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    Coinbase Customer's Crypto Could Be at Risk if It Goes Bankrupt

    Coinbase CEO takes to Twitter to reassure customers after the exchange's quarterly results revealed a surprise risk. Find out why all crypto investors might be worried.

    Coinbase Customer's Crypto Could Be at Risk if It Goes Bankrupt

    by Emma Newbery | Published on May 19, 2022

    Many or all of the products here are from our partners that pay us a commission. It’s how we make money. But our editorial integrity ensures our experts’ opinions aren’t influenced by compensation. Terms may apply to offers listed on this page.

    Image source: Getty Images

    Key points

    Coinbase's quarterly results highlighted a risk that may apply to other crypto exchanges too: Customer funds could be at risk in the event of bankruptcy.

    Assets held in a custodial wallet on Coinbase's platform could be subject to bankruptcy proceedings.

    Moving assets to a non-custodial crypto wallet gives you complete control over your assets.

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    It's been a crazy week for crypto investors. So much so that you may have missed a warning hidden in Coinbase's quarterly results. The popular cryptocurrency exchange said if it goes bankrupt, customers' crypto could be at risk.

    Like many crypto platforms, Coinbase offers a custodial wallet service. This lets users leave their digital assets on the exchange rather than moving them to an external crypto wallet. However, according to the Coinbase filing, if the company goes bust those assets could be subject to bankruptcy proceedings.

    "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," it said.

    It would mean Coinbase customers had to get in line behind other creditors in order to recover their own cryptocurrency assets -- funds they'd deposited on the platform. In contrast, money deposited with a bank is protected by FDIC insurance for up to $250,000 per eligible account.

    Custodial vs. non-custodial wallets

    There's a lot of debate in the crypto world about custodial and non-custodial wallets. A custodial wallet means assets remain on a centralized platform. The investor does not control the private keys to their crypto -- like a bank account PIN. If the platform gets hacked or for some reason closes down operations in your country, your crypto could be at risk.

    Moving your funds to a non-custodial wallet gives you total control over your assets. It means there's no risk of losing your funds in the event of a crypto platform hack or collapse. It would also mean your crypto didn't get tied up in a centralized crypto company's bankruptcy proceedings. Earlier this year, Kraken CEO Jesse Powell advised users to move their funds off centralized exchanges, but for different reasons. He was concerned that law enforcement officials could force crypto exchanges to freeze certain accounts.

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    It's worth noting that Coinbase has its own non-custodial wallet called Coinbase Wallet which would not be impacted by any bankruptcy proceedings. There are several different types of non-custodial crypto wallets, each with their own pros and cons. Broadly speaking, they divide into hot wallets, which are connected to the internet, and cold wallets, which are kept offline. Cold wallets are more secure and often physical hardware devices that can be bought for as little as $50. Hot wallets are things like MetaMask that you install on your browser, or a mobile wallet that's installed on your cell phone.

    Nonetheless, some investors prefer custodial wallets because they don't want the responsibility of securing and managing their crypto. Becoming your own bank is not as simple as it may seem. When you move your digital assets to an external crypto wallet, there's no handy 'forgot password' button as there is on a centralized exchange. If you forget your master password or seed phrase, or lose access to your wallet in another way, you may not be able to get your crypto back. Indeed, billions of dollars worth of Bitcoin (BTC) are stuck in inaccessible crypto wallets.

    Should Coinbase and other crypto exchange customers be worried?

    Coinbase CEO Brian Armstrong reassured customers on Twitter that the company wasn't in any danger of going bankrupt and that their funds are safe. "We have no risk of bankruptcy," he said. "For our retail customers, we’re taking further steps to update our user terms such that we offer the same protections to those customers in a black swan event."

    Coinbase's quarterly results come the same week that Terra's decentralized finance ecosystem collapsed and Bitcoin hit a 16-month low. To be clear, Coinbase is a very different product from Terra. Unlike Terra, Coinbase is a centralized crypto exchange that's listed in the U.S. and regulated by the SEC. Nonetheless, Terra's collapse is a stark reminder that there's very little in the way of protection for cryptocurrency investors in the event of platform failure, and that even seemingly established players can fail.

    Source : www.fool.com

    What Happens to Your Crypto if Coinbase Goes Bankrupt?

    It's one of the world's biggest crypto exchanges. So, what would happen if it ran out of cash?

    What Happens to Your Crypto if Coinbase Goes Bankrupt?

    BY SAMUEL L. GARBETT

    PUBLISHED 5 DAYS AGO

    It's one of the world's biggest crypto exchanges. So, what would happen if it ran out of cash?

    @[email protected]#=img=#

    Image Credit: viewimage/Shutterstock

    In May 2022, cryptocurrency exchange giant Coinbase made an SEC disclosure that created turmoil in the crypto space. It warned that customer assets could be subject to proceedings if the company went bankrupt, raising questions about the risks of investing on the platform.

    With Coinbase shares plummeting by more than 27% after the filing, the company has since released a statement to clarify its position. But, the big question is whether Coinbase is going bankrupt, and what happens to your crypto if it does?

    MAKEUSEOF VIDEO OF THE DAY

    Is Coinbase Going Bankrupt?

    The recent statement made by Coinbase [PDF] was part of a quarterly report filing, but the company did not say that it is getting close to insolvency. Instead, they were detailing a new risk factor per a new SEC requirement called SAB 121, specifically aimed at companies holding crypto-assets for customers.

    Rescinding Job Offers

    The situation gets a little more complicated when you consider Coinbase’s recruitment issues and rescinded job offers in the weeks following the quarterly report. In addition, the company has decided to slow down recruitment to focus on improving other aspects of its operations.

    Based on the evidence currently available, it would be pure speculation to say that Coinbase may go bankrupt. The company’s CEO has denied that Coinbase is at risk, and other cryptocurrency exchanges will have to add similar risk factors to their own reports. Unfortunately, though, trust is a significant factor in the crypto sector, and Coinbase’s falling stock value is a good indication that people don’t trust the exchange.

    What Happens if Coinbase Goes Bankrupt?

    There is little precedent for a cryptocurrency exchange going bankrupt, making it difficult to say exactly how a situation like this would play out. However, as of March 2022, Coinbase was the custodian of $256 billion in customer assets and money, so a lot is on the line if it goes bankrupt.

    Those investing in cryptocurrencies don’t have the same insurance or protection as those putting money in the bank. If an exchange like Coinbase goes bankrupt, the customer assets it holds may be subject to bankruptcy proceedings.

    But what exactly does this mean for those who have crypto-assets with an exchange?

    If Coinbase filed for bankruptcy, all of the company’s assets as well as the customer assets it holds would first be divided up to cover money owed to creditors. This means that if Coinbase’s debt exceeds the value of the company’s own assets, money would be taken from the customer pool to cover the difference. Only once this is done will customers be able to make a claim to get their money back.

    Keeping Your Cryptocurrency Investment Safe

    Whether you think exchanges like Coinbase will go bankrupt or not, it always makes sense to do everything you can to keep your investment safe. The only money at risk in a bankruptcy situation is that which is stored in custodial wallets owned by an exchange.

    Exchanges use custodial wallets to store cryptocurrencies on behalf of their customers, making trades faster but also taking power away from users. Avoiding a custodial wallet is the best way to keep your cryptocurrencies safe.

    Non-Custodial Cryptocurrency Wallets

    This is where non-custodial wallets come in. No matter which exchange you buy your cryptocurrencies from, you always have the right to move your money into a wallet under your control. New wallets can be made with ease with all major cryptocurrencies, from Bitcoin to Ether and beyond; you just need to take the step to move your money.

    What Happens to Your Crypto if Coinbase Goes Bankrupt?

    Coinbase doesn’t appear to be on the verge of bankruptcy, but it’s always worth securing your investments. You can avoid this sort of loss entirely by storing your currencies in your own wallets, making it worth learning about this side of crypto investment before you get started.

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    Coinbase admits users may lose crypto if exchange goes bankrupt

    Coinbase reported declines in revenues, trading volume and monthly users in a first-quarter earnings report that came below estimates.

    THE LEDGERCRYPTOCURRENCY

    Coinbase earnings were bad. Worse still, the crypto exchange is now warning that bankruptcy could wipe out user funds

    BY NICHOLAS GORDON

    May 11, 2022 6:59 AM UTC

    Sign up for the Fortune Features email list so you don’t miss our biggest features, exclusive interviews, and investigations.

    Hidden away in Coinbase Global’s disappointing first-quarter earnings report—in which the U.S.'s largest cryptocurrency exchange reported a quarterly loss of $430 million and a 19% drop in monthly users—is an update on the risks of using Coinbase’s service that may come as a surprise to its millions of users.

    In the event the crypto exchange goes bankrupt, Coinbase says, its users might lose all the cryptocurrency stored in their accounts too.

    Coinbase said in its earnings report Tuesday that it holds $256 billion in both fiat currencies and cryptocurrencies on behalf of its customers. Yet the exchange noted that in the event it ever declared bankruptcy, “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.

    That shouldn’t happen.

    An individual’s ownership of cryptocurrency is supposed to be immutable and absolute; that's one of the key selling points touted by blockchain evangelists everywhere. But when a user creates a Coinbase account, they often end up storing their cryptocurrency in a wallet controlled by Coinbase, which means the individual is giving away at least part of their control over their own funds.

    Never miss a story about cryptocurrency

    FOLLOW FOLLOW THE AUTHOR: NICHOLAS GORDON MORE TOPICS: CRYPTOCURRENCY SUPPLY CHAINS REAL ESTATE VIEW MORE

    Access to a crypto wallet is governed by a private key, which is a long string of characters that effectively acts as a password. Without the key, the cryptocurrency in the wallet can’t be accessed. On Coinbase, the exchange holds the private key and lets users access the funds within the wallet using a more conventional password. The setup makes it easier for users to enter their accounts, by remembering an easier password.

    Yet it means that when push comes to shove, Coinbase ultimately governs whether a user gets access to those assets.

    In comments shared on Twitter, 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.

    “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,” Armstrong tweeted, while reassuring users that “your funds are safe at Coinbase.”

    Coinbase does offer a self-custody wallet, titled “Coinbase Wallet,” in which users know their private key, and a Coinbase Wallet—or any crypto wallet—is not required to trade crypto on Coinbase. But by admitting that crypto assets aren't secure in the event of a bankruptcy, Coinbase is also highlighting a major difference between storing your funds with blockchain exchanges, versus keeping cash with traditional banks.

    Bank accounts in the U.S. are protected by deposit insurance offered by the Federal Deposit Insurance Corporation. In the event a bank fails, the FDIC steps in to protect deposits up to $250,000, preventing depositors from going broke along with the bank. Crypto exchanges don't offer that same protection—which is the primary reason why crypto enthusiasts advise investors to hold their cryptocurrency in a personal wallet, rather than on an exchange.

    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. Besides reporting a declining user base and lower than expected revenue, trading volume on the Coinbase exchange declined from $547 billion to $309 billion in the first quarter, over the same period last year. Coinbase warned that trading volume was likely to decline further in the current quarter.

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