in case of bankruptcy, the funds of its users are at risk

Key facts:
  • The statement stems from a request from the Securities and Exchange Commission (SEC).

  • Brian Armstrong, CEO of Coinbase, dismisses the possibility of a bankruptcy.

A recent statement by Coinbase has set off alarms in the bitcoiner community: in the event of a hypothetical bankruptcy of the United States-based company, the cryptocurrencies deposited in its reserves by exchange clients could be at risk.

SpecificallyUser Cryptocurrencies Could Be “Subject to Bankruptcy Proceedings” and such clients be considered as “general unsecured creditors”. That is, the funds could be used as company assets to meet its obligations.

The statement comes from the company’s most recent quarterly report. Although it corresponds to the first period of this year, the document was published this Tuesday, May 10. In that text, the company exposes the hypothetical scenario as part of its risks.

In cases of bankruptcy, the authorities intervene the company to resolve its debt obligations. And in case of going to trial, the court could determine the use of those funds deposited by the clients as part of the assets available for the fulfillment of the company’s debts, such as explained the CEO of the company, Brian Armstrong.

This does not mean that the funds will necessarily be used yes or yes for the discharge of debts of the company, before a hypothetical declaration of bankruptcy. But, without a doubt, it confirms that the risk exists.

Tax specialists such as the Spanish Cris Carrascosa stressed that just a court could determine the payment of company obligations with funds deposited by customers, although that does not eliminate the danger entirely.

The text sent by Coinbase to the United States Securities and Exchange Commission highlights that the mere existence of this risk can negatively impact your ability to grow the company’s customer base.

This may result in clients viewing our custody services as riskier and less attractive and any failure to increase our client base, interruption or reduction in the use of our platform and products by existing clients as a result could affect negatively our business, operating results and finances.


Brian Armstrong: Coinbase is not at risk of bankruptcy

Armstrong clarified that the inclusion of this warning in his report responds to an express request from the SEC. In this regard, he ruled out that the company was at risk of bankruptcy. “Your funds are safe on Coinbase, as they always have been,” he added in a tweet thread Tuesday night.

As a consequence of the inclusion of this warning in its reports before the SEC, there were many questions on social networks about the security of the funds deposited in Coinbase.

Many people questioned those deposits and they emphasized the bitcoiner motto of “not your keys, not your coins”. One of them is the Spanish lawyer José Antonio Bravo, who highlighted via Twitter that money deposited on an exchange is out of the user’s control.

On the other hand, Carrascosa responded to the doubt of a tweeter about the consideration of cryptocurrency deposits as company assets: that, in any case, depends on the bankruptcy regulations in the United States. And in last instance“we will have to wait to see what a judge says if in some remote case Coinbase goes bankrupt”.

Armstrong himself assured in his tweets that if the risk was too heavy for their users, they could choose to store their funds in self-custodial wallets. That is one of the maxims of what Bitcoin and, in extension, cryptocurrencies represent: individual responsibility and control over one’s own money.

Coins on exchanges are effectively under the control of those companies. There are several examples. Perhaps the most outstanding is that of Binance, which has blocked the funds of many users in countries such as Colombia and more recently in Venezuela, as we reviewed in CriptoNoticias.

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