Coinbase was out with bad earnings, and the stock dropped. In their quarterly report, they included language as required by the SEC:
https://fortune.com/2022/05/11/coinbase-bankruptcy-crypto-assets-safe-private-key-earnings-stock/
Coinbase said in its earnings report Tuesday that it holds $256 billion in both fiat currencies and cryptocurrencies on behalf of its customers. Yet the exchange noted that in the event it ever declared bankruptcy, “the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings.” Coinbase users would become “general unsecured creditors,” meaning they have no right to claim any specific property from the exchange in proceedings.
Fortune goes on to say:
That shouldn’t happen.
An individual’s ownership of cryptocurrency is supposed to be immutable and absolute; that's one of the key selling points touted by blockchain evangelists everywhere. But when a user creates a Coinbase account, they often end up storing their cryptocurrency in a wallet controlled by Coinbase, which means the individual is giving away at least part of their control over their own funds.
Wrong. Full stop. The rest of your article is garbage.
Let's say it again for the cheap seats.
Rule #1: not your keys, not your crypto
When you put funds on an exchange, or stake in a contract, or do anything where crypto assets are no longer in your wallet - it is no longer your crypto. You are then relying on a third party to do something on your behalf.
Most of the time, that works fine.
Sometimes it doesn't.
If Coinbase were to suddenly go bankrupt you as a customer with funds on the exchange are last in line to claim any funds. Chances are there will be little to none left.
Be smart about where you hold your funds and for what purpose - and never forget Rule #1.
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Not the full story coinbase also custodies assets on behalf of funds and ETFs where people don't own the keys and have no idea what keys are they just know they own some bitcoin in their portfolio.
Same with people who own ETFs that have a piece of it in bitcoin.
As for bitcoin, yes it has the highest self custody rate compared to everything else, while shitcoins like ETH have low self custody rates due to the fees
Also a lot of people don't have the technical knowledge to do staking so they do it via exchanges like coinbase and binance
There's a lot more exposure to CEX"s and people are going to get Quadriga'd and Gox'd
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Those HNWs and institutions that custody with Coinbase (or Fidelity or whoever) all have the same risk. They are depositors and last-in-line creditors.
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Absolutely I agree, these funds don't know what's they getting into, many of them be left with egg on their faces, I mean it's really only coinbase, fidelity and Gemini doing custody and some are even sharing that between one another in a bit of a circle jerk with multi sig in the case of something lien GBTC
Even saylor doesn't custody his bitcoin! Sure they can have legal claims on that bitcoin but the law and getting back those coins are two different things
I don't know when or how but one if these big custody services are going to fuck up or might even have fucked it but are covering it up
I didn't know Saylor doesn't hold his own coins. That's surprising
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I read a quote that he does custody his btc and refuses to lend it out because the single digit gains aren't worth the complications and risks
I was helping a friend who made an absurd amount of money last year talk to financial advisors about crypto. They all said stuff like "yeah we custody with Fidelity."
I told my friend that defeats the entire point of crypto. Fortunately he's savvy enough to understand the point.
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Wow, that should be an eye opener.
I'd never thought of it like that. And under current market conditions.. "That should never happen"... is weak sauce.
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Totally weak sauce
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How could Coinbase go bankrupt despite having some of the highest fees in the industry which are almost a daylight robbery? How bad do they have to be with their finances! As for Fortune, I have seen dumber things published by these so called financial media.
!PIZZA
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They aren't in any financial trouble. They are just required to disclose that if they got in trouble, funds would be subject to creditors.
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Poor management and using the fees to pay exorbitant salaries come to mind!
A very plausible scenario. We have seen this with companies again and again. Coinbase still have some very good profit margins. I don't think we will see a bankruptcy anytime soon.
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These exchanges are all fine.....until they're not. And you will be the last to know.
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Facts
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I don’t leave much in there thankfully but I’m pulling all my stuff out tonight! Screw them!
Good to remind everyone of rule #1, but it's not normal that we got used to exchanges owning their users' coins directly. Other non-bank financial services don't work that way. For example, my crowdfunding investments are paid to an independent foundation, not to the operating company running the crowdfunding platform. This isolates users from the risk of a mismanaged operating company going broke or stealing the money.
IIRC what coinbase is doing is the same way stock brokers work, with the exception that there is a national insurance program for your stock account balances.
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Exactly. And mostly this is why people should not store their cryptocurrencies on exchanges. If an exchange go broke/bankrupt, then the users lost their funds. Whatever amount they stored on the exchange. And if someone hacks an exchange, then the hacker can steal the funds, and if the hacker do that, then the users also lose their cryptocurrencies, which were stored on the exchange.
Yep, and we've seen it happen many times.
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What an eye opener! I'm surely going to have rule number one in my head all the time, thanks for this.
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Not your keys, not your crypto indeed. It's dangerous to be in such a situation if Coinbase happens to go bankrupt.
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A real eye opener. I blinked twice
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It's like someone studying veterinary medicine saying they can perform open heart surgery successfully.
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That's the reason,I don't use any wallet I see, to avoid case of stealing.
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Thanks for the educative information this is going to be useful for me
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All the security we need is to not keep sizeable amounts on exchanges (other than temporary).
Absolutely. I only use Coinbase as on ramp/off ramp. All my trading occurs on-chain through defi.
The only reason to use centralized exchanges is if you don't know how to use a wallet or you want to gamble with other people's money (futures).
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