Companies becoming worthless within days and investors losing their money overnight have become the norm in the incredibly unpredictable world of crypto. What’s more concerning is that if the exchanges where their funds are held go bankrupt, investors will be left with no recourse. In such a scenario, the value of all their cryptocurrency assets will be zero.
While Indian crypto exchanges have not issued a public statement in this regard, Coinbase, one of the top worldwide exchanges, recently raised eyebrows by stating that investors’ bitcoin holdings may not be their own in the event of bankruptcy.
“Because custodial held crypto assets may be considered the property of a bankruptcy estate, the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings, and such customers could be treated as our general unsecured creditors,” Coinbase stated recently in a US Securities and Exchange Commission filing. This comment illustrates the distinction between holding funds in banks and blockchain-based cryptocurrency exchanges.
Crypto Investors at the mercy of CEX
“Centralised Crypto Exchanges (CEX) function similarly to a corporation.” Their business approach facilitates trading by storing funds in their systems. CEX functions similarly to a bank account or a custodian in that customers must trust and rely on them to keep their money safe. “However, it is not governed by a centralized bank like the RBI, which protects the bank’s deposits for its consumers,” adds MuffinPay founder and CEO Dileep Seinberg.
A CEX has technical control over the funds and cryptocurrency assets of investors. It loses all of its assets and any help if it declares bankruptcy, just like any other firm.
“Crypto investors who use exchange-provided crypto-custody risk losing their cryptocurrency assets if the exchanges go bankrupt,” says Sharat Chandra, vice president of research and strategy at EarthID, a blockchain-based identity management platform. There is currently no regulation in place in India to protect customers’ funds from private crypto exchanges.
What should crypto customers do?
Chandra proposes that crypto-assets should be held in self-hosted or non-custodial offline wallets, citing a frequent refrain in the cryptocurrency community: “Not your keys, not your money.” “Having access to digital asset private keys is critical.” He argues that investors who hold their assets in self-hosted or non-custodial wallets shouldn’t be concerned about exchanges going out of business because they have custody of their funds.
According to Seinberg, holding crypto in hardware wallets or decentralized exchanges that are not controlled by central authorities is always safe. “For example, if you had LUNA in your wallet, it would not be delisted; the value would simply be zero.” But it never goes away.