What Happens When A Crypto Exchange Goes Bankrupt?

The possibility of loss is the main drawback of cryptocurrencies, and it is considerably harder to control when a cryptocurrency corporation is keeping your coins. Crypto exchange FTX experienced a severe liquidity difficulty in November 2022 and filed for Chapter 11 protection. Two significant cryptocurrency trading platforms, Voyager and Celsius, filed for bankruptcy in July 2022.

What does that imply for investors, though?

Crypto investors are unable to withdraw due to bankruptcy.

The collapse of Voyager and Celsius highlights the special dangers that cryptocurrency owners and investors run when they entrust their money to such businesses. Investor losses from these two occurrences could total well over $1 billion.

The FDIC Does Not Insure Cryptocurrency

The Federal Deposit Insurance Corp. never insures cryptocurrency holdings, despite confusing marketing messages leading investors to believe otherwise. The FDIC covers deposits in the event of bank failure. Investors should be aware that no government body will reimburse them if their cryptocurrency exchange closes. That's not like a bank, where money is insured by the government up to account and institution restrictions. The FDIC has even gone so far as to mandate that all member banks and financial institutions that engage in cryptocurrency-related operations declare those activities to the FDIC for oversight. Additionally excluded from FDIC protection are stablecoins, a kind of cryptocurrencies that are always linked to a national fiat currency backed by the government. Those currency pegs are not always practical, as holders of the TerraUSD stablecoin discovered.

Bottom Line
Any financial institution you work with may experience stressful, perplexing, and expensive effects from a bankruptcy. Even more customer uncertainty and losses may exist in the bitcoin sector. But instead of freaking out, it's preferable to wait for the bankruptcy procedure to finish before figuring out exactly what you'll get back. Keep an eye on your inbox and mailbox for advice on how to file a claim and recover as much of your money as you can if you discover yourself associated with a defunct crypto company.