Since June, it has become common for cryptocurrency exchanges to halt trade owing to erratic market conditions. The flash crisis that started in May and was followed by the collapse of the Terra sisters increased further last month, which left cryptocurrency exchanges with little liquidity. The Bitcoin market experienced a big loss due to global macroeconomic uncertainty, which also caused the stock market to see a significant decline. The latest market decline is the closure of the cryptocurrency hedge firm Three Arrows Capital (3AC). All of these circumstances contributed to the suspension of withdrawals and deposits on various cryptocurrency exchange platforms.
Celsius Network, situated in New Jersey, is the most recent company to declare voluntary bankruptcy as a result of illiquidity in its balance sheet. In order to stabilize its business and complete a comprehensive restructuring transaction that maximizes value for all stakeholders, Celsius has filed Chapter 11 cases.
Celsius Network, situated in New Jersey, is the most recent company to declare voluntary bankruptcy as a result of illiquidity in its balance sheet.
The exchange stated in its bankruptcy court petition, “Despite its early success, Celsius had certain setbacks. More digital assets were added to the platform of the company than they were ready to use. As a result, the Company took judgments about the deployment of its assets that, in retrospect, turned out to be bad ones.”
Celsius cited the implosion of Terra LUNA (“Luna”) and its TerraUSD (UST) stablecoin (“UST”) as the cause of a “crypto winter” and an industry-wide sell-off in 2022 as one of the negative factors for crypto exchanges.
Notably, Celsius has liabilities of over $5.5 billion and assets of about $4.31 billion as of July 13, 2022. As a result, the company’s balance sheet shows a $1.19 billion loss.
Another would be Voyager Digital, which filed for bankruptcy after suffering significant losses as a result of 3AC’s demise and the subsequent market slump. In the midst of the procedures, FTX has suggested providing some liquidity to Voyager clients.
Crypto exchanges are at risk for more reasons than just the recent cryptocurrency market fall. In actuality, even investors have the potential to severely constrain exchange liquidity. At least in the case of CoinFlex, the exchange’s trading was halted due to pressure from just one investor.
Crypto exchanges are at risk for more reasons than just the recent cryptocurrency market fall. In actuality, even investors have the potential to severely constrain exchange liquidity.
On July 9, CoinFlex announced that withdrawals had been stopped because a significant investor had failed to fulfill $47 million in margin calls. To recuperate $84 million, CoinFlex plans to sue this individual. The exchange also has plans to provide its depositors with some short-term liquidity soon. In the long run, it is also in discussions to create a joint venture with a significant US exchange/ATS platform.
The most popular cryptocurrency exchange in Asia, Zipmex, has joined the movement to halt trading temporarily. Even Nevertheless, the exchange allows withdrawals from the trade wallets of investors. Other cryptocurrency exchanges that have stopped processing withdrawals since June include Binance, Voyager CoinFlex, Celsius, Vauld, and Skybridge Capital.
Other cryptocurrency exchanges that have stopped processing withdrawals since June include Binance, Voyager CoinFlex, Celsius, Vauld, and Skybridge Capital.
Investors should be concerned about the troubles of the crypto exchanges since it could affect their hard-earned money. Everyone wants to see a healthy return on their investment when they invest in the cryptocurrency market or any other type of capital market instrument. But what if your money becomes involved in your cryptocurrency trading platform’s bankruptcy as well? Sadly, this is true!
According to Vinit Khandare, CEO and Founder of MyFundBazaar, limited market liquidity can cause a collapse in stock prices that ignites a new financial crisis. To survive the liquidity crunch, investors must increase their cash allocations, refrain from taking on excessive positions, be alert to the risk of overall crowding, and devise a comprehensive plan to take advantage of the negative effects of liquidity.
In a Securities and Exchange Commission (SEC) statement from May of this year, the largest cryptocurrency exchange operating in the US, Coinbase, said that “supported crypto assets are not insured or guaranteed by any government or government agency.”
According to Coinbase’s filing, any failure by the cryptocurrency platform or its partners to uphold the necessary controls or to manage customer crypto assets and funds properly and in compliance with applicable regulatory requirements could harm the company’s reputation, subject it to legal action, prompt regulatory enforcement actions, cause significant financial losses, cause customers to stop using the products or reduce their use of them, subject them to significant penalties and fines, and subject them to additional restraints.
“supported crypto assets are not insured or guaranteed by any government or government agency.”
-Coinbase
As a result, according to Coinbase, the crypto assets we hold in custody on behalf of our customers could be the subject of bankruptcy proceedings and such customers could be treated as our general unsecured creditors. This is due to the possibility that crypto assets handled in a custodial capacity will be seen as belonging to a bankruptcy estate.
Simply put, there is a potential that your crypto assets will be included in the bankruptcy process if a crypto exchange declares bankruptcy.
Tarality’s CEO and Director, Abhijit Shukla, stated that there is no guarantee that investors will be able to recover their money if an exchange were to freeze an account or, worse yet, fully fail because there are no rules controlling crypto-assets. The cryptocurrency and monies held in their accounts could not be regarded as their own property in a bankruptcy situation, so they frequently combine the cryptocurrency and assets of various customers in a single storage wallet or account.
There is no guarantee that investors will be able to recover their money if an exchange were to freeze an account or, worse yet, fully fail because there are no rules controlling crypto-assets.
Further, the CEO of MyFundBazaar emphasized that people who have their cryptocurrencies stored in self-custodial wallets won’t be impacted because they hold the private keys, whereas those who have their assets in custodial wallets are often last in line to receive payment.
Any financial institution you work with may experience stress, confusion, and expense due to bankruptcy. Customer uncertainty and losses could be even greater in the cryptocurrency industry. But instead of freaking out, it’s preferable to wait for the bankruptcy procedure to conclude to learn exactly what you’ll receive back.