Coinbase includes new risk factor in latest SEC filing as investors fear bankruptcy

Coinbase's latest 10-Q filing at the Securities & Exchange Commission sparked fear of losing funds among retail customers. In the event of bankruptcy with unsecured creditor's funds at the most risk. 

Investors fear loss of funds if Coinbase files bankruptcy

Coinbase filled out form 10-Q as part of its mandatory filing with the Securities & Exchange Commission. The SEC's new requirement introduced a risk factor SAB 121, which revealed Coinbase has a mechanism in place to protect cryptocurrencies of Prime and Custody customers. 

Coinbase's retail customers and their cryptocurrency assets on the exchange continue to remain at a high risk of loss in the event of the exchange's bankruptcy. An unsecured creditor typically loses most of their funds if the exchange declares bankruptcy. 

Brian Armstrong, CEO of Coinbase, allayed investors' fears and apologized for lack of mechanisms that protect retail customers' funds. Armstrong assured holders that the exchange was in no danger of bankruptcy. 

Armstrong was quoted as saying,

For our retail customers, we're taking further steps to update our user terms such that we offer the same protections to those customers in a black swan event. We should have had these in place previously, so let me apologize for that.

Coinbase’s Q1 2022 earnings call on May 10 alarmed investors as the exchange witnessed a 44% QoQ decline in trade volume. This coincided with a market-wide correction in cryptocurrency prices when billions were wiped out of the overall market cap. 

Coinbase's tokenized stock on FTX and Bittrex exchange has plummeted 30% and 20%, respectively, overnight. A 15% drop in COIN price followed Coinbase's earnings call. Coinbase's stock has nosedived over 75% a year to date, driving a bearish sentiment among holders and investors.