In May 2022, cryptocurrency exchange giant Coinbase made an SEC disclosure that caused an uproar in the crypto space. It warned that client assets could be subject to litigation if the company goes bankrupt and raised questions about the risks of investing on the platform.
With Coinbase shares plummeting more than 27% following the filing, the company has since released a statement to clarify its position. But the big question is will Coinbase go bankrupt, and what happens to your crypto if it does?
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Is Coinbase going bankrupt?
The most recent statement by coin base [PDF] was part of an earnings report, but the company didn’t say it was close to bankruptcy. Instead, they have detailed a new risk factor under a new SEC requirement called SAB 121, which specifically targets companies that hold crypto assets for clients.
Revocation of job offers
The situation gets a bit more complicated when considering Coinbase’s recruitment issues and withdrawn job offers in the weeks following the earnings report. Additionally, the company has decided to slow hiring to focus on improving other aspects of its operations.
Based on the evidence currently available, it would be pure speculation to say that Coinbase could go bankrupt. The company’s CEO has denied that Coinbase is at risk, and other cryptocurrency exchanges have had to add similar risk factors to their own reports. Unfortunately, trust is a key factor in the crypto sector, and Coinbase’s falling share 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 to go 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 funds, so the stakes are high if it goes bankrupt.
Those who invest in cryptocurrencies do not have the same insurance or protection as those who put money in the bank. When an exchange like Coinbase goes bankrupt, client assets it holds can be the subject of bankruptcy proceedings.
But what exactly does this mean for those who have crypto assets with an exchange?
Should Coinbase file for bankruptcy, all of the company’s assets, as well as customer assets it holds, would first be split to cover creditors’ debts. This means if Coinbase’s debt exceeds the value of its own assets, money would be taken from the customer pool to cover the difference. Only then can customers claim their money back.
Keep your cryptocurrency investment safe
Whether or not you think exchanges like Coinbase will go bankrupt, it always makes sense to do whatever you can to protect your investment. The only money at risk in a bankruptcy situation is that held in custody wallets owned by an exchange.
Exchanges use custody wallets to store cryptocurrencies on behalf of their customers, which speeds up trading but also removes power from users. Avoiding a depot wallet is the best way to keep your cryptocurrencies safe.
Non-custodial cryptocurrency wallets
This is where non-custodial wallets come in. No matter what exchange you buy your cryptocurrencies on, you always have the right to move your funds to a wallet under your control. New wallets can be easily created with all major cryptocurrencies, from bitcoin to ether and beyond; You just have 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 brink of bankruptcy, but it always pays to secure your investments. You can avoid this type of loss entirely by storing your currencies in your own wallets, so it’s worth learning about this side of crypto investing before you start.
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