“Because crypto assets in escrow can be considered the property of a bankruptcy estate, in the event of bankruptcy, crypto assets that we hold in escrow on behalf of our clients may be subject to bankruptcy proceedings and such clients may be treated as our general unsecured creditorsCoinbase wrote in the presentation.
Coinbase said in its earnings report on Tuesday that it holds $256 billion in both fiat and cryptocurrencies on behalf of its clients. However, he admitted that if he were to ever file for bankruptcy, those crypto assets he holds in escrow on behalf of his clients could be at risk. Coinbase users would become “general unsecured creditors,” meaning that they have no right to claim any specific property of the company in the proceedings, as explained fortune.
Ownership of a cryptocurrency by an individual is assumed to be immutable and absolute; that is one of the attractions most promoted by the promoters of the blockchain economy. But when a user creates a Coinbase account, they often end up storing their cryptocurrency in a Coinbase-controlled wallet, meaning the person is relinquishing at least some control over their own funds to them.
Access to a crypto wallet is governed by a private key, which is a long string of characters that acts like a password. Without the key, the cryptocurrencies in the wallet cannot be accessed. At Coinbase, the exchange holds the private key and allows users to access the funds within the wallet using a more conventional password. The setup makes it easy for users to log into their accounts by remembering that easier password. However, it is Coinbase that ultimately determines whether a user has access to those assets.
Via Twitter, the CEO and founder of Coinbase, Brian Armstrong, said that the company “had no risk of bankruptcy” and that the communication was made due to the new rules established by the US Securities and Exchange Commission. with respect to public companies holding crypto assets on behalf of others.
“This disclosure makes sense in that these legal protections have not been tested in court specifically for crypto assets, and it is possible, though unlikely, that a court might decide to consider customer assets as part of the business in a given case. bankruptcy proceedings, even if it harmed consumers,” Armstrong tweeted, assuring users that “your funds are safe at Coinbase.”
“We should have updated our retail customer terms sooner, and we did not proactively communicate when this risk disclosure was added,” Armstrong wrote. “My sincerest apologies,” she explained on the social network.
As of November, the Coinbase founder had a personal fortune of $13.7 billion. But the figure dropped to just $2.3 billion, according to the Billionaires Index. Bloombergafter a massive sale of digital currencies, which has ranged from Bitcoin to Ether, caused a sharp drop in the market value of Coinbase, considered the largest cryptocurrency platform in the United States.
Bank accounts in the US are protected by deposit insurance offered by the Federal Deposit Insurance Corporation. In the event that a bank fails, the FDIC steps in to protect deposits of up to $250,000, preventing depositors from going bankrupt along with the bank. Cryptocurrency exchanges do not offer the same protection, which is the main reason crypto enthusiasts advise investors to hold their crypto in a personal wallet, rather than an exchange.
Shares of Coinbase fell 15.6% in after-hours trading after the exchange released its earnings, sending the crypto exchange’s share price down as much as 80% below its Nasdaq debut in April 2019. 2021. In addition to reporting a declining user base and lower-than-expected revenue, trading volume on the Coinbase exchange fell from $547 billion to $309 billion in Q1, over the same period last year. . Coinbase warned that trading volume is likely to decline further in the current quarter.
With information from Bloomberg