Coinbase, one of the most popular cryptocurrency exchanges, stated that its users could lose access to their holdings in the event of a company going bankrupt.
This disclosure was made in the first-quarter earnings report. It was the first time that the risk factor had been mentioned. It was also mentioned that Coinbase had $256 billion in virtual and fiat currencies.
The company stated that custodial held crypto assets could be considered property of a bankruptcy estate. In the event of bankruptcy, crypto-assets we have in custody for our customers could be subjected to bankruptcy proceedings, and such customers could then be treated as general unsecured creditors.
This would mean that users would lose access to their balances as they become Coinbase’s property.
This is a completely different situation from traditional investments. The Federal Deposit Insurance Corp. insures many bank accounts including savings and checking, up to $250,000 per account in the event of a bank going under. Securities Investor Protection Corp. covers broker or dealer losses.
The decentralized movement has been long embraced by crypto enthusiasts as a way to have complete control over and ownership of one’s finances. This is only true for people who store their cryptocurrency in private wallets and not on a platform such as Coinbase. Coinbase offers a Coinbase Wallet self-custody wallet.
After the earnings report, sent the stock plummeted by over 23%. Coinbase CEO Brian Armstrong stated that there is no immediate risk of bankruptcy.
He tried to reassure Twitter users that their funds are safe, and he also apologized for not being more open about communicating the risk when it was added. According to him, the company disclosed the information due to new rules by the Securities and Exchange Commission.
Armstrong stated that this disclosure is sensible because these legal protections for crypto assets have not been tested in court. It is possible, though unlikely, that a court will consider customer assets in bankruptcy proceedings, even if it harms consumers.
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