Crypto Exchange Insolvency: When Your Coins Can Be Segregated and When They Fall Into the Estate

Anyone leaving a balance on a trading platform is entrusting it to somebody else's company. As long as withdrawals go through, nobody gives it a thought. The ownership question becomes interesting on precisely the day a custodian becomes insolvent, and by that point the answer can no longer be changed. It was settled by contracts and procedures that had been in force long before.

The reliable answer is that everything turns on a single condition. Not on instinct, but on the right of segregation, and whether it exists is something you can read up on before your first deposit. This piece explains what it depends on, which rules have applied since MiCAR, and which clause to look for in the custody terms.

This has to be kept apart from the tax side of the same question. Whether holdings lost after a collapse can be claimed for tax purposes is covered in our article on writing off coins lost in a crypto exchange insolvency. Here the subject is solely the prior question of civil and supervisory law: who owns the holdings in the first place.

Deposit Guarantee and Investor Compensation: Why Neither Covers Crypto-Assets

With a current account the position is familiar: if the bank goes under, the statutory deposit guarantee steps in. Many people carry that idea across to their account at a crypto exchange. It does not hold.

BaFin set this out expressly in a consumer notice of August 22, 2022. On that basis, crypto-assets do not fall within the protection of the deposit guarantee, and the protection of investor compensation does not apply either, in the regulator's words «as a general rule». That removes the entire backstop savers know from banking.

The decisive part is the second half of the same notice. The customer's position in an insolvency is governed by insolvency law and depends, as the regulator puts it, on whether a right of segregation exists given the structure and the actual performance of the contractual relationship between custodian and customer. That names the test to apply.

What follows in practice

There is no pot from which compensation is paid automatically when something goes wrong. There is only the question of whether the holdings are still legally attributed to you or whether they fall into the estate. Between those two outcomes lies the whole difference between full return and a pro rata dividend.

Segregation Under Section 47 of the German Insolvency Code: Your Coin Versus an Insolvency Dividend

The governing provision is short. Section 47 of the Insolvency Code (InsO) reads: «A person who is able to assert, on the basis of a right in rem or a personal right, that an object does not belong to the insolvency estate is not an insolvency creditor. Their claim to segregation of the object is determined by the laws applicable outside the insolvency proceedings.»

The sentence carries two statements that decide the matter for investors. First: a person able to segregate is not an insolvency creditor at all, and therefore does not join the queue of those who lost out. Second, for the underlying entitlement the provision refers to the law outside the insolvency proceedings, meaning the contract and the way it was actually operated.

That also states what insolvency law precisely does not do. It creates no right to the holdings. It merely recognises what already existed beforehand.

Insolvency Creditors Under Section 38 InsO: What the Dividend Means in Practice

Where segregation is unavailable, the standard case applies. Under Section 38 InsO, the insolvency estate serves to satisfy the personal creditors who hold a claim against the debtor that was established at the time the proceedings were opened.

A claim for the delivery of specific holdings then turns into a monetary claim, which is filed on the schedule and ultimately met on a pro rata basis. Two consequences are easy to overlook. The claim is fixed at a euro amount, so later price gains never reach you. And distribution as a rule takes years.

Separate Wallets as the Condition: What the Right of Segregation Really Turns On

The legal debate on the custody of crypto-assets circles one point, and it is surprisingly easy for investors to verify: the actual separation of holdings. Crypto-assets held on trust may qualify for segregation where they sit in wallets kept apart from the custodian's own holdings, and where the custodian also honours the trust arrangement.

Remove either of those conditions and the outcome changes. Where a provider mixes customer holdings with its own, or deploys them for its own purposes, an individual holding can no longer be attributed to an individual customer. What remains is a contractual claim, and that leads back to Section 38 InsO.

Why «my coins on my account page» proves nothing

The display in your customer account is a ledger line in the provider's database. What it states is what the provider owes you. On the question of where the holdings actually sit and whether they are kept separately, it says nothing. That gap between display and cover is precisely why reserve attestations are a subject at all; how to recalculate such an attestation and what it leaves open is set out in our article on checking proof of reserves yourself.

Article 70 MiCAR: The Duty to Protect Customer Holdings Against the Provider's Own Insolvency

Since the EU regulation on markets in crypto-assets came into force, authorised providers have been subject to a supervisory framework that takes hold at exactly this point. Article 70(1) requires crypto-asset service providers holding customers' crypto-assets, or the means of access to such crypto-assets, to make adequate arrangements to «safeguard the ownership rights of clients, especially in the event of the crypto-asset service provider's insolvency, and to prevent the use of clients' crypto-assets on their own account».

What stands out is that the regulation names the insolvency case expressly. Protecting customer holdings is therefore not an incidental duty but the stated purpose of the provision. You can read the text of the regulation in the official full version on EUR-Lex if you need it.

Article 75(7) MiCAR: Legal and Operational Separation of Crypto-Assets in Custody

The duties around custody are more concrete. Under Article 75(7), providers that hold or administer crypto-assets for customers must separate the holdings of crypto-assets held for customers from their own holdings and ensure that the means of access are clearly identified. Customer holdings are to be kept on the distributed ledger separately from the provider's own crypto-assets.

The sentence that decides our question comes next. Under the wording of the regulation, crypto-assets held in custody are «legally segregated from the crypto-asset service provider's estate, in accordance with applicable law, in the interest of the clients of the crypto-asset service provider, so that creditors of the crypto-asset service provider have no recourse to crypto-assets held in custody by the crypto-asset service provider, in particular in the event of insolvency». In addition, the provision requires holdings in custody to be operationally separated from the provider's own estate.

The regulation therefore addresses both levels at which segregation can fail: the legal attribution and the actual handling. The phrase «in accordance with applicable law» refers back to the relevant national law. In Germany, then, the test under Section 47 InsO still applies, only now with a supervisory duty behind it designed to create precisely those conditions.

Article 75(8) MiCAR: What the Custodian Is Liable For and Where Liability Ends

The following paragraph governs liability and is as instructive as it is limited. Providers holding or administering crypto-assets for customers are liable to their customers for losses of crypto-assets or of the means of access suffered as a result of incidents attributable to those providers.

Two limitations sit in the same paragraph. Liability is capped at the market value of the lost crypto-assets at the time of the loss. And it falls away for events where the provider demonstrates that they occurred independently of its service or activity, such as a problem in the operation of the distributed ledger over which it has no control.

For the insolvency question, one obvious point matters here: a liability claim against an insolvent company is itself no more than a claim. It helps in a hack; it is no substitute for segregation.

The Custody Policy in the Contract Terms: Which Clause to Look for Before You Deposit

Article 75(1) MiCAR requires providers to conclude an agreement with their customers setting out duties and responsibilities, and that agreement must include the custody policy among other things. This is the starting point for your own check, because the document is public.

It makes sense to search the custody terms for wording describing a separation of customer and proprietary holdings, for statements about maintaining separate wallets, for an express trust arrangement, and for clauses permitting the provider to reuse the holdings. The last point is the most critical, because permission to reuse dilutes the separation from the outset. Equally instructive is which group company actually performs the custody and which law governs it.

If nothing on separation can be found, that alone is no evidence of misconduct. What it means first of all is that the decisive assurance is absent and that you cannot answer the question from the documents.

Authorised Provider or Platform Without an EU Licence: Why Authorisation Changes the Risk

A practical distinction follows from how the provisions interact. With a crypto-asset service provider authorised in the EU, the separation duties under Articles 70 and 75 exist as supervisory law, and an authority can check compliance with them. A platform without an EU licence lacks that framework; there, everything turns on the contract and on the legal order at the provider's seat, and enforcing claims then happens there as well.

That is the substantive reason why the question of authorisation comes before the question of trading fees. You will find an overview of regulated providers in our comparison of the best regulated crypto exchanges.

BaFin Database and ESMA Register: How to Check Your Provider's Authorisation Yourself

Authorisation can be looked up in a few minutes, and at the regulator itself rather than on the provider's marketing page. For Germany, BaFin maintains a public company database; at European level, ESMA maintains a register of authorised crypto-asset service providers.

Two points matter when you look. Check the exact corporate name that appears in the contract, not the brand name of the app; the two regularly diverge. And pay attention to which services the authorisation covers, because a licence for the exchange of crypto-assets says nothing in itself about custody.

Staking, Lending and Reuse: When the Separation Is Lost Again

One detail most often brings the clean separation to an end in practice: the reuse of holdings. As soon as crypto-assets held in custody are deployed for the provider's own purposes, for instance within yield products, the attribution changes. Article 70(1) MiCAR names exactly this case and requires arrangements preventing customer holdings from being used on the provider's own account.

For you that means a product promising interest on holdings in custody rests on something being done with those holdings. Whether that affects the separation is set out in the terms of the individual product, not in the general custody terms. The two documents therefore have to be read separately.

Live Withdrawal Deadlines: Why the Question Becomes Practical in August 2026

The ownership question is no academic exercise, because several providers are currently setting deadlines after which normal access to holdings ends. Bitfinex has delisted 13 tokens and, according to reports by CryptoSlate, requires withdrawal by August 31, 2026 at 10:00 UTC; after that, a separate recovery procedure remains, chargeable, with no assured outcome and no fixed timeframe.

Such deadlines have become the norm since the MiCAR transition period expired and providers began reorganising their European business. We keep a running overview of the cut-off dates in crypto exchange deadlines: withdrawing balances in time. Let a deadline like that pass and you land squarely on the question this piece is about, only without any chance to check anything beforehand.

Self-Custody: What Your Own Wallet Changes About the Insolvency Question

Holdings in a self-managed wallet are not entrusted to any custodian. The question of segregation or dividend therefore does not arise at all, because there is no insolvency estate for them to fall into. That is the structural advantage, and it is considerable.

It is bought with a different kind of responsibility. Loss of access is then final and falls on you alone; nobody is liable under Article 75(8) MiCAR for a mistake in safeguarding the key. Which devices come into question and how they differ is covered in our hardware wallet comparison.

A sober interim assessment

For everyday purposes this comes down to a simple split: amounts actively traded necessarily sit with a provider and carry that provider's risk. Amounts held for the longer term do not have to. That weighing-up can be done before any emergency arises, and it is the real yield of this subject.

Crypto Exchange Insolvency: What to Take Away

Whether the holdings in custody are yours in an insolvency is decided by the separation that either existed beforehand or did not. The proceedings merely establish what already applies. Three steps to settle this for your own provider:

1. Look up the authorisation. Check the corporate name given in the contract against BaFin's company database or the ESMA register, and see whether the licence also covers custody. If you want to move holdings in the process, our comparison of the best regulated crypto exchanges helps with the choice.
2. Read the custody terms for the separation clause. Look for the assurance of separate wallets, a trust arrangement, and any clause on reusing the holdings. If the assurance is absent, treat the holding as what it then is: a claim against a company. Our crypto exchange comparison places the common providers in context.
3. Separate long-term holdings from your trading balance. What you do not move need not sit with a custodian. For moving into self-custody, our hardware wallet comparison is the starting point; for everything else, watch the deadlines and withdraw earlier than strictly necessary if in doubt.

(As of August 18, 2026. This article is not investment advice. Prices and fee structures change; check the terms with the provider before you buy.)