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Coinbase Issues Bankruptcy Warning to Crypto Investors
New language in latest SEC filing contains ominous warning regarding the ownership of crypto assets.
May 10, 2022
In response to this news— which we first broke on Twitter— Coinbase CEO Brian Armstrong apologized for not being more transparent sooner with retail customers and stated, "We have no risk of bankruptcy..." before reiterating the possibility that, in the event of bankruptcy, customer crypto may be deemed Coinbase property.

Shares of Coinbase (COIN), a crypto exchange, fell 15% after the company reported disappointing earnings and announced an equity offering. Even more troubling for some investors though is the new language the company included in its latest quarterly filing regarding the fate of client crypto in the event of bankruptcy.

Coinbase is a custodian tasked with protecting customers’ crypto. The company also partners with third parties that hold crypto on behalf of customers. Coinbase routinely includes a warning about its responsibility to safeguard customers’ crypto and the consequences of failing to do so.

However, the latest filing contains new language suggesting the possibility crypto customers may not be able to get their crypto back in the event of a custodial bankruptcy. The warning makes clear Coinbase customers are a low run on the capital structure totem pole:

“Moreover, because custodially held crypto assets may be considered to be the property of a bankruptcy estate, in the event of a bankruptcy, the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings and such customers could be treated as our general unsecured creditors.”

This disclosure, Coinbase acknowledges, may result in customers finding the company’s custodial services more risky, less attractive, and could adversely impact operating results.

The disclosure did not appear in Coinbase's original Registration Statement filed before going public.

DuDil broke this news on Twitter moments after the Coinbase 10-Q was filed. Even more surprising than the significant engagement the tweet prompted was the number of crypto enthusiasts seemingly unaware of the risk in keeping crypto on an exchange rather than holding the keys themselves.

The news prompted some to claim they've now pulled their crypto from the exchange. Some also urged others to do the same.
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