The disclosure was included for the first time as a risk factor in the company’s first-quarter earnings report, which also noted that Coinbase holds $256 billion in fiat currencies and virtual coins.
“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.
That means users would lose access to their balances since it would become Coinbase’s property.
It’s a different scenario from traditional investments. Many bank accounts, including checking and savings, are insured by the Federal Deposit Insurance Corporation for up to $250,000 per account if the bank goes under, while the Securities Investor Protection Corporation helps if a broker or dealer goes bankrupt.
Crypto enthusiasts have long heralded the decentralized movement as, in part, a way to give people complete control and ownership of their finances. That’s only the case for those who physically store their cryptocurrency on personal wallets, as opposed to a platform like Coinbase. (Coinbase does offer a self-custody wallet called Coinbase Wallet.)
Following the earnings report, which sent the company’s stock plummeting more than 23%, Coinbase CEO Brian Armstrong said there’s no risk of bankruptcy right now.
He took to Twitter Tuesday night to reassure users that their funds are safe and apologize for not being more forthright with communicating this risk when it was added, and noted the company included the disclosure because of new rules recently set by the Securities and Exchange Commission.
“This disclosure makes sense in that these legal protections have not been tested in court for crypto assets specifically, and it is possible, however unlikely, that a court would decide to consider customer assets as part of the company in bankruptcy proceedings even if it harmed consumers,” Armstrong said.