Protection Funds vs Insurance: What Crypto Exchanges Actually Cover

Crypto exchanges often maintain protection funds to absorb losses in case of security incidents. However, these funds differ significantly from FDIC and SIPC protections, which are designed for different types of financial failures.

While some crypto platforms place customers' US dollar cash with partner banks, eligible fiat deposits may receive pass-through FDIC insurance. Nevertheless, this coverage does not extend to Bitcoin or other crypto assets held on the platform.

Binance's SAFU fund and Bitget's Protection Fund are examples of these reserve funds. Binance's fund was established by allocating a portion of trading fees and has been used in the past to cover losses during an exchange-level security incident. However, the fund should not be described as the crypto equivalent of FDIC deposit insurance.

Bitget's Protection Fund is maintained separately from its proof-of-reserves program. The fund's valuation is reported regularly, providing evidence that it can actually be used in case of a loss. Coinbase, on the other hand, provides transparency through audited financial statements filed with the SEC.