How safe are your investments? It’s worth checking
5 min read . Updated: 14 Dec 2022, 05:29 PM IST 
PremiumHere is what happens to your money if your bank, brokerage or crypto exchange goes bust
The collapse of crypto exchange FTX raises a question for every saver and investor: What happens to your assets if the company that holds your bank, brokerage, 401(k) or crypto account goes under?
The answer varies depending on the type of account. Bank deposits have been backstopped by the Federal Deposit Insurance Corporation since the Great Depression. In the crypto world, there are no clear protections.
As FTX customers discovered, with the company entering bankruptcy proceedings, investors can suffer significant losses if the company that houses their account goes bust.
“If the platform fails, you become part of the bankruptcy process," said Adam Levitin, a law professor at Georgetown University who specializes in consumer protection and is a principal at Gordian Crypto Advisors LLC, which provides services to cryptocurrency businesses.
Here’s what happens in the event the company holding your assets fails, broken down by account type.
Bank Accounts
Banks do fail, but deposits in checking and savings accounts are among the safest of all assets.
When a bank goes under and no other bank takes over the deposits, the FDIC covers up to $250,000 in checking and savings accounts, money-market deposit accounts and certificates of deposit. (FDIC insurance doesn’t cover the investment accounts many banks offer through brokerage units.)
Some customers can get $250,000 of coverage for each account they have at a bank, provided the accounts are titled differently. For example, if you have a bank account in your name with $250,000 and you and your spouse have a joint account at the same bank with $500,000, both are fully insured. To calculate how much coverage you have, go to the FDIC’s electronic deposit insurance estimator.
If you hold more than the limit at a bank that fails, and the bank gets taken over by another bank, you probably won’t lose any money. Since there are no guarantees, people with balances that exceed the limit can protect themselves by transferring the excess deposits to an account at a different FDIC-insured bank.
Brokerage Accounts
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.
The federally mandated nonprofit intervenes on behalf of customers when client assets are missing and a brokerage firm is unable to meet its obligations to customers. If the firm fails but there are no customer assets missing, the firm might seek to transfer customer accounts to a different brokerage firm, said Josephine Wang, chief executive of the Securities Investor Protection Corp.
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.
SIPC replaces missing securities including stocks, bonds, mutual funds, ETFs and certificates of deposit. It doesn’t cover investments that aren’t SEC-registered, including fixed annuity contracts and limited partnerships.
An investor with more than the $500,000 limit in an account will receive a share of customer assets the firm possesses and any assets recovered in a liquidation in proportion to the customer’s account size at the failed brokerage, said Ms. Wang.
Nearly all brokerage firms that sell stocks or bonds to the public are required to join SIPC.
If assets are missing from your account and your brokerage firm is solvent, SIPC typically won’t intervene, Ms. Wang said. In that situation, the loss “will be between you and the firm to resolve," she said, adding that firms might have supplemental insurance to cover a loss.
401(k) Accounts
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, said Michael Kreps, a principal at Groom Law Group who specializes in retirement-plan law.
“The plan is separate from the company’s assets and shielded from the company’s creditors," he said.
The trust also protects employees’ money if your 401(k) plan administrator goes bust.
In contrast, the money executives save in other types of company-sponsored deferred compensation plans are considered assets of the employer and can be seized by creditors in a bankruptcy proceeding, said Mr. Kreps.
Cryptocurrency Accounts
If the company that holds your cryptocurrency fails, there is no guarantee that your money won’t go to pay the firm’s creditors, said Prof. Levitin.
Customer agreements for cryptocurrency exchanges and brokers often suggest that customer assets are shielded.
In June, Coinbase Global Inc., a cryptocurrency exchange with $102 billion in customer assets, updated its user agreement to say that it had agreed to be governed by a section of U.S. commercial law that it believes would protect customer accounts from its creditors in a bankruptcy. But Coinbase also said it is unclear whether a bankruptcy court would agree with that interpretation.
“Due to the novelty of crypto assets, courts have not yet considered this type of treatment for custodied crypto assets," the firm said in a Sept. 30 SEC filing.
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, said Prof. Levitin. But the protections don’t extend to any crypto assets you have purchased.
In August, the FDIC accused companies, including FTX, of making “false representations—including on their websites and social-media accounts—stating or suggesting that certain crypto-related products are FDIC-insured."
One way to safeguard your cryptocurrency against an FTX-style failure is to hold it in your own wallet, said Jerry Brito, executive director of Coin Center, a nonprofit focused on policy issues facing cryptocurrencies.
But there are risks. A wallet stored on a computer or mobile phone might be hacked. A so-called hardware wallet on a device that isn’t connected to the internet might be lost or stolen. In such a situation, investors without a backup would lose their digital assets, said Mr. Brito.