Bitcoin’s skyrocketing gains are filling investors’ pocketbooks handsomely – right before the holiday season.
The value surge – and the possibility of investors’ rush to cash out – has raised questions about cryptocurrency exchanges’ ability to handle large customer request volumes given their growing pains and investor-risk challenges.
A holiday run on Bitcoin – a la the bank-run scene in Frank Capra’s holiday classic “It’s a Wonderful Life” – isn’t likely if they are complying with U.S. state money transmission laws or most terms of service, Peter Van Valkenburgh, research director at the blockchain advocacy organization Coin Center, told Bloomberg Law.
A handful of U.S. states have money transmission laws that require cryptocurrency exchanges to have a certain amount of valuables on hand to honor customer requests, he said.
Most exchanges also have terms of service explicitly stating they will hold customers’ property, unlike banks, he said. Banks lend money deposited and a withdrawal run could pose a business risk. An exchange customer that could not access their currency could sue for breach of contract, he said.
The exchange should be able to connect a customer seeking to cash out with a buyer at market price, Van Valkenburgh said.
“The price rapidly rising or falling won't affect an exchanges’ ability to give you the bitcoins,” he said. “It will only affect the price you can get if you decide to sell the bitcoins to a buyer on the exchange.”
Many exchanges also put limits on daily withdrawals to prevent a crisis, financial attorneys told Bloomberg Law.
Still, there are plenty of risks of losing money while trading Bitcoin, even if the price keeps rising, the attorney said.
Hackers can break into exchange users’ accounts and raid the contents. The problem has riddled a slew of large exchanges, including Bitfinex and Poloniex.
The cryptocurrency on exchanges aren’t insured by a federal body – like the Federal Deposit Insurance Corporation’s protection of banks—and many don’t carry private insurance, attorneys said.
Unregulated exchanges also have no legal requirements to have circuit breakers in place for flash crashes. Still, multiple exchanges have crashed in recent days after being deluged with new users anxious to trade Bitcoin.
“From a practical perspective, technology is serving as a circuit breaker,” said Carol Van Cleef, partner with BakerHostetler LLP’s financial technology practice, said. “Many of the existing trading platforms are not currently equipped to handle the volume of transactions we have seen in the last few weeks, and they have effectively had self-imposed trading halts.”
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