What happens when an exchange fails?
- Author
- CRYPTO PORT Editorial
- Published
- Updated
- Reading time
- 6 min
In short
Assets held at an exchange are not bank deposits and are not covered by deposit insurance. If the operator fails, there is no guarantee you get everything back, and recovery can take years. Failures have occurred in several markets, which is why self-custody is worth knowing about for long-term holdings.
Key points
- Exchange balances are not covered by deposit insurance
- There is no guarantee of full recovery
- Proceedings can take a very long time
- Self-custody is an available alternative
Definition
A state in which a crypto exchange can no longer meet its obligations or return customer assets, moving into formal insolvency proceedings where the timing and extent of any return are decided.
Bank deposits sit behind a public insurance scheme that guarantees repayment up to a limit. Crypto exchanges have no equivalent. Legally, a balance at an exchange is not a deposit but property entrusted to a business. That distinction becomes decisive in a failure.
Failures happen for different reasons: assets lost in a breach, holes opened by transfers with affiliated companies, or a business that simply stops covering its costs. Failures of varying size have occurred across several markets. Segregation rules strengthen a user's position, but the amount and timing of any return are still settled in the proceedings.
Practically, that argues for not concentrating funds with a single operator, and for considering self-custody for holdings you intend to keep. Holding your own keys removes exposure to an operator's failure, but moves the risk of loss and theft onto you. Which is appropriate depends on the amount and on how well you can manage keys.
Watch out for
- · There is no public scheme that repays you if the operator fails
- · Any return may be partial and can take a long time
- · Messages urging you to move funds because of a 'failure' are very likely scams