What happens to investors’ money when a cryptocurrency exchange goes bankrupt | Mint – mint | Vette Leader

New Jersey-based Celsius Network is the latest company to file for voluntary bankruptcy due to illiquidity on its balance sheet. Celsius has filed Chapter 11 cases, allegedly offering the best opportunity to stabilize its business and complete a comprehensive restructuring transaction that maximizes value for all involved.

Last week, the exchange said in its bankruptcy filing, “Celsius’ early success was not without its hiccups. The amount of digital assets on the company’s platform grew faster than the company was willing to deploy, which has in hindsight turned out to be certain poor resource deployment decisions.”

Celsius highlighted some negative factors for crypto exchanges, noting that the implosion of Terra LUNA (“Luna”) and its TerraUSD (UST) stablecoin (“UST”) was the cause – as it marked the beginning of a “crypto -Winters” accelerated and an industry-wide sell-off in 2022.

Specifically, as of July 13, 2022, Celsius has liabilities of approximately $5.5 billion and assets of approximately $4.31 billion. The company shows a deficit of 1.19 billion US dollars on its balance sheet.

Another would be Voyager Digital in bankruptcy proceedings after suffering heavy losses as 3AC collapsed and markets collapsed. Recently, FTX has suggested offering some liquidity to Voyager customers amid the proceedings.

It’s not just the crypto market crash that has left crypto exchanges vulnerable. In fact, even investors can lead to a deep liquidity crisis for exchanges. At least in the case of CoinFlex, it was just one investor urging the exchange to halt trading.

On July 9, CoinFlex said they had suspended their payouts after a major investor failed to pay $47 million in margin calls. CoinFlex plans to recover $84 million through lawsuits against this individual. In addition, the exchange plans to provide temporary liquidity for its depositors soon. In the long term, it is now also in talks about establishing a joint venture with a major US stock exchange/ATS platform.

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

These crypto exchange struggles are alarming for investors as they are likely to impact their hard-earned cash. When investors invest in crypto markets or other capital market instruments, everyone wants to earn a significant 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 that constrained market liquidity can trigger a stock price collapse that triggers a new financial crisis, which entails surviving the liquidity crisis – increasing cash allocations, avoiding excessive positions, warning of a general risk of overcrowding and to develop a comprehensive strategy to exploit the negative effects of liquidity.

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

Coinbase said in the filing that any failure by the crypto platform or its partners to maintain necessary controls or manage customers’ crypto assets and funds appropriately and in accordance with applicable regulatory requirements could result in reputational damage, litigation, regulatory enforcement action, and Losses could result in significant financial consequences, cause customers to discontinue or restrict use of the Products, and result in significant penalties, fines, and additional restrictions that could adversely affect their business, results of operations, and financial condition.

At the same time, Coinbase had also said that since crypto-assets held in custody may be considered the property of an estate, the crypto-assets we hold in custody on behalf of our clients could be subject to bankruptcy proceedings in the event of bankruptcy and such clients could be treated as our general unsecured creditors .

Simply put, if a crypto exchange files for bankruptcy, chances are your crypto assets will be pushed into the process as well.

Abhijit Shukla, CEO and director of Tarality, said: “Without laws governing crypto assets, there is no guarantee that investors will be able to get their funds back if an exchange freezes an account – or, worse, collapses entirely. In a bankruptcy scenario, the cryptos and funds in their accounts may not be considered their own property, often merging different customers’ cryptos and funds in the same stash bag or account.”

Additionally, the CEO of MyFundBazaar stressed that in the event of bankruptcy, crypto customers with assets in custody are usually the last in line to receive payments – those whose cryptocurrencies are locked in self-custody wallets are not affected as they own them private keys.

“Due to market ups and downs using either non-directional or probability-based trading methods, investors may be able to protect their assets from potential losses and benefit from rising volatility scenarios,” Khandare said.

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