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How Does a Crypto Company Bankruptcy Affect Investors?

WikiBit 2022-08-11 16:04

Abstract:The main disadvantage of cryptocurrency is the risk of loss, which is even more difficult to manage when your coins are held by a cryptocurrency company. The two major crypto trading platforms, Voyager and Celsius, declared bankruptcy in July 2022. But how does this affect investors?



  Bankruptcies Leave Crypto Investors Unable to Withdraw


  The failures of Voyager and Celsius ( highlight the unique risks that cryptocurrency holders and investors face when entrusting their funds to crypto firms. These two incidents could result in well over a billion dollars in investor losses.

  On July 1, 2022, Voyager filed for Chapter 11 bankruptcy protection. Customers should have all US dollar deposits returned, according to the company, but it is unclear how much of their crypto holdings will be returned. It claimed that as of the bankruptcy filing, it had $1.3 billion in customer crypto assets on its platform.

  Celsius Network, a large cryptocurrency lending platform, declared bankruptcy on July 13, less than a month after suspending all withdrawals, swaps, and transfers between customer accounts. Celsius disclosed in a filing with the United States Bankruptcy Court in New York that it owes roughly $1.2 billion more than it has on hand.

  With customers of Voyager and Celsius unable to withdraw their cryptocurrency assets, it's critical for cryptocurrency users worldwide to consider any risks associated with the exchange or lending platform they're using, if applicable.

  Cryptocurrency is Not FDIC Insured

  Despite misleading marketing messages to the contrary, cryptocurrency holdings are never FDIC (Federal Deposit Insurance Corporation) insured. This agency insures deposits if a bank fails.


  Investors should be aware that if the cryptocurrency exchange goes out of business, no government agency will compensate them. In contrast, at a bank, the government insures funds up to account and institution limits.

  The FDIC has gone so far as to require any member banks and financial institutions that engage in cryptocurrency-related activities to report those activities to the FDIC for supervisory feedback.

  Stablecoins, a type of cryptocurrency that is always pegged to a national, government-backed fiat currency, are also not insured by the FDIC. As TerraUSD stablecoin holders discovered, currency pegs are not always viable.

  Who Gets Priority During a Bankruptcy?

  There is a clear chain of who gets paid for the remaining assets during Chapter 11 bankruptcy proceedings. Investors may not be left empty-handed even if a company owes $1 billion more than it has in assets.

  The bankrupt company must produce a detailed schedule of assets and liabilities, as well as other financial statements and reports, under Chapter 11. During the bankruptcy process, the company, lawyers, and a bankruptcy judge collaborate to determine who receives what.

  According to the legal code, the first payments are made to secured creditors in general. Once those obligations are met, funds are used to repay unsecured creditors. When it comes to recovering their assets, investors are nearly last in line.

  When the pool of assets to be returned to individual investors is determined, everyone is informed of their pro-rata share. Customers would receive approximately 90% of their deposits back if the company owed them $100 million and had $90 million remaining after paying off debt.

  How to Recover Funds from a Bankrupt Cryptocurrency Company

  If you followed the know your customer (KYC) requirements and created your account with accurate information, the cryptocurrency company should have your contact information and an accounting of what you owe on file. If the company declares bankruptcy, you should ideally hear from them as soon as possible with information on how to recover funds.

  Most businesses will use their own procedure to distribute funds to customers. This may necessitate you completing forms, confirming your address or payment information, and keeping up with any other paperwork required to get your cryptocurrency or cash returned.

  While there is a chance cryptocurrency investors will receive no money or cryptocurrency after bankruptcy, there is also a chance they will receive something, even if it is only a portion of their original investment.

  Are Cryptocurrencies Backed by Other Assets?

  Each cryptocurrency is distinct, with its own set of rules and features. Some cryptocurrencies, such as stablecoins, are backed by assets, while others are not.

  How Do Stablecoins Work?

  Stablecoins are a cryptocurrency asset class that is designed to always be worth the same amount in relation to an underlying asset, such as the US dollar, euro, or physical gold. Asset-backed stablecoins, such as USD Coin and Gemini dollar, only create new currency when new dollar-backed assets are deposited into the underlying account. Algorithmic stablecoins rely on methods other than underlying assets to maintain their pegged value.

  Are Cryptocurrencies a Good Investment?

  Cryptocurrencies are a new asset with an uncertain track record. While values may rise significantly in the future, they may also fall to zero. It is up to each investor to determine whether cryptocurrencies are appropriate for their financial objectives and investment strategy.

As a reminder, WikiBit is ready to help you search the qualifications and reputation of projects in a bid to protect you from hidden dangers in this risky industry!

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