The recent crypto downturn has made many clutch their metaphysical crypto wallets in fear. The crash, witnessed on the Terra blockchain for both the Luna and TerraUSD tokens, has only heightened fears of investors losing all their money. But outside of scams, rug pulls, market crashes and regulatory clampdowns, investors also need to vary of losing their crypto holdings in case their cryptocurrency exchange goes bankrupt.
As highlighted by the largest US-based centralised crypto exchange (CEX), Coinbase, in case of bankruptcy at the exchange, investors' assets can be forfeited. In a filing with the US Securities Exchange Commission, Coinbase stated that the holdings of investors could be subject to bankruptcy procedures.
“Since custodially held crypto assets may be considered to be the property of a bankruptcy estate, in the event of a bankruptcy, 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,” the company said in its regulatory filing.
This was seen during the Luna crash when many exchanges delisted the token, preventing investors from exiting their investments in the token. These investors are now stuck with their Luna holdings unless the exchanges decide to list the token again.
Unlike banks, crypto exchanges aren't regulated by the Reserve Bank of India or any statutory or regulatory body in India, leading to weak customer protection against private exchanges in case of any issues.
The solution for crypto investors is to hold their assets in self-hosted or non-custodial offline wallets. Additionally, for added security against hackers and other threats is to keep the majority of your holdings on a “Cold Wallet”', a piece of hardware which usually resembles a USB stick that stores crypto offline. Only a small amount which will be used for regular trading should be kept in these non-custodial wallets which are known as "Hot Wallets". Using decentralised crypto exchanges (DEX) can also keep your crypto assets safe from bankruptcy or delisting but can have its own security concerns.