Coinbase warns that users may lose their cryptocurrencies in the event of a company’s bankruptcy | 17/05/22

The cryptocurrency exchange Coinbase recently shocked investors with extremely disappointing figures for the recent business quarter. But it could get worse: At worst, users could lose their cryptocurrencies, the company warned.

• Coinbase shows disappointing results for the first quarter
• In case of insolvency, users may lose claims on their crypto assets
• CEO Armstrong considers risk “unlikely”

At the Milken Institute’s Global Conference 2022, Brian Armstrong, head of the cryptocurrency 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 about 200 million today to one billion by the end of this decade. On the one hand, he based this positive view on the fact that he expected rapid legislative progress. In return, he sees a wide range of applications for digital currencies, which is why he assumes that the cryptocurrency world will make a crucial contribution to the overall economy in the future.

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 marked decline of 19 percent in monthly users, leading to a decline in quarterly revenue from $ 1.80 billion to just $ 1.17 billion. Coinbase also had a loss of $ 1.98 per share after posting a plus of $ 3.05 per share a year ago. Analysts’ expectations were clearly overlooked with these figures.

Users can lose crypto deposits

In its quarterly report, Coinbase, which celebrated a strong NASDAQ debut 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 – at least $ 256 billion in customer assets under management in fiat and cryptocurrencies, according to the latest quarterly report.

“The cryptocurrencies we have for our customers could become part of the bankruptcy process,” Coinbase warned, according to Fortune. Namely, users could become “general unsecured creditors”, which means 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 danger exists because users who create a Coinbase account often store their cryptocurrencies in a wallet controlled by Coinbase. The advantage of this is that they do not even need a complicated key to access their assets, just a relatively simple password, while Coinbase has the key. While this is a relief for the users, it also gives them some control over their assets.

How big is this danger?

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

The background is that so far there has simply been no legal precedent for such a scenario. It is therefore possible, albeit unlikely, that a court in the event of bankruptcy may decide to regard customers’ crypto assets as belonging to the stock exchange.

After all, this warning from Coinbase makes a clear distinction between a deposit in a traditional bank and a crypto exchange: While in 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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