Crypto Held on Coinbase Could be Subject to Bankruptcy Proceedings

Some small print in a financial report from Coinbase has raised eyebrows over a potential bankruptcy scenario and the implications for retail customers’ crypto assets stored on the platform.

In its 10-Q report on May 11, America’s largest crypto exchange clarified its position on asset custody and safeguarding customer funds. A 10-Q is a quarterly report mandated by the U.S. Securities and Exchange Commission, to be filed by publically traded companies.

However, there was a section that raised eyebrows among the crypto community regarding the possibility of bankruptcy. It read:

“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.”

Crypto critic ‘CryptoWhale‘ was quick to assert “In other words, when they eventually go bankrupt, they will use YOUR crypto to bail themselves out.”

Armstrong apologizes

Coinbase chief executive Brian Armstrong was quick to refute the claims, stating that funds are safe on the platform. In a tweet on May 11, he said that there was no risk of bankruptcy but the company had to include the statement as required by the financial regulator.

“We have no risk of bankruptcy, however we included a new risk factor based on an SEC requirement called SAB 121, which is a newly required disclosure for public companies that hold crypto assets for third parties.”

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 protects their assets.”

Armstrong added that they were working on adding the same protections for retail customers and apologized for not implementing them earlier. The implication there is that legal protection currently does not exist for retail traders. According to the firm’s Q1 earnings report, only 24% of the trade volume conducted on the platform is by retail clients.

“It is possible, however unlikely, that a court would decide to consider customer assets as part of the company in bankruptcy proceedings,” he added.

Armstrong suggested the firm’s self-custodial wallet solution, Coinbase Wallet, for those who prefer to store their own crypto, however, this too is likely to be somewhat centralized.

COIN price slumps to an all-time low

Coinbase stock has plunged to an all-time low following an earnings report that came in under analysts’ expectations with net losses of $430 million for Q1.

COIN has crashed a further 12% today following yesterday’s rout in anticipation of the disappointing revenue report. The stock is now at an all-time low of $61.55, having crashed more than 80% from its all-time high last year.