Coinbase Says Users Could Be Subject to Bankruptcy Filings After Reporting Q1 Loss of $430 Million

Photo illustration in Ukraine - 23 May 2021
Pavlo Gonchar / SOPA Images /

Cryptocurrency is currently exhibiting incredibly volatile market behavior, as major cryptocurrencies like bitcoin and ethereum have seen value loss over the last six months. To say that cryptocurrency platform Coinbase has had a disastrous 2022 is a massive understatement.

As troubling as its stock value is right now, users should be more nervous about information divulged by the company in its first quarter earnings report filed Tuesday.

Fortune is reporting that if Coinbase goes bankrupt, then users carrying funds with the company may no longer have access to them. The coin could become the property of Coinbase, undermining the entire point of cryptocurrency — giving people more control and ownership of their finances.

On page 83 of the 135 page 10-Q filing with the U.S. Securities and Exchange Commission (SEC), the company mentions the issue for the first time: “Moreover, because custodially held crypto assets may be considered to be the property of a bankruptcy estate, in the event of a bankruptcy, the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings and such customers could be treated as our general unsecured creditors.”

Coinbase’s stock fell 30% on May 11 after it reported on the evening of May 10 that it lost $430 million in the first quarter of 2022. So far this year, the exchange’s stock price has plunged 80%. The report also shows a 19% drop in monthly users.

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As bad as the numbers and crypto stock trends look, there isn’t any indication that Coinbase is going bankrupt, something that was pointed out quickly by Coinbase CEO and founder Brian Armstrong. Armstrong also acknowledged that the bankruptcy warning was included in Coinbase’s earnings report because of new SEC requirements regarding public companies’ disclosures.

In a series of May 10 tweets, Armstrong wrote that “your funds are safe at Coinbase, just as they’ve always been” and added that “we have no risk of bankruptcy.”

Because they aren’t overseen by federal market regulators, there is an inherent risk with trading on crypto exchanges. Banks are protected by deposit insurance — provided by the Federal Deposit Insurance Company — for up to $250,000. Investments on crypto platforms are not similarly protected.

Although it is recommended to save any crypto in personal wallets (Coinbase offers a self-custody wallet), most Coinbase users simply keep their funds stored in a wallet controlled by the company. If the popular crypto exchange goes bankrupt or gets hacked, users could be considered creditors may see their digital tokens become the property of Coinbase.

When the company went public in April of last year through a direct listing of its shares on the Nasdaq, it was immediately valued at nearly $100 billion. Coinbase’s market value now sits at around $15 billion. It currently holds approximately $256 billion in fiat currencies and crypto in custody on behalf of its customers.

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