto assets and funds appropriately and in accordance with applicable regulatory requirements could result in a breach. to reputation, litigation, regulatory enforcement actions, significant financial problems. losses, lead customers to discontinue or reduce their use of the products and result in significant penalties and fines and additional restrictions, which could adversely impact their business, results of operations and financial condition.

Thus, Coinbase had stated, in addition, that crypto assets held in custody could be considered the property of a bankrupt estate, in the event of bankruptcy, the crypto assets that we hold in custody on behalf of our customers could subject to bankruptcy proceedings. and these customers could be treated as our general unsecured creditors.

Simply put, if a crypto exchange goes bankrupt, chances are your crypto assets will also be pushed into the proceedings.

Abhijit Shukla, CEO and Director of Tarality, said: “With no laws governing crypto-assets, there is no guarantee that investors would be able to recover their funds if an exchange were to freeze an account – or, even worse, completely collapse.In a bankruptcy scenario, the crypto and funds held in their accounts may not be considered their own property, often consolidating crypto and funds from different clients into the same wallet or storage account.”

Furthermore, the CEO of MyFundBazaar pointed out that in the event of bankruptcy, crypto customers with held assets are usually the last to receive payment – ​​those who have their cryptocurrencies locked away in self-custodial wallets will not be affected. since they own the private key.

“Due to bull runs and market downturns, by using non-directional or probability-based trading methods, investors may be able to protect their assets from potential losses and may be able to take advantage of downturn scenarios. increasing volatility,” Khandare said.

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Robert D. Coleman