Coinbase Chief Legal Officer Paul Grewal has blown up on the company’s latest 10q that contains worrying language concerning the management of clients’ funds in the event of bankruptcy. Grewal said that Coinbase has very little chance of bankruptcy, and explained how users’ funds are currently kept safe.
Are clients’ funds safe?
In a statement on Wednesday, the CLO clarified that client funds and corporate assets are kept separate within Coinbase’s internally audited ledger. Therefore, there is no question about whose fiat currency – or cryptocurrency – belongs to whom.
In addition, the Exchange does not engage in lending or other activities with the assets of customers unless explicitly permitted to do so. In a 10q report released in May, Coinbase claimed that clients’ crypto assets were not protected by FDIC insurance.
In traditional finance, it is common for banks to use money deposited by their customers to issue loans. This means that only a fraction of the total deposit is available for withdrawal at any given time, posing a risk to the customers if the bank is running.
“Coinbase has always held customer assets 1:1,” Grewal said. “This means funds are available to our customers 24 hours a day, 7 days a week, 365 days a year.”
bankruptcy black swan
The legal officer’s final point addressed the company’s retail user agreement. The agreement has been updated to clearly establish that the assets of retail clients are protected under UCC Article 8 in the same way as institutional clients.
This is in contrast to a preliminary report’s claim that custodial crypto assets may be subject to “bankruptcy proceedings”, and may be considered the property of a bankruptcy estate. “Such customers may be treated as our ordinary unsecured creditors,” it read.
Grewal claimed that the amendment is not a change in the company’s effective treatment of digital assets. “We believe that the digital assets in our custody have always been Article 8 financial assets,” he said.
Coinbase CEO Brian Armstrong issued an apology for the language of the report shortly after its release. He explained that the disclosure made sense at the time, as such legal protections are yet to be tested in court for crypto assets.
“We should have updated our retail terms sooner, and we didn’t actively communicate when this risk disclosure was added,” the CEO said.
Coinbase stock has seen a massive drop in recent months, coinciding with the cryptocurrency market. A spokesperson for the company recently revealed that four top executives have sold a combined more than $1 billion worth of COIN stock since going public — of which Brian Armstrong was one.
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