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What happens if my cryptocurrency trading platform shuts down?

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What happens if my cryptocurrency trading platform shuts down?

What happens if my cryptocurrency trading platform shuts down?

19May, 22

Once viewed as a fringe and highly volatile investment, cryptocurrency, also known as “crypto”, has become increasingly popular and mainstream, triggering plans for more regulation by the Securities and Exchange Commission (SEC) to protect investors.

For example, if a crypto exchange platform is shut down, what recourse do investors have? Can they get their money back? Was the platform a scam? These concerns are understandable.

In order to assess the risks and potential recourse available after an exchange platform is shut down, it is important to understand how these exchanges operate and what might cause a shut down to occur.

What is a cryptocurrency exchange?

A cryptocurrency exchange is a platform on which buyers and sellers can trade cryptocurrency coins and also convert the coins into liquid assets. Exchanges can be either “fully banked” or “partially banked.” Fully banked exchanges allow users to fund their exchange accounts through their banks and also send money back to their bank accounts, whereas partially banked exchanges allow investors to fund their accounts through credit cards or payment apps, but they cannot send money back to their card or app. 

Cryptocurrency exchanges make their money through various fees including:

  • Trading fees
  • Withdrawal fees
  • Interest fees
  • Cryptocurrency listings

The financial viability of an exchange depends heavily on the amount and activity of its users. It is therefore no surprise that cash flow problems could lead to instability of the platform. 

Let’s explore some of the specific reasons a platform might be shut down.

Financial collapse or insolvency

When a platform cannot pay its bills and is not bringing in enough income to cover its overhead for infrastructure, staffing, technology requirements, and other expenses, or when it cannot repay its debts, it may be forced to shut down due to insolvency. 

Hacking

Cryptocurrency platforms are a hot target for hackers. Where platforms themselves hold private encrypted keys for their users, rather than the users holding these keys, it can be difficult for investors to recover their money after a data breach.

Illegitimate scam

No investor wants to experience the cryptocurrency exchange they use being shut down, but the situation is made even worse if they discover that the platform was created as a scam from the very beginning. In this situation, like so many other online scams, it can be extremely difficult for investors to recover their money.

Legal troubles

While the regulations controlling the exchange of cryptocurrency are nowhere near as robust as those that apply to other, more traditional commodities, cryptocurrency platforms are not unregulated. If a platform is accused of violating applicable regulations or engaging in criminal activity, it could be shut down or fined so heavily that it becomes insolvent. 

Do investors lose their money if a cryptocurrency platform is shut down?

Whether investors will be able to recover their investment depends on a few factors, namely, the reason for the shut down and whether the exchange was decentralized or centralized.

If the exchange is shut down because it was a scam from its inception, then investors will probably not be able to recover any of their investment. Although, theoretically, a victim could pursue legal action against the scammer, it can be very difficult to locate them and take action against them. 

If the exchange is shut down due to insolvency or legal issues like regulatory actions or criminal convictions, then the exchange should notify users so that they can transfer their digital assets into another wallet. 

And finally, if the exchange is shut down due to hacking, an investor’s ability to recover their assets will generally depend on whether the exchange was decentralized or centralized. If the platform was decentralized, then users typically hold their own private keys, which are variables in cryptocurrency used to encrypt the data. So, if a data breach occurs on a decentralized platform, the user can transfer their assets to a new exchange. 

On a centralized exchange, however, the platform generally holds the users’ private keys, so in the event of a data breach, it is unlikely that an investor would be able to recover their assets. 

Legal Counsel for Cryptocurrency Investors in California

The world of cryptocurrency is a new frontier for investors, regulatory agencies, law enforcement, and the courts. If you have lost a high value of cryptocurrency as a result of a platform shut down, you may be able to recover your money, but you will first need to assess the facts surrounding the shut down and fully understand the nature of the platform and your digital assets. 

At Delahunty & Edelman LLP, our cryptocurrency attorneys are knowledgeable about risks and the ever-evolving regulatory landscape of these investments. If you have lost a substantial investment due to the shut down of a cryptocurrency exchange, contact our team of attorneys today at (415) 891-6210 for a complimentary consultation of your case. 

For more information

If you have been served with a subpoena to produce evidence or testify, contact our team today at at (415) 891-6210 for a complimentary consultation of your case.

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