The FTX bankruptcy was a timely reminder that even the top-trusted, well-run companies providing crypto services can go under. While most investors end up reclaiming some of their funds, in some instances, malpractice can lead to the total loss of crypto assets. This article lists the top crypto bankruptcies and the best practices to avoid becoming a victim of a bankrupt crypto exchange.
Crypto Bankruptcies: Quick Facts
- There have been 17 major crypto bankruptcies since 2009, of which there were more than 5 crypto exchange bankruptcies alone in 2022.
- Mt. Gox was the first major crypto exchange to go bankrupt in 2014 following a significant crypto hack and loss of funds.
- The biggest crypto exchange to go bankrupt was FTX, which peaked at $21 billion in daily trading volume.
- A crypto exchange going bankrupt does not mean a customer’s funds are entirely irretrievable. This is especially true if a customer holds cash, rather than crypto, on the platform.
How Many Crypto Exchanges Have Gone Bankrupt?
Several crypto exchanges have gone bankrupt for various reasons. Some have just failed as businesses and been unable to sustain new customers, while others have seriously mismanaged funds, or worse, acted illegally. Since 2009, there have been at least 16 major crypto bankruptcies, with the FTX scandal the most recent that resulted in a loss of 10 billion in customer assets.
|Exchange||Bankruptcy Type||Deficit||Bankruptcy Outcome||Still operating?|
|Bittrex||Chapter 11||$1 billion||Unknown||Yes (outside US via Bittrex Global)|
|FTX||Chapter 11||$10 billion||Court case still ongoing, at least $5 billion recovered||No|
|Genesis||Chapter 11||$3.5 billion||About 80% expected to be refunded||Yes|
|Three Arrows Capital||Chapter 15||$3.5 billion||$40 million to date||No|
|Voyager Digital||Chapter 11||$1.3 billion||72% of customer’s funds expected to be refunded||No, but plans to re-open trading are in place|
|BlockFi||Chapter 11||$1.2 billion||Reimbursement is underway||No|
|Celsius||Chapter 11||$1.2 billion ($4.7 billion owed to customers)||Reimbursement of approximately 72.5% of lost funds underway, likely using native token CEL||No, but plans to re-open trading are in place|
|Mine Digital||Voluntary administration||$15 million+||Australian authorities are trying to recover funds||No|
|Zipmex||Bankruptcy protection (Moratorium)||$53 million||Recovery approved and repayments currently underway||Yes|
|Babel Finance||Bankruptcy protection (Moratorium)||$280 million||Raising funds to repay 100% of customers’ lost assets||Yes|
|Hodlnaut||Interim judicial management||$189.7 million||Ongoing||No|
|Blockchain Global/ACX||Voluntary administration||$21 million||Unknown||No|
|Cryptopia||Chapter 15||$16 million||Ongoing, but about 50% of funds have already been recovered and returned to customers||No|
|Quadriga||Canadian Bankruptcy Act||$215 million||$30 million has been recovered, with more efforts underway||No|
|Bitgrail||Voluntary liquidation||$170 million||Still under investigation with no funds recovered, but at least 13% of lost assets will be repaid||No|
|Youbit||Liquidiation||17% of the company’s total assets, approximately $82.7 million||Customers will be repaid a certain amount, but 100% of losses will not be recovered||No|
|Mt. Gox||Chapter 15||850,000 BTC||200,000 BTC has been recovered. Big creditors will receive 90% of lost funds nearly a decade after Mt. Gox’s demise||No|
Crypto Exchange Bankruptcies Explained
Bittrex - $1 Billion Deficit (2023)
The latest crypto exchange to file for Chapter 11 bankruptcy is Bittrex. One of the first and leading crypto exchanges in the United States, the company announced it's closing down its operations due to regulatory action from the SEC. The announcement comes only 1 week after the SEC accused the exchange of securities violations. According to reports, Bittrex had between $500 million and $1 billion in liabilities as part of the bankruptcy filing.
FTX - $10 Billion Deficit (2022)
Sam Bankman-Fried’s cryptocurrency exchange, FTX was the second biggest crypto trading platform in the world. This empire came tumbling down in late 2022 however, largely due to illegal activity from the company’s CEO. Bankman-Fried reportedly misused nearly $10 billion in customer funds to support risky investments that eventually went south.
As investors noticed and began pulling assets from the exchange (known as a “bank run”), FTX could no longer reimburse its customers and promptly froze withdrawals. To date, customers have not received their money, and legal experts are suggesting it’s unlikely they will until at least 2024 or 2025.
Genesis - $3.5 Billion Deficit (2022)
Genesis was a crypto trading and lending conglomerate that comprised 200+ different businesses, including Genesis Global Trading. This faction of the company (along with a couple of others) suffered a severe breakdown in late-2022 after FTX’s collapse, revealing they were over $3.5 billion in debt. Genesis, in conjunction with rival exchange Gemini, reached a repayment plan for their 100,000+ creditors. So far, Genesis has recovered $150 million to assist with restructuring the business and paying off debts.
Three Arrows Capital - $3.5 billion Deficit (2022)
Three Arrows Capital (3AC) wasn’t an exchange, however, they were a major hedge fund that managed close to $10 billion in cryptocurrency for its customers. The company experienced its untimely demise in mid-2022 as a result of TerraUSD’s stablecoin, UST, de-pegging from the US Dollar. As UST plummeted to worthlessness, 3AC lost about $500 million, resulting in the team filing for bankruptcy. 3AC’s total debt is approximately $3.5 billion. At this point, $40m has been recovered and re-distributed to their clients.
Voyager Digital - 1.3 Billion Deficit (2022)
Voyager Digital was one of the crypto industry’s foremost lending platforms that allowed customers to deposit their assets in exchange for passive income generation. However, the company went under due to its high level of exposure to Three Arrows Capital (and in turn, TerraUSD). However, giants in the space Binance planned to save and restructure the company in a billion-dollar deal. Voyager's deficit is a reported 1.3 billion and is in the process of returning funds to its customers, and it’s likely most users will be reimbursed at least partially.
BlockFi - $1.2 Billion Deficit (2022)
BlockFi was a leading crypto lending platform that offered investors an easy way to earn passive income on their assets. The platform went under in November 2022, filing a Chapter 11, stating they owed $1.2 billion to creditors and only had $257 million in cash. BlockFi is a bankrupt cryptocurrency company still in the process of paying back its customers, which could take years. However, some investors may not recoup the full amount of their losses.
Celsius - $1.2 Billion Deficit (2022)
Like BlockFi, Celsius was an in-demand lending platform that surged in the early 2020s. The company was hit extremely hard by the 2022 bear market, which was only compounded by Terra’s stablecoins de-pegging from the US dollar. The company owes its creditors about $1.2 billion, and a court ruling has mandated customers will receive up to 72.5% of their funds back – although this payout will no doubt take years.
Mine Digital - $15 million deficit (2022)
Mine Digital was a popular Australian cryptocurrency exchange and broker that collapsed in mid-2022 – months before the contagion caused by FTX’s bankruptcy. There isn’t much information available on the exchange’s demise, although reports suggest the company was in financial strife for months prior to going under. The platform is now completely inaccessible, and Australian authorities are attempting to recover some $15 million in lost funds due to scams and the exchange’s insolvency.
Zipmex - $53 Million Deficit (2022)
Zipmex is a Thai/Singaporean-based crypto exchange that filed for bankruptcy protection in July 2022 following the fall of Celsius and Terra. The company had approximately $53m in exposure that it needed to recoup and temporarily halted withdrawals. However, unlike other platforms, Zipmex didn’t sink underwater and eventually re-opened withdrawals.
Babel Finance - $280 Million Deficit (2022)
Babel Finance was one of the first dominoes to fall in the harsh crypto winter of 2022, with the company filing for bankruptcy in June 2022. The liquidity crisis arose due to Babel Finance essentially holding lots of risky trade positions that eventually failed. All up, the business owed its customers nearly $280 million worth of cryptocurrency. Babel Finance is still in operation, however, and is currently raising funds to pay back every penny to its creditors.
Hodlnaut - $189 Million Deficit (2022)
Hodlnaut is a Singaporean-based, mobile-first app that allows customers to earn passive income on their crypto assets. The company paused withdrawals in August 2022, citing difficult market conditions and a desire to solidify its liquidity. However, to date, the business has not re-opened withdrawals and it is unclear when (or if) this will happen. Reports state the company is facing a 189.7 million loss that led to the bankruptcy filing. There is currently an internal battle between creditors and the board – creditors want to liquidate Hodlnaut, while the founders want to sell the platform.
Blockchain Global - $21 Million Deficit (2020)
Blockchain Global was the parent company of the now-failed Australian crypto exchange ACX, a platform intended to bring international liquidity to a national market. The company was one of the first to feel the sting of the crypto bear market, freezing withdrawals in early 2020. Due to this, ACX and Blockchain Global quickly had their AUSTRAC license revoked. Blockchain Global owes about $21 million to its creditors – and it’s uncertain if this figure will be fully recovered. In fact, the company has been accused of stealing customers' funds in an elaborate exit scam.
Cryptopia - $16 Million Deficit (2020)
Cryptopia was a New Zealand-based cryptocurrency exchange that suffered a major hack in 2019, resulting in “significant losses”. The platform was ultimately incapable of recovering from the damages and entered voluntary liquidation a few months later. It’s estimated that up to $16 million was stolen in the hack. Customers will likely receive at least some of their funds in a multi-stage reimbursement plan that is set to wrap up in the mid-2020s.
Quadriga - $215 Million Deficit (2019)
Quadriga is a particularly unique case of a Canadian crypto exchange going bankrupt and is an ironic metaphor for one of crypto’s major concepts – decentralization. The crypto exchange was apparently run by a single entity, who passed away in 2019. The founder, Gerald Cotten, was the only owner of the cold wallet storage keys, and liquidators were unable to access customers' funds. The co-founder was previously charged with identity theft and eventually deported to face trial. About $215 million was owed to customers, with very little of that being re-paid as of writing this article.
Bitgrail - $170 Million Deficit (2018)
Bitgrail was a relatively obscure Italian crypto exchange until 2018 when it suffered a massive $170 million-dollar hack. In a twist, authorities accused the Bitgrail founder of setting up the hack himself to make off millions of customer funds. The court ruled that the founder had to repay all of the customer’s funds, regardless of whether he himself initiated the hack, or was responsible due to inaction. Users who filed repayment applications early have received some reimbursement, but exactly how much is still unclear.
Youbit - 17% of Assets (2017)
South Korean-based exchange Youbit suffered a spate of attacks in 2017, culminating in over 4,000BTC in lost funds. Ultimately, the crypto exchange shut down, unable to continue as a business due to losing up to 17% of its total assets. However, customers were reimbursed about 75% of lost funds in a process that is still ongoing. South Korean investigators were tangling with the possibility that North Korean cyber-criminals were involved in the attacks.
Mt.Gox - $65 Million Deficit (2014)
The fall of Mt.Gox is one of Bitcoin’s seminal moments, ushering in one of the harshest crypto winters the industry has seen. Mt.Gox was perhaps the world’s biggest exchange in the early days of BTC trading. Its popularity made it a big target for hackers, and eventually, 850,000BTC was stolen in February 2014, completely tearing the business apart. It took until 2021 for Mt. Gox to implement a bankruptcy repayment plan, and in early 2023 customers received their first repayments – nearly a decade later.
What Happens To Your Crypto If The Exchange Goes Bankrupt?
Each exchange will handle bankruptcy proceedings and customer funds differently. In general, many companies don’t actually hold customer assets 1:1 in individual wallets, rather, they mix and match cryptocurrencies into the same storage solution. Most instances of bankruptcy occur when exchanges can no longer pay out the assets customers are “holding” on the platform. If an exchange is holding crypto (rather than deposited cash) on a customer’s behalf, it may be considered their property. So, in the event of bankruptcy, these funds will be used to pay back certain creditors, with retail investors being reimbursed last.
Because each platform has a different user agreement, it’s vital to check the company’s terms and conditions to see what the outcome may be.
From Binance CEO CZ:
“We have more than 100 percent reserves on every coin that we hold on behalf of our users”.
The way Binance treats insolvency will vary in accordance with the “Applicable Law in the Territory”. It’s very likely customers would get some of their funds back, but it would take a long time. Coinbase, similarly, views many of its casual investors as “unsecured creditors”. These users would be last to receive payouts in the event of bankruptcy.
Which Crypto Exchanges Are Insured Against Bankruptcy?
Most governments have an insurance scheme for banks where, in the event of bankruptcy, customers’ funds are insured for up to $250,000. This does not, however, apply to cryptocurrency exchanges. Certain crypto platforms have taken the initiative to create an insurance fund in the event of a hack or insolvency. Examples of leading exchanges with an insurance policy for bankruptcy include:
- Binance. Has insurance funds for all sorts of events, such as over-leveraged trading from its users, hacking, or bankruptcy. It totals well over $1 billion dollars.
- ByBit. Offers an insurance fund that protects users from traders that fall into negative balance (which, if the deficit was large enough, would mean the company does not hold 1:1 reserves). This fund totals $250m+.
- Coinbase. Insures all funds it holds are in hot storage – although, 98% of customer’s funds are held in cold storage.
- Crypto.com. Has insurance against physical damage or theft to its cold storage wallets. However, there is no information on bankruptcy insurance.
What Happens After The Crypto Exchange Is Bankrupt?
The first thing that will likely happen is a crypto exchange will swiftly halt withdrawals to prevent the loss of any further funds. Next, they will file a Chapter 11, which allows them to reorganize their assets and debts and give them a chance at continuing as a viable business.
Then, the exchange will put together all of its assets and attempt to recover additional funds to see how much debt they are in. Finally, they will liquidate and attempt to distribute assets to the most-important secured creditors.
These two processes are typically extremely drawn out and can take years, often taking place in court. Generally, liquidation and compensation will have a “queue”, where the exchange will pay back its biggest creditors (usually institutional investors) first, sometimes using the customer’s funds.
Unsecured creditors – your average crypto investor – will be last in the queue and may not be compensated whatsoever. Alternatively, they may have to accept a percentage of their losses, or in certain instances, they will be repaid entirely. The outcome will vary depending on that exchange’s specific financial situation.
How Can You Recover Your Crypto If An Exchange Goes Bankrupt?
Generally speaking, there isn’t a whole lot that customers can do to recover their funds in the event of company insolvency. The exchange will typically have its own processes for distribution and complying with any legal requirements. That said, there are a few things to do to ensure the best chance of receiving compensation in the event of an exchange bankruptcy:
- Always complete KYC verification, or stick to platforms that require this. Once the company begins liquidation, it will likely reach out to users who have completed KYC. This allows them to quickly access investors' contact information, as well as their financial status and transaction history.
- Keep an eye out for emails or SMS. Crypto exchanges will typically inform customers of an unfolding bankruptcy scenario as quickly and frequently as possible. By keeping up-to-date on all possible contact methods, investors can find out any potential measures they can take to reclaim funds.
- Fill out forms. Some crypto exchanges will send out forms to customers as they work through distributing creditor funds. These might be payment slips, tax forms, or proof of address requirements.
- Transfer funds to a non-custodial wallet. The only foolproof, guaranteed step investors can take is to avoid a bankruptcy situation altogether. Using a non-custodial and trusted cryptocurrency wallet ensures that customers retain full ownership over their digital currencies.
How Can You Protect Yourself From Crypto Exchange Bankruptcies?
- Non-custodial wallets. Using a non-custodial wallet like TrustWallet, Exodus or MetaMask means that customer funds can’t be considered the property of a bankrupt estate.
- Hardware wallets. To take security to the next level, investors can consider using an offline, hardware wallet – the safest storage method currently available in the crypto industry.
- Only hold small amounts. Admittedly, keeping all crypto in a cold wallet can be a pain when trading on a daily basis. Instead, investors can consider just keeping a small amount of crypto on an exchange while keeping longer-term assets in a third-party wallet.
- Decentralized exchanges. Decentralized exchanges lack the same risks as popular centralized exchanges as they are not under the authority of a single entity. These platforms require the use of a non-custodial wallet, making bankruptcy essentially impossible. However, DEXs have some risks of their own to be aware of such as crypto scams.
- Read the Ts&Cs. It can be easy to ignore the terms and conditions when signing up for an exchange, but these can provide valuable insight into the company’s actions in the event of a financial emergency.
- Only use licensed exchanges. Exchanges registered with the relevant financial authorities are more likely to have protocols or insurance in place to protect users' funds in case of bankruptcy.
The Government's Role With Bankrupt Crypto Exchanges
For the best part of a decade, crypto exchanges have sat in a gray area for government regulators. While there are certain laws that platforms have to abide by as financial service providers, they are still lacking certain protections that other institutions (like banks) receive. There is a bit of dissonance between government regulation and the crypto community. A leading philosophy of blockchain tech is decentralization – that is, systems operating outside the control of a single entity (like the government).
However, given the prominence of centralized exchanges, it becomes inevitable that governments need to step in and regulate these platforms further to better protect consumers. While it's unlikely the US Government will ban Bitcoin, they are considering various legislative proposals, such as The Responsible Financial Innovation Act. Other governments, including Australia, New Zealand, and Germany, are all working toward a regulatory framework for centralized exchanges and lending protocols. The Government is also engaged in several crypto lawsuits to protect consumers. Meanwhile, decentralized platforms can continue to operate without a centralized entity’s intervention.
Frequently Asked Questions
There is some risk associated with any business going bankrupt, thanks to any number of factors. However, most well-run crypto exchanges have fail-safes in place to prevent bankruptcies and massive hacks. While some major crypto platforms may have gone under in recent times, reputable exchanges like Binance and Coinbase are very unlikely to experience the same issues.
An exchange going bankrupt can result in customers losing their funds with little hope of them all being returned. In some instances, however, investors will be repaid their entire exchange balances. A crypto exchange going bankrupt can also cause a ripple effect among the industry, depending on if other businesses had invested in the bust exchange.
Crypto exchanges going bankrupt is a scary thought for many investors. The process to reclaim customer funds can take years if it ever happens at all. Government protections are starting to come into play, but it may be a while before investors are fully protected against businesses becoming insolvent. In reality, though, the chances of top-tier exchanges going bankrupt are very low.
The only way to fully protect against an exchange going bankrupt is to ensure assets are held in self-custody. This means downloading and installing a third-party crypto wallet or purchasing a hardware storage solution. In this case, a company liquidating its assets will have no impact on the investor’s crypto holdings.