- As general unsecured creditors, retail crypto investors could lose their funds on Coinbase in the event of bankruptcy.
- Coinbase acknowledged that traders' funds on their exchange are at risk according to their latest SEC filing.
- COIN, the tokenized stock of Coinbase, has posted a massive rally of about 60%.
In the event of bankruptcy, Coinbase's retail customers would lose their cryptocurrency assets as unsecured investors in the exchange. The exchange revealed that new measures would be taken to protect user funds, and there is no likelihood of Coinbase going bankrupt.
Why investors are moving digital assets from Coinbase to hardware wallets
Cryptocurrencies held on Coinbase's wallets are considered unsecured funds and are at risk in the event of the cryptocurrency exchange's bankruptcy. Based on the mandatory SEC filing 10-Q, Coinbase introduced a new risk factor, SAB 121, which protects cryptocurrency assets of Prime and Custody customers.
Brian Armstrong, CEO of Coinbase, apologized to retail investors and mentioned that the exchange would place further measures to secure the cryptocurrency holdings of traders.
Armstrong assured investors,
Your funds are safe at Coinbase, just as they've always been. We have no risk of bankruptcy.
In response to the news, there was a massive decline in COIN (the tokenized stock of Coinbase) on FTX. Coinbase published its Quarterly Reports and submitted Form 10-Q, a week ago.
The exchange reported a decline in its trade volume and revenue from trade in Q1 2022.
Regulators have consistently warned investors of the lack of oversight and fund protection on cryptocurrency exchange platforms.
Since Coinbase's announcement, COIN has made a complete recovery. On FTX, COIN exploded, posting around 60% gains on Tuesday.
Armstrong commented on the issue in a tweet,
For 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.
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