Coinbase revealed for the first time Tuesday in its first quarter earnings report that if it was to go bankrupt funds held by the company may become property of the bankruptcy estate. Coinbase‘s stock is currently trading at $53.72 down from its high in November 2021 of $368.90. That’s a blood bath and if the bleeding continues bankruptcy is a possibility.
Currently, 11 USC Section 541 governs what is included in the company’s bankruptcy estate. This section encompasses a lot of property as the estate of the debtor filing bankruptcy, but in my opinion does not indicate that assets held on the exchange belonging and managed by another would be considered part of the property of the company holding such assets.
Now if the company was to file bankruptcy, these items may become part of the estate if there is no exception that fits excluding such items from being a part of the bankruptcy estate. It’s just that at the time the bankruptcy code was written and “property of the estate” was defined, cryptocurrencies didn’t exist so there is no definitive exception for crypto held on exchanges written into the code.
When you buy crypto on an exchange, you are charged a processing fee. My understanding is that no other fees are paid until transfer. If the company was to file bankruptcy, I think the only potential interest to the funds held would be the fee it could have charged the owners from withdrawal or transfer off the exchange. This right of Coinbase could turn the owner of the crypto into a creditor of Coinbase; therefore, the owner of the crypto would have to file a proof of claim with the bankruptcy estate to get its property back. This possible effect, along with the Company’s significant reduction in stock value, may be the reasons Coinbase finally disclosed the risk.
Hopefully, this will never happen, but if it does, it will be interesting to see how the powers to be decide the issue.
In the meantime, you might want to move your money off the exchange and into a self-custodial wallet or a cold storage wallet like ledger.
Coinbase has been in operation since June 20, 2012. And it has never disclosed in all those years that there was a risk of the funds being held on the exchange being property of the company’s bankruptcy if one was to occur. This would have been good information to disclose earlier, especially being that part of the lure and popularity of crypto is decentralization, transparency, and individual ownership of assets.
Coinbase currently holds around $256 billion in dollars and virtual coins.
In the disclosure on Tuesday, the Company reported that these assets “may be considered to be the property of a bankruptcy estate, in the event of a bankruptcy, the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings and such customers could be treated as our general unsecured creditors.” Generally unsecured creditors are the last to get paid and more likely never get paid from an insolvent bankrupt debtor-company. This means that the majority of this $256 billion in dollars and virtual coins belonging to the people would be lost.
Brian Armstrong, the CEO for Twitter, indicated that he thinks it highly unlikely that a bankruptcy court would consider these assets the Company’s assets, but that the “disclosure makes sense in that these legal protections have not been tested in court for crypto assets.” That is true Brian Armstrong—it has not been tested, but this disclosure should have came long before the blood bath of your stock on Wallstreet and the accumulation of $256 billion in people’s money.
Sounds like Coinbase needs to amend some internal operational provisions to better ensure its users that the risk of this possibility is minimal under this current version of the bankruptcy code.
ABOUT THE BLOGGER
La Shon Y. Fleming Bruce a/k/a SHONSPEAKS is a blogger, futurist, certified brain health specialist, speaker, and lead creator of freeyourthinkingmind.com. I am also a lawyer and managing member of The Fleming-Bruce Law Firm, P.L.L.C. If you want to check out more of my writings that may not be released on this site, go over to my website at freeyourthinkingmind.com
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