Coinbase warns that your crypto could be lost if they go bankrupt. Following the announcement of the earnings, Coinbase shares tumbled 15.6 percent in after-hours trading.
Coinbase Global’s poor first-quarter financial report. which the U.S.’s biggest cryptocurrency exchange recorded a quarterly deficit of $430 million and a 19 percent reduction in monthly users—contains an update on the hazards of using its service that may startle its millions of users.
Coinbase warns that if the cryptocurrency platform goes bankrupt, users would lose all cryptocurrency in their accounts.
In its earnings statement (read below) on Tuesday, Coinbase stated that it held $256 billion in both fiat currencies and cryptocurrencies on behalf of the customers. However, the exchange warned that “the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings” if it ever went bankrupt. Users of Coinbase would become “general unsecured creditors,” which means they would have no right to seek any particular assets from the exchange in court. Their money would be rendered inaccessible.
That should not occur.
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One of the primary selling points emphasized by blockchain enthusiasts worldwide is that an individual’s possession of cryptocurrency is meant to be unchangeable and permanent. However, when a user registers a Coinbase account, they frequently wind up keeping their cryptocurrency in a Coinbase-controlled wallet, which implies the user is handing over at least some authority over their own assets.
A secret key, which is a lengthy sequence of characters that functions as a password, governs admission to a crypto wallet. The bitcoin in the wallet cannot be retrieved without the key. Coinbase retains the private key and allows customers to access the funds in the wallet utilizing a more traditional password. The configuration makes it easier for users to access their accounts by requiring them to memorize a simpler password.
However, when it comes down to it, Coinbase essentially decides whether a consumer has accessibility to those assets.
Coinbase CEO and founder Brian Armstrong stated on Twitter that the platform faced “no risk of bankruptcy,” and that the notification was required owing to new SEC laws governing public corporations that store 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 posted on twitter, trying to reassure users that “your funds are safe at Coinbase.”
Coinbase does provide a self-custody wallet called “Coinbase Wallet,” in which customers know their private key, but a Coinbase Wallet—or any crypto wallet—is not necessary to trade cryptocurrency on Coinbase. However, by conceding that crypto assets are not secure in the event of bankruptcy, Coinbase highlights a significant distinction between holding assets with blockchain exchanges and retaining cash with traditional banks.
Deposit insurance provided by the Federal Deposit Insurance Corporation protects bank accounts in the United States. If a bank fails, the FDIC protects funds up to $250,000, preventing depositors from going bankrupt along with the bank. Crypto exchanges do not provide the same level of security, which is why crypto advocates encourage investors to keep their bitcoin in a private wallet rather than on an exchange.
Coinbase shares tumbled 15.6 percent in after-hours trading following the announcement of earnings, bringing the crypto exchange’s stock price to 80 percent of its Nasdaq debut in April 2021. Aside from reporting a decreased user base and lower-than-expected revenue, Coinbase exchange trade volume fell from $547 billion to $309 billion in the first quarter compared to the same period last year. Coinbase predicted that trade volume would fall more in the current quarter.
Read the full report below: