Coinbase Says Users’ Crypto Assets Lack Bankruptcy Protections

Coinbase Says Users' Crypto Assets Lack Bankruptcy Protections

Cryptocurrency trading platforms might look and feel like regular brokerage apps to everyday users, but regulators have long warned they lack the oversight and investor protections that are built into traditional financial services.

Coinbase Global Inc.

CORNER 8.90%

acknowledged that reality this week. In its quarterly filings, the crypto trading firm suggested that the digital tokens it holds for its users might not really belong to them if push comes to shove.

“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 said.

By contrast, securities held for customers by a registered brokerage are legally segregated from the assets of the brokerage, meaning they can’t be touched in bankruptcy proceedings. The Securities Investor Protection Corp., a nonprofit entity set up by Congress in 1970, also insures as much as $500,000 of customers’ securities and cash in brokerage accounts.

Trading platforms such as those operated by

Coinbase

CORNER 8.90%

offer investors a seemingly more user-friendly avenue into cryptocurrency markets than the alternative of setting up a so-called crypto wallet to transact directly with counterparties.

Securities and Exchange Commission Chair Gary Gensler has frequently sought to warn investors about the risks associated with the platforms, which aren’t overseen by federal market regulators.

“When you trade on a crypto exchange—and I’m saying this to the investors who might watch this—you no longer own your crypto asset,” Mr. Gensler said in an interview with The Wall Street Journal last year. “If that exchange gets hacked, if somebody steals the underlying token…you’re just a creditor. And when crypto exchanges fail, you’re just in line in bankruptcy court.”

Coinbase Chief Executive Brian Armstrong said in a

Twitter

thread that the disclosure about bankruptcy risks reflected guidelines released by the SEC in March. Those guidelines directed publicly traded cryptocurrency trading platforms to report users’ assets on their own balance sheets.

Coinbase held $256 billion in cash and cryptocurrencies for its customers at the end of the first quarter.

“Your funds are safe at Coinbase, just as they’ve always been,” Mr. Armstrong said. “We have no risk of bankruptcy.”

Markets have been looking increasingly shaky recently: Stocks, bonds and crypto have all been falling as investors struggle to manage the large swings roiling financial markets around the globe. WSJ’s Caitlin McCabe looks at some of the causes behind the recent market frenzy. Photo: Spencer Platt/Getty Images

Coinbase’s stock has hit closing lows for four consecutive trading days. The company reported on Tuesday evening that it lost millions of dollars in the first quarter. In the year to date, the exchange’s stock price has plunged by 80%.

Mr. Armstrong said the firm believes its service that caters to institutional clients, known as Coinbase Prime, has “strong legal protections” in its terms of service, even during big, unpredictable occurrences.

“For 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,” he said. “We should have had these in place previously, so let me apologize for that.”

Reached for comment, a Coinbase spokesman referred back to Mr. Armstrong’s Twitter thread.

Write to Paul Kiernan at paul.kiernan@wsj.com

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Appeared in the May 12, 2022, print edition as ‘Coinbase Discloses Risk to Users.’

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