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 sheets. Celsius has filed Chapter 11 cases that would represent the best opportunity to stabilize its business and complete an extensive restructuring operation that maximizes value for all stakeholders.

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

Celsius highlighted some negative factors for crypto exchanges, pointing to the implosion of Terra LUNA (“Luna”) and its stablecoin TerraUSD (UST) (“UST”) as the cause – as it marked the beginning of a “crypto winter” and a worldwide sale in 2022.

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As of July 13, 2022, Celsius’s liabilities were approximately $5.5 billion and assets were valued at approximately $4.31 billion. Thus, the company has a $1.19 billion deficit 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 create a serious shortage of liquidity for exchanges. In the case of CoinFlex, it was at least just one investor that prompted the exchange to stop trading.

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

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

This battle with crypto exchanges is 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 get a substantial return on their investment. But what if your money also gets caught up in the bankruptcy of your crypto trading platform. This is unfortunately true!

Vinit Khandare, CEO and founder of MyFundBazaar, said limited market liquidity could lead to a collapse in stock prices triggering another financial crisis. develop a broad strategy to exploit the negative effects of liquidity.

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

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

For example, Coinbase had furthermore stated that crypto assets held in custody can be considered property of a bankrupt estate, in the event of bankruptcy, the crypto assets we hold in custody on behalf of our customers may be subject to bankruptcy proceedings. and these customers may be treated as our common unsecured creditors.

Simply put, if a crypto exchange goes out of business, chances are your crypto assets will be pushed into the proceedings as well.

Abhijit Shukla, CEO and director of Tarality, said: “Without laws regulating crypto assets, there is no guarantee that investors will be able to get their money back if an exchange were to freeze an account – or worse, collapse completely. In a bankruptcy scenario. the cryptocurrency and money in their accounts may not be considered their own property, with cryptocurrencies and money from different customers often bundled in the same wallet or storage account.”

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

“As a result of bull runs and market declines, using non-directional or probability-based trading methods allows investors to protect their assets from potential losses and potentially take advantage of downside scenarios with increasing volatility,” Khandare said.

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