How FTX’s Collapse Affects Your Crypto
As of November 2022, cryptocurrency has been in the news–a lot. But there’s no need to be cryptic about why: This month, the FTX exchange collapsed, sending investors running to assess their portfolios, and what their next moves should be.
The reports following the collapse of FTX brought additional bad news: Allegations have surfaced that FTX used customer funds on risky investments that left the crypto exchange trying to dig itself out of a deep hole. When the chaos hit, the company halted withdrawals and the availability of customer funds remains uncertain. What’s more, the initiation of bankruptcy proceedings raises new questions about the status of clients’ assets.
Even for those cryptocurrency owners with no relationship to FTX, the most recent turmoil might be making you think twice about your appetite for risk. It’s important to note that crypto is regulated by a patchwork of U.S. agencies, which means investors don’t always have the fallback measures and safeguards provided by traditional financial institutions. The Federal Deposit Insurance Corp.? The Securities Investor Protection Corp.? Both are a no-no when it comes to crypto.
Steps You Can Take
If you have concerns that some, or all, of your crypto holdings have disappeared into thin air, your first step should be gathering records of your crypto investments. According to Miles Fuller, head of government solutions at the crypto tax firm TaxBit and a former IRS attorney focusing on virtual currencies, “The first step is taking stock, and documenting as a customer to the extent possible what you had on what exchange.” Your crypto records could prove useful when you attempt to recover funds.
Withdrawing Your Crypto
FTX has delivered mixed messages regarding whether customers can withdraw their crypto from its various platforms. There have been widespread reports of users being unable to withdraw their assets and finding that their wallets have been drained following the apparent hack.
On November 11, FTX.US posted a banner declaring that withdrawals would remain open; however, a readily accessible login page doesn’t exist. One can only assume that the status of withdrawals on FTX’s U.S. app remains uncertain.
BlockFi, which FTX had been considering acquiring, ceased allowing withdrawals. The fallout from the FTX meltdown also touched Gemini, which issued a statement explaining that it may have to delay redemptions in its “earn” rewards program because a lending partner, Genesis Global Capital, had paused withdrawals. In a bit of good news, Gemini affirmed that the rest of its withdrawal services were operational.
If you are able to withdraw from your exchange, consider choosing another place to store your cryptocurrency such as a dedicated crypto wallet that can keep your assets offline. Should you find that your crypto remains inaccessible or unaccounted for, you may need to seek legal recourse.
Be In The Know About Your Crypto Storage
In general, you can store crypto in a custodial wallet run by a crypto exchange company, or you can use a noncustodial crypto wallet that allows you to manage the information needed to send and receive crypto.
Steve Larsen, the founder of DeFi Steward, a company that assists financial advisors with managing crypto, says crypto owners should review their cryptocurrency storage. Both storage approaches carry risks, but Larsen believes that recent events in the space make a convincing argument for 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.
Consider Legal Action
If you can’t recover your cryptocurrency from a company holding it, starting legal proceedings might be your next best option. Because FTX has filed for bankruptcy, individuals who can definitively establish that the company owes them money will need to get in line and wait their turn to receive payment.
The FTX legal case most likely will be protracted and complex. The courts will need to decide not only the amount that individual clients are entitled to but also where they rank among the entire group of creditors. Fuller encourages crypto users to follow the federal court case and proceedings and to carefully review any information received regarding legal decisions.
“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.”