How to keep investors’ assets safe from bankruptcy

The recent downturn in cryptocurrencies has made many people fear their metaphysical wallets. The crash, which occurred on the Terra platform for both the Luna and TerraUSD token, has heightened fears of investors losing all their money. But investors should not lose their holdings in case their exchange goes bankrupt, outside of scams, market crashes and regulatory clampdowns.

In case of bankruptcy at the exchange, investors' assets can be forfeited, as highlighted by the largest US-based centralised criptocurrency exchange CEX Coinbase. In a filing with the US Securities Exchange Commission, Coinbase stated that the holdings of investors could be subject to bankruptcy procedures.

Since custodially held assets can be considered the property of a bankruptcy estate, the assets we hold on behalf of customers could be subject to bankruptcy proceedings and could be treated as our general unsecured creditors, the company said in its regulatory filing.

This was seen during the Luna crash when many exchanges delisted the token, preventing investors from exiting their investments in the token. If the exchanges decide to list the token again, these investors are stuck with their Luna holdings.

Unlike banks, cryptocurrencies exchanges are not regulated by the Reserve Bank of India or any statutory or regulatory body in India, which leads to weak customer protection against private exchanges in case of any issues.

The solution for non-custodial offline wallets is to hold their assets in self-hosted or non-custodial offline wallet. The majority of your holdings on a Cold Wallet are a piece of hardware that is usually resembled a USB stick that stores cryptocurrencies offline, which is a good idea for added security against hackers and other threats. A small amount that will be used for regular trading should be kept in non-custodial wallets known as DEX, a non-custodial wallet that keeps your assets safe from bankruptcy or delisting, but can have its own security concerns.