What happens to my money 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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Legal experts told CNBC that traders hoping to get their money back from failed crypto exchanges anytime soon are likely to be disappointed.

Cryptocurrency trading and lending companies Celsius and Voyager Digital filed for bankruptcy this month, leaving users’ assets trapped inside their platform. Both companies Freeze customer accounts after a large amount of withdrawals led to liquidity problems.

Celsius works like a bank, taking customer deposits and lending or doing risky games on so-called decentralized financial products to generate high yields.

Voyager has a similar model. The company was entangled in the collapse of popular crypto hedge fund Three Arrows Capital, which lifted itself after defaulting on a $660 million loan from Voyager.

Such connectivity has caused the crypto market to leave easy to spreadwith large companies falling into dominoes as the token price plummeted did not create excessive leverage in the system.

Is my cryptocurrency safe?

Cryptocurrencies are unregulated, which means they don’t offer people the same protection as they would get for money held in a bank or shares in a brokerage firm.

For example, US Securities Investor Protection Corporation insurance Trade up to $500,000 in cash and securities if a member broker is in financial difficulty.

Meanwhile, the Federal Deposit Insurance Corporation offers bank depositor protection up to $250,000 if an insured lender fails.

There are similar programs in the UK and the European Union.

With no laws governing cryptocurrencies, there is no guarantee investors will be able to get their money back if an exchange freezes someone’s account – or worse, completely collapses. .

“There is no such plan at this time” for cryptocurrencies, said Daniel Besikof, partner at Loeb & Loeb.

“It wouldn’t surprise me if something happened at the bottom,” he added. “This will spur calls for increased regulation.”

What if an exchange fails?

For now, it’s still not entirely clear. While there are examples of crypto companies filing for bankruptcy abroad – Mt. Gox in Japan – such an event is unprecedented in the US

Creditors of Mt. Gox, which went offline in 2014, is still waiting to be reimbursed for billions of dollars worth of cryptocurrency.

According to Daniel Saval, an attorney for Kobre & Kim, the problem with centralized crypto platforms is that they can mix different client funds together for risky bets. Such travel could lead to a judgment that the assets are the property of the exchange, not the users.

“Users may be surprised to learn that, in a bankruptcy situation, cryptocurrencies and the funds held in their accounts may not be considered their own property,” Saval said.

“Exchanges will often pool cryptocurrencies and different customer funds together in the same wallet or account.”

Read more about technology and crypto from CNBC Pro

Besikof said what happens to client funds in bankruptcy cases will depend heavily on the company’s user agreement and how it uses their assets.

Poison ‘ terms of use states that any funds deposited with the company are “uncollectible” in the event of bankruptcy. The company filed for Chapter 11 protection last week, revealing a $1.2 billion hole in its balance sheet and about $4.7 billion in debt to users.

Celsius claims to have $167 million in cash on hand. But it still does not allow customers to withdraw their funds and has not provided clarity on when it will reopen withdrawals.

Voyager said its client’s dollars are held in an FDIC-insured account at Metropolitan Commercial Bank in New York – however, This claim has been disputed by legal experts and the bank itself. The FDIC only provides money protection in the event of a bank failure, not a cryptocurrency exchange.

For its part, Voyager said it is working through a “fraud prevention and reconciliation process” with its banking partner, after which users will be able to regain access to their cash.

Voyager also laid out a plan to reimburse users for crypto in their accounts, Voyager shares and the company’s own tokens, as well as any debt recovered from Three Arrows Capital.

Both Celsius and Voyager hired the prestigious law firm Kirkland & Ellis to represent them in court.

“Investors holding crypto assets through Voyager Digital and now Celsius have been put in a difficult position, with their accounts frozen, their lawsuits still pending and,” Besikof said. The value as well as the duration of any recovery is unknown,” Besikof said.

“There’s a lot of work for them to do in bankruptcy court before these issues are resolved.”

Celsius and Voyager have filed for what is known as Chapter 11, a form of bankruptcy protection that allows companies to restructure their debts. The aim is to ensure there is still a viable business at the end of the process.

Legal experts say it’s more likely that Celsius and Voyager’s users will be treated as “unsecured creditors,” a classification that puts them in the same category as a business’s suppliers and contractors. .

This means they will probably stay after a long queue of creditors lined up to get paid from court proceedings – behind banks, employees and tax authorities.

In one month of the year submit the application as prescribedCoinbase said its users would be considered “generally unsecured creditors” in the event of bankruptcy.

“In general, most customers in crypto exchanges are unsecured creditors, so when an exchange goes down,” said Dustin Palmer, managing director at consulting firm Berkeley Research Group. default, secured creditors will be reimbursed in advance, along with legal fees.” “Customers will be paid ultimately on a pro-rata basis. In a typical bankruptcy, this is pennies on the dollar.”

“Customers will likely have to wait until the entire bankruptcy process is complete before receiving compensation, and bankruptcy often takes years,” Palmer added. “Lehman has been gone for years. For example, some Mt. Gox clients have yet to receive any compensation.”

Saval added that customer recoveries in bankruptcy proceedings “could be further diluted by other unsecured creditors such as suppliers, lessors and claimants.”

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