Another Problem for Coinbase. What Happens to Customer Assets in a Bankruptcy?

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As if crypto investors don’t have enough to worry about. This past week, a 10-Q from crypto exchange Coinbase Global,
which had missed earnings estimates, suggested that customers could lose their assets if the company went bankrupt. On Tuesday evening, Coinbase CEO Brian Armstrong tweeted a clarification. “We have no risk of bankruptcy,” he wrote, blaming the disclosure on a Securities and Exchange Commission rule, while noting that it wasn’t yet clear how a bankruptcy judge might treat custodied crypto assets. By Friday, Coinbase was down 34.6% on the week.

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In February, Georgetown University law professor Adam Levitin outlined crypto bankruptcy risks. “The big point here is, if you are a customer of a cryptocurrency exchange, you risk being a general unsecured creditor of the exchange if it should file for bankruptcy,” he wrote. “It doesn’t matter that the exchange’s contract with you says you ‘own’ the currency. That’s not determinative of what will happen in bankruptcy.”

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Customer funds aren’t normally treated that way. In a brokerage bankruptcy, assets are typically transferred to another brokerage. In fraud cases, when shares go missing, the Securities Investor Protection Corp. Provides up to $500,000 worth of protection, including a $250,000 limit for cash. When a bank fails, the Federal Deposit Insurance Corp. arranges a sale to a healthy bank, which might include insured deposits, or pays depositors up to $250,000.

Investors can avoid the uncertainty of a crypto failure by keeping coins off-platform in “self custody” crypto wallets. The investor retains the private key that allows access to the cryptocurrency. Of course, self custody has its own risks. If you lose the key, you might lose the crypto.

Next Week

Monday 5/16
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Take-Two Interactive Software reports quarterly results.

The Federal Reserve Bank of New York releases the Empire State Manufacturing Survey for May. Consensus estimate is for an 18.2 reading. After three readings close to or less than zero to begin the year, April saw a surge to 24.6, indicating growth in the region’s manufacturing activity.

Tuesday 5/17

Walmart reports first-quarter fiscal-2023 earnings. The retail giant’s shares are up 2% this year, one of only eight of the 30 DJIA members to be in the green, as investors have fled to the safety of energy, utilities, and consumer staples.

Home Depot,

Keysight Technologies,,
and Vodafone Group announce earnings.

Caterpillar and Moderna host investor days.

The National Association of Home Builders releases its Housing Market Index for May. Economists forecast a 75 reading, two points fewer than in April. The 77 figure in April was a seven-month low for the index, as 30-year fixed-mortgage rates have risen above 5% for the first time since 2011.

The Census Bureau reports retail sales data for April. Expectations are for it to be up 0.8%, month over month, while retail sales, excluding autos, are likely to have risen 0.4%. This compares with gains of 0.75% and 1.4%, respectively, in March.

Wednesday 5/18

analog devices,

Bath & Body Works,

Cisco Systems,

Target, and TJX Cos. release quarterly results.

Akamai Technologies,

and Thermo Fisher Scientific hold investor meetings.

The Census Bureau reports new residential construction data for April. Consensus estimate is for a seasonally adjusted annual rate of 1.76 million privately owned housing starts, slightly lower than the March figure.

Thursday 5/19

Applied Materials,

Palo Alto Networks,

Ross Stores,
and VFCorp
hold conference calls to discuss earnings.

The National Association of Realtors reports existing-home sales for April. Economists believe that they fell to a seasonally adjusted annual rate of 5.6 million from 5.77 million in March. It would be the third consecutive monthly decline if estimates prove correct.

The Conference Board reports its Leading Economic Index for April. Expectations are for a flat month-over-month reading of 119.6. The board currently projects 3% gross domestic product growth for 2022, despite fears of a hard landing precipitated by the expected interest-rate hikes from the Federal Reserve.

Friday 5/20

Deere reports results for its 2022 fiscal second quarter.

Write to Joe Light at [email protected]


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