What to do when a cryptocurrency exchange shuts down?

Today, there are thousands of crypto exchanges. Some have closed because of regulations. Others were hacked. Before we go into what you should do when a cryptocurrency exchange shuts down, let’s understand how they work.

What is an exchange?

Exchanges are a kind of market place that connects a buyer and seller. Here, in particular, a cryptocurrency exchange facilitates buying and selling of crypto assets between individuals or institutions.

How does an exchange make money?

Cryptocurrency exchanges survive mostly on transaction fees. They also make money from cryptocurrency listings. Operations, infrastructure and security depend on the revenue generated from these transaction fees. Unless they have enough volume (number of people buying and selling), an exchange cannot make enough money to survive.

So, it’s a tough balance to maintain while charging them enough and providing services that they need. Don’t forget the competition at the same time (Some exchanges with enough funding from external investors can easily pump money with low transaction fees and kill a lot of small players).

Where do exchanges spend most?

  1. Infrastructure
  2. Security
  3. Regulatory compliances
  4. Legal expenses
  5. Engineering
  6. Support
  7. Research & Innovation

All of the above-said points are very crucial for an exchange to function as expected (expectations won’t be small when it’s dealing with millions or billions of dollars worth assets of users).

What could be reasons for exchanges to shutdown?

There are a number of reasons that could lead to a cryptocurrency exchange shutting down. Here are the obvious ones:

  • Hacking: many cryptocurrency exchanges shut down because hackers steal all or a large sum of their customers’ money.
  • Insolvency: This happens when a crypto exchange cannot pay its bills, such as operational costs, tax liabilities, or what’s due investors.
  • Regulatory issues. A cryptocurrency exchange can also shut down when authorities do not approve of its operations.
  • An exit scam. Some crypto exchanges are created to scam users right from the beginning. Thus, they end up shutting down once they get enough money.

What are your options when a crypto exchange shuts down?

crypto exchange tax

There are options for traders and investors when exchanges close their doors. However, this would largely depend on whether the exchange is centralized or decentralized.

Your options on a decentralized exchange

Decentralized exchanges give users more control over their cryptocurrencies. In this case, investors and traders usually keep their own private keys. When something happens the exchange, it doesn’t affect your crypto assets that much.

Therefore, when a decentralized cryptocurrency exchange shuts down, all you need is to transfer to a different one. A decentralized exchange is the safest for crypto investors and traders. What you should note is that many exchanges that claim to be decentralized are actually not.

Your options on a centralized exchange

Centralized exchanges usually keep your private keys and store your crypto on their platforms. A central authority manages your crypto resources and maintains infrastructure. Thus, when there is a breach, users lose their crypto assets.

So when a centralized cryptocurrency exchange shuts down, there are some possible remedies. However, this is not always guaranteed.

The exchange can notify traders and investors to move their coins to other wallets. This will happen if the exchange is shutting down because of government regulation or insolvency. However, if it’s an exit scam or a hack, traders could lose everything.

Tax implications?

When a cryptocurrency exchange shuts down, your liability to pay tax depends on your activity. If you move your crypto from the exchange to another one or wallet, there’s no taxable event. However, some traders usually decide to sell their crypto assets for fiat. In this scenario, the event is taxable.

How to stay safe

  • Since many centralized cryptocurrency exchanges have shut down, it’s advisable to use a decentralized one.
  • Always look out for notifications from your exchange. They could notify you of a pending security breach, government enforcement or shut down because of insolvency. And this is an opportunity for you to transfer your funds before something happens. and you can use that time to transfer your funds.

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