Professor Adam Levitin of Georgetown University on the latest Fresh Start podcast discussed what could happen to investors in cryptocurrency if a crypto exchange were to file for bankruptcy.
Levitin began writing about the topic first on the Credit Slips blog and then in a paper, “Not Your Keys, Not Your Coins.” As he was working on and updating the paper, Coinbase Global Inc. (COIN), a major exchange, altered its user agreement to include Levitin’s recommendations.
A range of potential options would exist for crypto holdings in the event of a Chapter 11 bankruptcy, with Levitin drawing a huge distinction between such assets and other assets that are protected by the Federal Deposit Insurance Corp. or Securities Investor Protection Corp.
In contrast to other types of investments, if an investor were holding crypto in a wallet on an exchange, “it’s not entirely clear what the legal treatment would be” in the event of a bankruptcy, Levitin explained. If the coins belonged to the exchange, however, it’s possible the investor would be just an unsecured creditor.
There is, luckily, a relatively easy solution exchanges could employ to protect their customers’ assets — if the exchange decided. Without such clarification from exchanges, “I don’t think anyone can say with certainty how a bankruptcy court would characterize the relationship.”
Additionally, Levitin defined much of the important language used in crypto investing and why this information would become important in the event of a bankruptcy.
Listen to the podcast with Adam Levitin below: