Definition ∞ Insolvency risk is the potential for an entity to be unable to meet its financial obligations as they become due. In the digital asset sector, this risk applies to cryptocurrency exchanges, lending platforms, and other firms holding or managing user funds. It arises from factors such as poor risk management, significant market downturns, or insufficient liquidity to cover withdrawals. The realization of this risk can result in substantial financial losses for customers and broader market disruption.
Context ∞ Recent market events have highlighted insolvency risk as a critical concern, leading to increased scrutiny of digital asset firms’ balance sheets and operational practices. Regulators are assessing how existing insolvency laws apply to novel digital asset structures and seeking to implement clearer frameworks for resolution. Understanding the financial health and risk management protocols of digital asset service providers is paramount for market participants.
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