Beware: The companies that hold your crypto aren’t insured the way banks are
But that risk is by no means limited to price volatility.
Should the company holding your crypto assets declare bankruptcy 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 offer greater levels of guaranteed protections for your money than a crypto account.
Nevertheless, in the event of a 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 — to say nothing of the legal definitions of what a specific cryptocurrency is — are still being worked out. They’re not legal tender and they’re not always viewed as securities.
That’s partly why they do not enjoy the same safeguards as more traditional financial accounts.
So read the legal fine print before buying, selling or storing digital assets with any company facilitating crypto trading to see what protections they do offer.
Given that Coinbase is publicly traded and therefore required to be more transparent than privately held firms, its promises and safeguards are likely to be among the best on offer for those looking to invest in crypto.
For investments and savings in which you’d like to have a greater sense of safety, here are some of the key protections offered by traditional financial accounts.
Bank and credit union accounts
If you have a checking or savings account, a money market deposit account or certificates of deposit at a bank or credit union, make sure the institution has deposit insurance.
Up to half that amount can be used to protect cash in your account associated with your securities — for example, if you just sold some stocks and left the proceeds in your account with the brokerage.
On top of the SIPC insurance, a brokerage may provide additional protection to its customers through private insurers like Lloyd’s of London.
If your employer goes belly up, legally the money in your 401(k) cannot be treated as the company’s assets by a bankruptcy court.