The Problem: Two Major Platforms Collapse
Crypto trading and lending platforms Celsius and Voyager Digital filed for Chapter 11 bankruptcy in July 2022. Both had frozen customer accounts before filing, leaving users unable to access their funds.
Celsius operated like a bank, taking customer deposits and lending them out or placing them in decentralized finance products. Voyager faced collapse after Three Arrows Capital, a major crypto hedge fund, defaulted on a $660 million loan and failed itself. Both firms encountered liquidity problems as token prices fell and withdrawals accelerated.
The Scale of the Shortfall
Celsius owed users approximately $4.7 billion but reported only $167 million in cash on hand—about 3.6 percent of what customers were owed. The firm's balance sheet showed a $1.2 billion gap between assets and liabilities. Celsius's terms of use stated that deposited funds "may not be recoverable" if the firm went bankrupt.
Crypto Has No Insurance Protection
Cryptocurrencies lack the regulatory protections afforded to bank and brokerage customers. In the United States, the Federal Deposit Insurance Corporation protects bank depositors up to $250,000, and the Securities Investor Protection Corporation covers brokerage customers up to $500,000 in cash and securities. No equivalent scheme exists for crypto exchanges.
Voyager claimed that customer dollars were held in an FDIC-insured account at Metropolitan Commercial Bank in New York. However, legal experts and the bank itself contested this claim. FDIC coverage only protects funds if a bank fails—not if a crypto exchange fails.
Ownership Questions and Commingling
A fundamental issue in exchange failures is who actually owns the cryptocurrency. Crypto platforms often pool different customers' funds in shared storage wallets, a practice called commingling. This mixing can make it difficult to determine which coins belong to which user and may blur the line between customer assets and company assets.
Courts may rule that commingled funds are the property of the exchange rather than its users. The outcome depends heavily on the exchange's user agreement and how the company used customer assets. Coinbase stated in a May 2022 regulatory filing that its users would be treated as "general unsecured creditors" if the company went bankrupt.
The Payout Line
Voyager outlined a plan to repay users with cryptocurrency held in their accounts, company shares, Voyager's own token, and any funds recovered from Three Arrows Capital. However, the timing and actual value of repayments remain uncertain.
Legal experts noted that accounts were frozen, lawsuits were stayed, and both the value and timeline of recovery were unknown. Each bankruptcy case proceeds at its own pace, with outcomes shaped by court decisions and asset valuations.
Self-Custody as an Alternative
Some investors move crypto off exchanges into self-custody wallets, where they control their own private key. This approach removes the risk of platform freezes and commingling but introduces a different risk: if the private key is lost, the funds may be irrecoverable. Countless examples exist of people losing hard drives or USB sticks containing crypto worth significant amounts.
The Bottom Line
Crypto held on a platform is not insured like bank deposits or brokerage assets. Users of a failed platform are likely to recover funds slowly, partially, or not at all. Legal experts suggested that these failures may spur calls for enhanced regulation and the development of protection schemes in the future.
