Coinbase Says Users’ Crypto Assets Lack Bankruptcy Protections

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

Coinbase COINS -27.15%

Global Inc. acknowledged that fact this week. In its quarterly filing, the cryptocurrency exchange company hinted that the digital tokens it holds for users may not actually belong to them if the push comes to shove.

“Because crypto assets held may be considered assets of bankruptcy estate, in the event of bankruptcy the crypto assets that we hold on behalf of our clients may subject to bankruptcy proceedings, and those customers may be treated as our general unsecured creditors,” the company said.

In contrast, securities issued by a registered brokerage firm keep clients legally segregated from the brokerage firm’s assets, meaning they cannot be touched in bankruptcy proceedings. The Securities Investor Protection Corporation, a nonprofit created by Congress in 1970, also insures up to $500,000 in securities and client cash in brokerage accounts.

Trading platforms such as those operated by Coinbase offer investors a seemingly more user-friendly path into the crypto market rather than setting up a so-called crypto wallet. to deal directly with partners.

Securities and Exchange Commission Chairman Gary Gensler has regularly sought to warn investors of the risks associated with platforms, which are not monitored by federal market regulators.

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

Coinbase CEO Brian Armstrong said in a Twitter TWTR -1.58%

subject that bankruptcy risk disclosure reflects guidelines released by the SEC in March. Those guidelines instructed publicly traded cryptocurrency trading platforms to report people’s assets. used on their own balance sheets.

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

“Your funds are still safe at Coinbase, just like they always have been,” Mr. Armstrong said. “We’re not in danger of bankruptcy.”

Shares of Coinbase fell 30% on Wednesday after it reported Tuesday night that it had lost hundreds of millions of dollars in the first quarter. Up to now, the stock price of this exchange has dropped by 80%.

Armstrong said the company believes its service for institutional customers, called Coinbase Prime, has “strong legal protections” in its terms of service, even in Large, unpredictable cases.

“For retail customers, we are taking further steps to update our user terms so that we provide the same protections for those customers during a black swan event. ,” he said. “We should have had these before, so let me apologize for that.”

To comment, a Coinbase spokesperson echoed Armstrong’s Twitter thread.

WSJ’s Dion Rabouin explains why Wall Street is betting big on crypto right now and what that means for the new asset class and its future. Photo compilation: Elizabeth Smelov

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