The biggest problem with cryptocurrency is that you could lose it, which is even harder to deal with if a company is holding your coins. In November 2022, the cryptocurrency exchange FTX ran out of money and had to file for Chapter 11. In July 2022, the two most significant places to trade crypto, Voyager and Celsius, went bankrupt. But what does that mean for people who invest?
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Due to bankruptcies, crypto investors can’t get their money back.
The failures of Voyager and Celsius show the unique risks that cryptocurrency investors and owners face when they give their money to cryptocurrency companies. These two events could cause investors to lose more than $1 billion.
On July 1, 2022, Voyager filed for Chapter 11 bankruptcy.
The company said that customers should get back all their U.S. dollar deposits, but they can’t say how much of their crypto holdings they will get back. It said that when it filed for bankruptcy, it had $1.3 billion worth of customer crypto assets on its platform.
On July 13, 2022, Celsius Network, which is a powerful platform for lending cryptocurrency, filed for bankruptcy. About a month before the filing, Celsius stopped any withdrawals, swaps, or transfers between customer accounts. Celsius told the U.S. Bankruptcy Court in New York that it owes about $1.2 billion more than it has in cash.
Customers of Voyager and Celsius can’t get their cryptocurrency assets back, so cryptocurrency users everywhere should consider the risks of the exchange or lending platform they use if there are any.
The FDIC doesn’t cover cryptocurrency.
Even though investors have been led to believe otherwise by confusing marketing, the Federal Deposit Insurance Corp. will never cover cryptocurrency holdings (FDIC). The FDIC protects deposits if a bank goes bankrupt.
Investors should know that if their cryptocurrency exchange goes out of business, they will not get their money back from the government. That’s different from a bank, where the government protects your money up to the limits of your account and the bank.
The FDIC has even made it a requirement that any member banks or financial institutions that do anything related to cryptocurrencies must tell the FDIC about it so that they can get feedback from their supervisors.
Stablecoins, a type of cryptocurrency always tied to a national fiat currency backed by the government, are also not covered by the FDIC. As people who owned the TerraUSD stablecoin found out, these currency pegs don’t always work.
Who Has the Most Important Role in a Bankruptcy?
During a Chapter 11 bankruptcy, the people paid for the remaining assets following a precise order. Even if a company owes $1 billion more than it has in assets, investors might not be left empty-handed.
Under Chapter 11, the bankrupt company must make a detailed list of its assets and debts, among other financial statements and reports. During the bankruptcy process, the company, its lawyers, and a bankruptcy judge work to figure out who gets what.
According to the law, the first payments are usually made to secured creditors. Once these obligations are met, the money is used to pay off debts to creditors who are not secured. Investors are almost at the end of the line when it comes to getting their money back.
When the pool of assets that will be returned to each investor is calculated, everyone is told how much of that pool they will get based on how much they put in. For example, if the company owes customers $100 million and has $90 million left over after paying off debt, customers would get back about 90% of their deposits.
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How to Get Money Back from a Cryptocurrency Company? That Went Bankrupt
If you followed the know your customer (KYC) rules and made your account with accurate information, the crypto company should have your contact information and a record of what you owe on file. If the company goes out of business, you should hear from them as soon as possible about getting your money back.
Most businesses will have their way of giving money to customers. To get your crypto or cash back, you may have to fill out forms, confirm your address or payment information, and keep up with any other paperwork that needs to be done.
There’s a chance that cryptocurrency investors won’t get any of their money or cryptocurrency back if the company goes bankrupt. Still, there’s also a chance that they will get something back, even if it’s just a tiny amount of what they put in.
What’s the point of stablecoins?
Stablecoins are a type of cryptocurrency asset designed to always be worth the same amount compared to an underlying asset, like the U.S. dollar, the euro, or physical gold. Asset-backed stablecoins, like the USD Coin and Gemini dollar, only make new money when new dollar-backed assets are put into the backing account. Algorithmic stablecoins don’t use the value of underlying assets to keep the pegged value. Instead, they use other methods.
Should you put your money into cryptocurrencies?
Cryptocurrencies are a new asset that hasn’t been around for very long. Values could go up a lot in the future, but they could also go down to zero. It’s up to each investor to decide if cryptocurrencies make sense for their financial goals and investment strategies.
In conclusion
Any financial institution you work with can be stressful, hard to understand, and expensive if you file for bankruptcy. Even more customer confusion and loss can happen in the cryptocurrency business. But instead of freaking out, it’s best to wait until the bankruptcy process is over to find out what you’ll get back.
If you were involved with a crypto company that went out of business, keep an eye on your email and mail for information about how to file a claim and get as much of your money back as possible.
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