Crypto exchange insolvency – consequences for users

  • March 14, 2019

Very popular crypto exchange and a pioneer in the industry – Gatecoin, has started a liquidation procedure and ceasing all operations with immediate effect. A wind-up procedure shall be run under the law of Hong Kong and it will be interesting to follow the outcomes of the process, especially in the light of users’ assets, both fiat and crypto, what will happen to them and how much will users be able to recuperate. The platform has operated for 6 years, served many users and stored a great amount of crypto and fiat assets. It might seem a simple case for the liquidator, but it will most certainly be a challenge.

There are many legal and factual questions to be answered, especially regarding the distribution of users’ assets, for example, what is the reason behind the liquidation, was there a substantial debt that caused wind-up, did users’ funds remain on segregated bank account and untouched throughout the custody of the assets, was fiat money in fact saved in segregated bank accounts, how will users’ assets be treated by the insolvency court and most importantly, will users get back their money and bitcoins in full or partially?

In this article, I will outline the possible consequences of such a liquidation procedure on the assets of users, describe the wind-up process and stride the possible scenarios for crypto and fiat asset distribution. In the end, I will also draw a parallel with a historical Lehman brothers collapse in 2008 and how did UK Supreme court treat investors’ assets in the insolvency proceeding. I choose this case due to the fact that Lehman Brothers had (or should) have put investors’ money on a segregated bank account, but they failed to do that fully. Now, Gatecoin users are in the same position as investors of Lehman Brothers in 2008.


Gatecoin is (was) a regulated crypto exchange, founded in 2013 with its headquarters in Hong Kong and it was the first cryptocurrency exchange to list Ether (Ethereum native token) in 2015 and were the first one to support ERC20 standard tokens and token generation events (Initial Coin Offerings or ICOs).

They were licensed as a Hong Kong Money Service Operator (MSO), which governs fiat currency foreign exchange activities. As such, Gatecoin conducted strict anti-money laundering (AML) policies and exercised Know Your Customer procedure accordingly. They claimed they are dedicated to regulatory compliance and to the highest security standards while trying to be a progressive platform for crypto trading at the same time. They proclaimed themselves as the NASDAQ of the blockchain era.

As successful as they were, in May 2018 Gatecoin was hacked in a cyberattack in which 250 Bitcoins (BTC) and 185.000 Ethers (ETH) were stolen. The alienated coins were worth 2.14 million USD. It looks like this was a breaking point for Gatecoin.


Under the law of Hong Kong, a wind-up procedure is one of the legal ways to liquidate assets and close a company, it is a bankruptcy procedure with a different name. The reasons to initiate a wind-up procedure are many, such as non-profitability of a company, inability to pay debts, inability to continue its business due to bad reputation, bad business decisions in the past, ineffective business development, non-compliance with regulatory requirements, mismanagement of a company, corporate restructuring, past events that affected the business, and more.

The purpose is to settle the accounts, pay off all the company’s debts if there are any, liquidate (sell, redeem, etc.) the company’s assets and distribute the surplus to shareholders (after the payment of employees, debts, liquidator and all the costs connected to liquidation).

A wind-up procedure can be voluntary or compulsory, anyhow, both of the procedures entail several formal steps, which can take months or years to complete.

A voluntary wind-up is initiated by the directors and shall be wind-up by the company’s shareholders and creditors. This happens when it is estimated that the company will be able to pay its debts within 12 months after the commencement of the winding-up. Directors must appoint a provisional liquidator, publish a notice of the commencement of the winding-up, and other necessary requirements by the law. The effect of such wind-up is that the company must cease to carry on with pending business (except insofar as it is beneficial for the creditors and wind-up process – such business is carried on by the liquidator. The directors’ powers cease and any transfer of shares is null and void.

On the other hand, a compulsory wind-up is initiated by a creditor, a shareholder or the company itself when a company is unable to pay a debt of 10.000 dollars or above, or if the court decides that it is just and equitable that a company should close or when the company decides that the court should wind-up a company. The consequences of the pending business are nearly the same as a voluntary wind-up.


Gatecoin stated in their message to users, on the 13th March 2019, that the reason for closing the business is the inability of their french Payment Service Provider (PSP)  to process transactions, which had an impact to their operations up to the point of not being profitable anymore. Gatecoin also stated that they made their best endeavors to change their payment service provider and transfer the money flow to the new one(s), however, the old Payment Service Provider retained the majority of their funds. They initiated legal procedures against this french PSP to recover the finds, but this has not yet happened and it might never happen. Gatecoin did not say whether the retention of the funds was a consequence of the cyberattack that happened 10 months ago and of the potential lawsuits of those who were affected by the cyber attack.

Gatecoin has not given any note about who initiated the winding-up procedure, what was the legal reason for wind-up – was it due to significant debts, which the company could not pay or some other reason. It is clear, however, that the company is in a compulsory wind-up procedure.


Upon registration and KYC verification, Gatecoin created and assigned users special personal wallets for different cryptocurrencies. Each user was able to access the wallet, manage, trade, transfer and dispose of the funds freely. Crypto wallets were no different than regular bank accounts. This means that users had their coins or tokens in their respective wallets (Bitcoin wallet, Ether wallet, Tezos wallet, etc.). In the sense of insolvency law, such account and assets should not be a part of the insolvency asset fund and should be separated and distributed to users in full, according to their wallet balances.

However, there is one fact which was communicated by Gatecoin as a competitive advantage, which could now be seen as a downside. Gatecoin kept cryptocurrency and token deposits stored in multi-sig cold storage. This means, that the majority of the crypto assets were stored in the cold storage. I am talking 95% of crypto assets or even more.

The problem with distribution could arise from two angles, the first one is that there are also Gatecoin’s own crypto assets in that cold storage, which are mixed with the assets of users. The liquidator will have the challenge to gather information from hundreds of thousands (or even millions) of users’ wallet balances and separating their assets with Gatecoin assets.

The second relevant concern is also that Gatecoin might have used some of the crypto assets for different purposes, such as market-making. It can be that some of the assets were converted to fiat money and used to pay off debts when the French PSP retained their funds on the bank account. This means that crypto assets in the cold storage might not reflect the right sum of the users’ crypto assets.

Note, that these are all mere speculations and possible scenarios, which do not accuse that Gatecoin has indeed engaged in such an activity. It will take a certain amount of time to gather all the information about wallets, balances, and users, to see whether they are true or not.


At the end of the Gatecoin’s official notification about a wind-up, Gatecoin stated that they will assist in expediting the realization and redistribution of assets of its users. It would certainly help to know, which legal reason is behind this liquidation, especially if there is an outstanding debt and how outstanding, which could potentially affect users’ assets being held by the PSI and liquidator. Additionally, it will also matter where de facto were users’ funds stored – either in the segregated account, partially on the segregated account, or not on the segregated accounts at all.

In 2015 Gatecoin launched segregated bank accounts and advertised that fiat deposits are secured in segregated client accounts at reputable global banks in more than 40 countries. The CEO Aurélien Menant said that “Keeping clients’ deposits in segregated bank accounts ensure that the clients’ funds are protected and therefore, drastically minimizing counterparty risk.”

Segregated bank account means that a company has at least two different bank accounts at one bank – one for the collection of fees and process operating expenses (own business account) and one for the collection of users’ deposits (segregated account, similar to the escrow). Such segregation could indeed significantly minimize the counterparty risks and protect fiat deposits from the risk of failures of mismanagement, fines, and from the consequences of an insolvency proceeding. Segregated accounts lower the exposure risk when the money of the clients has to be distinguished from the corporate’s money. If this is the case and all the deposits of fiat money are indeed on such accounts, then this money could easily be distributed and returned back to users.

Segregated money thus cannot be used by the company for operational purposes and normally (depending on the rules of the jurisdiction and applicable law that governs a specific segregated bank account), under trust law, property law and insolvency law, this money should be protected and unavailable to general creditors in the unlikely event of ceasing to operate or becoming insolvent.

However, depositing funds on such segregated bank account is still not the same as depositing funds in users’ (personal) bank account, which a crypto exchange with let say e-money license could do. This is not an account of a user and under the user’s power to manage, but it remains in the hands of an account holder – in this case, Gatecoin. This means that users’ funds could be taken from this account and used for paying costs and expenses, etc. Of course, such funds must be returned back but it can happen that a company becomes insolvent before it can repay its debt to the segregated account.

In addition to that, segregated accounts can fall under different jurisdictions and if a company goes bankrupt, the money from the segregated account can be used to pay off debts and segregated users might not be the first in line for the money. It will depend on the fact if there are secured creditors in line and also on the ruling of the insolvency procedure itself.

If Gatecoin has not transferred all of the deposits to segregated accounts, then the decision about how big is the pool of segregated users and what is the value of segregated money will be up for the insolvency court to decide.

Let us remind you, that the majority of the Gatecoin’s fiat assets are currently kept by the French PSI, which means that there can be (and probably is) the money of users which also is being kept and shall remain kept until the legal proceedings against the PSI are over.


Lehman Brothers International was an international bank, having served its clients with its financial products, such as investment banking, equity sales, trading investment management, private equity, private banking, etc. At that time it was the fourth-largest investment bank in the US.

According to US law, the bank used segregated bank accounts to collect and store their money. In a collapse of Lehman Brothers in 2008, which happened for using accounting gimmicks to make their finances appear better, the clients of the case against Lehman Brothers International (Europe), a UK subsidiary, who issued claims in the insolvency proceedings in the UK, have fallen into three categories:

  1. those whose money was in fact held on the segregated account,
  2. those whose money was to be held on the segregated bank account, but was at the time held on the company’s business account and not yet transferred to the segregated account,
  3. those whose money should have been recognized as segregated money but wasn’t.

In the decision of the UK Supreme Court, the court said, that the client’s trust over their money is vested onto to a company upon depositing funds, not upon segregating the funds on a segregated bank account. Moreover, the court said, that the clients’ money is not only the money which is already segregated but also the money which can be identified as users’ money and should be segregated but was not and is held at the company’s own accounts. This way the Supreme court enlarged both: (i) the number of clients in the segregated account group and (ii) the value of the segregated money, which should be deposited on the segregated account, but was not.

Such ruling clearly benefited the second and third group of clients, however, this decision greatly deprived clients, which had, in fact, segregated money on segregated account.


Gatecoin was indeed a remarkable crypto trading platform, which has moved many frontiers that the crypto world has faced in the past. The liquidation process of this kind will be interesting to follow and very challenging to the liquidator.

Some of the questions raised at the beginning could not be answered due to unfamiliarity with the all facts, but all the questions will inevitably be resolved by the end of the insolvency process. I feel that this case will be a breakthrough case as it will show the stance of the court regarding crypto assets on users’ crypto wallets, the stance regarding users’ fiat money on segregated bank account, but it will also show how do regulated crypto exchanges treat users’ money, what kind of consequences are there for misusing users’ assets and last but not least, what kind of regulation (or self-regulation) is needed to put such cases into a secured and defined legal framework, especially in the view of the treatment of users’ assets.

If you need a legal expert in the technology field, contact us here.

DISCLAIMER: This article outlines the possible scenarios of this case from a general legal perspective, and not from a perspective of the law of Hong Kong. The author is not familiar with the specifics of the law, regarding segregated bank accounts and insolvency proceedings in Hong Kong. The author is not connected to Gatecoin and is not familiar with the deep legal and factual background of Gatecoin and derives its conclusions merely on the basis of the publicly available information and its own industry legal knowledge and experiences as a user of the Gatecoin platform.

Call Now ButtonCall Us