Firms Holding Crypto Aren't Insured The Way Banks Are
The “crypto winter” that hit earlier this year walloped digital asset prices and served as a healthy reminder that cryptocurrencies are highly risky, volatile investments, Jeanne Sahadi reported for CNN Business.
Photo Insert: Crypto custodial accounts, however, do not enjoy those same safeguards, in part because the legal, tax, and regulatory frameworks – to say nothing of the legal definitions of what a specific cryptocurrency is – are still being worked out.
But now, in the wake of crypto exchange FTX’s implosion, crypto investors were reminded of another risk they face: Crypto accounts lack guaranteed protections when the exchange or platform provider goes belly up.
Traditional savings and investment accounts can never be 100% safe in the event an institution becomes insolvent, either. But most banks and brokerages, as well as 401(k) plans, do provide federally guaranteed protections and other insurance.
Crypto custodial accounts, however, do not enjoy those same safeguards, in part because the legal, tax, and regulatory frameworks – to say nothing of the legal definitions of what a specific cryptocurrency is – are still being worked out. They’re not legal tender and they’re not always viewed as securities.
What’s more, customers may unwittingly agree to let the company running an exchange or platform use their digital assets.
“There are some platforms that have agreements which essentially say that ‘by depositing your crypto with us, you are granting us the authority to use, transfer, invest, do whatever we want with your crypto,’” said Florida-based bankruptcy attorney Alan Rosenberg.
And if the company goes bankrupt, then customers may be treated as unsecured creditors – meaning they may not get anything back.
So, Rosenberg’s best advice is to read the legal fine print before buying, selling, or storing digital assets with any company facilitating crypto trading to see what protections they do offer.