Coinbase’s disturbing disclosure: 'If we go bankrupt …'

Coinbase caused a stir with a regulatory filing that contained a troubling message: Users could lose their crypto assets if the company goes bankrupt.

In a filing with the SEC, Coinbase said that “in the event of a bankruptcy” the crypto assets that the company holds in custody for its customers “could be subject to bankruptcy proceedings and such customers could be treated as our general unsecured creditors.”

The mention of “bankruptcy” quickly triggered chatter about the state of Coinbase after it posted dismal results Tuesday that sent its stock tumbling. Coinbase shares were down another 27% on Wednesday, and 85% from their November peak.

“There is some noise about a disclosure we made in our 10-Q today about how we hold crypto assets,” CEO Brian Armstrong said in a tweet. “Your funds are safe at Coinbase, just as they’ve always been. … We have no risk of bankruptcy.”

He said the company added the risk factor in connection with a new SEC accounting bulletin issued this year that advised companies holding cryptocurrencies on behalf of customers to record those assets as a liability on their balance sheets. They must also disclose potential risks to investors.

Coinbase said it held $256 billion in fiat currency and cryptocurrencies on behalf of customers as of March 31.

Alex Johnson, author of the Fintech Takes newsletter, said the timing of the disclosure was not ideal. “There’s something jarring about the company disclosing the risk and saying the quiet part out loud, especially given the turbulence in the crypto market right now,” he told Protocol.

In his Twitter thread, Armstrong also said the company is also updating its user terms for retail customers to clarify that “we offer the same protections ... in a black swan event” as those enjoyed by Prime and Custody customers.

Armstrong said the company should have made those disclosures sooner: “My deepest apologies, and a good learning moment for us as we make future changes."

Johnson called it a “bizarre” lapse. “I don't understand how they possibly could have forgotten to do that, but apparently they did,” he said.