Digital Assets Are Not Protected On Coinbase During Bankruptcy

By Kevin • May 11, 2022 3:50 pm • Comments

In Coinbase’s latest SEC filing with the SEC, the report shows that it’s customer’s digital assets may not be protected or secured in the event of a bankruptcy.

Specifically, customer’s of the exchange are considered general unsecured creditors which means that their assets will be used as collateral if a bankruptcy does actually happen.

This is considered shocking for most of the crypto industry given that the purpose of crypto is to provide customers complete control over their own digital assets.

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However, it is clear that this won’t be the case if you hold your assets on a third-party exchange that is subject to the laws of the government and regulatory agencies.

Yahoo reports:

Brian Armstrong made his comments after Coinbase said on Tuesday that, in the event of bankruptcy, crypto assets held by the exchange could be considered property of the bankruptcy proceedings and customers could be treated as general unsecured creditors.

An unsecured creditor would be one of the last to be paid in any bankruptcy and last in line for claims.

Coinbase, whose shares plunged 15% in extended trade on Tuesday, also missed estimates for first-quarter revenue and posted a loss as turmoil in global markets curbed investor appetite for higher risk assets including cryptocurrencies.

Coinbase, the largest U.S. cryptocurrency exchange, said its disclosure might lead customers to believe that keeping their coins on the platform would be considered “more risky”, which would in turn materially impact its financial position.

In an attempt to alleviate concerns over its recent SEC filing, Coinbase’s CEO stated that the company currently does not have any risk of a bankruptcy.

Apparently, that disclosure was made in order to comply with SEC requirements, but it still added some risk to the minds of some investors.

With that being said, this many now entice more and more customers to move their digital assets of thee exchange which would impact Coinbase’s financial status.

After all, the possibility of a black swan event happening for Coinbase is still considered a remote possibility.

So far, Coinbase has reported a $400M loss in just the first quarter of 2022.

CoinDesk reports:

“We believe our Prime and Custody customers have strong legal protections in their terms of service that protects their assets, even in a black swan event like this,” Armstrong wrote in the tweet.

“This disclosure makes sense in that these legal protections have not been tested in court for crypto assets specifically.”

Caitlin Long, founder and CEO of digital asset bank Custodia Bank (formerly known as Avanti), said in a tweet that this provision isn’t new and is an inherent problem with the regulatory structure used by most custodians.

“Wyoming addressed this by creating a new customer-friendly structure designed to respect segregation of customer assets in bankruptcy, the Wyoming special-purpose depository institution,” she said.
Coinbase stock is trading at $72, down 70% year to date.

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