Coinbase spooked customers with an admission that their crypto holdings could be at risk if the company goes bankrupt – a warning that surfaced alongside a dismal earnings report that crushed the cryptocurrency hub’s stock on Wednesday.
Shares plunged more than 27% Wednesday after Coinbase detailed the risk for the first time in an SEC filing – prompting a panicked response that led the company’s boss to address the situation on Twitter.
“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 custody on behalf of our customers could be subject to bankruptcy proceedings and such customers could be treated as our general unsecured creditors,” the filing said.
As “unsecured creditors,” Coinbase customers would be left without recourse to recover their cryptocurrency or equivalent cash balances if the company went bankrupt.
CoiCoinbase said it held $256 billion in traditional currencies and cryptocurrencies on behalf of its customers through the end of March.
Armstrong downplayed concerns about Coinbase’s disclosure in a series of tweets Tuesday, telling customers that their “funds are safe” despite the warning.
“We have no risk of bankruptcy, however 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,” Armstrong said.
Last month, the SEC issued new guidance instructing crypto platforms such as Coinbase to begin including customers’ crypto holdings as assets and liabilities on the company’s balance sheet.
In the past, crypto platforms would leave customer assets off their reports, mirroring the practice followed by publicly traded brokerages. The SEC said the updated guidance was necessary due to legal “uncertainties” in the mostly unregulated crypto sector.
Meanwhile, Coinbase’s first-quarter revenue fell far short of Wall Street’s expectations. The firm posted a loss of $430 million during the period and noted a decline in trading volume.
The plunge in Coinbase’s share price occurred alongside a steep drop in the value of bitcoin and other leading cryptocurrencies.
The price of bitcoin sank more than 3% to $29,978.70 as of 2:25 p.m. ET. The latest downturn marked the first time bitcoin has fallen below the $30,000 threshold since July 2021.
Ether was down more than 7% to $2,203.64. Solana was also down more than 25% to $52.25.