There are now hundreds of cryptocurrency exchanges that litter the market. With the majority now offering features far beyond the simple process of buying and selling crypto, investors can find themselves keeping a crypto portfolio on an exchange platform which can be risky.
Unfortunately, there are several instances where crypto exchanges have been shut down by the Government or the crypto exchange has gone bankrupt. It can happen for a variety of different reasons and can put deposited crypto at risk. In this guide, we will discuss the reasons that crypto exchanges may be shut down, uncover examples of when exchange shutdowns have occurred, and evaluate what happens to investors’ digital assets during such an event.
- Crypto exchanges can fail and shut down due to bankruptcy, security breaches and hacks, legal troubles, poor operational management, and significant damage to reputation.
- Recovering funds from a closed crypto exchange will depend on the reason and is not guaranteed
- Investors can protect against exchange shutdowns by transferring funds to a non-custodial wallet
What Is A Crypto Exchange?
A cryptocurrency exchange is an online platform that allows individuals to perform either fiat-to-crypto transactions or crypto-to-crypto transactions. How crypto exchanges work can be described by understanding the different types of exchanges: (1) centralized and (2) decentralized.
Centralized crypto exchanges
Centralized cryptocurrency exchanges act as a middle platform to match buyers with sellers. All orders executed on the platform are consolidated within a centralized order book. To improve convenience and efficiency, the best exchanges for crypto trading offer native crypto wallets on the platform that investors can use to store digital assets.
While these wallets are only accessible to individual users, all private keys, that provide the authority to move cryptocurrencies, remain under the custody of the exchange. By using a platform-based wallet, investors are trusting an exchange to protect and utilize digital assets accordingly.
Decentralized crypto exchanges
Just like centralized exchanges, decentralized cryptocurrency exchanges (DEXs) also allow investors to swap cryptocurrencies. However, the major difference with decentralized exchanges is that cryptos can be exchanged without forfeiting custody. Instead of relying on a centralized order book, transactions are executed using automated smart contracts and user-supplied liquidity pools. This removes the need for a centralized middleman. The outcome of all transactions is then recorded on a blockchain, such as Ethereum.
Investors can exchange and swap assets directly from a personal cryptocurrency wallet which means that individuals remain in control of private keys at all times. Although DEXs offer greater control to individuals, it does mean that investors carry more responsibility to secure digital assets correctly.
Can A Crypto Exchange Be Shutdown?
Cryptocurrency exchanges can be shut down for a variety of different reasons including insolvency, hacking attempts, hoax or scam platforms, and legal troubles. There are also instances of exchanges that close down due to financial issues or reputation damage. In some cases, the owners of the exchange can re-emerge under a different business name. It is, therefore, extremely important to keep up to date with the operations of each platform.
Why Would A Crypto Exchange Shutdown?
- Insolvency. Like any business, crypto exchanges need to generate income to pay bills. If bills cannot be paid, it is likely the business will be placed into insolvency. Every crypto exchange needs to make enough money to pay for the underlying infrastructure, staff, and any other technological requirements. As the business activities and investments of a crypto exchange involve the most volatile asset class in the world, these crypto exchanges can become bankrupt if operational risks are not managed correctly.
- Exchange hacks. Cryptocurrency exchange hacks have been a significant reason for platforms shutting down. With control of exchange-based digital assets residing online, if a malicious party gets unauthorized access, investors’ accounts can be drained instantaneously. Once a hack has occurred, it can be extremely difficult to recover funds. If a significant volume of funds is stolen, an exchange can be shut down. Although crypto exchanges can sometimes recover funds from an attack, the lack of faith that results can be enough to permanently damage an exchange’s reputation and, therefore, business.
- Hoax or crypto scams. The lengths to which malicious parties are willing to go are constantly increasing. Exchange platforms have, in the past, been created simply to scam as many users as possible. These platforms are designed with the intention that one day the platform will be shut down permanently and owners will disappear with users’ funds.
- Legal troubles. While cryptocurrency regulations are still in their infancy, crypto exchanges are still bound by the regulations of the operating jurisdiction. If a platform is found to be involved in criminal activity or breaching regulations the exchange could be shut down instantly. Alternatively, the platform may be fined. If the fine is too much for the exchange to pay, it may be pushed into insolvency.
What You Should Do If Your Crypto Exchange Shutsdown?
If an exchange is shutdown for insolvency or legal reasons, the exchange should get in contact with all investors and tell them to transfer all digital assets to another crypto wallet. The exchange will likely provide a time window to complete all cryptocurrency transfers. In the event the exchange closed down due to a widescale hack, it is recommended to stay alert for communications from the crypto platform via their official channels. Secondly, move funds from unaffected exchange wallets to a self-custody or non-custodial wallet immediately.
Do Investors Lose Money If A Crypto Exchange Is Shutdown?
Unfortunately, the reason for a crypto exchange shutdown is always unique to that company or organization. This means it is nearly impossible to estimate the possibility of recovering investors’ funds from an individual scenario. With that being said, history shows that the reason for a shutdown can shed light on the overall likelihood of reimbursement.
- Exchange scams. If a crypto exchange was established to be a scam from the very beginning, the chances of recovering funds are extremely low. A hoax crypto exchange has set out with the intention of defrauding investors; therefore, it is highly likely malicious parties behind the hoax have thought through ways to move liquidity without being traced or caught. While there are cryptocurrency sleuths that can track blockchain transactions, it can still be difficult to identify and catch the people involved to recover lost or stolen crypto.
- Exchange hacks. Similarly, cryptocurrency exchange and DeFi hacks can also leave investors empty-handed. When cryptocurrencies are stolen via a hack it is almost impossible to retrieve lost funds. However, unlike hoax crypto exchanges, if digital assets are stolen from a regulated and respected crypto exchange, the company may reimburse investors that have lost funds. Several cryptocurrency exchanges offer internal insurance policies to cover such an eventuality. One example is Coinbase, which offers crypto insurance and all USD cash balances up to a maximum of $250,000.
- Insolvent exchanges. If an exchange falls into insolvency there is a greater chance that investors may be able to recover funds but will be last in line to receive payment. Firstly, insolvency does not mean that an investor’s assets have been used incorrectly by an exchange. The exchange may be placed into insolvency for other reasons. However, for assets deposited with a centralized exchange, where users do not have true control and, therefore, ownership of digital assets, there is a risk that these assets may be used to pay off larger creditors. While liquidators will endeavor to make investors whole, the reimbursement of investors may come after existing debts are paid off.
- Legal troubles. Finally, a crypto exchange shut down for legal reasons likely provides the strongest opportunity to recover funds. History has shown that exchanges shut down for legal reasons, such as the withdrawal of an operating license, will typically reimburse all customers.
List of Crypto Exchanges That Have Collapsed
As cryptocurrencies have increased in popularity, the market for cryptocurrency exchanges has become saturated. But with increasing competition, changing regulations, and the constant threat of hacking attempts, not all exchanges manage to survive. According to Crypto Wisser’s Exchange Graveyard, over 100 cryptocurrency exchanges have been shut down since 2014. Let’s take a look at 7 examples and see exactly what causes each exchange to cease operations.
- Mt. Gox, 2014. Mt. Gox signifies one of the biggest crypto exchange shutdowns in history. At its peak, the exchange was responsible for over 70% of global Bitcoin transactions. Leading up to its demise, the exchange suffered from several technical bugs and several issues regarding withdrawals. Eventually, in February 2014, between 650,000 and 800,000 bitcoins were stolen from the exchange. At the time, these were worth $460 million. The lost value of the bitcoins pushed the crypto exchange into insolvency later in the year. The exchange was eventually liquidated in April 2014. Although 200,000 bitcoins were found, the majority were never recovered.
- Cryptopia, 2019. Cryptopia was a New Zealand-based crypto exchange that shutdown operations in 2019. The exchange was the victim of two hacks in January 2019 that resulted in the net loss of $23 million worth of digital assets. As a result of the stolen funds, the company was placed into liquidation in May of the same year. According to reports, over $100 million worth of investor's assets were included in the liquidation, which was thankfully returned to investors by liquidators.
- Polonidex, 2021. Polonidex is a decentralized exchange associated with the popular centralized exchange, Poloniex. For a time, Polonidex was the largest DEX that existed on the Tron blockchain. However, in December 2021, the website for Polonidex was decommissioned. A message on the website explained that the DEX had been shutdown due to “changes in business strategy.” Investors could no longer access the exchange and all orders were canceled.
- Africrypt, 2021. Africrypt is a crypto exchange that was marketed as an artificial intelligence trading platform. It focused on helping users leverage AI robots that could trade on an investor’s behalf. However, according to reports, the platform was built as a Ponzi scheme from the very start. Money from new investors was transferred to older users of the platform to keep people investing. Eventually, in April 2021, the two founders, Raees Bilal Cajee and Ameer Bilal Cajee, disappeared with a reported $3.6 billion worth of digital assets. While the two brothers claim that there was no wrongdoing, traders continue to push for the brothers to face criminal charges.
- Thodex, 2021. In April 2021, the Turkish crypto exchange, Thodex, went offline overnight leaving $2 billion worth of cryptocurrency assets unaccounted for. At the same time its CEO, Faruk Fatih disappeared. It was later discovered that Fatih had flown to Albania. Shortly after Fatih’s disappearance, the CEO posted a video on Instagram explaining that the downturn of the exchange was due to a political smear campaign. He outlined that he would be returning to Turkey to set things straight, but has, so far, not made an appearance. According to Turkish authorities, there is proof that large volumes of crypto-assets were moved to bank accounts controlled by Ozer’s family members.
- Eqonex, 2022. The Eqonex cryptocurrency exchange was launched in 2020 as an extension of Eqonex Limited, a publicly traded blockchain service company. However, after two short years in operation, the Eqonex crypto exchange was closed in August 2022 to free up and redirect resources to its custody and asset management business, Digivault. According to the CEO, the Eqonex crypto exchange was unlikely to “move the needle” for the company financially and, therefore, was not worth continuing. Before closing, Eqonex provided a 7-day window for customers to close trading positions and then a 30-day window to remove cryptocurrency assets.
- Huobi Thailand, 2022. Huobi Thailand is an exchange with tenuous links to the world-renowned crypto exchange, Huobi Global. Huobi Thailand leverages the Huobi Cloud, which is a blockchain solution provider and was established when the larger Huobi Group was expanding outside of China. However, in June 2022, the Security and Exchange Commission of Thailand revoked the exchange’s operating license because of deficiencies in the management structure and internal operating systems. As a result of the license being revoked, Huobi Thailand was subsequently closed in July, but, fortunately, returned the investor’s assets before closing.
Is It Safe To Keep Crypto on Exchanges?
Regulated cryptocurrency exchanges are safe platforms to store digital assets. The majority keep backup funds in place as insurance against hacks or malicious breaches. However, investors must understand that keeping assets on an exchange means trusting the exchange to hold and secure assets on a user’s behalf. If assets are lost or stolen, not all exchanges are legally obligated to reimburse investors. The safest place to store cryptos remains a secure hardware wallet.
Crypto exchanges are the key on and off ramps for the world of cryptocurrencies. With so many features now offered by each platform, it is common to leave a small percentage of a portfolio within an exchange-based crypto wallet. However, if an exchange is shutdown, there is risk investors may be left empty-handed.
Crypto exchanges can be shutdown as a result of financial issues, hacking attempts, scams, and legal reasons. The reason for the shutdown will determine the likelihood that investors can recover funds. To avoid unwanted losses, make sure that only regulated crypto exchanges are used when investing, and remember to keep the majority of funds offline in a cold storage wallet.