Coinbase bankruptcy disclosure spooks users of losing their funds

The cryptocurrency market has not performed well during the past few weeks. The crash in the market was triggered by the collapse of Terra (LUNA) and UST. Moreover, the recent policies by the Federal Reserve to tame the growing level of inflation have contributed to losses in both the stock and crypto market.

Cryptocurrency investors were further spooked by Coinbase’s Q1 earnings report that showed that the exchange made a net loss of $430 million. The company’s bankruptcy disclosure revealed that users could be “unsecured creditors” if the company goes under.

Coinbase user funds could be used if the company went bankrupt

This was the first time that Coinbase had mentioned the risk factor posed to users that stored their funds on the exchange. Currently, Coinbase holds $256 billion in virtual currencies and fiat, and this sum could be used to salvage the company in case of bankruptcy filings.

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“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,” the company announced.

The bankruptcy disclosure is quite different from what happens in traditional finance. In the traditional finance space, checking and savings accounts are insured by the Federal Deposit Insurance Corp, with the insured amount being a maximum of $250,000 per account if the company becomes bankrupt.

Cryptocurrency investors have been urged to take their money out of exchanges and store them in self-custodial wallets following this disclosure. Self-custodial wallets allow users to have full control over their funds, and Coinbase offers a self-custody wallet known as the Coinbase Wallet.

Coinbase assures users funds are safe

With the disclosure causing anxiety among users, the Coinbase CEO, Brian Armstrong, s quick to assure the community that there was nothing to worry about and that their funds were safe on the platform.

Armstrong released a tweet on Tuesday night saying that user funds were safe and even apologized for failing to be forthright with the communication regarding this risk. He said that the company added the disclosure per the Securities and Exchange Commission (SEC) recommendations.

1/ There is some noise about a disclosure we made in our 10Q today about how we hold crypto assets. Tl;dr: Your funds are safe at Coinbase, just as they’ve always been.

— Brian Armstrong – barmstrong.eth (@brian_armstrong) May 11, 2022

“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 added.

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