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Beware: The Companies That Hold Your Crypto Aren't Insured The Way Banks Are - Cryptocurrency - PostsMania

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Beware: The Companies That Hold Your Crypto Aren't Insured The Way Banks Are by anigold: 12:41 pm On 6 Jun
The latest "crypto winter," which sent the values of Bitcoin and other digital currencies plummeting, served as a healthy reminder that cryptocurrencies are highly risky investments.

But that risk is by no means limited to price volatility.
Should the company holding your crypto assets declare bankruptcy or otherwise be unable to meet its financial obligations, you could be out of luck. While your traditional savings and investment accounts can never be 100% safe in the event your institution becomes insolvent, your traditional bank and brokerage as well as your 401(k) plan offer greater levels of guaranteed protections for your money than a crypto account.
Investors were reminded of that difference when Coinbase, a publicly held crypto trading and storage platform, disclosed last month that if it were ever to go bankrupt, customers may be treated as unsecured creditors by a bankruptcy court, meaning they could lose their crypto investments.
"It is possible, however unlikely, that a court would decide to consider customer assets as part of the company in bankruptcy proceedings," Coinbase CEO Brian Armstrong said in a tweet thread in early May.
But leaders at the company have indicated that it is not at risk of bankruptcy and customer "funds are safe." The company also noted that it updated its retail user agreement to clarify that customer assets are separate from -- and not to be confused with -- company assets.

Nevertheless, in the event of a bankruptcy, "a judge will go by what the law says, not what you put in your retail user agreement," said bankruptcy attorney Alan Rosenberg. But, he added, "it's impossible to predict what would happen [because] there is very limited case law."
That's because the legal, tax and regulatory frameworks for digital assets -- to say nothing of the legal definitions of what a specific cryptocurrency is -- are still being worked out. They're not legal tender and they're not always viewed as securities.
That's partly why they do not enjoy the same safeguards as more traditional financial accounts.
So read the legal fine print before buying, selling or storing digital assets with any company facilitating crypto trading to see what protections they do offer.
Given that Coinbase is publicly traded and therefore required to be more transparent than privately held firms, its promises and safeguards are likely to be among the best on offer for those looking to invest in crypto.
For investments and savings in which you'd like to have a greater sense of safety, here are some of the key protections offered by traditional financial accounts.

Bank and credit union accounts
If you have a checking or savings account, a money market deposit account or certificates of deposit at a bank or credit union, make sure the institution has deposit insurance.
Banks typically are insured by the Federal Deposit Insurance Corporation (FDIC). Should your bank fail, that coverage will protect up to $250,000 per depositor for each account ownership category at an FDIC-insured bank. There are several types of deposit accounts you may have at one bank (e.g., personal account, business account, etc.) and each would be covered separately. Plus, if you own an account jointly, each owner is covered up to $250,000. (Use this FDIC calculator to figure out your coverage given the particulars of your situation.)
And if you have deposits in a self-directed retirement account at a federally insured bank, they would also receive up to $250,000 in protection.
Credit unions that are federally insured offer the same level of coverage through the National Credit Union Administration (NCUA).

Brokerage accounts
If you have an IRA or a taxable account of stocks and bonds with a registered broker-dealer that is a member of the nonprofit Securities Investor Protection Corporation, you will receive up to $500,000 of protection should that brokerage go bankrupt.
Up to half that amount can be used to protect cash in your account associated with your securities -- for example, if you just sold some stocks and left the proceeds in your account with the brokerage.
On top of the SIPC insurance, a brokerage may provide additional protection to its customers through private insurers like Lloyd's of London.
In addition, the Securities and Exchange Commission issued a Customer Protection Rule that requires registered broker-dealers to safeguard customer securities and cash, prohibiting the dealers from using any customer money to fund the firm's overhead or activities.

401(k)s
If your employer goes belly up, legally the money in your 401(k) cannot be treated as the company's assets by a bankruptcy court.
"[The Employee Retirement Income Security Act] protects 401(k) assets that have been deposited and are fully vested if the employer files bankruptcy," said Hattie Greenan, spokesperson for the Plan Sponsor Council of America.

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