The recent crypto downturn has scared many of their metaphysical crypto wallets. The crash, seen on the Terra blockchain for the Luna and TerraUSD tokens, has only heightened fears that investors will lose all their money. But aside from scams, rug draws, stock market crashes, and regulatory crackdowns, investors should also avoid losing their crypto holdings in case their cryptocurrency exchange fails.
As the largest centralized crypto exchange (CEX) based in the United States, Coinbase, points out, in the event of bankruptcy at the exchange, investors’ assets may be confiscated. In a filing with the U.S. Securities Exchange Commission, Coinbase said investors’ holdings could be subject to bankruptcy proceedings.
“Because crypto assets held in custody may be considered the property of a bankruptcy estate, in the event of bankruptcy, the crypto assets we hold in custody on behalf of our clients could be subject to legal proceedings. bankruptcy and these 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 locked in with their Luna holdings unless exchanges decide to re-list the token.
Unlike banks, crypto exchanges are not regulated by the Reserve Bank of India or any statutory or regulatory body in India, resulting in little customer protection from private exchanges should something go wrong.
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, you should keep the majority of your assets on a “Cold Wallet”, a piece of hardware that usually looks like a USB drive that stores cryptography offline. Only a small amount that will be used for regular transactions should be kept in these non-custodial wallets called “Hot Wallets”. Using decentralized crypto exchanges (DEXs) can also protect your crypto assets from bankruptcy or delisting, but can have its own security issues.