Cryptocurrency: Are Your Crypto-Assets Safe?

Are your crypto-assets safe? While the collapse of Terra threatened part of the crypto ecosystem, the exchange platform Coinbase announced that it would be possible in the event of bankruptcy to consider the loss of cryptocurrencies kept in the name of customers? At the same time, ECB President Christine Lagarde told German television that she was worried about people "who have no understanding of the risks, who are going to lose everything and who will be terribly disappointed, which is why it should be regulated”.

In this context of uncertainty, investors seek both a framework of trust from crypto exchange platforms and legal answers from the authorities. Find the decryption of risks in case of bankruptcy of exchange platforms or security problems for virtual currency investors below.

Cryptocurrency: What Regulatory Framework In France?

In France, activities relating to services in the cryptocurrency sector are regulated by the AMF (Autorité des Marchés Financiers). In particular, the AMF grants the status of PSAN for Digital Asset Service Provider to trading platforms. This mandatory registration is necessary to carry out 4 types of activity, namely " the custody of crypto-assets or access to crypto-assets (via private encryption keys for example) ", the purchase and sale of cryptocurrencies, etc. It can also be portfolio management, advising clients on crypto-assets, or “guaranteed or unsecured placement of crypto-assets”.

To date, more and more exchange platforms have PSAN status, such as Litebit, Coinhouse, Bitpanda, and Binance, for example. The list of platforms with PSAN status is available on the AMF website. This regulation introduced in 2019 by the PACTE law aims to establish a framework of trust, but the AMF recalls that it is necessary to monitor "the measures taken by the platform to secure its own equipment because it too could be the victim of actions malicious”.

Note: there is also a PSAN approval, optional, more demanding, and protective for the investor, but no PSAN has been approved at this stage.

Are Your Crypto-Assets Safe: The importance of Approval

In addition, for financial products derived from cryptocurrencies, the service provider must have PSI approval for Investment Services Provider. We must remember that in the context of derivatives, the investor is in no way the holder of the cryptocurrencies. Similarly, ETFs that reproduce the movements of cryptocurrencies also require the approval of the AMF. It is therefore now possible to trade cryptocurrencies from traditional stock brokers via derivatives and the risk of bankruptcy is subject to the same legal constraints as shares.

For example, it is possible to trade cryptocurrencies via Futures contracts listed on the Chicago Mercantile Exchange., which clearly defines the terms of the contract and the risks known by the investor. In this sense, the question of the risk of loss of its portfolio in cryptocurrencies is rather relative to the issuer of the derivative product and the regulation of transactions.

Thus, the purchase of cryptos live via exchange platforms does not have the same legal guarantees as the trading of cryptos with derivatives via traditional Stock Exchange brokers.

Are Crypto Exchanges Secure?

The famous exchange platform Coinbase, which has a balance sheet of nearly 20 billion dollars, was recently questioned in a document intended for the SEC regarding the security of guarantees to customers. This challenge in the event of Coinbase's insolvency comes as Coinbase has been down more than 75% since the start of 2022. The result for the first quarter of 2022 is down more than 26% year on year, to $1.16 billion.

The company, listed on Nasdaq since 2021, said in its report filed with the SEC that the platform's cryptocurrencies“could be treated as assets subject to bankruptcy proceedings and customers could be treated as general unsecured creditors. This could lead clients to find our custody services riskier and less attractive. ” In other words, the risk of bankruptcy would not offer security to customers.

Quickly, the CEO of Coinbase Brian Armstrong reacted on the networks by specifying that there was “no risk of bankruptcy” and adds further that “this disclosure makes sense insofar as these legal protections have not been tested in court for crypto assets specifically, and it is possible, though unlikely, that a court will decide to consider client assets as part of the business in a bankruptcy proceeding… even if it harms clients ». Therefore, this raises the question of the solvency of all other cryptocurrency exchange platforms in the event of bankruptcy.

Are Your Crypto-Assets Safe: The risk of loss

As Martin Finnegan, COO of the British law firm Punter Southall Law, reminds us, most trading platforms specify in their conditions the presence of risks of loss. The terms state that “you agree that all of your funds may be lost and not only can you do nothing about it, but we (the platform) will not be liable under any circumstance”.

Nevertheless, some platforms like Binance would have chosen to secure part of the dollar deposits with the FDIC (federal deposit insurance corporation). In France, it does not appear that any deposit guarantee has been taken out by the platforms with the Guarantee Fund for Deposits and Resolutions (FGDR). The FGDR guarantees €100,000 to savers in the event of the bankruptcy of traditional banks. However, these cryptocurrency deposit guarantee measures would be essentially arbitrary and almost non-existent.

Are Your Crypto-Assets Safe: The risks of crypto exchanges

This legal clarification from Coinbase reminds us that crypto exchange platforms are above all there to provide a service of democratization and flexibility. However, security issues are resurfacing, whether it is the risk of hacking or the solvency of the platforms.

The first crypto players still have in mind the bankruptcy of the Japanese exchange platform Mont Gox, which operated from 2009 to 2014. In 2014, the platform suffered a hack that caused the disappearance of more than 700,000 Bitcoins and caused the bankruptcy of the platform. Examples of theft are numerous in the financial industry. Recently, the perpetrators of the Bitfinex platform hack in 2016 for 120,000 Bitcoins were found, and American justice seized the equivalent of more than 3 billion dollars worth of Bitcoin after a long investigation in 2022.

Are Your Crypto-Assets Safe: The democratization of the market

From now on, the risks of losses evolve due to the democratization of the market. The risks of hacking are quite limited, but we are now seeing the appearance of solvency risks, closer to the bank-run risks of traditional finance in the 19th century. In this sense, certain regulatory measures have been exposed since 2021, in particular by the bank of international settlements concerning stablecoins for example.

Are Your Crypto-Assets Safe: The different ways to secure your cryptocurrencies

As we have seen, the AMF communicates its white list in France of all players benefiting from PSAN approval. However, this is not enough to lay down sufficient legal bases to answer the questions of customers of crypto platforms in the event of bankruptcy. Coinbase recently raised this question with regard to its exposure to the equity market and to investors. For the time being, it is likely that a bankruptcy of the exchange platforms will not give rise to any additional guarantee from institutions or dedicated funds. In this sense, exchanges may expose their clients to the risk of losing their deposits in the event of insolvency.

Today, no serious case of exchange platform bankruptcy has been recorded since the broad democratization of the market began in 2017. But the context of tensions in the cryptocurrency market raises many security questions. It is therefore always preferable to diversify the means of holding cryptocurrencies. The use of hard wallets such as Ledger, Trezor, or Ngrave makes it possible to physically hold the keys that guarantee the ownership of virtual currencies. In addition, it is always possible to use online or mobile wallets like Metamask.

Are Your Crypto-Assets Safe: What future guarantees for cryptos?

In any case, the limitation of the ownership of cryptocurrencies to the possession of a digital key does not yet make it possible to rule on the conditions under which ownership is recognized. The AMF recalls the practical precautions to optimize the security of its investments and legally regulates many services provided by trading platforms to date.

Furthermore, this context of uncertainty about market security was recently highlighted by ECB President Christine Lagarde. The President of the ECB did not omit to specify that “the day we have the digital currency of the central bank, any digital euro, I will guarantee it. […] The central bank will therefore be behind this. I think it's very different from any of those things. " This declaration comes after both the collapse of Terra and the fall of Bitcoin which called into question the solvency of certain players in the system.

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Disclaimer:

All of our information is, by nature, generic. They do not take into account your personal situation and do not in any way constitute personalized recommendations with a view to carrying out transactions and cannot be assimilated to a financial investment advisory service, nor to any incentive to buy or sell instruments.