Warning from Coinbase: In the event of a bankruptcy, users could lose their crypto assets

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Coinbase with disappointing results for the first quarter
In the event of insolvency, users could lose claims to their crypto assets
CEO Armstrong says risk is ‘unlikely’

At the Milken Institute’s Global Conference 2022, Brian Armstrong, head of the crypto exchange Coinbase, was still very optimistic about the development of the crypto market. He euphorically expressed his belief that the number of people who have used or tested cryptocurrencies will increase from around 200 million today to one billion by the end of this decade. On the one hand, he based this positive outlook on the fact that he expects rapid regulatory progress. On the other hand, he sees a wide variety of applications for digital currencies, which is why he assumes that the crypto world will make a decisive contribution to the overall economy in the future.

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The balance sheet of the largest US crypto trading exchange for the first quarter, on the other hand, speaks a completely different language. Coinbase had to cope with a significant drop of 19 percent in monthly users, which led to a slump in quarterly revenue from $1.80 billion to just $1.17 billion. Coinbase also posted a loss of $1.98 per share after posting a plus of $3.05 per share a year ago. The analysts’ expectations were clearly missed with these figures.

Users could lose crypto deposits

In its quarterly report, Coinbase, which celebrated a strong NASDAQ premiere via direct placement in mid-April 2021, also pointed out a risk that many of its users may not even be aware of. In the event of Coinbase’s insolvency, they could lose their assets – after all, 256 billion US dollars in customer assets under management in fiat and crypto currencies, according to the latest quarterly report.

“The crypto assets we hold for our customers could become part of the bankruptcy process,” Coinbase warned, according to Fortune. Namely, users could become “general unsecured creditors”, meaning that they would not be entitled to any specific ownership of the crypto exchange and thus would not have access to their crypto deposits.

This risk exists because users who create a Coinbase account often store their cryptocurrencies in a wallet controlled by Coinbase. The benefit of this is that they don’t need a complicated key themselves to access their funds, just a relatively simple password, while Coinbase holds the key. Although this is a relief for users, it also means that they sometimes give up control over their investments.

How great is this danger?

However, founder and CEO Brian Armstrong quickly tried to reassure users. In a tweet, he stated that there was “no risk of bankruptcy” for the crypto exchange. The warning was only due to a new regulation by the SEC.

The background is that up to now there has simply been no legal precedent for such a scenario. It is therefore possible, albeit unlikely, that in the event of a bankruptcy, a court might decide to consider clients’ crypto assets as belonging to the exchange.

After all, this warning from Coinbase makes a clear difference between a deposit with a traditional bank and a crypto exchange clear: while at a traditional bank, customer funds are protected up to a certain maximum limit by the FDIC deposit protection system, this protection does not apply to crypto trading platforms.

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