Our Clients Receive Individualized Attention And Advice

Crypto Uncertainties Mount: What Happens in a Bankruptcy?

by | Jul 13, 2022 | Bankruptcy, Bankruptcy, Debt, Cryptocurrency, Debt

By: Laura Day DelCotto

Now that the lights are coming on in financial markets, there is more chatter and mostly speculation about what would happen in a cryptocurrency corporate bankruptcy.

Recent reports on the Coinbase SEC 10-Q filed in May, 2022 have been in the press. While stating that Coinbase has no risk of filing a bankruptcy, Coinbase’s CEO Brian Armstrong noted on Twitter that Coinbase is now required to make disclosures in response to the SEC Accounting Bulletin (SAB) 121, which advises that holders of crypto assets must provide disclosures describing “legal ownership of the crypto-assets held for platform users, including whether they would be available to satisfy general creditor claims in the event of a bankruptcy….”

What Did Coinbase Say?

In its filing, Coinbase disclosed that the over $250 billion of cryptocurrencies that it holds “on behalf of its customers” could “potentially” be included in its bankruptcy estate if it were to file. Further, Coinbase disclosed that its “customers” could possibly be treated by the bankruptcy court as general unsecured creditors. HUH? This comes as a total shock to all of those “customers” who believe that they own their cryptocurrency which is merely stored in the Coinbase vaults.

How Likely is a Filing?

While stating that there is no current need or decision to file, Coinbase also mentioned that its cybersecurity insurance is less than possible losses in a hack, and that Coinbase has potential exposure for liabilities due to losses exceeding assets and insurance IF this were to happen. Now, everyone knows that blockchain is supposedly un-hackable, but that is a risk every crypto owner is taking.

What’s Next?

As a “customer,” it will be too late to get out if a bankruptcy is ever filed by the holder of the assets. As a speaker said at a recent conference I attended, if you don’t have your key, then you don’t control (or maybe even own) the asset. Coinbase and other platforms market on their ease of use in entering the market. Know that holding crypto on a platform with many other “customers” has risk beyond mere market fluctuation risk, and decide accordingly.

About DelCotto Law Group

DelCotto Law Group is Kentucky’s asset preservation and business restructuring law firm known for its commitment to the lifetime success of its clients. DLG serves Kentuckians with complicated financial matters, especially in the areas of bankruptcy and complex litigation. For more information please call (859) 231-5800, email [email protected] or reach us on our contact page.