How Does a Crypto Company Bankruptcy Affect Investors? – Investopedia | Vette Leader

The biggest disadvantage of cryptocurrency is the risk of loss, which is even more difficult to manage when a crypto company is holding your coins. In July 2022, two major crypto trading platforms, Voyager and Celsius, filed for bankruptcy. But what does this mean for investors?

The central theses

  • Cryptocurrency users have limited recourse if the cryptocurrency company they are using goes bankrupt.
  • Investors have reason to worry after the bankruptcies of crypto firms Celsius and Voyager.
  • Cryptocurrency holdings are not protected by government-backed insurance.

Bankruptcies leave crypto investors unable to retire

The bankruptcies of Voyager and Celsius highlight the unique risks cryptocurrency holders and investors face when entrusting their funds to crypto companies. Those two incidents alone could result in well over $1 billion in investor losses.

Voyager filed for Chapter 11 bankruptcy protection on July 1, 2022. The company said customers should get all deposits back in US dollars, but cannot say what portion of their crypto holdings will be returned to customers. It claimed that it held $1.3 billion in client crypto assets on its platform at the time of the bankruptcy filing.

Celsius Network, a major cryptocurrency lending platform, filed for bankruptcy protection on July 13, 2022. The filing came about a month after Celsius suspended all withdrawals, exchanges, and transfers between customer accounts. In a filing with US bankruptcy court in New York, Celsius said it owes about $1.2 billion more than it has available.

Since Voyager and Celsius customers cannot withdraw their cryptocurrency assets, it is important for cryptocurrency users everywhere to consider any risks of the exchange or lending platform they are using, if applicable.

Cryptocurrency is not FDIC insured

While confusing marketing messages have led investors to believe otherwise, cryptocurrency holdings have never been insured by the Federal Deposit Insurance Corp. (FDIC) insured. If a bank fails, the FDIC insures deposits.

Investors should know that if their crypto exchange goes bust, no government agency will bail them out. This is different from a bank where the government insures funds up to the account and institution limit.

The FDIC has gone so far as to require all member banks and financial institutions engaged in cryptocurrency-related activities to disclose those activities to the FDIC for regulatory feedback.

Stablecoins, a category of cryptocurrencies always tied to a national, government-backed fiat currency, also do not fall under FDIC coverage. As holders of the stablecoin TerraUSD have learned, these currency pegs are not always feasible.

Who has priority in a bankruptcy?

During Chapter 11 bankruptcy proceedings, there is a clear chain of who will be paid for the remaining assets. Even if a company owes $1 billion more than it has in assets, investors can’t be left empty-handed.

Chapter 11 requires the bankrupt company to prepare a detailed statement of assets and liabilities, along with other financial statements and reports. During the bankruptcy process, the company, lawyers, and a bankruptcy judge work to determine who gets what.

The code states that generally the first payments are made to secured creditors. Once these obligations are met, funds are used to repay debts to unsecured creditors. Investors are almost last when it comes to getting their wealth back.

When calculating the pool of assets to be returned to individual investors, each is informed of the pro rata share they will receive. For example, if the company owes customers $100 million and has $90 million left after paying off the debt, customers would recover approximately 90% of their deposits.

How to recover funds from a bankrupt cryptocurrency company

If you followed your customer’s (KYC) requirements and created your account with legitimate information, the crypto company should have your contact information and a statement of what you are owed on file. Ideally, if the company goes bankrupt, you should immediately educate yourself with information on how to recover funds from them.

Most companies use their own procedures to distribute funds to customers. This may require you to fill out forms, verify your address or payment information, and complete any other paperwork required to get your cryptocurrency or cash back.

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

Are cryptocurrencies backed by other assets?

Each cryptocurrency is unique and follows its own set of rules and functions. Some cryptocurrencies, like stablecoins, have assets that back them, while others don’t.

How do stablecoins work?

Stablecoins are a cryptocurrency asset class designed to always be worth the same amount relative to an underlying asset such as the US dollar, euro or physical gold. Asset-backed stablecoins, such as USD Coin and Gemini Dollar, issue new currency only when new dollar-backed assets are deposited into the backing account. Algorithmic stablecoins use other methods to maintain tied value and do not rely on underlying assets for value.

Are cryptocurrencies a good investment?

Cryptocurrencies are a relatively new asset with an unproven track record. While it is possible for values ​​to increase significantly in the future, they may also drop to zero. It is up to each investor to decide whether cryptocurrencies make sense for their financial goals and investment strategy.

The final result

A bankruptcy at a financial institution you work with can be stressful, confusing and costly. In the cryptocurrency industry, customer confusion and losses can be even worse. But instead of panicking, it’s best to run the bankruptcy process to determine exactly what you’re getting back.

If you are involved with a bankrupt crypto company, keep an eye on your inbox and mailbox for information on how to file a claim and get as much of your money back as possible.

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