I kept my trading stack on a “Tier 1” exchange. Rumors swirled, withdrawals paused, and then: Chapter 11. My funds are frozen. I checked the exchange’s “Insurance” page. It said “Assets held in hot wallets are insured.” But they didn’t lose my assets to a hack; they gambled them away.
Key Takeaways
- Insolvency Exclusion: Nearly every crypto insurance policy (corporate or personal) excludes “Financial Default” or “Insolvency” of the custodian. Insurance covers theft by hackers, not theft by the CEO.
- SIPC Does Not Apply: Stock brokerages have SIPC ($500k protection). Crypto exchanges do not. You are an “Unsecured Creditor.”
- Hot Wallet Insurance is Misleading: Exchanges tout their insurance policies. These policies cover them if they get hacked. They do not cover you if they go bust.
- Bankruptcy Claims Markets: Your only “insurance” is selling your claim on a secondary market (like Xclaim) for 20 cents on the dollar.
The “Why” (The Trap)
The trap is “Custodial Risk.”
When you deposit crypto, you are legally lending it to the exchange (unless it is a designated trust company). In bankruptcy, your assets are pooled with the company’s assets.
The insurance policy is for “Crime,” not “Credit.”
The Investigation (I Read the Fine Print)
I looked at the terms of major 2026 exchanges.
Coinbase
- Status: Public company.
- Terms: “Digital currency is not legal tender and is not backed by the government… crypto accounts are not protected by SIPC.”
Kraken
- Terms: similar disclaimers. They rely on “Proof of Reserves” audits rather than insurance for insolvency.
DeFi Options (Opyn)
- Innovation: Some DeFi options protocols allow you to buy “Put Options” on the exchange token (e.g., shorting BNB). If the exchange fails, the token usually crashes, and your profit offsets your lost funds.
Comparison Table
| Event | Exchange Insurance | SIPC (Stocks) | FDIC (Banks) |
| Exchange Hacked | Covered (usually) | N/A | N/A |
| Exchange Bankrupt | Denied | Covered ($500k) | Covered ($250k) |
| User Hacked | Denied | Denied | Denied |
Step-by-Step Action Plan
- Self Custody: The only 100% insurance against bankruptcy is holding your own keys.
- Diversify Custodians: If you must trade, split funds across 3 exchanges. Never keep >20% on one.
- Check Claims Markets: If trapped, check claims markets immediately. Sometimes selling early for 50% is better than waiting 5 years for 10%.
- [IMAGE: Graph showing the declining value of bankruptcy claims over time]
FAQ
Is Coinbase FDIC insured?
Only the USD cash in your wallet (passed through to partner banks). The BTC/ETH is not.
What is ‘Proof of Solvency’?
A cryptographic proof that the exchange holds enough assets to cover liabilities. Trust only this, not promises.