How Safe Are Your Investments? After FTX, It’s Worth Checking
Here is what happens to your money if your bank, brokerage or crypto exchange goes bust
By Anne Tergesen, The Wall Street Journal, Dec. 13, 2022
… Bank deposits have been backstopped by the Federal Deposit Insurance Corporation since the Great Depression. In the crypto world, there are no clear protections…
If a brokerage fails, customer assets should be safe.
The U.S. Securities and Exchange Commission prohibits broker-dealers from using customer money or commingling it with the firm’s assets.
SIPC covers up to $500,000 per account, including up to $250,000 in cash.
If you have a brokerage account in your own name, a traditional individual retirement account, a Roth IRA account and a joint account at the same brokerage firm, each might be eligible for up to $500,000 of protection, according to SIPC…
If a company with a 401(k) plan files for bankruptcy, the plan’s assets are protected. The federal Employee Retirement Income Security Act, the 1974 law that governs 401(k) plans, requires the assets to be held in trust…
When you transfer cash to a cryptocurrency exchange to make purchases, the company often holds the money in an FDIC-insured bank account where it is available for trading. If the cryptocurrency exchange fails, customers should be able to access any cash they have in a linked bank account, provided the cryptocurrency firm titled the account properly…[snip potential complications]… [end quote]
Whenever I open an account at a new bank I always double-check their FDIC coverage.
SIPC protects against the loss of cash and securities – such as stocks and bonds – held by a customer at a financially-troubled SIPC-member brokerage firm. The limit of SIPC protection is $500,000, which includes a $250,000 limit for cash. Most customers of failed brokerage firms are protected when assets are missing from customer accounts.
SIPC protection is limited. SIPC only protects the custody function of the broker dealer, which means that SIPC works to restore to customers their securities and cash that are in their accounts when the brokerage firm liquidation begins.
Except as specifically provided above, the term “security” does not include any
currency, or any commodity or related contract or futures contract, or any warrant or right to subscribe to or purchase or sell any of the foregoing.
I can verify that FDIC is efficient since it managed the failure of 3 banks where I held assets in 2008.
Of course, protecting an investment (such as stock or crypto) only makes sure that the shares are there and doesn’t protect against market-related price drops.