Hidden away in Coinbase Global’s disappointing first-quarter earnings report—in which the U.S.’s largest cryptocurrency exchange reported a quarterly loss of $430 million and a 19% drop in monthly users—is an update on the risks of using Coinbase’s service that may come as a surprise to its millions of users.
In the event the crypto exchange goes bankrupt, Coinbase says, its users might lose all the cryptocurrency stored in their accounts too.
Coinbase said in its earnings report Tuesday that it holds $256 billion in both fiat currencies and cryptocurrencies on behalf of its customers. Yet the exchange noted that in the event it ever declared bankruptcy, “the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings.” Coinbase users would become “general unsecured creditors,” meaning they have no right to claim any specific property from the exchange in proceedings. Their funds would become inaccessible.
That shouldn’t happen.
An individual’s ownership of cryptocurrency is supposed to be immutable and absolute; that’s one of the key selling points touted by blockchain evangelists everywhere. But when a user creates a Coinbase account, they often end up storing their cryptocurrency in a wallet controlled by Coinbase, which means the individual is giving away at least part of their control over their own funds.
Access to a crypto wallet is governed by a private key, which is a long string of characters that effectively acts as a password. Without the key, the cryptocurrency in the wallet can’t be accessed. On Coinbase, the exchange holds the private key and lets users access the funds within the wallet using a more conventional password. The setup makes it easier for users to enter their accounts, by remembering an easier password.
Yet it means that when push comes to shove, Coinbase ultimately governs whether a user gets access to those assets.