How to Recover Funds From Bankrupt Crypto Exchanges

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Contributor, Benzinga
February 27, 2023

Trying to withdraw your funds from a bankrupt platform like FTX, BlockFi or something similar but not sure what recourse you have? Read on to find out exactly what you need to do to try to get your money back. 

Bankruptcy and insolvency are a common part of life in the business world, especially in extremely new emerging sectors, but crypto seems to be its own breed in this regard. The avalanche of bankruptcies this year that started with the Terra Luna snowball turned into a catastrophe for thousands of crypto investors.

The main and easiest way creditors can get their money back is through the company’s bankruptcy filings. If a crypto exchange or other kind of platform is holding your money when it goes bankrupt, you can file a claim before the bankruptcy proceedings to try to get your money back.

Other potential avenues that investors can explore include filing a complaint with one or more regulatory bodies like the U.S. Securities and Exchange Commission (SEC) or the Financial Industry Regulatory Authority (FINRA). Some consumer creditors have already launched a full class-action lawsuit against FTX, claiming that the remaining funds are the property of the consumers. 

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How to Try to Recover Lost Funds From Insolvent Crypto Platforms

The first thing you should do if you lose a meaningful amount of money is to seek legal advice. This article is a great overview of the process of reclaiming funds from insolvent companies, but it may not be the best thing for your specific situation. Also, try to withdraw again if the platform lets you. Surprisingly, that sometimes works.

The next thing you should do is contact the platform’s support and ask for the funds you are entitled to. If that doesn’t work, get ready for the bankruptcy proceedings as much as you possibly can. Most of the top exchanges use claim partners like Kroll to distribute important info about the proceedings like dates and how to file a claim.

To prepare to file, gather as much information as you can access related to your lost funds to prove how much you lost. Research what you need to do to file a claim for each bankruptcy filing. These claims have due dates, so make sure you submit yours on time. Usually, you can find this info with a bit of googling but keep reading to learn how to file a claim with BlockFi and FTX specifically.

How to File a Claim With BlockFI

BlockFi's claims agent, Kroll, has all the basic information you need on BlockFi’s bankruptcy filings on its BlockFi page, including important dates and how to file a claim. It has links to file a claim electronically and the address and form if you want to go the paper route. General claims are due on March 31, 2023, so make sure you get them filed in time.

How to File a Claim With FTX

FTX's bankruptcy case isn't far along in late February 2023, and the court hasn't set the due date for filing claims yet. However, there is still a ton of info on Kroll's page that you should read to prepare. Keep an eye on the FTX Kroll page for updates to the file claim due date and the forms for you to fill out and file. 

Will I Actually Get My Funds Back?

Most consumer creditors have a chance to get at least some of their funds back. The outcome will depend on two main things that will be decided in the various bankruptcy filings that are going on now: how consumer creditors are treated by the courts and how much money the company still has after its other debts are paid.

Secured creditors — those who backed their debt with some kind of collateral — are generally made whole before unsecured creditors. It seems like the bankruptcy courts may treat consumers with deposits on FTX, BlockFi and similar insolvent platforms as unsecured creditors because their debt isn't secured with collateral. If this ends up being the case in your specific bankruptcy process, the companies and investors that the exchange owes will be paid first.

Even if this does happen, it's still possible that you can reclaim some of your funds, but only if the amount of secured debt at the company is less than unsecured debt. The remaining creditors are usually paid before equity shareholders, so you won't be last in line.

How to Avoid This Problem in the Future

The absolute best way to keep your funds safe is to keep them off centralized and decentralized platforms and custody them yourself. You can use a hardware wallet that stores your wallet entirely offline or the slightly less safe kind of wallet called a software wallet. Ledgers and Trezors are two of the top hardware wallet brands, and Exodus Wallet, MetaMask and ZenGo are top choices for software wallets.

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About Henry Stater

Henry is an expert in all things crypto. He stays up to date with all the latest coins, platforms and technologies in the field. He has particular expertise in the burgeoning decentralized finance ecosystem and loves trying out all the new platforms. He also always follows major events in other financial markets and geopolitics as a whole, especially when an event’s effects ripple through the crypto market.