The recent crypto crisis has caused many to grab their metaphysical crypto wallets out of fear. The crash, observed on the Terra blockchain for both the Luna and TerraUSD tokens, has only heightened fears that investors will lose all their money. But beyond scams, carpet pulls, market crashes and regulatory measures, investors must also range from losing their crypto holdings in the event that their cryptocurrency exchange goes bankrupt.
As highlighted by the largest US-based centralized crypto exchange (CEX), Coinbase, investors’ assets could be forfeited in the event of stock exchange bankruptcy. In a filing with the US Securities Exchange Commission, Coinbase stated that investors’ holdings could be subject to bankruptcy proceedings.
“Since crypto assets held in custody may be considered the property of an insolvent estate, in the event of bankruptcy, the crypto assets we hold in custody on behalf of our clients may be subject to bankruptcy proceedings and such clients may be treated as our general unsecured creditors,” the company said in its registration application.
This was seen during the Luna crash when many exchanges removed the token, preventing investors from exiting their investments in the token. These investors are now locked into their Luna holdings unless the exchanges decide to relist the token.
Unlike banks, crypto exchanges are not regulated by the Reserve Bank of India or any legal or regulatory body in India, leading to weak customer protections against private exchanges in case of problems.
The solution for crypto investors is to keep their assets in self-hosted or non-custodial offline wallets. In addition, for added protection against hackers and other threats, keep most of your assets on a “Cold Wallet”, a piece of hardware that usually resembles a USB stick that stores crypto offline. Only a small amount of money that will be used for regular trading is allowed to be kept in these non-custodial wallets known as “Hot Wallets”. Using decentralized crypto exchanges (DEX) can also protect your crypto assets from bankruptcy or delisting, but can have its own security issues.