What happens to your cryptocurrencies if the entity where you keep them goes bankrupt?

“If something can go wrong, it will go wrong”. It is one of the best known formulations of Murphy’s Law, a paradigm of pessimism, and it perfectly represents how the year 2022 is unfolding for the world of cryptocurrencies. Just a year ago, the global cryptocurrency market accumulated a capitalization of almost 3 trillion dollars (more than the GDP of the United Kingdom), scoring an all-time high thanks, in large measure, to a bitcoin that traded above 65,000 Dollars. But the succession of falls of most digital currencies was followed by various scandals, such as the collapse of Terra, the risks of disappearance of Tether, the massive layoffs of Coinbase and, this week, the bankruptcy of FTX.

The cryptocurrency platform created by Sam Bankman-Fried declared bankruptcy this Friday, taking advantage of the US bankruptcy law to try to restructure itself (along with more than a hundred affiliated companies). The firm claimed at the beginning of the year that it exceeded 5 million active users in all its subsidiaries, of which the American exceeded 1.2 million. When a massive withdrawal of funds began on Wednesday following Binance’s refusal to acquire the company, FTX went so far as to stop refunding users. Given these circumstances, what can be expected for those who had their digital currencies there (or in another cryptocurrency trading or custody platform)?

The short and simple answer is ‘nothing’. The Deposit Guarantee Fund (FGD) insures the savings and some investments of users of Spanish banking entities up to 100,000 euros per holder and entity. The rule guarantees that, in the event of bankruptcy of a credit institution, the client will recover their deposits that are in savings accounts, current accounts, fixed-term deposits, shares and bonds. Some exceptional issues will also be covered for a period of three months, but in no case does it cover cryptocurrencies or other digital assets such as NFTs that many users hoard on platforms such as FTX.

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In addition, no central bank protects cryptocurrencies – this is precisely one of the characteristics that advocates of decentralized finance most advocate -, so they do not endorse the loss of value or the disappearance of this type of asset either.

The only alternative that the investor may have in bankruptcy cases is to become a creditor, claiming the value of their assets through the courts, something that can last for months and even years. This is the case of Celsius, which has been receiving lawsuits since it filed for bankruptcy in July and which this week has requested an extension of the term to restructure. In addition to the usual problems of any bankruptcy, there is little legislation that countries have developed regarding cases related to cryptocurrencies, so it is practically unexplored terrain.

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Despite this, there are precautions that the investor can take to avoid losing everything in cases such as FTX. These platforms provide the facility to safeguard the assets in a simple way and to be able to operate with them easily and quickly, but it implies assuming a double financial risk: on the one hand, the drop in the value of the asset itself (bitcoin loses more than 60% of its value so far this year); on the other, the bankruptcy of the company to which the investor has given the key to his portfolio. In fact, often the client does not even have access to the private keys of his wallet.

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The best way to have full control over your digital assets is the use of private wallets. This can be achieved with downloadable applications on mobile or computer devices, or by physically saving the keys generated from the wallet, writing them down on a piece of paper.

The most secure of this class are the so-called ‘cold wallets’, hardware devices that do not have internet connectivity (such as a USB) where the information is stored in an encrypted form and with various authentication mechanisms so that only the owner can access.