Beware: The Companies That Hold Your Crypto Aren’t Insured The Way Banks Are
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.
Traditional savings and investment accounts can never be 100% safe in the event an institution becomes insolvent, either. But most banks and brokerages, as well as 401(k) plans, do provide federally guaranteed protections and other insurance.
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Crypto custodial accounts, however, do not enjoy those same safeguards, in part because the legal, tax and regulatory frameworks – 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.
What’s more, customers may unwittingly agree to let the company running an exchange or platform use their digital assets. “There are some platforms that have agreements which essentially say that ‘by depositing your crypto with us, you are granting us the authority to use, transfer, invest, do whatever we want with your crypto,’” said Florida-based bankruptcy attorney Alan Rosenberg.
And if the company goes bankrupt, then customers may be treated as unsecured creditors – meaning they may not get anything back.
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