In May 2022, cryptocurrency exchange giant Coinbase made an SEC disclosure that created an uproar in the crypto space. It warned that customer assets could be subject to proceedings if the company went bankrupt, raising questions about Coinbase’s exposure to bankruptcy risk.
The company has since issued a statement clarifying its position, with Coinbase shares down more than 27% following the filing. But the big question is, if Coinbase goes bankrupt, what happens to the Coinbase wallets owned by ordinary users like you?
Is Coinbase Going Bankrupt?
The 2022 statement by Coinbase [PDF] was part of a quarterly report filing and sparked talks about Coinbase going bankrupt – but the company did not say it was approaching bankruptcy. Instead, they were detailing a new risk factor called SAB 121, a new SEC requirement specifically aimed at companies holding crypto-assets for clients.
Canceling job offers
The situation gets a bit more complicated when you consider Coinbase’s 2022 hiring issues and job offers in the weeks following the quarterly report. Furthermore, the company has decided to slow down hiring in order to focus on improving other aspects of its operations.
Based on the evidence, it would be pure speculation to say that Coinbase could be insolvent. Coinbase CEO Brian Armstrong denied that Coinbase is at risk, adding that other crypto exchanges would add similar risk factors to their reports. Unfortunately, however, trust is a critical factor in the crypto sector. At the time, Coinbase’s falling stock price was a good sign that people didn’t trust the exchange, but its stock performance was also symptomatic of broader issues with tech stocks and, indeed, the global economy as a whole.
Now, in February 2023, Coinbase stock has soared since hitting all-time lows in early January 2023, according to the chart above.
What if Coinbase goes bankrupt?
There are very few precedents for cryptocurrency exchanges going bankrupt, which makes it difficult to say what such a situation would be like. However, as of February 2023, Coinbase was the custodian of $101 billion in customer assets and funds (a huge decrease from the $256 billion it held in March 2022), so a lot is on the line if it goes bankrupt.
While Coinbase’s bankruptcy risk is low and funds are insured, users do not enjoy the same protections as those who put money in a bank. If an exchange like Coinbase becomes insolvent, customer assets held by it may be subject to bankruptcy proceedings.
But Is Your Coinbase Wallet Safe From Bankruptcy?
If Coinbase files for bankruptcy, all of the company’s assets and the customer assets it holds will be divided up to cover the money previously owed to creditors. This means that if Coinbase’s debt exceeds the value of the company’s own assets, money will be taken from the customer pool to cover the difference. Only after doing this, customers will be able to claim their money back.
Protecting Your Cryptocurrency Investments
Whether you think Coinbase will go bankrupt or not, it always makes sense to do everything you can to protect your investments. The only money at risk in the event of bankruptcy is that stored in custodial wallets owned by the exchange.
Exchanges use custodial wallets to store cryptocurrencies on behalf of their customers, making trades faster but also taking away the power from users. Avoiding custodial wallets is the best way to keep your cryptocurrency safe.
Non-Custodial Cryptocurrency Wallet
This is where non-custodial wallets come in. It doesn’t matter which exchange you buy your cryptocurrencies from, you always have the right to move your money to a wallet under your control. New wallets can easily be created with all major cryptocurrencies from bitcoin to ether and beyond; You just need to take the steps to move your money.
Users on this platform enjoy insurance coverage for at least a portion of their funds in case Coinbase goes bankrupt or funds are stolen. And Coinbase is committed to keeping 100% of its users’ funds accessible. With the difficulty finding trust in the crypto space especially after the FTX bankruptcy, it is understandable that secure platforms like Coinbase are seeing a rise in popularity.
What happens to your crypto if Coinbase goes bankrupt?
Coinbase doesn’t appear to be on the verge of bankruptcy, but it’s always worth protecting your investments. You can completely avoid this pitfall by storing your currencies in your own wallet, so it’s worth learning about this side of crypto investing before you start.
