Beware: The companies that have your crypto are not insured like banks are

Beware: The companies that have your crypto are not insured like banks are

Beware: The companies that have your crypto are not insured like banks are

But that risk is by no means limited to price volatility.

Should the company that owns your crypto assets go bankrupt or otherwise be unable to meet its financial obligations, you could be out of luck. While your traditional savings and investment accounts can never be 100% safe in the event your institution becomes insolvent, your traditional bank and brokerage as well as your 401(k) plan are offer higher levels of guaranteed protection for your money than a crypto account.

Investors were reminded of that difference when Coinbase, a public crypto trading and storage platform, announced last month that if it ever went bankrupt, customers could be treated as unsecured creditors by a bankruptcy court, meaning they could lose their crypto investments.
“It is possible, as unlikely as it may be, that a court would rule to consider customer assets as part of the business in bankruptcy proceedings,” Coinbase CEO Brian Armstrong said in a statement. tweet thread the beginning of May.
But company leaders have indicated that it is not at risk of bankruptcy and that the customer’s money is safe. The company also noted that it has updated its retail user agreement to clarify that customer assets are segregated from: — and not to be confused with — assets.

Nevertheless, in the event of bankruptcy, “a judge will go by what the law says, not what you put in your retail user agreement,” said bankruptcy attorney Alan Rosenberg. But, he added, “it’s impossible to predict what would happen.” [because] there is very limited case law.”

That’s because the legal, tax and regulatory frameworks for digital assets – not to mention the legal definitions of what a specific cryptocurrency is – are still being worked out. They are not legal tender and are not always considered securities.

That’s partly why they don’t enjoy the same guarantees as more traditional financial accounts.

So read the legal fine print before buying, selling or storing digital assets with any company that facilitates crypto trading to see what protection they provide.

Since Coinbase is publicly traded and therefore needs to be more transparent than private companies, its promises and guarantees are likely to be among the best offered to those looking to invest in crypto.

For investments and savings in which you want a greater sense of security, here are some of the key protections that traditional financial accounts offer.

Bank and credit union accounts

If you have a checking or savings account, money market deposit account or certificates of deposit with a bank or credit union, make sure the institution has deposit insurance.

Banks are typically insured by the Federal Deposit Insurance Corporation (FDIC). Should your bank fail, that coverage protects up to $250,000 per depositor for each category of account ownership with an FDIC-insured bank. There are different types of deposit accounts that you can have with one bank (for example, a personal account, a business account, etc.) and each would be covered separately. And if you own an account together, each owner is covered up to $250,000. (Use this FDIC calculator to calculate your coverage, taking into account the specifics of your situation.)
And if you have deposits in a self-directed retirement account with a federally insured bank, they would also receive up to $250,000 in protection.
Credit unions that are federally insured offer the same level of coverage through the National Credit Union Administration (NCUA).

brokerage accounts

If you have an IRA or a taxable account of stocks and bonds with a registered broker-dealer who is a member of the nonprofit Securities Investor Protection Corporation, you will receive up to $500,000 in protection if that brokerage goes bankrupt.

Up to half of that amount can be used to protect cash in your account linked to your securities, for example if you just sold some shares and left the proceeds in your account with the brokerage.

In addition to SIPC insurance, a brokerage can offer its clients additional protection through private insurers such as Lloyd’s of London.

In addition, the Securities and Exchange Commission has issued a customer protection rule requiring registered broker-dealers to safeguard customers’ securities and cash, prohibiting dealers from using customers’ money to fund the company’s overhead or operations.


If your employer goes bankrupt, the money in your 401(k) cannot legally be treated as the company’s assets by a bankruptcy court.

†[The Employee Retirement Income Security Act] protects 401(k) assets deposited and fully acquired if the employer files for bankruptcy,” said Hattie Greenan, spokesperson for the Plan Sponsor Council of America.