Cryptocurrency can be a risky investment. Your assets won’t be insured like they are with a brokerage or bank.
You are always susceptible to losses when you invest in risky assets. You can just think of all the cryptocurrency owners who had to learn the hard way after several high-profile bankruptcies.
Investors were reminded to remember that their individual retirement accounts (IRAs) and 401(k) plans are protected at all times. These protections do not extend to crypto accounts.
What kind of protection is available for crypto accounts?
Your crypto assets could be held by a bankruptcy-filed cryptocurrency firm. Coinbase told crypto investors that they were informed about this in May, when Coinbase experienced a liquidity crisis.
“Legal protections for crypto assets have not been tested in court. It is possible, though unlikely, that a judge would consider customer assets in bankruptcy proceedings,” Coinbase CEO Brian Armstrong stated in a May 10, tweet.
This statement implies that crypto customers could be treated by bankruptcy courts as unsecured creditors and may lose their assets.
Underwater crypto firms’ users are now being rudely awakened that they don’t have legal titles to their digital assets. This is despite many crypto scandals, including BlockFi’s bankruptcy and FTX’s November implosion.
Most cases, like the bankruptcy of Celsius crypto-firm in June, have users only a right to be paid back plus a refund, according to Manny Grillo, a partner in Allen & Overy’s restructuring team who represents troubled businesses.
“In the Celsius case, the bankruptcy court just ruled that even accounts held in sole custody, in which investors retained title, their assets had only been converted from earned accounts to custodial accounts, and that holders of these accounts cannot withdraw them today,” he said.
Custodial accounts in crypto refer to an account or wallet that stores the private keys of a user’s cryptocurrency. You can have complete control over your private keys with non-custodial wallets.
Experts say that users are choosing to move their assets from cryptocurrency exchanges into non-custodial wallets in light of recent crypto bankruptcies. This is to protect their holdings.
Author
Chris Munch is a professional cryptocurrency and blockchain writer with a background in software businesses, and has been involved in marketing within the cryptocurrency space. With a passion for innovation, Chris brings a unique and insightful perspective to the world of crypto and blockchain. Chris has a deep understanding of the economic, psychological, marketing and financial forces that drive the crypto market, and has made a number of accurate calls of major shifts in market trends. He is constantly researching and studying the latest trends and technologies, ensuring that he is always up-to-date on the latest developments in the industry. Chris’ writing is characterized by his ability to explain complex concepts in a clear and concise manner, making it accessible to a wide audience of readers.
