As a holder of crypto, one of the main questions you should often ask yourself is "am I doing enough to keep my digital assets safe?" You already know that the crypto eco system is decentralized in nature, so there is no government, nor middleman to turn to if your assets are compromised, lost or stolen.
Most people starting out in crypto will make their first purchase on a centralized exchange (CEX), the user interface is extremely friendly, the functionality is simple, their funds are held in custody by the exchange, but often times they don't think about the next step, "when will I move my assets off the exchange and into the safety of my own crypto wallet?"
With the bankruptcy and collapse of crypto exchange FTX in 2022, where over $8 billion of customer assets were lost, people started asking themselves how safe is the crypto I've bought and held on the exchange, and are my assets insured by the exchange?
Digital assets are not FDIC insured / What amount, if any, does Coinbase protect? / What happens to your assets if a CEX go bankrupt?
There are numerous popular crypto exchanges, Binance, Coinbase, Crypto.com, Gemini, to name a few, but after the FTX collapse there was a lot of chatter about Coinbase, one of the most popular crypto exchanges with over 108M+ verified users (source: Coinbase Jan 2023).
So, in this article we are going to use Coinbase as an example and clarify whether your digital assets held on a CEX are insured or not?
Unlike traditional banking, crypto exchanges are not required by regulators to insure either your fiat currency, or your digital assets on an exchange. In fact, in the U.S., digital currencies are not defined as legal currency, so your coins and tokens are given no insurance protections at all.
So, how safe is my crypto?
With the collapse of previous crypto platforms, Coinbase has put out clarifying statements explaining that Coinbase carries crime insurance that protects a portion of digital assets held across their storage systems against losses from theft, including cybersecurity breaches. We believe the amount insured to be in the region of $255 million. So, if we look a bit deeper at this, Coinbase has insurance covering $255 million of the approximate $2.5 billion they hold in Coinbase hot wallets, and this insurance is provided to cover cybersecurity breaches against the exchange.
How safe is my cash?
Coinbase has provided further clarity and explained that in addition to the insurance it has in place, U.S. customer cash funds are pooled in custodial accounts at one or more banking institutions insured by the FDIC. So, should any of those FDIC insured banks fail, each Coinbase U.S. customer's funds are protected up to the FDIC protection maximum of $250,000.
However, one key point to note is that for FDIC coverage to be enforced, it requires the provider, such as Coinbase to actively deposit that customer USD into an FDIC institution and keep accurate records. Now, while we are confident that Coinbase has strict processes and measures in place to ensure that their user's USD is deposited with FDIC institutions on a frequent basis, this safety does rely on the good practice of the CEX itself.
Outside the U.S. we don't have any clear indication that such protections are in place for non-U.S. customers' cash. So, if we take the U.K. Financial Compensation Scheme, U.K. customer funds held at a licensed financial institution are protected up to £85,000. However, Coinbase is not a licensed U.K. financial institution and therefore unlikely to apply this.
Coinbase Account Protection
Coinbase is now offering its Coinbase One customers with a product called Coinbase Account Protection. This offers eligible customers a one-time reimbursement up to $1,000,000 on actual losses of U.S. Dollars, or the Dollar equivalent if these losses were in the form of digital currency, due to vulnerability, or deficiencies in Coinbase's systems and/ or security protocols.
To qualify there are a number of criteria you need to fulfill, including:
· You must be a Coinbase One customer for at least 30 days before the loss
· You must have completed all steps in the Photo ID verification process
· You must have 2-Factor authentication in place on your account
So, having assessed the facts, there is no regulatory obligation on Crypto exchanges to protect or insure either your digital assets or your cash held on their platforms. Established platforms such as Coinbase have made efforts to offer some level of protection, but in the event of a crypto exchanges collapse, the digital assets you leave on-exchange will most likely be lost, and if you do have any chance of claiming them back, you will be so far down the list of creditors, that it is unlikely that you will see those assets returned.
Crypto investors should always ask themselves the question "am I doing enough to keep my crypto assets safe?" Its good practice to move your crypto assets to your own wallet, not controlled by an exchange and if you need to leave crypto or cash on-exchange for ease of transacting, leave the least amount you need to, so the risk of potential loss is limited as far as possible.
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