Crypto currency exchanges can go bankrupt for a variety of reasons. While most of these cases result in customer loss, some do involve a restitution process. In these cases, a bankrupt company may give back some or all of the customer’s crypto, depending on what the exchange was doing before it went under. This can be a complex and confusing process for a customer, but it is important to wait until the bankruptcy process is complete to determine how much money you’ll get back.
In the case of FTX, the filing showed that the company had more than 100 thousand creditors. Because all of the company’s customers are technically creditors, it will take months before the situation is resolved. In addition, the cryptocurrency sector has no legal protections, meaning that any company that fails may face months or years of legal fallout. The SEC and the Justice Department have already opened investigations into the company. They are also looking into whether FTX improperly used customer funds.
FTX’s failure highlights the need for more regulation of the crypto market. The founder of Binance said that the global financial crisis is an accurate analogy for the crypto market crisis. This is in line with his recent comments. While the collapse of FTX may seem unimportant to some, it should not be forgotten that the economy is directly connected to crypto. This is why it is important to ensure that regulations are in place to protect investors and businesses.
In the past few years, many investors have used cutting edge financial products to profit. But now, markets are turning, and many are wondering how to protect themselves against the next collapse. As a result, many of these companies are facing bankruptcy court for the first time. This is not an unusual phenomenon, but it is nonetheless unfortunate.
Another example is Celsius Network, which filed for chapter 11 in July 2022. In the same month, Voyager Digital and Celsius Network also filed for chapter 11. The two companies, like FTX, have fought over remaining assets. As a result, these companies have become bankrupt, leaving users’ assets in the midst of a liquidity crisis. This could potentially lead to a massive meltdown of the crypto industry.
While crypto assets might be considered “estate property” in bankruptcy, it is unlikely to be seized by a court. Currently, the Federal Deposit Insurance Corporation offers up to $250,000 in coverage in insured lender failures. Similar schemes are in place in the European Union and U.K. However, there are no laws that govern cryptoassets, and investors may not be able to recover their funds in the event of exchange failure. Moreover, some crypto firms have declared bankruptcy in foreign jurisdictions, such as Mt. Gox in Japan.
Since there is very little caselaw regarding cryptocurrency in bankruptcy, the best option for the debtor is to sell the cryptocurrency to a third party. However, it is important to understand that cryptocurrency is not a common asset, and a bankruptcy trustee may be able to discover it if you don’t disclose it. This could lead to a criminal prosecution.