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If a Crypto Exchange Goes Bankrupt, What Happens?: Explained

Ponzi Scheme

If a Crypto Exchange Goes Bankrupt, What Happens?: Explained

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Coinbase Global’s public pondering of what-if-bankruptcy scenarios underscored cryptocurrency market volatility and raised questions about what may happen to users’ assets on an exchange if it does go bankrupt.

The largest US crypto exchange said in a Securities and Exchange Commission filing last week that a bankruptcy court could consider customer assets Coinbase is the custodian of a bankruptcy estate’s property.

Coinbase CEO Brian Armstrong clarified that the company faces “no risk of bankruptcy.” But the filing and the crypto market’s topsy-turvy week did little to allay concerns over how crypto assets would be treated in the event of an exchange’s bankruptcy.

The concerns partly stem from the fact cryptocurrency’s emergence has outpaced courts’ review and regulators’ oversight. Bankruptcy rules and regulations may not apply neatly in dealing with any cryptocurrency fallout.

Here are some questions to consider.

What do bankruptcy laws say about cryptocurrency?

Federal laws aren’t explicit on how consumers are protected if a crypto exchange files for Chapter 11 protection.

Cryptocurrency exchanges are different than traditional brokerage firms, which are members of the Securities Investor Protection Corp., or SIPC, a federally created nonprofit charged with overseeing the liquidation of brokerage firms.

Cryptocurrency isn’t subject to Federal Deposit Insurance Corporation or SIPC protections.

A federal law that created SIPC regulates brokers and…

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