In one of the first rounds of the SEC and Binance show, users sat in the front row, uncomfortable with the prospect of keeping or fleeing their money.
According to experts, the answer depends on what risk a person is exposed to.
The SEC has accused Binance, the world's largest cryptocurrency exchange, of mishandling customer funds and trading on an unregistered securities exchange. Regulators are asking a federal judge to hit the pause button on freezing assets linked to Binance.US, the company's U.S. citizen exchange. SEC attorneys said in court filings that the lawsuit is a legal attempt to protect the status quo.
Lawyers for Binance.US said that the asset freeze was "extremely serious and serious" and that the damage to Binance.US customers at the same time forced the platform and trading companies to have an associated wallet.
The lawyers said in court documents that both their clients' crypto assets and fiat currency are safe.
Binance.US has announced that it will stop depositing USD and resume buying orders starting last Friday. Banks and payment partners are preparing to close the possibility of withdrawing dollars from the currency as early as Tuesday. They said on Twitter that the platform will "disrupt" the process of receiving and withdrawing deposits.
"As long as we have more stable banking partners, Binance.US will remain a cryptocurrency-only trading platform for at least some time," Binance.US said in a statement last week.
The SEC filing is before Washington District Court Judge Amy Berman Jackson.
The lawsuit filed by Binance is part of the latest SEC action against the cryptocurrency industry. The SEC also sued Coinbase, a public company that operates an unregistered exchange, brokerage and clearinghouse.
As the judge decides how to adjudicate Binance.US assets, cryptocurrency investors may be concerned about how to manage their assets. Many cryptocurrency investors are young, building their wealth and already seeing cryptocurrency red flags.
FTX went bankrupt last year. Founder Sam Bankman-Freed has been charged and pleaded not guilty. FTX is part of a stellar list of crypto lenders and brokers.
"It's very easy to get started with cryptocurrency," said Mark Hayes, senior policy analyst at Financial Reform America, a coalition that advocates for more regulation in the space. “What people don't realize is that often these exchanges are not regulated or well protected, and sometimes they don't comply with regulations. You don't have the same protection with your money as regular investors."
Are customer funds safe on Coinbase and Binance?
Yes, according to stock exchanges. They mentioned that in public statements and court documents.
"Customer assets are safe and secure on Coinbase," a MarketWatch spokesperson said Tuesday.
At Binance.US, "customer assets are secure, properly distributed and accessible to customers," lawyers said in court filings on Monday.
Coinbase and Binance.US claim to maintain a 1:1 reserve for client assets. According to the company's website, Coinbase holds its customers' funds in banks that are insured by the Federal Deposit Insurance Corporation, which protects up to $250,000 per deposit per account. Coinbase's largest cash holdings go into money market mutual funds that are conservative and highly liquid.
Coinbase CEO Brian Armstrong said the lawsuit against the company is "very different" because it only focuses on the definitions of what they consider value.
Binance.US said it is working with custodians to ensure dollar deposits are held in FDIC-insured bank accounts.
Others are skeptical. Hayes emphasized that he does not provide investment advice, but owners of money and assets in stocks "should think carefully about the security issue."
The lawsuit is not about "bad apples," but rather about regulators' response to "systemic" weaknesses in investing in cryptocurrencies in the new world.
He said the Securities Investor Protection Fund reports are good evidence. SIPC is a non-profit organization established in 1970 by federal law. Although not a government agency, the organization acts to recover lost assets from investors when members of a brokerage firm go bankrupt.
SIPC coverage is up to $500,000 in guarantees and cash, although the coverage includes a $250,000 cash limit. Insurance coverage applies when companies are liquidated and does not protect against market fluctuations or bad investment advice.
SIPC President and CEO Josephine Wang said two things must happen before coverage can begin. It says customers hold their money and assets with the member firm and the customer is owed "cash or related securities".
“Under the SIPC Establishment Act, 'value' does not include unregistered investment contracts. Cryptocurrencies are generally considered investment contracts, and unless they are registered with the SEC, they are not SIPC securities and therefore cannot be owned by clients,” Wang said. .
Wang said Binance is not a member of SIPC. According to a person familiar with Coinbase, Coinbase has two brokers and two traders that are SIPC members. But the company is currently not allowed to use digital assets pending a green light from the Financial Industry Regulatory Authority (FINRA), the person said.
FINRA is a non-profit organization administered by the US Securities and Exchange Commission (SEC) that regulates brokerage firms.
What are the options?
If people are withdrawing digital assets from Binance and Coinbase, where are they going now? Options are money exchanges, holding cryptocurrencies in private wallets, and decentralized finance.
Binance and Coinbase, along with Crypto.com, are the two "most popular exchanges," according to attorney Blake Harris, who focuses on client asset protection.
"I can't say that Binance or Coinbase is game over," he said. But in general, Harris said, if people want to keep their money in the stock market, they can't do everything in the stock market.
Crypto.com did not immediately respond to a request for comment.
Another option is to store cryptocurrency in an offline wallet called "cold storage."
One risk is losing or forgetting recovery codes, passwords, and phrases after encryption is established. There is also the risk of misplacing it, he said. Another risk, Hayes added, is poor design and coding errors that prevent access. Still, Harris said he likes the idea of cold storage, but there are strings attached.
Banks exist for a reason. According to Harris, people are not good at saving money themselves. Harris, a tech-savvy investor with less than $10,000 in cryptocurrencies, said this could be a move.
The more cryptocurrency an investor has, "the more you become a target for lawsuits, the more you become a target for theft."
Another option is decentralized finance, or DeFi, which is a peer-to-peer payment system that avoids intermediaries such as banks or brokers. However, Hayes said there are cybersecurity risks and the risk of putting money into investments and currencies that someone may not want.
Regardless of the path, Hayes said. “There's a lot of risk involved in this business, it really depends on the risk you're willing to take.