Token Value Decrease Shuts Celsius and Voyager This Month
Legal experts warn CNBC that traders who expect to get their money back from defunct cryptocurrency exchanges shortly are likely to be let down.
Celsius and Voyager Digital, two cryptocurrency trading and lending companies, declared bankruptcy this month, locking user money inside their systems. Both businesses shut down customer accounts after a surge in withdrawals caused liquidity problems.
Similar to a bank, Celsius utilized client deposits to support loans to other customers or huge wagers on supposedly decentralized financial instruments. It resembled Voyager. The insolvency of Three Arrows Capital, which missed payments on a $660 million loan from Voyager, impacted the firm.
Due to this interconnection, the crypto market is susceptible to contagion, with significant enterprises collapsing one after the other when a decline in token values unwinds excessive leverage in the system.
Celcius and Voyager Bankruptcy
According to a report from the Business Wire, last week, Celsius Network commenced voluntary Chapter 11 proceedings to stabilize its company and complete a thorough restructuring transaction that optimizes value for all stakeholders. Celsius and a few of its subsidiaries voluntarily filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the Southern District of New York to carry out the restructuring.
On July 6, a report from CNBC said that beleaguered crypto brokerage Voyager Digital had filed for Chapter 11 bankruptcy. According to a filing from the business, Voyager started the bankruptcy process on Tuesday in the Southern District of New York's U.S. Bankruptcy Court. Assets between $1 billion to $10 billion and liabilities in the same range are included in the file.
The startup stated it had $1.3 billion in crypto on its platform and more than $350 million in cash for Metropolitan Commercial Bank clients.
Is Your Crypto Secure?
Cryptocurrencies aren't regulated. Therefore they don't provide the same safeguards as bank or brokerage accounts.
If a member broker goes into financial trouble, the U.S. Securities Investor Protection Corporation guarantees traders up to $500,000 in cash and securities.
FDIC protects bank depositors up to $250,000 if an insured lender fails. U.K. and EU have comparable programs.
Without regulations controlling crypto assets, investors can't retrieve their investment if an exchange freezes or collapses.
What Transpires if a Transaction Fails?
It's still unclear at this time. Although there are instances of cryptocurrency companies declaring bankruptcy elsewhere (Mt. Gox in Japan, for instance), such a situation has never occurred in the United States.
Mt. Gox, which went down in 2014, still hasn't paid back billions of dollars worth of cryptocurrencies to its creditors.
According to Kobre & Kim's attorney Daniel Saval, centralized crypto platforms may mix customers' assets to make dangerous wagers. This may lead to a finding that the exchange, not the users, owns the assets.
The user agreement of the firm and how it utilizes the customers' assets will have a significant impact on what happens to the customers' finances in bankruptcy situations.
Saval warned that additional unsecured creditors, including suppliers, lessors, and lawsuit claimants, might further reduce consumer recovery in bankruptcy proceedings.
How can You Safeguard Your Cryptocurrency?
Investors might choose to transfer their cryptocurrency away from exchanges and into wallets referred to as "self-custody" instead.
Here, an individual is in charge of their own private key, a coded password necessary to open a cryptocurrency wallet.
However, doing so has hazards of its own. A cryptocurrency owner may never be able to get their money back if they misplace their private key.
There are innumerable instances of individuals who have misplaced hard drives or USB sticks with hoards of cryptocurrency valued at millions of dollars.
