Coinbase: Customers Could Lose Crypto if It Ever Went Bankrupt
As if crypto investors don’t already have enough to worry about, Coinbase COIN +16.02% Global in its 10-Q said customers could lose their crypto in bankruptcy proceedings were the firm ever to go under.
In essence, customers might only get their crypto back after the platform had paid off other, more senior, creditors, according to the disclosure. If the firm were in a big enough hole, a customer could lose everything.
Coinbase CEO Brian Armstrong Tuesday evening took to Twitter to attempt to clarify the disclosure. “We have no risk of bankruptcy,” he wrote, saying that the new disclosure came in response to a recent rule from the Securities and Exchange Commission. Coinbase (ticker: COIN) is in the business of holding cryptocurrency for customers, and Armstrong noted that it isn’t yet clear how a judge would treat custodied crypto assets in a bankruptcy proceeding.
The crypto platform made the new risk disclosure as part of its otherwise dismal first-quarter earnings report. The firm reported a first-quarter loss of $1.98 a share, missing analyst estimates of a 1-cent loss. Shares of the firm on Wednesday fell 26.4% to $53.72.
Included in the firm’s 10-Q was a new risk disclosure that in the event Coinbase were to enter bankruptcy, “the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings,” with the customers being treated as unsecured creditors.
Some legal scholars have long foreseen bankruptcy as a potential problem. In February, Georgetown Law Professor Adam Levitin outlined the risks that crypto exchange customers could face were a firm to go under.
“The big point here is the if you are a customer of a cryptocurrency exchange, you risk being a general unsecured creditor of the exchange if it should file for bankruptcy,” Levitin wrote. “It doesn’t matter that the exchange’s contract with you says that you ‘own’ the currency. That’s not determinative of what will happen in bankruptcy.”
Coinbase slammed for what users say is terrible customer service after hackers drain their accounts
While the cryptocurrency exchange company has grown rapidly, complaints have continued to arise. Since 2016, Coinbase users have filed more than 11,000 complaints against Coinbase with the Federal Trade Commission and Consumer Financial Protection Bureau, mostly related to customer service.
Former employees told CNBC the company’s customer service practices shifted over time, with representatives struggling to keep up with demand.
How The IRS Is Looking For Its Share Of Cryptocurrency And NFT Growth
But is the IRS really watching this? The short answer is yes. As early as 2016, the IRS utilized a “John Doe” summons to Coinbase, which is a secure online platform for buying, selling, transferring, and storing cryptocurrency. The summons requested transaction activity for Coinbase users from 2013 through 2015 who were US persons. Coinbase was required to provide user information who bought, sold, sent or received cryptocurrency of at least $20,000 in value in one year. Based off the information received, the IRS sent 10,000 compliance letters to taxpayers advising them of their failure to properly report cryptocurrency transactions.
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Author: H. A. Goodman