After Crypto Crash: Coinbase Reacts to Bankruptcy Rumors

Coinbase recently released a statement claiming it has “no financial exposure” to failed crypto companies Celsius, Three Arrows Capital (3AC) or Voyager Digital. Coinbase hopes this will allay concerns that the exchange may be facing a liquidity squeeze.

“Many such crypto firms were legacy and had short-term liabilities that were not matched by longer-term, illiquid assets”wrote Coinbase in a blog post dated July 20, 2022.

Each of the above crypto companies filed for bankruptcy after the current crypto crash led to liquidations of the companies’ highly leveraged positions.

“We have not engaged in these types of risky lending practices and have instead focused on building our financing business with care and a conscious focus on the customer”explained the company further.

Coinbase’s stock price rose to about $75, or 15%, after the blog post was published. The stock started the year at $251 and has since fallen more than 70%.

Coinbase stock chart Source: Tradingview

Coinbase Responds to Bankruptcy Rumors

The crypto exchange also announced that the company’s venture capital arm “intangible investments in Terraform Labs”, the South Korean company behind Terra. The $60 billion Terra ecosystem collapsed like a house of cards in May 2022. The Terra crash set off a kind of chain reaction that affected many other crypto companies.

After the IPO, the US crypto exchange became increasingly subject to much market speculation. Market watchers suspected that Coinbase’s recent decision to suspend the affiliate program could be an indication of the company’s insolvency. With the latest blog post, Coinbase wants to allay these fears.

According to Coinbase, the solvency problems were Celsius, Three Arrows, Voyager “an expression of insufficient risk control”. In addition “Problems predictable and actually credit specific, not crypto specific” been

Coinbase emphasized that the exchange does not engage in lending or other activities with clients’ assets. Possible lending is carried out “at the customer’s discretion and backed by collateral that acts as the first layer of protection against potential bug contagion.”

“Coinbase always holds customer funds at a 1:1 ratio,” according to the company. This means that users’ funds are available for withdrawal 24/7.

Additionally, they required “always 100%+ collateral…so we have recorded no losses on our funding portfolio and no exposure to counterparty insolvency.”

The Terra Luna crash shakes the crypto markets

Since the multi-billion dollar collapse of the Terra ecosystem in May of this year, the crypto market cap and prices of most cryptocurrencies have fallen sharply. In the midst of the crisis, with the Bitcoin price down more than 70% from its recent all-time high, Major crypto companies such as Celsius and 3AC began to suffer from a lack of liquidity.

The heavily indebted companies were forced to suspend withdrawals as investors rushed to withdraw their funds. The value of the companies’ assets fell so much that they were unable to comply with withdrawal requests.

Eventually, Celsius, 3AC and Voyager filed for bankruptcy protection. The market decline also prompted Zipmex, a popular Singapore-based crypto exchange that caters to the Asian market, to stop allowing withdrawals.

As we have previously reported Coinbase invested several million US dollars in the exchange in June. Although Coinbase is much more careful with customer funds than its competitors, the company cannot completely escape the current market crash.

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