What Is Insolvency and How Does It Affect Custodial Accounts?

Insolvency is a state where a company or individual is unable to pay its debts as they fall due or when its liabilities exceed its assets. In a custodial account, like a centralized exchange, the exchange holds the assets.

If the exchange becomes insolvent, the user's assets are typically tied up in lengthy bankruptcy proceedings. Users become unsecured creditors, often recovering only a fraction of their funds, demonstrating the risk of not holding one's own keys.