Will Coinbase’s Loss Reflect on Your Bitcoin Holding in the Exchange?

Coinbase on Tuesday reported a pretty disappointing quarter on most fronts.

In the last week so much has happened in the crypto space which is nothing but a nightmare for the investors. On Thursday, over US$275 billion were wiped off from the global crypto market cap within 24 hours and Bitcoin dropped to nearly US$27,000, a level it saw in December 2020. The world's second-largest cryptocurrency Ethereum has joined the cryptocurrency crash, plummeting in value by 20 percent, as the digital currency downturn hammers investors who bought during the Covid years. Then Kenneth Donovan and Hussien Kassfy filed the potential class-action lawsuit Thursday, accusing the largest US crypto exchange of misleading customers about the stability of the Gyen. Coinbase caused a stir with a regulatory filing that contained a troubling message: Users could lose their cryptocurrency assets if the company goes bankrupt. In a filing with the SEC, Coinbase said that "in the event of a bankruptcy" the crypto assets that the company holds in custody for its customers "could be subject to bankruptcy proceedings and such customers could be treated as our general unsecured creditors." So, this means Coinbase's loss reflects on your bitcoin holding in the exchange? Let's find out.

What Happened?

Coinbase on Tuesday reported a pretty disappointing quarter on most fronts. First-quarter revenues were off 27% year-over-year to US$1.17 billion, widely missing analysts' expectations for US$1.50 billion. Meanwhile, the company swung to a US$430 million loss after earning US$388 million in the year-ago period, and monthly users were down 19% YoY.

It effectively means that in the event of a hack, loss, or another negative event at Coinbase, the company may not be able to recover the cryptocurrencies it holds on behalf of its clients. In the event Coinbase goes bankrupt, its clients' cryptocurrency assets may be recognized as the property of Coinbase:

"Moreover, because custodial 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."

Unsecured creditors are treated as entities that have written loans to Coinbase without the benefit of security (assets) as protection. In the event of bankruptcy, an unsecured creditor effectively takes whatever is left (if anything) once secured creditors are repaid.

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