Coinbase Claims Users’ Crypto Assets Lack Bankruptcy Protection

Cryptocurrency trading platforms may look like regular brokerage apps for everyday users, but regulators have long warned that they lack the oversight and investor protections that are built into traditional financial services.

CORNER -26.40%

Global Inc. acknowledged this reality this week. In its quarterly filings, the crypto-trading firm suggested that the digital tokens it holds for its users might not really belong to them if things go wrong.

“Because crypto assets held in custody may be considered the property of a bankrupt estate, in the event of bankruptcy, crypto assets held by us in custody on behalf of our clients could be subject to legal proceedings. bankruptcy, and these customers could be treated as our general unsecured creditors,” the company said.

In contrast, securities held for clients by a registered brokerage are legally separated from the assets of the brokerage, meaning they cannot be affected in bankruptcy proceedings. The Securities Investor Protection Corp., a nonprofit entity created by Congress in 1970, also insures up to $500,000 of securities and cash from clients in brokerage accounts.

Trading platforms such as those operated by Coinbase offer investors a seemingly friendlier route to the cryptocurrency markets than the alternative of creating a so-called crypto wallet to transact directly with counterparties.

Securities and Exchange Commission Chairman Gary Gensler has frequently sought to warn investors of the risks associated with the platforms, which are not overseen by federal market regulators.

“When you trade on a crypto exchange — and I say this to investors who might be watching this — you no longer own your crypto asset,” Gensler said in an interview with The Wall Street Journal last year. “If this exchange is hacked, if someone steals the underlying token… you are just a creditor. And when crypto exchanges fail, you’re right in line in bankruptcy court.

Coinbase CEO Brian Armstrong said in a TWTR Twitter -2.48%

wire that the bankruptcy risk disclosure mirrored guidance issued by the SEC in March. These guidelines directed publicly listed cryptocurrency trading platforms to report user assets on their own balance sheets.

Coinbase held $256 billion in cash and cryptocurrencies for its customers at the end of the first quarter.

“Your funds are safe at Coinbase, as they always have been,” Armstrong said. “We have no risk of bankruptcy.”

Coinbase shares fell 30% on Wednesday after announcing Tuesday night that it lost hundreds of millions of dollars in the first quarter. So far this year, the stock market price has fallen by 80%.

Mr. Armstrong said the company is confident that its service that caters to institutional clients, known as Coinbase Prime, has “strong legal protections” in its terms of service, even during large and unpredictable events. .

“For retail customers, we are taking additional steps to update our Terms of Service to provide the same protections to those customers during a black swan event,” he said. “We should have had them in place before, so allow me to apologize for that.”

Reached for comment, a Coinbase spokesperson linked to Mr. Armstrong’s Twitter feed.

WSJ’s Dion Rabouin explains why Wall Street is now betting big on crypto and what that means for the new asset class and its future. Photo composition: Elizabeth Smelov

Write to Paul Kiernan at [email protected]

Copyright ©2022 Dow Jones & Company, Inc. All rights reserved. 87990cbe856818d5eddac44c7b1cdeb8

Appeared in the print edition of May 12, 2022 under the title “Coinbase Discloses Risks to Users”.

Comments are closed.