What is Crypto Exchange Bankruptcy? How Does Exchange Go Bankrupt and Affect the Crypto Community?

What is Crypto Exchange Bankruptcy?

A crypto exchange bankruptcy is a state of exchange when it fails to meet or fulfil its obligation to the platform’s users. Then crypto exchange ceases its operations and meets its downfall. There could be multiple reasons behind the cryptocurrency exchange going bankrupt i.e., financial mismanagement, market downturns and regulatory crackdowns.

Whenever a crypto exchange goes bankrupt, that particular exchange is itself responsible for it due to plain stupidity, fraud or hack. As a result, the exchange finds it difficult or impossible to meet the financial obligation or to pay debt to the creditors and customers. Apart from the previously mentioned reasons, cryptocurrency exchanges sometimes go bankrupt because of neglecting the rules and regulations of the country where it is based.

Notable Bankrupt Cryptocurrency Exchanges

In the last decade, more than 5 cryptocurrency exchanges went bankrupt due to financial mismanagement, not following the rules and regulations of the region. Due to these bankruptcies, millions of people had to suffer and faced financial loss. A few bankrupt crypto exchanges are given below.

• FTX

FTX was the world’s third-largest cryptocurrency exchange by trading volume. More than one million users were registered on the FTX. FTX went bankrupt in November 2022 due to liquidity crises of the token of the company. Moreover, it was using customers’ funds for risky investments.

• Three Arrows Capital

3AC collapsed because it borrowed too much to invest in cryptocurrencies. However, it is believed that 3AC didn’t disclose how much it was at risk.

• Voyager Digital

Voyager Digital was a cryptocurrency brokerage firm. The firm filed for bankruptcy in July 2022 after it was unable to meet margin calls from its lenders.

• Mt.GOX

Mt. Gox was once the largest bitcoin exchange in the world. However, the exchange was hacked in 2014, and 850,000 bitcoins were stolen. Mt. Gox filed for bankruptcy shortly after the hack.

How Does Crypto Exchange Bankruptcy Affect the Crypto Community?

Crypto Exchange Bankruptcy has adverse effects on the crypto community as creditors and investors have no longer control over their digital assets in case of exchange bankruptcy. They cannot withdraw their cryptocurrencies and have to suffer in terms of massive losses. Moreover, it can lead to a loss of confidence in the market and a decline in prices.

In such cases, the price value of the crypto assets sees a massive decline and users have to sell their holdings at a very low price. Bankruptcy alerts the regulatory authorities due to which crypto markets might have to face regulatory scrutiny which slows down the market and traders, investors and creditors have to face loss.

Are Crypto Assets Protected by the Local Government?

Sadly, cryptocurrencies are not protected by the government. Being part of Decentralized Finance (DeFi), the crypto industry is not regulated by the central government customers have to be cautious of this aspect as well.  So, crypto users have no choice but to wait for the legal procedures of the exchanges to get access and regain their digital assets.

Cryptocurrencies have seen different attitudes around the globe. Few of the countries are highly against the crypto industry and take strict measures against it while some have shown leniency toward the cryptoindustry. So the loss and benefits of having access to digital finance depends upon the country’s rules and regulation. Some countries have shown a positive attitude toward digital finance and working on their central bank-regulated currencies named CBDCs.

How Can We Protect Our Assets Amid Crypto Exchange Bankruptcy?

Interestingly, cryptocurrencies were developed to protect people’s assets amid bankruptcies in 2008 but now they are facing a tough time. Crypto users can do the following to protect their digital assets;

• Use a self-custody wallet
• Non-custodial wallet allows you to create secrete keys and gives you full control of your digital assets
• You can use cold wallets (Trezor, Ledger) and hot wallets like MetaMask
• Invest in multiple exchanges instead of putting all the assets in a single place
• Study the description of the exchange and then select the exchange according to your use

Conclusion

Investing in cryptocurrency can make you rich, but it can hurt if you ignore risks. To lower your risk, learn about bankruptcy and protect your assets. Do your research before entering the crypto space.