DISB Consumer Alert
DISB Urges District Residents to Exercise Caution in light of Multiple Crypto Bankruptcies
The recent collapse of cryptocurrency exchange FTX and other digital asset firms highlights the risks and hazards of cryptocurrency investments and the centralized financial platforms on which many crypto investors store and trade their crypto assets. The DC Department of Insurance, Securities and Banking (DISB) urges you to: (1) be extremely cautious about investing in crypto; (2) never invest more than you can afford to lose; and (3) consider storing crypto in your own digital wallet rather than on crypto platforms that might be at risk of failure.
To protect yourself, DISB recommends the following:
- Consider avoiding crypto investments altogether. Many will decide it is not worth the risk.
- If you do invest in cryptocurrency, invest only what you can afford to lose.
- Avoid crypto accounts that give the firm ownership or control over your crypto.
- Consider storing crypto in your own wallet rather than on a crypto exchange.
- Consider using multiple crypto wallets, including cold wallets.
- Keep your password and private key information stored in a secure place where you will never lose it.
FTX and Other Crypto Bankruptcies
On November 11, 2022, FTX, the third largest cryptocurrency exchange in the world, filed for bankruptcy. The firm’s senior managers have also been charged with criminal fraud. The expected losses to FTX’s customers are likely to total in the billions of dollars. FTX is only one of several crypto firms that have gone bankrupt this past year, including BlockFi, Voyager Digital and Celsius Network. In addition, DISB and other state and federal regulators are investigating several additional crypto firms that may be in financial trouble.
Bankruptcies Expose Problems and Risks of Crypto Exchanges
The bankruptcies of FTX and other crypto platforms have exposed numerous problems with crypto firms, including:
- Commingling, mismanagement and (in some cases) misappropriation of customer funds;
- Multiple firms lending to and borrowing from each other, creating the risk that when one firm fails, others will fall with it;
- Inadequate capital to handle withdrawal requests from customers;
- Using native tokens (crypto issued by the same company that is using it) to create a false appearance of adequate capital reserves or largely worthless collateral for loans; and
- Failing to adequately diversify risks outside of the cryptocurrency ecosystem.
These factors create an unstable crypto financial industry that is built on a fragile foundation of digital assets, the value of which may be based on little more than speculation.
For more information about cryptocurrency risks and recommendations, see DISB’s Bulletin on Cryptocurrency Interest Bearing Accounts and our Consumer Alert on “Defi”. See also a joint statement on crypto-asset risks to banking organizations released by federal banking regulators on January 3, 2023.
If you believe you have been the victim of a cryptocurrency fraud, you may file a complaint with the U.S. Securities and Exchange Commission at sec.gov/oiea/Complaint.html. You may also contact the DISB Enforcement and Consumer Protection Division at 202-727-8000 or request assistance here.
Our mission is three-fold: (1) cultivate a regulatory environment that protects consumers and attracts and retains financial services firms to the District; (2) empower and educate residents and (3) support the development and expansion of business.
District of Columbia Department of Insurance, Securities and Banking
Office of Communications
1050 First Street NE, Suite 801, Washington, DC 20002