If Coinbase Goes Bankrupt, Will Your Crypto Be Seized?

Brian Armstrong, the CEO of Coinbase (NASDAQ:COIN), has come forward to clarify a recent 10-Q filing with the U.S. Securities and Exchange Commission (SEC). The filing in question stated that in the event of bankruptcy, Coinbase users would become “general unsecured creditors” and “the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings.”

This language spooked the cryptocurrency industry, with a viral tweet urging Bitcoin (BTC) hodlers to get their holdings off exchanges.

New disclosure in today's $COIN (Coinbase) 10-Q: 👀

"In the event of a bankruptcy…..customers could be treated as our general unsecured creditors." 🚩🚩🚩

🚨Get your #Bitcoin off exchanges.🚨 pic.twitter.com/KDBiAvYcog

— Sophia Zaller (@sophiamzaller) May 10, 2022

Armstrong has now clarified that this disclosure was required by the SEC and that it does not reflect a change in Coinbase’s financial standing. He also reassured customers that their funds are safe and that the company has built-in “legal protections” for its institutional clients in their terms of service (ToS).

This means that if anything goes wrong on Coinbase’s end – say, for example, a black swan event or the exchange is hacked – then institutional investors are not liable. This is a huge selling point for Coinbase, and it’s one of the main reasons why institutional investors have been flocking to the platform in droves.

Armstrong also said that Coinbase has moved to offer the same level of protection institutional investors enjoy to retail clients. However, he adds that if Coinbase were to declare bankruptcy, a court could consider “customer assets as part of the company in bankruptcy proceedings even if it harmed” them.

This would obviously harm users who have stored their assets on the platform, as they would not be able to access them.

Armstrong claims that such a scenario is unlikely since Coinbase is in a good financial position and is unlikely to go bankrupt. At the same time, he admitted that the company should have updated its terms of service for retail customers sooner.

So much for soothing user anxiety.

Price Action

As of writing, Coinbase shares are up $9.37, or 16%, to $67.87. It’s no secret that Coinbase has been facing some tough times lately. The company’s trading volume has shrunk significantly – 43.5% from last quarter – and retail volume has fallen even more sharply. This is bad news for Coinbase, as 95% of its transaction fees come from retail trading.

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