A precipitous plunge in Coinbase Global (COIN, $72.99) stock is suddenly more than just a concern to current shareholders. That’s because the cryptocurrency exchange operator just warned its users that, in the event of a bankruptcy, the company might just hold on to their digital assets.
Typically, the most important news to come out of a publicly traded company’s quarterly earnings report is … well, the earnings. Analysts, media and investors all flock to see how the company’s most recent sales, profits and other performance metrics stacked up, and when available, what the company projects it will do going forward.
But in Coinbase’s report, released Tuesday after the market close, the biggest news nugget was tucked away in a lesser-viewed section: “Risk factors.”
Public companies must regularly disclose extensive amounts of information related to their business to aid investors in understanding the full risks involved with their investments. And in their Q1 2022 filing, a new SEC requirement called SAB 121 obligated the company to detail responsibilities to safeguard crypto assets held for users on the trading platform. The disclosure stated that, in the event Coinbase ever declared bankruptcy, “the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings” and Coinbase users would become “general unsecured creditors”.
Coinbase CEO Brian Armstrong insists Coinbase isn’t at risk of bankruptcy.
“There is some noise about a disclosure we made in our 10Q today about how we hold crypto assets,” he tweeted. “Tl;dr: Your funds are safe at Coinbase, just as they’ve always been.”
But amid a weak quarterly performance and a recent collapse in crypto prices – not to mention shares that had crumpled by 25% late Wednesday and, as of late in the session, were down more than 85% from the company’s $381 initial public offering (IPO) price – Coinbase users wouldn’t be blamed for wondering what exactly this new risk factor means for them.
And for that matter, users of any platform that facilitates crypto trading might want to learn a little more about this situation.
What Happened?
Coinbase on Tuesday reported a pretty disappointing quarter on most fronts. First-quarter revenues were off 27% year-over-year to $1.17 billion, widely missing analysts’ expectations for $1.50 billion. Meanwhile, the company swung to a $430 million loss after earning $388 million in the year-ago period, and monthly users were down 19% YoY.
But investors were more drawn to an SEC disclosure related to what would happen to user cryptocurrency assets in the worst-case event of a future bankruptcy proceeding:
“Because 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 …….
