The major downside to cryp🅘tocurrency is the risk of loss, which is even more difficult to manage when a crypto exchange is holding your keys. In July 2022, two major crypto trading platforms, Voyager and Celsius,𝓰 declared bankruptcy. In November 2022, crypto exchange FTX suffered a major liquidity crisis and filed for Chapter 11.

FTX created a wave of bankruptcies throughout the industry. In 2023, BlockFi, Genesis, and 3AC (a hedge fund), all of whom had money in or loaned to FTX, failed🍌.

But what does all this failure mean for investors wishing to get their money back after their trusted crypto exchanges fail? In a nutshell, be careful where you place your money and be familiar with the bankruptcy process.

Your Exchange Accounts Might Be Frozen

The bankruptcies of FTX, Voyager, Celsius, BlockFi, and the rest highlight the unique risks that cryptocurrency holders and investors face when trusting crypto firms with their funds. One of the most pressing risks is that you might lose access to you🦂r funds.

After so many failures, hacks, and schemes involving cr൩yptocurrency, freezing accounts to prevent losses, theft, or mass withdrawals has become a common practice when a cryptocurrency exchange is experiencing technical or security issues.

Funds are also typically frozen when exchanges experience liquidity issues in anticipation of declaring bankruptcy. This practice is supposed to keep fuꦯnds in place so that if a bankruptcy occurs, all creditors can be paid accordingly, and customer funds are not lost.

You'll Need to File a Claim

The exchange should have followed standard know-your-customer (KYC) requirements to set up your account with identification, a🔯ddress, and other personal information. It should have your contact information and an accounting of what you're owed on file. If the company declares bankruptcy, you should ideally hear from them right away with information about the next steps.

When an exchange files for Chapter 11 bankruptcy, the court will appoint someone to act as CEO during the company's restructuring. This entity will take stock of the exchange's assets, debts, and other obligations and work with lawyers and the judge to create a payback or restructuring plan.

Once approved by creditors and the judge, the distribution process begins. However, it may take some time as the restructuring team needs to collect claims from all creditors. The claim process may require completing forms, confirming your address and payment information, and keeping up with any other necessary paperwork to get your crypto or cash returned.

You'll Be Paid Based on Creditor Priority

During Chapter 11 bankruptcy proceedings, there will be a clear chain of creditor priorities published. The bankrupt company must produce a detailed schedule of 澳洲幸运5官方开奖结果体彩网:assets and liabilities, among other financial statements and reports. During the bankruptcy process, the company, lawyers, and a bankruptcy judge work to determine who gets paid back, how much, and in what order.

The legal code states that, in general, the first payments are made to 澳洲幸运5官方开奖结果体彩网:secured creditors. Once those obligations are met, funds must be used to repay debts to 澳洲幸运5官方开奖结果体彩网:unsecured creditors. If you own any stock in the exchange, you'll be nearly last in line when it comes to recovering those assets🅘, but your funds and possibly cryptocurrency may take priority over stockholders.

When the pool of assets to be returned to individual investors is calculated, everyone is notified of the pro rata share they will receive based on their priority. However, cryptocurrency returns may not be guaranteed, as their return (or a value equal to it) depends on how it was held by the exchange. Additionally, because cryptocurrencies are considered property, their market value at the time of bankruptcy petitioning is likely to be used rather than their value at the time of distribution. For instance, Kroll Restructuring was appointed to reorganize FTX. In its plan, cryptocurrency holders will be paid according to the market price of their crypto at the time FTX petitioned for bankruptcy.

ꦅYour Cryptocurrency and Funds May Not Be Insured

While confusing marketing messages have led investors to believe otherwise, cryptocurrency holdings are not insured by the ✱澳洲幸运5官方开奖结果体彩网:Federal Deposit🍃 Insurance Corp. (FDIC), and many exchanges are not covered by the FDIC even if they hold funds for customers. Some exchanges might place your deposits in an FDIC-insured institution to try and take advantage of FDIC pass-through insurance, but this tactic has not yet been tested by courts, nor has it been officially approved by the FDIC. The FDIC only pays insurance "...after an insured bank fails"—not when an exchange that held pooled assets at a bank fails.

Additionally, the Securities Investor Protection Corporation (SIPC) does not cover cryptocurrency—unless it is registered as a security with the SIPC—even on an exchange that is an SIPC member.

澳洲幸运5官方开奖结果体彩网:Stablecoins, a category of cryptocurrency pegged to a government-backed fiat currency or other more stable asset, also fall outside FDIC and SIPC coverage. As holders of the 澳洲幸运5官方开奖结果体彩网:TerraUSD stablecoin experienced, those currency pegs are not always viable.

Before Investing, Be Cautious

There are many legitimate and honest cryptocurrency-related businesses, but there are just as many that are not. Some scams even appear to be 澳洲幸运5官方开奖结果体彩网:large, successful businesses and attract vast numbers of retail and enterprise cli🐷ents. These are the circumstances in which caution should be exercised.

Businesses do not nꦆormally become w🔯ildly successful after only a few years of operation—consider the case of the exchange FTX. It was founded in 2018 and, by January 2022, was worth a reported $32 billion before it collapsed. By comparison, Coinbase, another cryptocurrency exchange, was founded in 2012 and had a market cap of about $54 billion (enterprise value of about $51 billion) in July 2024. Coinbase is also publicly traded, meaning it has undergone a rigorous regulatory process to be listed on Nasdaq. But even Coinbase is still very young compared to the national stock exchanges everyone knows and trusts.

Rapidly growing businesses have always been hazardous investments, and there is even more risk involved when people place money in a young exchange company's custody. Worse than being a young company is the fact many of these exchanges have been created by individuals with no experience managing a financial organization likely to see billions of dollars in cash flowing through it. Then, they surround themselves with friends and other developers instead of industry gurus who could give them experienced, solid, and legal advice.

The Bottom Line

A 澳洲幸运5官方开奖结果体彩网:bankruptcy at any financial institutio𒊎n tha🌜t you work with can be stressful, confusing, and costly. In the cryptocurrency industry, customer confusion and losses can be even worse. But rather than panic, it's best to let the bankruptcy process pan out to determine exactly what ꦫyou'll get back.

There's a risk that cryptocurrency investors might not get any of their money or crypto back after bankruptcy, but there's also a chance that they will get something back—even if it's just a portion of their original investment.

If you find yourself involved with a bankrupt crypto exchange, it's best to file a claim as soon as it is available and keep close tabs on your inbox and mailbox for information.

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