In its earnings report on Tuesday, Coinbase warned users through their ‘Terms of Service’ that they could lose their cryptocurrencies in bankruptcy. This was the first time this disclosure had been included in their earnings reports. And while Coinbase’s CEO quickly responded by saying there was no risk of bankruptcy and that users’ funds were safe, the warning created concern among users about the possibility of losing their assets if Coinbase were to encounter financial difficulties.
What Is Coinbase?
Founded in June 2012 by Fred Ehrsam and Brian Armstrong, Coinbase is a digital currency exchange headquartered in San Francisco, California. They broker assets like Litecoin, Ethereum, and Bitcoin across 32 countries – this includes a range of other digital assets with fiat currencies. In addition, they also broker bitcoin transactions and storage across 190 countries worldwide. Bitcoin is now licensed to operate in more than 30 states and territories around the globe.
As one of the largest cryptocurrency exchanges, Coinbase has been described as the most popular way to buy and sell digital currency. Coinbase also supports the buying and selling of cryptocurrencies on its website through a user-friendly interface. Users can connect their bank account or credit card to their Coinbase account to purchase or sell cryptocurrencies.
In addition, Coinbase offers a wallet service, which allows users to store their digital currency in a secure online account. They charge a fee of 1% to 3% for each transaction that a user makes. Users can use Coinbase’s API to create their own applications. While Coinbase has been criticized for its high fees, it’s still one of the most popular cryptocurrency exchanges.
The Disclosure by Coinbase
Coinbase has disclosed that it holds a whopping $256 billion in fiat currencies and virtual coins. But this is the first time the company has mentioned this risk factor in its earnings report.
For some time now, Coinbase has been criticized for its opaque accounting practices and lack of disclosure around its risk factors. They have been under pressure to improve their disclosures after losing tens of millions of dollars in a single day last month due to a software glitch.
The Coinbase disclosure is a sign that the company is starting to take greater transparency seriously, which should help build confidence in the company among investors and regulators.
A company statement declared: “Because custodial-held crypto assets may be considered 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. As such, customers could be treated as our general unsecured creditors.”
What this means is that users could well lose access to their Coinbase balances because they would legally become the property of Coinbase.
Facts Behind The Disclosure
Coinbase has since clarified that this clause only applies to Coinbase Pro (its professional trading platform) and not to its regular Coinbase wallet service. Coinbase CEO Brian Armstrong said there are no plans to declare bankruptcy.
Armstrong attempted to reassure users via Twitter that their funds were safe, apologizing to users for not being more open when communicating this risk. He added that the disclosure was only included because the Securities and Exchange Commission had recently set new rules.
He added that the disclosure makes sense because legal protections for crypto assets have never been tested in court. And while it’s unlikely, it’s possible that a court could decide that, even though consumers would be disadvantaged, customer assets are legally part of the company in bankruptcy.
The earnings report resulted in Coinbase’s stock plummeting by more than 23%. Given the volatile nature of the cryptocurrency market, it’s important for investors to carefully consider where they store their digital assets.
Coinbase Is Different From Traditional Investments
With traditional investments, the Federal Deposit Insurance Corp insures accounts like savings and checking accounts for up to $250,000 for each account, should the bank go under. If a dealer or broker goes bankrupt, the Securities Investor Protection Corp steps in to help.
Crypto enthusiasts appreciate that they have complete ownership and control of their finances. However, unlike Coinbase, this applies to users who use personal wallets to store their cryptocurrency. Note that Coinbase does have Coinbase Wallet, which is a self-custody wallet.