Crypto Crash: Coinbase warns bankruptcy could wipe out user funds

Picture Courtesy: CNBC

Coinbase released its first-quarter earning today and was a huge disappointment. The U.S.'s largest cryptocurrency exchange reported a quarterly loss of $430 million and a 19% drop in monthly users. The most concerning part was that the company said in the event the crypto exchange goes bankrupt, its users might lose all the cryptocurrency stored in their accounts too.

Coinbase said that it holds $256 billion in both fiat currencies and cryptocurrencies on behalf of its customers. The company said, “the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings.” Coinbase users would become “general unsecured creditors,” meaning they have no right to claim any specific property from the exchange in proceedings. Their funds would become inaccessible.

Coinbase CEO and founder Brian Armstrong said the exchange had “no risk of bankruptcy,” and that the disclosure was made due to new rules set by the U.S. Securities and Exchange Commission regarding public companies that hold crypto assets on behalf of others.

He tweeted, “This disclosure makes sense in that these legal protections have not been tested in court for crypto assets specifically, and it is possible, however unlikely, that a court would decide to consider customer assets as part of the company in bankruptcy proceedings even if it harmed consumers.”

Coinbase shares fell 15.6% in after-hours trading after the exchange released its earnings, dragging the crypto exchange's stock price down to 80% below its Nasdaq debut in April 2021.