In the highly volatile world of crypto, companies become worthless in a matter of days and investors lose their money overnight. Of further concern, however, is that investors have no recourse when the exchanges, where they keep their funds, go bankrupt. In such an event, the value of all their crypto assets would literally be zero.
Although no official announcement has been made by Indian crypto exchanges, Coinbase, one of the largest international exchanges, has recently raised fears that investors’ cryptocurrency assets may not be their own in the event of bankruptcy.
“Since the crypto assets held in custody can be considered as bankrupt assets, in the event of bankruptcy, the crypto assets we hold in custody on behalf of our customers may be subject to bankruptcy and may be considered as such customers. Our general unsecured creditors, Coinbase recently announced in a filing with the U.S. Securities and Exchange Commission that the statement distinguishes between bank reserves and blockchain-based crypto exchanges.
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Investors at the mercy of CEX
Investors usually place their funds in a custodial wallet provided by various centralized crypto exchanges (CEX). They do this for quick access to their funds for trading and to avoid paying various related fees for transferring money from bank accounts to these exchange wallets. However, unlike bank deposits that come with certain guarantees, these exchanges are not legally obligated to return investors’ assets.
Despite the long-standing demands of these exchanges for the protection of assets parked in their wallets, it has been repeatedly proven that investors are at the mercy of this CEX. The most recent example of this is the listing of Terra (LUNA) by many exchanges.
“Centralized Crypto Exchange (CEX) is just like a company. Their business model facilitates trading by holding money in their systems. CEX acts like a bank account or acts as a custodian where a customer has to trust and rely on them. Their money is safe. But it is not regulated by a centralized bank like RBI, which protects bank deposits for its customers, “said Dilip Senberg, founder and CEO of MuffinPay, a crypto fintech company.
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Technically, a CEX controls investors’ funds and crypto assets. Like any other company, if it files for bankruptcy, all help and holdings are lost.
Sarat Chandra, VP, research and strategy at blockchain-based Identity Management Platform, said, “Crypto investors who choose to take crypto-custody offered by the exchange risk losing their crypto assets.”
Currently, there are no rules in India to protect customers’ money from privately owned crypto exchanges.
What customers should do
Citing a general break in the crypto-community, “Not your keys, not your coins”, Chandra suggests that it is best to keep crypto assets in self-hosted or non-custodial offline wallets. “Access to the personal keys to digital assets is an important aspect here. Investors who keep their assets in self-hosted or non-custodial wallets should not be wary of losing their exchanges because they have custody of their assets,” he said.
Senberg says it’s always safe to keep crypto in your wallet on hardware or decentralized exchanges, which is independent of central authorities. “For example, if you hold LUNA in your wallet, it will not be listed; it only shows the value as zero. But it never disappears. Be able, ”he said.
Points to remember
* Keep your crypto in a non-custodial, hardware wallet
* Always remember – not your key, not your currency
* There are no rules to protect customers from private exchanges
* In the event of bankruptcy, investors may lose crypto parked with the exchange
* Investors have control over the exchange of funds and crypto assets
(Cryptos and other virtual digital assets are unregulated in India. They are considered highly risky to invest in. Please consult your financial advisor before making any investment decision.)