When a cryptocurrency files for bankruptcy, it may not end very well for those who have invested their cryptocurrency into the exchange. The reason why is because the customer would not have an understanding of the legal process surrounding custodial proceedings. Also, the exchange has no motive to inform the investors. Not only that, but the customers are being led to believe that the coins are theirs. However, the fact is that under a bankruptcy, the coins will likely be handled as a debt in the creditor’s eyes. If this is the case, then the risk will be real for investors, which can become a problem due to the exchange having no regulations.
Cryptocurrency May Be Considered Custodial
During a bankruptcy, the bankruptcy estate may be the custodial for the cryptocurrency/ The reason why is because it is considered bankruptcy estate property. It will be this estate that will come about when a bankruptcy is filed. This estate will assume the rights to all of the property, including the cryptocurrency.
If anything, the exchange may have an interest in it as a possession. So if it is just possessory, then you will likely have your cryptocurrency returned to you, although it may not be instantaneous.
Investors Are Unable to Redeem the Cryptocurrency due to a Stay
As soon as a bankruptcy is filed, a stay is automatically placed that prevents redeeming of investment or any other type of estate property. When a transgression occurs, then you will likely experience a sanction. Although there are exceptions, the stay is a legal way that denies any collection attempt not associated with the bankruptcy. This means that a creditor will need to wait until a bankruptcy is finished in order to make a claim or make an attempt to request the stay to be lifted.
Any Investor Will Be Considered As An Unsecured Creditor
When there are investors involved, the bankruptcy will view them as an unsecured creditor. This means they will be waiting to get their money back after the bankruptcy has been discharged. The amount they obtain will be proportional in nature. With the amount that remains once secured creditors have been paid.
Conclusion
When you have invested cryptocurrency and it files for bankruptcy, you will be at risk of becoming an unsecured creditor. This is regardless of you being the owner of the cryptocurrency as the bankruptcy will be making the determination of who gets what first. When you own a cryptocurrency and it files for bankruptcy, then you will likely not get anything in return. If you currently have cryptocurrency and would like more information concerning the possibilities of what could happen to your cryptocurrency, then call us today.