You’re Cold Storing or You’re Completely Trusting a Platform. Period.
We’re big advocates of cold storage via Trezor or Ledger, and we’ve made no secret about it. If you haven’t obtained cold storage and have any crypto above 500 USD or EUR, stop reading this, click one of the links above, and buy one. Go ahead. We’ll be here when you come back.
Ok now that you have your hardware wallet, you have one of two means of storing your digital assets. The second is absolute trust.
Crypto on a Platform? Look into Their Terms of Service
Should you choose to retain crypto on a centralized platform, your first course of business is to establish stated policies around ownership (should be explicitly yours) and custodianship (should be explicitly theirs). For example, here’s the relevant bit from Coinbase’s terms of service (emphasis is ours):
2.7.1. Ownership. Title to Supported Digital Assets shall at all times remain with you and shall not transfer to Coinbase. All interests in Digital Assets we hold for Digital Asset Wallets are held for customers, are not property of Coinbase, and are not subject to claims of Coinbase’s creditors. As owner of the Supported Digital Assets in your Digital Asset Wallet, you shall bear all risk of loss of such Supported Digital Assets. Coinbase shall have no liability for Supported Digital Asset fluctuations or loss. None of the Supported Digital Assets in your Digital Asset Wallet are the property of, or shall or may be loaned to, Coinbase; Coinbase does not represent or treat assets in User’s Digital Assets as belonging to Coinbase. Coinbase may not grant a security interest in the Supported Digital Assets held in your Digital Asset Wallet. Except as required by law, or except as provided herein, Coinbase will not sell, transfer, loan, hypothecate, or otherwise alienate Supported Digital Assets in your Digital Asset Wallet unless instructed by you.
It’s worth noting the above policy is typical of exchanges, rather than farming and staking operations. The risk then, stems from cyclical and fast spinning markets leveraged by these entities to pay out your rewards.
The Risks Lurking in Balance Sheets
By this point, everyone following crypto markets is aware of the Celsuis bankruptcy filing which Celsius published a mere nine days after broker Voyager Digital filed for Chapter 11 bankruptcy in the same court as it faced its own liquidity crisis triggered by the collapse of Singapore-based crypto fund Three Arrows Capital.
In May, Coinbase added language to its securities filings that said in a bankruptcy situation “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 bankruptcy filing of Celsius Network on Wednesday in federal court in New York means that its customers are faced with becoming unsecured creditors in that case, with limited claims only to the general bankruptcy estate and not their specific accounts. While unlikely, to understand where this goes, look to Celsuis. Court filings revealed that Celsius has a $1.2 billion hole in its balance sheet, consisting of $4.7 billion in customer holdings, another 800 million in liabilities outside holdings, and only $4.3 billion in assets to make good on those. Most of the 4.3 billion is illiquid. Celsius has already begun to pay off its debt to institutional creditors, leaving retail investors to likely bear the brunt of Celsius’ failing.
And bear it they shall. Celsius’ lawyers have asserted that customers have transferred their title to coins to Celsius under the Terms of Use, giving up rights to the digital coins deposited in the borrow-and-earn programs. If you’re going to employ a platform, understanding terms of service is a must. Don’t scroll past the legal terms when you sign up. Read them.
The Bottom Line
We’re not recommending you run from your exchange (we’re not providing any financial advice here at all . We deal in education here).
We are saying you should understand terms of service and understand your risk of storing crypto on platforms. If you don’t understand the risks of custody or do not wish to accept them, become familiar with a few self-custody crypto asset management options: upLink for crypto purchases. Trezor or Ledger for storage. GMX or Pika Protocol for active portfolio management, and FlourishingAI for passive portfolio management.
Caveat Emptor.
