FTX and BlockFi Bankruptcies: What Happens to Your Crypto?
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It’s December 2022: Do you know where your cryptocurrency is? After the collapse of FTX and BlockFi this month, it’s a good time for anyone who owns crypto to take stock of their portfolio.
Customer funds remain in limbo as FTX and BlockFi both move through bankruptcy proceedings. Both companies had left their customers' ability to withdraw funds in question amid the crisis that began with reports that FTX had used customer funds on risky investments.
Both FTX and BlockFi have halted withdrawals during the chaos, and customers are facing uncertain prospects for recovering their crypto investments. Making matters worse for FTX customers, the company suffered a large apparent hack that affected user accounts. BlockFi halted withdrawals soon after.
If you’re directly affected by the BlockFi and FTX financial crisis, you can take several steps to check in on your digital assets. If you want to get your cryptocurrency off of FTX, now may be a good time to see if you can log in to do so.
But even if you’re a cryptocurrency owner with no relationship to FTX or BlockFi, the issues raised by the latest turmoil may help you think more clearly about your risk appetite.
Because crypto is regulated by a patchwork of agencies in the United States, investors don’t always have the fallbacks available through traditional financial institutions. These include Federal Deposit Insurance Corp. or Securities Investor Protection Corp. protections.
If you’re concerned that some of your holdings may have gone missing, you can start by gathering any records of your crypto investments, says Miles Fuller, head of government solutions at the crypto tax firm TaxBit.
“The first step is taking stock, and documenting as a customer to the extent possible what you had on what exchange,” says Fuller, a former IRS attorney focusing on virtual currencies. Even if the news is bad, these records could be helpful with attempts to recover funds later.
See if you can withdraw
FTX has sent mixed messages about whether customers can withdraw their crypto from its various platforms. There are widespread reports of users not being able to withdraw their assets and having wallets drained following the apparent hack.
FTX.US, the company's U.S. site, posted a banner on Nov. 10 declaring that withdrawals will remain open. The banner remains, yet there is no readily accessible login page. The status of withdrawals on FTX's U.S. app remains unclear.
Meanwhile, the FTX crash is rippling across the industry. Crypto businesses with financial relationships to FTX are showing signs of distress, and there may be continued trouble in the future.
BlockFi, which had been in line for a potential acquisition by FTX, also halted withdrawals before announcing Nov. 28 that it was entering bankruptcy proceedings.
The fallout has also touched Gemini, which said it may have to delay redemptions in its "earn" rewards program because a lending partner, Genesis Global Capital, had paused withdrawals. Gemini said the rest of its services were processing withdrawals as normal.
If you can withdraw from your exchange, you’ll want to choose another place to store your cryptocurrency. One option is a dedicated crypto wallet that can keep your assets offline. But if your crypto remains stuck or unaccounted for, you may have to turn to the judicial system for help.
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Prepare for bankruptcy court
If you cannot recover your cryptocurrency from a company holding it, the next step might be going to court. In bankruptcy, anyone who can establish that the company owes them money will have to get in line to request repayment.
FTX bankruptcy filings have said the company may have more than 1 million creditors. The company has now made public a form through which people can submit and document their claims.
The bankruptcy will be a complex and protracted legal situation, as courts may have to decide how to treat individual clients, Fuller says, including where they rank in priority alongside other creditors.
If you’re getting the latest information about what’s going on from social media, you might want to add another news source to your diet: the federal court system. Fuller says it’s a good idea to follow the case and carefully review any information you receive.
“If you’re not comfortable, talk to a professional to assist you,” Fuller says. “Because if you have a decent amount of money — or really any amount of money — you don’t want to forgo any rights you may have.”
Understand your crypto storage
Steve Larsen, the founder of DeFi Steward, a company that helps financial advisors manage crypto, says crypto owners would be well served to take a hard look at how they store their cryptocurrency.
Generally speaking, you can store crypto in a custodial wallet, which a company like a crypto exchange runs. Or you can use a noncustodial crypto wallet, through which you manage access to the information needed to send and receive crypto.
While there are risks to either approach, Larsen said recent events in the space offer a solid argument in favor of greater user control.
“It appears to be riskier to use a private exchange [to] hold your assets rather than take care of them yourself, and follow the best practices that go along with it,” Larsen says.