Recent crypto market volatility has caused many people to clutch their metaphysical crypto wallets in fear. The crash observed on the Terra blockchain for both the Luna and TerraUSD tokens has only increased investors' fears of losing their entire investment. In addition to scams, rug pulls, market crashes, and regulatory crackdowns, investors also risk losing their crypto holdings if their cryptocurrency exchange fails.
As highlighted by Coinbase, the largest centralized cryptocurrency exchange (CEX) in the United States, investors' assets may be forfeited in the event of the exchange's bankruptcy. Coinbase stated in a filing with the US Securities and Exchange Commission that investors' assets could be subject to bankruptcy procedures.
"Since custodially held crypto assets may be considered the property of a bankruptcy estate, the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings and such customers could be treated as our general unsecured creditors," the company stated in its regulatory filing.
During the Luna crash, many exchanges delisted the token, making it impossible for investors to liquidate their holdings. These investors are currently unable to sell their Luna holdings unless exchanges decide to relist the token.
Cryptocurrency exchanges, unlike banks, are not regulated by the Reserve Bank of India or any other statutory or regulatory body in India, resulting in inadequate customer protection against private exchanges in the event of problems.
The solution for crypto investors is to store their assets in offline wallets that are self-hosted or non-custodial. Additionally, for added security against hackers and other threats, you should store the majority of your cryptocurrency offline on a "Cold Wallet," a piece of hardware that typically resembles a USB stick. In these non-custodial wallets, known as "Hot Wallets," only a small amount that will be used for regular transactions should be stored. Using decentralized crypto exchanges (DEX) can also protect your crypto assets from insolvency or delisting, but there are security risks involved.
