Regulations on Trading and Investing in Crypto Assets
What happens to investors' funds when a crypto exchange collapses and files for bankruptcy?
Investors are not likely to recoup their funds from failed cryptocurrency exchanges, given that regulatory measures on investor protection for retail investors are still in their early stages.
According to MAS (Consultations)
last revised on 30 November 2022
2.10 Regulation does not shield consumers from the risk of their cryptocurrency holdings losing value, or if DPT service providers collapse due to unsustainable business models, fraud or excessive risk taking.
2.11 [DPT service providers] are also not subject to prudential reuglation to ensure their financial safety and soundness, and do not have additional safety nets like deposit insurance or policy protection, unlike retail banks and insurance companies.
"While depositors in a cryptocurrency exchange may feel similar to bank account holders, they have far less legal protection. In the case of a collapsed exchange such as FTX, they are simply unsecured creditors, and legally stand to be some of the last creditors to recover funds, far behind bank loans and slightly ahead of equity owners."
"The problem with centralized crypto platforms is they can mix different clients’ funds together to make risky bets ... Such commingling may lead to a ruling that the assets are the property of the exchange, not users.
Users may be surprised to learn that, in a bankruptcy scenario, the crypto and funds held in their accounts may not be considered their own property. Exchanges will often pool different customers’ crypto and funds together in the same storage wallet or account. What happens to customers’ funds in bankruptcy cases will depend a lot on the company’s user agreement and how it used their assets."