Coinbase CLO Addresses Bankruptcy Concerns Surrounding Latest Earnings Report

Paul Grewal, Chief Legal Officer of Coinbase, terminated the company’s latest 10q, which included disturbing language regarding the management of customer funds in the event of bankruptcy. Grewal stated that a bankruptcy event at Coinbase is highly unlikely and explained how user funds are currently secured.

Are customer funds safe?

In a statement On Wednesday, the CLO clarified that customer funds and company assets are segregated in Coinbase’s internally audited ledger. Therefore, there is no question about which fiat currency – or cryptocurrency – belongs to.

Further, the exchange does not engage in lending or other activities with client assets unless explicitly authorized to do so. In the 10q report published in May, Coinbase claimed that customers’ crypto assets were not protected by FDIC insurance.

In traditional finance, it is common for banks to use funds deposited by their customers to issue loans. This means that only a fraction of total deposits are available for withdrawal at any given time, creating risk for customers in the event of a bank run.

“Coinbase still owns customer assets 1:1,” Grewal said. “This means funds are available to our clients 24 hours a day, 7 days a week, 365 days a year.”

The black swan of bankruptcy

Counsel’s final point concerned the company’s retail user agreement. The agreement has been updated to make clear that the assets of retail clients are protected under Article 8 of the UCC, just like institutional clients.

This is contrary to the initial report’s claim that crypto assets held in custody could be subject to “bankruptcy proceedings” and be considered the property of a bankrupt estate. “These customers could be treated like our general unsecured creditors,” it read.

Grewal asserted that the change is not a change in the company’s efficient handling of digital assets. “We believe that the digital assets in our custody have always been Article 8 financial assets,” he said.

Coinbase CEO Brian Armstrong issued an apology for the report’s language shortly after it was released. He explained that the disclosure made sense at the time, as such legal protections have yet to be tested in court for crypto assets.

“We should have updated our retail terms earlier, and we did not proactively communicate when this risk disclosure was added,” the CEO said.

Coinbase stock has fallen significantly in recent months, alongside the cryptocurrency market. A spokesperson for the company recently revealed that four senior executives have jointly sold more than $1 billion worth of COIN stock since their IPO – of which Brian Armstrong was one.


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