Bankruptcy-focused investment firm Cherokee Acquisitions has started offering what it calls “put options” to crypto investors to protect their funds on crypto exchanges Binance, Coinbase and Kraken in the event of a bankruptcy, CoinDesk learned Wednesday from the company.
The put options will protect account holders’ deposits on the listed exchanges, paying back 100% of the assets in the account if the exchange files for bankruptcy protection within the contract period.
Large institutional investors and hedge funds will sell the options and compensate investors in the event of bankruptcy filings, Brian Ferrara, sourcing and trading specialist at Cherokee, told CoinDesk.
The monthly fees of the options are 0.25% to 0.35% for funds on Coinbase, 0.35% to 0.45% for Kraken and 0.45% to 0.55% for Binance Holdings Ltd, the firm said in an email to investors reviewed by CoinDesk.
Cherokee Acquisition is a distressed asset investment banking firm that also has a marketplace for credit claims against bankrupt firms. The firm has been actively structuring deals and buying customer claims for their crypto holdings against embattled crypto firms such as Celsius Network, Voyager Digital and FTX.
The new offering comes as multiple digital asset firms have filed for bankruptcy protection over the past year, freezing withdrawals and locking up investors’ holdings. After November’s spectacular collapse of FTX, the exchange of disgraced entrepreneur Sam Bankman-Fried, crypto traders became wary about the stability of centralized exchanges and the security of their digital assets. As fear grew, they withdrew funds in waves.
The pricing of the options is an estimate based on the firm’s proprietary formula considering a six-month contract, and should be interpreted “as a starting point” between the buyer and seller, according to Cherokee.
This means a Binance account holder with a balance of $1 million who wants protection may buy a put option with a six-month expiry for an estimated price of $27,000-$33,000 paid upfront given the monthly rates. If the firm files for bankruptcy within the contract term, the seller would be obligated to buy the account holder’s valid bankruptcy claim at the full $1 million price.