When a crypto business fails, the first question is whether customer assets belong to the customers or to the estate. The answer usually sits in the terms of service.
The estate absorbs company property
Bankruptcy proceedings gather everything the company owns into an estate, which is distributed to creditors according to a legal order of priority.
Assets the company merely held for someone else are not part of that estate and can be returned, which is the position customers would prefer.
Which category deposits fall into depends on the arrangement documented when the account was opened, not on what customers assumed at the time.
Terms of service do the deciding
Custodial arrangements holding assets separately for identified customers point toward the assets remaining customer property throughout.
Terms granting the company the right to use deposited assets, to lend them or to pledge them as collateral point the other way, toward a debt owed rather than property held.
Yield-bearing programs are the clearest example, since the yield had to come from putting the assets to work, which requires the company to control them.
Unsecured creditors are near the back
A customer whose deposit is treated as a loan to the company becomes an unsecured creditor, ranking behind secured lenders and administrative expenses.
Recovery in that position is a fraction of the claim and arrives after proceedings that can run for years, with legal costs paid from the estate along the way.
Claims are typically valued in dollars at the date of the filing, so subsequent price movements in the asset do not change what the claim is worth.
Commingling makes tracing hard
Even where assets were meant to be held for customers, mixing them in shared wallets without adequate records makes proving whose coins are whose difficult.
Courts must then decide how to allocate what remains, and the outcome depends on the quality of the failed company's own bookkeeping.
Segregated accounting with clear internal records is what makes a custodial claim provable, which is why examiners focus on it early.
What this implies about deposit safety
Federal deposit insurance covers bank failures and does not extend to crypto balances, despite marketing language that has sometimes blurred the distinction.
Assets held in self-custody are not part of any company's estate at all, which is the structural difference behind the phrase about holding your own keys.
Outcomes turn on specific facts, documents and jurisdictions, and anyone with an actual claim in a proceeding needs their own legal advice rather than general description.