Coinbase is now warning that bankruptcy could wipe out user funds
Some small print in a Coinbase financial report has prompted concerns about a possible bankruptcy scenario and the repercussions for retail users’ crypto holdings housed on the platform.
On May 11, America’s largest cryptocurrency exchange updated its position on asset custody and customer monies in its 10-Q report. A 10-Q is a quarterly report required by the Securities and Exchange Commission for publicly traded firms.
Coinbase Global’s poor first-quarter earnings report—in which the U.S.’s largest cryptocurrency exchange recorded a quarterly loss of $430 million and a 19% reduction in monthly users—is an update on the hazards of utilizing Coinbase’s service that may surprise its millions of users.
In its earnings report on Tuesday, Coinbase stated that it held $256 billion in both fiat currency and cryptocurrency on behalf of its customers. However, the exchange warned that “the crypto assets we hold in custody on behalf of our customers may be subject to bankruptcy proceedings” if it ever declared bankruptcy.
Users would become “general unsecured creditors,” which means they would have no right to claim any specific property from the exchange in court. Their money would be rendered inaccessible.
Crypto critic ‘CryptoWhale‘ was quick to assert “In other words, when they eventually go bankrupt, they will use YOUR crypto to bail themselves out.”
Coinbase CEO Brian Armstrong quickly refuted the reports, stressing that assets are secure on the site. In a tweet on May 11, he stated that there was no risk of bankruptcy, but the company was forced by the financial authority to add the statement.
He went on to label the current market crash as 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.”
The company shares tumbled 15.6% in after-hours trading following the announcement of earnings, bringing the crypto exchange’s stock price to 80 percent of its Nasdaq debut in April 2021. Aside from reporting a decreased user base and lower-than-expected revenue, Coinbase exchange trade volume fell from $547 billion to $309 billion in the first quarter compared to the same period last year.
The company predicted that trade volume would fall more in the current quarter.
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