Wednesday, June 29 2022

Some fine print in a Coinbase financial report has drawn attention to a possible bankruptcy scenario and the implications for retail customers’ crypto assets stored on the platform.

In its 10-Q report on May 11, the largest cryptocurrency exchange in the United States clarified its position on asset custody and protection of customer funds. A 10-Q is a quarterly report required by the US Securities and Exchange Commission that publicly traded companies must file.

However, there was a section that caught the attention of the crypto community regarding the possibility of bankruptcy. He said:

“In the event of bankruptcy, the crypto assets we hold in custody on behalf of our clients could be subject to bankruptcy proceedings and such clients could be treated as our general unsecured creditors.”

crypto critic ‘Cryptowhale‘ was quick to state: “In other words, when they eventually go bust, they’ll use THEIR crypto to bail themselves out.”

armstrong apologizes

Coinbase CEO Brian Armstrong was quick to refute the claims, stating that funds are safe on the platform. In a tweet on May 11, he said there was no risk of bankruptcy but that the company had to include the declaration required by the financial regulator.

“We have no bankruptcy risk, however we do include a new risk factor based on an SEC requirement called SAB 121, which is a newly required disclosure for public companies that hold crypto assets for third parties.”

He went on to call the current market crash a “black swan event,” but confirmed that Coinbase Prime and Custody customers have “strong legal protections in their terms of service that protect their assets.”

Armstrong added that they were working to add the same protections for retail customers and apologized for not implementing them sooner. The implication is that there is currently no legal protection for retail traders. According to the company’s first quarter earnings report, only 24% of the trading volume done on the platform is from retail clients.

“It is possible, though unlikely, that a court may decide to consider clients’ assets as part of the business in bankruptcy proceedings,” it added.

Armstrong suggested the company’s self-custody wallet solution, Coinbase Wallet, for those who prefer to store their own crypto, however this is likely to be somewhat centralized as well.

COIN price falls to an all-time low

Coinbase shares have plunged to an all-time low following an earnings report that fell short of analyst expectations with a net loss of $430 million for the first quarter.

COIN has plunged an additional 12% today after yesterday’s loss in anticipation of the disappointing earnings report. The stock is now at an all-time low of $61.55, having fallen more than 80% from its all-time high last year.

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