What Happens To A Client’s Crypto If A Platform Goes Bankrupt

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Concerns arose after Coinbase said customers could be considered unsecured creditors in bankruptcy proceedings.

The time of dreams

Coinbase Global

shocked some of his clients last week when he suggested that their cryptocurrencies could be lost if the company ever went bankrupt. The truth is that clients are likely exposed to this risk on most crypto trading platforms, experts say.

The problem is that unlike stock accounts where brokers are required to segregate client assets, some crypto trading platforms mix the funds of many clients, said Tyler Gellasch, who heads the Healthy Markets Association and worked previously at the Securities and Exchange Commission.

“I don’t think there is a reasonable way for a retail crypto consumer to have confidence that their broker or trading platform is keeping their assets out of bankruptcy unless they get a very accurate disclosure that they are,” Gellasch said.

Concerns arose after Coinbase (ticker: COIN) in its 10-Q included a new risk disclosure that said customers could be considered unsecured creditors in bankruptcy proceedings. That could mean they wouldn’t get their funds back until older creditors were paid, if at all.

Brian Armstrong, CEO of Coinbase mentioned on Twitter that the company was not at risk of bankruptcy and that the disclosure was a response to SEC rules. The disclosure came because the matter had not been tested in court and “it is possible, though unlikely, that a court could decide to treat customer assets as part of the business in a litigation proceeding. bankrupt,” Armstrong wrote.

Other crypto platforms contacted by Barrons were mostly silent on whether they thought their customers were at the same risk.

Spokespersons for FTX US and Gemini declined to comment. Spokespersons for Binance.US and Kraken did not respond to requests for comment.

A spokesperson for

Robinhood Markets

(ticker: HOOD) said the company told the SEC at the time of its initial public offering that it believed the crypto held on its platform was the property of a customer and should not become the property of Robinhood in the event of bankruptcy.

“This view has not been tested in court, so there is some risk that would apply to crypto held on any platform,” the spokesperson said.

This puts crypto accounts in stark contrast to what investors know from stockbrokers. For traditional securities, brokers are required to keep client assets separate so that in the event of bankruptcy, accounts can be easily transferred elsewhere. If a client’s stock has disappeared, due to fraud or theft, most stock accounts carry insurance that replaces securities up to a limit of $500,000.

Customers of Coinbase or other platforms can avoid having their funds tied up in possible bankruptcy by keeping their coins “off-platform” in self-custodial crypto wallets. In this arrangement, no one can access the crypto without having the wallet’s private key.

“At this time, there is no easy way for clients to determine the nature and extent of their exposure to the bankruptcy of a crypto trading platform,” said Cornell Law School professor Dan Awrey, who investigated the matter, in an email. “Clients should assume that a platform’s failure would expose them to significant recovery delays, at the end of which they could only recover pennies on the dollar.”

Email Joe Light at [email protected]

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