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What Happens When A Crypto Exchange Goes Bankrupt?

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major drawback to Cryptocurrency This is even more difficult to control if a crypto company holds your coins. November 2022, Crypto exchange FTX suffered major liquidity crisisWhen submitted for Chapter 11July 2022, two major cryptocurrency trading platforms, Voyager and Celsius, have declared. bankruptcy. But what does that mean for investors?

important point

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

Bankruptcy will prevent crypto investors from exiting

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

Voyager filed Chapter 11 Bankruptcy Protected on July 1, 2022. The company said customers would have to return all U.S. dollar deposits, but could not say what portion of its cryptocurrency holdings would be returned to customers. Claimed to own $100 million in customer crypto assets.

Celsius networkMassive crypto lending platform .Celsius has revealed that it has about $1.2 billion more debt than it has on hand, in filings with the U.S. Bankruptcy Court in New York.

Voyager and Celsius customers cannot withdraw their crypto assets, which is important for crypto users around the world. consider all risks If applicable, of the exchange or lending platform they are using.

Cryptocurrencies are not covered by the FDIC

Confusing marketing messages have led investors to believe otherwise, but cryptocurrency holdings are by no means guaranteed. Federal Deposit Insurance Corporation (FDIC)The FDIC will insure your deposit if the bank fails.

Investors should know that if a cryptocurrency exchange goes bankrupt, no government agency will make them whole. government guarantees funds Up to account and institution limits.

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

stablecointhe category of cryptocurrencies that are always pegged to a national government-backed fiat currency is also exempt from the FDIC. TerraUSD stablecoin Even with experience, these currency pegs are not always viable.

Who gets priority in bankruptcy?

During the Chapter 11 bankruptcy proceedings, A clear chain of who gets paid for remaining assets. Even if he had $1 billion more debt than the company had in assets, investors wouldn’t be left empty-handed.

Chapter 11 requires a company in bankruptcy to draw up a detailed schedule. assets and liabilities, among other financial statements and reports. During bankruptcy proceedings, the company, lawyers, and bankruptcy judges work to determine who gets what.

In the statutory code, generally the first payment is secured creditorOnce those obligations are met, the funds will be used to pay off the debt unsecured creditorInvestors are almost the tail end when it comes to asset recovery.

Everyone will be notified when the asset pool to be returned to retail investors is calculated. proportionately share what they receive. For example, if a company owes a customer $100 million of her debt, and after paying off the debt she has $90 million left over, the customer will return about 90% of the deposit.

How to recover funds from a bankrupt cryptocurrency company

if you follow Know Your Customer (KYC) If you have met the requirements and created your account using valid information, the crypto company must have your contact information and accounting for what you owe on file. , ideally you should hear the information immediately to recover the funds.

Most companies employ their own processes to distribute funds to their customers. As such, follow-up may be required such as filling out forms, verifying address or payment information, and producing any other documents required to return the crypto or cash.

While there is a risk that crypto investors will not be able to get their money or cryptocurrency back after bankruptcy, it is also possible that they will get something back, even if it is just a fraction 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, such as stablecoins, have assets backing them, while others do not.

How do stablecoins work?

Stablecoins are a cryptocurrency asset class designed to always have the same value to their underlying assets such as US dollars, euros and physical gold. Asset-backed stablecoins such as USD Coin and Gemini Dollar only issue new currency when new dollar-backed assets are deposited into the underlying account. Algorithmic stablecoins use other methods to maintain pegged value and are not dependent on the underlying asset for value.

Is cryptocurrency a good investment?

Cryptocurrencies are a relatively new asset with no proven track record. It is possible that the value will rise significantly in the future, but it could also be zero. It is up to each investor to decide if cryptocurrencies make sense for their financial goals and investment strategy.

Conclusion

a Bankruptcy of any financial institution It can be stressful, confusing, and costly. Customer disruption and losses could be even worse in the cryptocurrency industry. But rather than panic, it’s best to proceed with bankruptcy proceedings and decide exactly what you’ll get back.

If you find yourself involved with a bankrupt crypto company, keep a close eye on your inbox and mailbox for ways to file a claim and get back as much money as possible.

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