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Are your coins at risk? Large stock exchanges are silent about risks for customer funds

 


Coinbase 's recent revelation about the risk of losing customer funds in the event of the exchange's bankruptcy has highlighted the need for consumers to be cautious when choosing crypto platforms.


Coinbase CEO Brian gave users a glimpse of what could happen to their assets should the exchange go bankrupt. He emphasized the stark differences between crypto exchanges and traditional stockbrokers.


Under Rule 15c3-3 of the US Securities and Exchange Commission (SEC), stock brokers are required to hold client funds in a separate account from broker funds. If the customer's holdings disappear through theft or crime, inventory accounts are usually backed with insurance. This replaces the lost inventory of up to $500,000. In addition, customers can transfer their accounts elsewhere in the event of the company's bankruptcy.


Coinbase 's announcement made it clear that some crypto exchanges are mixing customer funds with their own funds.


“I don't think there's any reasonable way for a private crypto user to trust their broker or trading venue to hold their wealth in a non-bankruptcy manner. Unless he gets very specific disclosure that he is," said Tyler Gellasch, a former SEC official and current director of the Healthy Markets Association.


Toll-free brokerage firm Robinhood Markets said in a filing with the SEC when it filed for an IPO that it believes clients' assets should remain segregated from the company in the event of a bankruptcy. This view has not yet been tested in court. This creates some risk of keeping cryptos on a platform, ” said a spokesman for Robinhood .


The stock markets are keeping a low profile

The Coinbase CEO reassured users on Twitter, assuring that $256 billion in user funds were safe. Meanwhile, crypto exchanges FTX US and Gemini declined to comment on whether user funds are at risk. Binance.US and Kraken also did not respond to the request.


I don't think customers understand the legal nature of the relationship... In fact, exchanges are lulling customers by saying that the coins " belong to the consumer". But the legal treatment in the event of bankruptcy is likely to be different, ” says Adam Levitin, who is a law professor at Georgetown University.


Customers could only get “cent amounts” back

Investors would be considered “general, unsecured creditors” in the event of a stock exchange bankruptcy . That is, they would be the last to be paid out in case there are any funds remaining after the senior creditors have been paid.


“Customers should expect to face significant delays in repayment should the platform go bankrupt. And they may end up getting pennies back,” said Dan Awrey, a professor at Cornell Law School.


Disclaimer

All information contained on our website has been researched to the best of our knowledge and belief. The journalistic contributions are for general information purposes only. Any action that the reader takes based on the information found on our website is entirely at their own risk.

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