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The cryptocurrency is currently exhibiting incredibly volatile market behavior as major cryptocurrencies like bitcoin and ethereum have seen a loss in value over the last six months. To say that cryptocurrency platform Coinbase has had a disastrous 2022 is an understatement.
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As worrisome as its stock value is right now, users should be more nervous about the information the company disclosed in its first-quarter earnings report on Tuesday.
Fortune reports that if Coinbase goes bankrupt, users carrying funds with the company may no longer have access to them. The coin could become the property of Coinbase, undermining the whole point of cryptocurrency: giving people more control and ownership of their finances.
On page 83 of the 135-page 10-Q filing with the US Securities and Exchange Commission (SEC), the company mentions the issue for the first time: “Furthermore, because crypto assets in escrow can considered the property of a bankruptcy estate, in the event of bankruptcy, the crypto assets we hold in custody on behalf of our clients could be subject to bankruptcy proceedings and such clients could be treated as our general unsecured creditors.”
Coinbase shares fell 30% on May 11 after it reported on the night of May 10 that it had lost $430 million in the first quarter of 2022. Year-to-date, the exchange’s share price It has plummeted 80%. The report also shows a 19% drop in monthly users.
As bad as the numbers and trends for crypto stocks seem, there is no sign of Coinbase going bust, something Coinbase CEO and founder Brian Armstrong was quick to point out. Armstrong also acknowledged that the bankruptcy warning was included in Coinbase’s earnings report due to new SEC requirements regarding public company disclosures.
In a series of tweets on May 10, Armstrong wrote that “your funds are safe at Coinbase, as they always have been,” adding that “we have no risk of bankruptcy.”
Because they are not overseen by federal market regulators, there is inherent risk with trading on crypto exchanges. Banks are protected by deposit insurance, provided by the Federal Deposit Insurance Company, for up to $250,000. Investments in crypto platforms are not similarly protected.
Although it is recommended to store any crypto in personal wallets (Coinbase offers a self-custody wallet), most Coinbase users simply keep their funds stored in a company-controlled wallet. If the popular cryptocurrency exchange goes bankrupt or is hacked, users could be considered creditors and see their digital tokens become the property of Coinbase.
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When the company went public in April last year through a direct listing of its shares on the Nasdaq, it was immediately valued at nearly $100 billion. Coinbase’s market value now sits at around $15 billion. It currently holds approximately $256 billion in fiat currencies and crypto in escrow on behalf of its clients.
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