Bankruptcy filings from Celsius and Voyager raised questions about what would happen to investors’ cryptography if the platform failed.
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Traders who want to get their money back from a failed crypto exchange are likely to be disappointed, legal experts tell CNBC.
Cryptographic and lending companies Celsius and Voyager Digital File for bankruptcy This month, we’ll keep your assets trapped within the platform.Both companies I have frozen my client account After the influx of withdrawals led to liquidity problems.
Acting like a bank, Celsius received and lent customers deposits and gambling at high risk with so-called decentralized financial products to generate high yields.
Voyager was a similar model. The company was involved in the collapse of the well-known crypto hedge fund Three Arrows Capital. Three Arrows Capital was angry in itself after defaulting on a $ 660 million loan from Voyager.
Such interconnectivity has left the crypto market Vulnerable to transmissionThe plunge in token prices has unleashed the excessive leverage of the system, causing big companies to fall like Domino’s.
Cryptocurrencies are not regulated. That is, they do not provide people with the same protection that money held in banks or stocks of securities firms can provide.
For example, the Securities Investor Protection Corporation of the United States Get insurance Traders up to $ 500,000 in cash and securities in the event of financial difficulties for member brokers.
The Federal Deposit Insurance Corporation, on the other hand, provides bank depositors with protection of up to $ 250,000 in the event of an insured lender’s failure.
Similar schemes are being implemented in the United Kingdom and the European Union.
There is no law governing crypto assets, so there is no guarantee that investors will be able to recover their funds if the exchange freezes someone’s account or, worse, completely collapses.
“There is no such scheme at this time,” said Daniel Besikof, a partner at Loeb & Loeb.
“I wouldn’t be surprised if it happened in the future,” he added. “This increases the need for tighter regulations.”
So far, it’s not completely clear yet.There are examples of cryptocurrency companies filing for bankruptcy abroad (for example, Mt. Gox in Japan), but such events are unprecedented in the United States.
Mt. Gox creditors, who went offline in 2014, are still waiting for billions of dollars worth of cryptocurrencies to be repaid.
According to Kobre & Kim’s lawyer Daniel Saval, the problem with centralized crypto platforms is that they can combine the funds of different clients into risky bets. Such a mix can lead to a ruling that the asset is the property of the exchange rather than the user.
“In a bankruptcy scenario, users may be surprised to find that the cryptocurrencies and funds held in their account may not be considered their property,” Saval says. ..
“Exchanges often pool cryptocurrencies and funds from different customers together in the same storage wallet or account.”
What happens to a customer’s funds in a bankruptcy case depends heavily on the company’s user contracts and how they use their assets, Beskov said.
Celsius’ terms of service In the event of bankruptcy, the funds deposited with the company “may not be recoverable,” he said. Last week, the company applied for Chapter 11 protection, revealed a $ 1.2 billion hole in its balance sheet, and is obliged to pay its users about $ 4.7 billion.
Celsius claims to have $ 167 million in cash on hand. However, it still cannot withdraw funds to its customers and does not clearly indicate when to resume withdrawals.
According to Voyager, the customer’s dollars are stored in the FDIC insured account of Metropolitan Commercial Bank in New York. This claim was disputed By legal experts and the bank itself. The FDIC provides financial protection only in the event of a bank failure, not crypto exchange.
Voyager states that it is in the process of “reconciliation and fraud prevention” with its banking partners, after which users will be able to regain access to cash.
Voyager also planned to reimburse users for accounts, Voyager shares, company-own tokens, and debt recovered from Three Arrows Capital.
Both Celsius and Voyager have hired a prestigious law firm, Kirkland & Ellis, to represent them in court.
“Investors holding crypto assets through Voyager Digital and now Celsius are in a difficult position due to account freezes, ongoing proceedings and unknown value and timing of recovery.” Besikof said.
“There is a lot of work they have to do in bankruptcy court before these issues are resolved.”
Celsius and Voyager have applied for what is known as Chapter 11, a form of bankruptcy protection that allows businesses to restructure their debt. The purpose is to ensure that there is still a viable business by the end of the process.
According to legal experts, Celsius and Voyager users are likely to be treated as “unsecured creditors” and fall into the same bucket as corporate suppliers and contractors.
This is because they Behind a long line The number of creditors lined up behind banks, employees, and tax authorities seeking payments from proceedings.
In May Submission to regulatorsCoinbase said that in the event of bankruptcy, users will be treated as “general unsecured creditors”.
Dustin Palmer, Managing Director of the consulting firm Berkeley Research Group, said: “Customers are paid last in proportion. In a typical bankruptcy, this is a dollar penny.”
“Customers are likely to have to wait until they receive compensation until the complete bankruptcy process is complete, and bankruptcy usually lasts for years,” Palmer added. “Lehman took years. For example, some Mt. Gox customers haven’t received any compensation yet.”
Saval added that customer recalls in bankruptcy proceedings “may be further diluted by other unsecured creditors such as vendors, lenders, and claimants.”
Investors can instead choose to move cryptocurrencies from exchanges to so-called “self-managed” wallets.
This is where someone is responsible for their private key, the secret password needed to access the crypto wallet.
However, such movements carry their own risks. If the cryptographic holder loses his private key, he may not be able to recover his funds.
was there Countless examples Percentage of people who have lost a hard drive or USB stick, including a swarm of millions of valuable ciphers.