Crypto exchange Coinbase has warned its customers that they may lose their investments in crypto if the company becomes bankrupt.
"Custodially held crypto 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," the Nasdaq-listed crypto exchange warned in an exchange filing.
This, according to the crypto exchange, may result in customers finding the company's custodial services more risky and less attractive. "Any failure to increase our customer base, discontinuation or reduction in use of our platform and products by existing customers as a result could adversely impact our business, operating results, and financial condition," Coinbase says in its SEC filing.
Unlike the stock market where stocks are held in a demat with a depository and have no broker risk, crypto with exchanges carry a risk, cautions Nithin Kamath, the founder and chief executive of India's largest online brokerage Zerodha. Indian crypto investors on exchanges also need to be aware of this, he adds.
Coinbase co-founder and CEO Brian Armstrong, however, assured customers that the company has no risk of bankruptcy. "We included a new risk factor based on an SEC requirement called SAB 121, which is a newly required disclosure for public companies that hold crypto assets for third parties," says Armstrong.
"We believe our Prime and Custody customers have strong legal protections in their terms of service that protects their assets, even in a black swan event like this," Armstrong points out in a Twitter thread. "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."
Earlier this week, Coinbase disabled Unified Payments Interface (UPI) payments after "informal pressure" from the Reserve Bank of India.
Coinbase, which launched its services in India on April 7, had said it would allow payments through UPI on its platform. On the same day, the National Payments Corporation of India (NPCI) issued a statement stating it’s not aware of any crypto exchange using UPI.
Coinbase reported $1.17 billion in revenue during the first quarter of 2022, recording a 27% drop on YoY basis. The company's net quarterly loss stood at $430 million.