The money may never be withdrawn! Millions of cryptocurrency players may lose all their money in the crypto platform bankruptcy wave?

Cailianshe reported on July 19 (Editor Xiaoxiang) If the encryption platform goes bankrupt, can the money still be withdrawn?

For many Celsius and Voyager Digital users, this may be the question they have been tossing and turning over in the past few weeks. According to US legal experts, these users should not have too much hope of recovering all their funds now...

Two cryptocurrency lending and investment platforms, Celsius and Voyager Digital, both filed for bankruptcy earlier this month, leaving millions of user assets frozen in their respective platforms. The two companies had frozen customer accounts before filing for bankruptcy after a large number of withdrawals caused liquidity problems.

Celsius operates much like a bank, taking customer deposits and lending them out, or making risky bets on so-called decentralized finance products to generate high returns. Voyager Digital operates in a similar way. The company was unfortunately caught up in the high-profile collapse of crypto hedge fund Three Arrows Capital, which went bankrupt after defaulting on a $660 million loan from Voyager.

The wind starts from the tip of the green reed. The close connection between industry platforms makes the cryptocurrency market very vulnerable to the wave of bankruptcies. This layer-by-layer subprime loan model is almost identical to the situation when Lehman Brothers collapsed. As the price of cryptocurrency plummeted, the risks of this very fragile leveraged ecosystem were completely exposed, causing many major cryptocurrency platforms to fall one by one like dominoes.

In this cryptocurrency crisis, the worst hit are obviously the ordinary investors who have deposits and cryptocurrency assets in these crypto platforms…

The crypto industry lacks investor protection mechanisms

Crypto lenders may look similar to traditional financial institutions, but in reality, they do not have the investor supervision and legal protection mechanisms inherent in banks and brokerages.

For example, the Securities Investor Protection Corporation (SIPC) insures traders’ cash and securities up to $500,000 if a member broker encounters financial difficulties, while the Federal Deposit Insurance Corporation protects bank depositors up to $250,000 against the risk of a bank failure.

Not only in the United States, but also in the traditional financial sectors of the United Kingdom and the European Union, there are similar regulatory and legal protection mechanisms.

However, there is a complete lack of regulation and protection in the cryptocurrency space: since there are no laws governing crypto assets, investors have no guarantee of getting their funds back if an exchange freezes someone’s account, or worse, if the platform collapses completely.

Daniel Besikof, a partner at Loeb & Loeb, said, “No such protection mechanism for the crypto market has been developed. I would not be surprised if it really happens (it will eventually become difficult to withdraw funds), which will increase calls for stronger regulation of the crypto industry.”

Users of a bankrupt platform may lose both money and coins?

It’s unclear what exactly Celsius and Voyager Digital customers will face: While there have been cases of crypto companies filing for bankruptcy outside the U.S., such as Japan-based bitcoin exchange Mt. Gox, this is unprecedented in the U.S.

It is worth mentioning that Mt.Gox, once the world's largest Bitcoin exchange, filed for bankruptcy in 2014, and many of its creditors are still waiting for repayment of billions of dollars worth of cryptocurrencies.

Daniel Saval, an attorney at Kobre & Kim, said the problem with centralized crypto platforms is that they can mix funds from different customers and make high-risk bets. This way of operating could lead courts to rule that the assets are the property of the exchange, not the users.

“Users may be surprised to learn that in the event of a platform’s insolvency, the cryptocurrencies and funds in their accounts may no longer be considered their own,” Saval said. “Platforms often pool cryptocurrencies and funds from different customers in the same storage wallet or account.”

Celsius' user terms and conditions state that any funds deposited with the company "may not be recoverable" in the event of the company's bankruptcy. The company filed for bankruptcy protection last week, disclosing a gap of about $1.2 billion on its balance sheet and owing about $4.7 billion to users. Celsius claims to have $167 million in cash on hand, but it has not yet allowed customers to withdraw funds and has not made it clear when it will reopen withdrawal services.

Voyager said its customers' U.S. dollars are held in FDIC-insured accounts at Metropolitan Commercial Bank in New York. However, this claim has been questioned by legal experts and the bank itself. Metropolitan Commercial Bank said the FDIC only protects funds in the event of a bank's bankruptcy, not for crypto exchanges.

Voyager has now developed a plan to use their accounts, Voyager shares and tokens issued by the company itself, as well as cryptocurrency recovered from Three Arrows Capital.

Both Celsius and Voyager hired the renowned law firm Kirkland & Ellis to represent them in court.

Besikof said, "Investors who hold crypto assets through Voyager Digital and Celsius are currently in a difficult situation. Their accounts are frozen, the lawsuits are on hold, and the value and timing of their assets to be recovered are unknown. They still have a lot of work to do in the bankruptcy court before these issues are resolved."

Many users are worried and unable to sleep at night

Celsius and Voyager are both currently filing for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the Southern District of New York, a form of bankruptcy protection that allows companies to reorganize their debts while continuing their business as usual.

Legal experts say Celsius and Voyager users are likely to be considered "unsecured creditors," a classification that puts them in the same category as a business's suppliers and contractors.

That means they are likely to be at the end of a long line of creditors waiting for payouts from court actions - behind banks, company employees and tax authorities.

In a regulatory filing in May, Coinbase, the largest cryptocurrency trading platform in the United States, stated that in the event of bankruptcy, its users would be considered "general unsecured creditors." This means that if Coinbase falls into bankruptcy, Coinbase's customers will not be able to recover their cryptocurrencies or withdraw cash of equivalent value.

“Typically, most of the customers of cryptocurrency exchanges are unsecured creditors, so when an exchange collapses, secured creditors are repaid first, and legal fees are paid first,” said Dustin Palmer, managing director of consulting firm Berkeley Research Group. “Customers will get paid pro rata at the end. In a typical bankruptcy case, what you get is just a drop in the bucket.”

In terms of timing, Palmer noted, “customers may have to wait until the bankruptcy process is complete, which can often take years — Lehman’s experience is representative. In addition, some Mt. Gox customers have not received any compensation to this day.”

At present, some cryptocurrency investors whose accounts have been frozen have been living in fear and unable to sleep at night.

Alla Driksne, 34, said she had six figures worth of Bitcoin and Ethereum locked in her Celsius account, her life savings. She had sleepless nights after Celsius initially suspended withdrawals in June. Driksne pointed out, "Since it is such a big company and so many people trust it, deep in my heart I still hold on to the possibility of not losing everything, although the hope is slim."

Jake Greenbaum, a 32-year-old cryptocurrency influencer living in Miami, also has a lot of Solana tokens in his Celsius account, which was worth more than $107,000 when the platform announced the withdrawal freeze. Greenbaum now believes that he can't get his money back and has recorded the money as cost expenses. He recently started selling his watches, but still plans to use the money to buy more cryptocurrencies.