What Happens With Your Money When Crypto Platforms Go Bankrupt? | Notum
Apr 28, 20235 min read
The crypto world is so adventurous and so attractive with all the opportunities. We often don't listen to people nagging about risks, reminding us to think twice before diving deeper and evaluating the current situation carefully. On the other hand, crypto companies assure us that every step is protected and do everything they can to grow our wealth. Even though, in most cases, there is no reason to doubt the good intentions of developers, we must remember about unfriendly market environments, lousy timing, and hacker attacks.
There are a lot of situations in which a company may lose its position and capital. Unfortunately, the victim is always an investor. Thus, it is necessary to understand what may happen under such circumstances.
In this article, we will look through some examples of recently bankrupted crypto companies to see how they dealt with them in real life. After this, we will compare the reality with the promises of the existing companies.
FTX's fall story has been one of the most popular recently. The reasons for its bankruptcy were discussed a lot. However, one of the most essential points is whether investors can return their funds or at least some.
At the moment, it is known that FTX made a deal in March to recover about $400 million from Modulo Capital, a Bahamas-based hedge fund.
Three Arrows Capital
The Three Arrows Capital hedge fund filed for bankruptcy in the summer of 2022. The LUNA crash got them hard. As it was known by December, the company's founders, Kyle Davis, and Su Zhu, were not very cooperative in recovering investors' funds.
However, this spring, they cooperated with co-founders of the CoinFlex exchange to launch a new platform called Open Exchange. On this platform, users will be enabled to use bankruptcy claims as a margin and also will be able to sell them.
BlockFi, a crypto lending platform, declared bankruptcy on November 11, 2022. This service became one of the affected by the FTX collapse. The company couldn't operate anymore and had to freeze withdrawals and transactions.
After the court's investigation, the company agreed to refund $103,471 to Californian clients. But the story has yet to end, and another hearing will be in April.
Core Scientific, a Bitcoin miner, announced its bankruptcy in December. However, the company was not planning to close but wanted to continue its work. Bankruptcy was connected to the fact that the increase in energy and crypto prices did not let them continue paying the stockholders, who lost their income because of the situation.
Voyager Digital, a crypto broker, filed for bankruptcy in July 2022. This event followed the collapse of Three Arrow Capital, which owed Voyager Digital about $650 million. The story seems to have a nice end since Binance.us agreed to pay the company $20 million in cash and take the assets of Voyager's investors.
In Case of Bankruptcy
Coinbase, a crypto trading platform, has prepared a Bankruptcy trustee guide to provide the necessary information in an emergency. According to the company's rules, if it filed for bankruptcy, all the funds it holds, including customers' assets, would be used to repay creditors. This is the first thing that would be done in this case. Coinbase will take as many assets from the customer pool as necessary to cover the difference. After this, customers could make their claims to return their money.
First of all, since Binance is one of the biggest crypto exchange services in the world, its bankruptcy would shake the crypto world. Binance provides insurance for customers' funds. Moreover, Binance is supposed to notify users in such cases. Nonetheless, it's good to remember that storing your funds on exchange is unsafe. It's always better to move them to a wallet.
Another crypto exchange service, Huobi, has several points about bankruptcy in its User Agreement. From this document, we can find out that the company can use all the funds provided to the company according to their interest in case of emergency. In general, Huobi is only trying to assure its customers that there is nothing to worry about.
Bitfinex is a well-known cryptocurrency exchange service. To explain the company's policy in case of bankruptcy and other emergencies, there is a Risk Disclosure Statement published on the official website. According to this document, Bitfinex and its affiliates can use customers' assets for their benefit. It also states that transferring assets exposes them to various risks, potentially resulting in total loss. These risks include the company's bankruptcy.
Bittrex provides information for cases such as bankruptcy in its Global Terms of Service. From this document, we find out that there is a chance to receive only a fraction of the value of possessed assets in case of bankruptcy. Undoubtedly, it states that the safety of the client's funds is the number one priority of the service.
None of the crypto companies would like to go bankrupt. However, as we can see, it sometimes happens. In some cases, such things occur as an unpleasant surprise or as a result of a domino effect. Unfortunately, not all companies have enough funds to cover all their debts and repay their customers.
As we know, the crypto world is highly unpredictable. Thus, it is not always possible to evaluate all the possibilities. Nonetheless, a few things should be done to protect yourself.
First of all, read the terms and conditions and all the agreements attentively. It is always good to know beforehand about possible outcomes.
Secondly, participate in big projects with a good reputation. Usually, big crypto companies are better equipped to protect their customers in emergencies. They have more instruments, and chances are high that if something goes wrong, you can still get your money back.
Of course, it is crucial to follow the market situation. As a rule, bankruptcies do not come out of nowhere. There are usually signs of problems inside the company, such as a decrease in cash flow, changes in management, inability to pay debts, etc. This information is available to platform participants and should be taken seriously.
Disclaimer: Notum does not provide any investment, tax, legal, or accounting advice. This article is written for informational purposes only. Cryptocurrency is subject to market risk. Please do your own research and trade with caution.