Coinbase Warns Bankruptcy Could Wipe Out User Funds (fortune.com) 132
An anonymous reader shares a report: 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.
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.
How to trigger a bank run (Score:5, Insightful)
In one easy regulatory filing.
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Certainly made me move my coin out of their wallet...
Re:How to trigger a bank run (Score:4, Interesting)
The question is: How can an exchange lose $430 million?
Surely the house always wins. They make money on every single trade.
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Because this is not the house as in a casino. Yes they make money on every single trade. And we are talking about fees here in the range of 0.05% to 0.60% while it looks like they spend aprox $678M per year on salaries and it costs (in 2020 they had a revenue of $1bn with a net profit of $322M which was the first time they made an actual profit since 2017).
Looking at their report the trading volume was down 44% in 2022-Q1 vs 2021-Q4 and it's possible that the highly volatility of the crypto markets are hit
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Why does Coinbase need massive amounts of bandwidth and servers? A crypto exchange is basically a SQL database (they aren't mining). AWS should be more than enough to handle what is a glorified spreadsheet.
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They aren't mining (that would require them to have insane amounts of machines) but they have to manage orderbooks that are hundreds of thousands orders long for each crypto pair as well as sending out orders and trades over both their REST api and their websockets api to millions of people where there are probably millions of transactions per billable transaction (you can e.g connect to their websockets right now without an account and get free streaming data).
Just go here: https://pro.coinbase.com/trade. [coinbase.com]
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by being hacked, for example,
Comment removed (Score:5, Funny)
Blackmail? (Score:5, Interesting)
Sounds like blackmail to me. Keep pumping more and more money into us or we will hold our users hostage.
You mean no FDIC (Score:5, Insightful)
Don't worry (Score:2)
Don't worry. Enough crypto-bros have donated to politicians that I'm sure they'll get a taxpayer-funded bailout if necessary.
Re:You mean no FDIC (Score:5, Insightful)
This feels very much like those 19th century regional/local banks in the US. Taking USD deposits, issuing their own currency while they invest in other, riskier ventures like railroads, gold mines, etc. The customer thinks they have $1000 in the bank, but really they have nothing but promissory notes from a not-very-trust-worthy set of characters. These went kaboom fairly regularly, and there were mini-recessions, and depressions throughout the post-Civil War period.
History coming alive again. Fun.
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I'm safe - all my money goes directly to the Company Store!
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Brings new meaning to hiding your cash under the mattress [thecompanystore.com]
Re: You mean no FDIC (Score:2)
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Ah, but the whole point of cryptocurrency is to be the wild west with no regulations, no governments, no laws. But it's just not viable to work that way, you can't meet everyone in person with a neutral computer to do a transaction these days and settle any disputes using whatever small arms you bring with you. Thus the cryptocurrency exchanges popped up, and once they did now there's a fundamental need for laws, which means regulations. To discard the dark net vestiges and try to prove they're a real gro
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I mean, first of all if you are not holding coinbased created crypto like USDC you should use an offline wallet. Than the risk of coinbase taking your money is only the few minutes when you transfer it there to cash out.
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Regulation?!
The DeFi industry operates because of no regulation. That's what "DeFi" stands for - Deregulated Finance.
Regulations goes contrary to the whole "raison d'etre" for cryptocurrencies, NFTs and other things.
If people w
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Because they aren't segregated. From their user agreement (https://www.coinbase.com/legal/user_agreement/united_states#hosted-wallet-and-custodial-services)
2.6.3. Digital Assets Not Segregated. In order to more securely custody assets, Coinbase may use shared blockchain addresses, controlled by Coinbase, to hold Supported Digital Assets held on behalf of customers and/or held on behalf of Coinbase. Although we maintain separate ledgers for User accounts and Coinbase accounts held by Coinbase for its own be
Re:You mean no FDIC (Score:5, Insightful)
We keep being told that cryptocurrencies are safer than regular currencies because of the blockchain. Transactions can be audited and proven whenever desired.
And yet, we have heard so many stories about crypto currency theft, perpetuated by various means, and now this.
I'm just not buying it. Crypto is a high risk and purely speculative investment, with too few controls in place. Not for me.
Re:You mean no FDIC (Score:4, Insightful)
All of the resiliency and security of crypto blockchains relies on the fact that you hold the wallet. The moment you hand the money over to someone else to "manage" for you, it's not really yours.
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It's a simulation of gold, which proponents like to call "real money". I've been saying for years that the problem with real money is that when you lose it, it's really gone. No FDIC, no canceling the check, no charge-backs on your credit card. Gone.
Crypto just simulates gold and all its problems. Deposited your gold coins in a shady bank? It goes belly-up? It's gone.
Hard drive full of BTC forgotten, buried in a land fill? Gone.
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Crypto is a high risk and purely speculative investment, with too few controls in place.
This is the problem with Crypto. It's advertised as a decentralized currency, free from government oversight. By definition, a currency must be fairly stable in value to be a currency ie a medium of exchange, and crypto is not stable and therefore it's not useful as a currency. It's oxymoronic that people buy it to speculate on it's future when in fact for it to be successful in it's intended role it can't be speculative.
Cryptocurrency is the biggest game of musical chairs. Except there will be quite
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Because this is not directly cryptocurrency. This is a cryptocurrency exchange. Ie, iwht the original bitcoin you would take your wallet (on a hard drive, or possibly a thumb drive once those were more common) meet another person who also had a wallet, and you performed a computation on a computer to update the block chains. It's kind of risky, but mostly it's incredibly inconvenient.
So instead you give your bitcoins to an exchange. Then you've mostly got a virtual wallet, probably just a lot of account
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It's like if it were gold and you demanded that the teller hand over your 10.0137 ounces by slicing it off of a gold bar...
...But it turns out they sent all of the gold to a Nigerian prince. For some reason he hasn't been reachable since...
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I keep getting told that people far richer than I are into cryptocurrencies. However, the endpoint security and landmines of scams/compromise is vast. We hear about wallets drained almost on a daily basis.
We have safes designed and required by insurance for cash holding. Europe has many grades for safes. The US has TL-15/TL-30/TL60x6, etc. However, people who store 7-8 digits of cryptocurrency are using cellphones for their wallet... devices which are not rated for any security whatsoever.
At best, you
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Who keeps telling you that?
I have read this many times from posters right here on slashdot.
Hopefully you're new here (Score:3, Funny)
Who keeps telling you that?
I have read this many times from posters right here on slashdot.
stop that
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Not safer, just more transparent.
For me Coinbase is only ever a gateway (Score:2, Redundant)
Stuff like this is why for any exchange (not just Coinbase) I keep crypto in private wallets only controlled by me...
I don't have any currently, but whenever I do buy crypto I transfer it pretty much immediately to some other wallet.
Since Coinbase makes all its money on fees I don't think this will hurt them as a company, but hopefully it's a wakeup call to anyone storing a lot of crypto in Coinbase.
How can they lose money (Score:5, Interesting)
OK, dumb question time: how can an exchange lose that kind of money? I mean, they take a cut if every transaction, and their only expense is running their platform.
Unless...are they speculating themselves? And not in a separate business unit? That would seem stupid, but banks do it all the time, so I suppose a crypto exchange might also.
Re:How can they lose money (Score:5, Informative)
They don't do 'transactions' between wallets. If you have a 'wallet' with Coinbase, you don't have one.
You just have a part of a wallet that's owned by Coinbase. If Coinbase goes poof, so does that wallet, and your 'share' of that wallet.
The reason for this is so that Coinbase can facilitate 'transfers' that aren't transfers because they never actually leave Coinbase's wallet.
Re:How can they lose money (Score:4, Interesting)
The reason for this is so that Coinbase can facilitate 'transfers' that aren't transfers because they never actually leave Coinbase's wallet.
Also because the trading volume on an exchange would bog down your typical blockchain. Transaction fees would be nuts all the time.
The downside to doing everything off the blockchain, is that everything only exists in the exchange's ledger, and there's that whole centralization thing that cryptocurrency was ostensibly designed to avoid.
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This sounds like the perfect infrastructure for a Ponzi Scheme.
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The numbers are right there in the report:
Total Revenue: $1,166,436M
Transaction expense: $277,826M
Technology and development: $570,664M
Sales and marketing: $200,204M
General and administrative: $413,578
Other operating expense, net: $258,627M
Total operating expenses: $1,720,899M
So in 2022-Q1 they made $1.2bn but had expenses of $1.7bn
Hollywood Accounting? (Score:1)
If it's in your best interest to show a loss instead of a profit, an accountant can always make that happen.
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"That kind of money" isn't that much money. Bankruptcy doesn't mean "no money left", it means "not enough money left". Remember, $256B in deposits doesn't mean they have $256B of wiggle room before they go bankrupt, because it's matched by $256B of liability to their users. In addition to those holdings, they have outstanding bank loans, bond issues, etc. -- for much less money than $256B -- and if they become unable to pay *those* back with cash on hand, bankruptcy is the process by which they get to dip
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The summary of the article says that they lost $430 million dollars this last quarter. That's not assets they control, that's money that they have somehow managed to flush down the toilet. They should be making a commission on every sale. Heck, they should be able to get some interest from the assets that they are holding. They should be swimming in money, Scrooge McDuck style. Instead, somehow they managed to lose $430 million dollars in a single quarter. Looking at their quarterly report it looks as
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They could run out of money in the same way any business that otherwise should be profitable runs out of money: poor management.
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They spent (an estimated) $12 million on a Super Bowl ad that also had a $3 million giveaway [coinbase.com].
Their May Giveaway [coinbase.com] doled out $1 million. Their April Giveaway (same link) doled out $500k. March "Trading" Giveaway doled out $500k. March "New User" Giveaway doled out $500k.
The better question is probably: Given past/current business practices, how could they ever *not* lose money?
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OK, dumb question time: how can an exchange lose that kind of money? I mean, they take a cut if every transaction, and their only expense is running their platform.
FWIW, they seem to have pretty large payroll expenses. At least, I know they're recruiting aggressively and offering enormous salaries (they've been emailing me monthly, even though every time they do I tell them I think that cryptocurrencies actively harm humanity and I won't be part of it; I'd feel better about building arms), and I know several people who've left FAANG jobs to go to Coinbase.
I'm not sure what all of those people are doing. Maybe not much.
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how can an exchange lose that kind of money?
When it's an unregulated exchange operating outside of the normal financial system somehow it seems possible.
DeFi is going to die a quick death, a few visible failures, and some regulatory pressure and it'll disappear along with all those intangible funds
people have so lovingly invested in it.
That goes without saying that all major currencies in the world are worthless fiat but that's another discussion.
Fat salaries for the board, perks for the workers (Score:2)
who do you think is paying for the fat salaries of the board members and the caffe latte that employees are sipping on all day?
Spending money in a startup is the easiest part of the venture.
Funds? What funds? (Score:4, Insightful)
There's no funds here. Only imaginary cryptoasset value perceived by its users.
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Red flags everywhere (Score:5, Informative)
Even the largest exchange is saying that you will lose al your money in cryptocoins. There are so many red flags that it's a matter of when, not if.
Together with the 98% value lost [slashdot.org] from certain so-called "stablecoin" (Terra, but it can trigger a chain effect), the significant drop of Bitcoin and Ethereum [slashdot.org] (50% off in the last 6 months), and the fact that this could trigger a margin call in significant players [businessinsider.com], it seems that we have interesting times coming.
Get your popcorn. And sell your crypto ASAP.
Short MSTR, COIN, and all crypto related stocks (Score:2)
Rediscovering The Regulatory State (Score:5, Informative)
Libertarians keep rediscovering the reasons for every aspect of the regulatory state one scam at a time. You'd think it would just be easier to learn from the past. But you'd need to not be a moron for that to work. So, that rules out Libertarians.
Can't miss a chance for a cheap shot, can we? (Score:5, Informative)
Libertarians who were pro-crypto from day 1 were talking about people managing their OWN wallets. All of these exchanges like Coinbase that popped up are part of the PROBLEM of having a centrally controlled currency, really. (EG. Instead of people happily spending the crypto-currency among themselves, they feel the need to convert it to US dollars or other state-backed currencies first. And these middle men effectively destroy most of the advantages crypto had to begin with.)
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That's the rub though isn't it? Asking everyone to manage their own wallets in the "correct" manner is going to leave crypto as a niche tech and likely it won't attain any critical mass outside the speculative trades and payments for illicit goods.
A good portion of the rise of crypto over the last few years can probably be attributed to the user friendly tools and exchanges like CoinBase, MetaMask, OpenSea etc that have sprung up to make the idea accessible.
Crypto being a currency to compete with USD as li
re: That's the rub (Score:2)
Agreed.... but that's why I always tell people crypto like Bitcoin is really a "version 1.0" creation.
It *is* too complicated for the average person to work with directly, and too slow with transaction processing to work optimally for small transactions.
I don't see any of that as a damning of the concept though? It just speaks to a need to improve the implementation. And all of these work-arounds of crypto exchanges are just postponing that happening.
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I agree it doesn't really damn the concept but can you improve the implementation without involving these centralized exchanges and corporate control of them? Especially when we are talking about operating crypto as an actual currency and not an asset which it has shown to have almost no practical ability at. Bitcoin, Eth, and every other crypto is an asset, none of them, not even the stable coins meet the needs of a practical currency.
They're going to have to solve that and solve it fast otherwise the dig
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This is always how crypto was going to play out. This is always how crypto was supposed to play out. That's clear by the simple fact that all crypto is designed to be inherently deflationary. It means that the people who got in earliest would always be the ones in control of the wealth. It encourages hoarding and discourages actually using it for transactions.
Consider the inverse. You could have designed a cryptocoin to be inherently inflationary based on the trading volume. Instead of coins being burned,
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Yes, but first off? Why does it have to play out this way perpetually? Your suggestion to change crypto to be inherently inflationary would be easy to implement any time someone wanted to create a new e-currency with those properties.
I feel like at the time this was first created, you simply had the creators concerned that early adopters should be guaranteed some sort of financial reward for taking chances on it. The unfortunate long-term outcome, though, is what you've cited; motivation to mine coins with
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Yes, but first off? Why does it have to play out this way perpetually? Your suggestion to change crypto to be inherently inflationary would be easy to implement any time someone wanted to create a new e-currency with those properties.
Yes, at any point someone could mint a coin like that. But it's never happened once because literally all cryptocoins are scams. Which was my premise.
I feel like at the time this was first created, you simply had the creators concerned that early adopters should be guaranteed some sort of financial reward for taking chances on it. The unfortunate long-term outcome, though, is what you've cited; motivation to mine coins with hugely energy inefficient farms of proprietary hardware that rapidly gets outdated and discarded, and people more interested in trading it on the market like a stock.
What you're describing is a scam. That's what a scam does. The early adopters of Ponzi schemes or pyramid schemes usually make money. Everyone else after is just a mark. Meaning roughly everyone who invested in crypto after ~2012 has been there just to get fleeced. Which is the point of cryptocurrency.
Massive mining rigs don't make sense under a inflationary
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Oh, so you just need literally everybody to all of a sudden have a wallet, with coins in it, and know how to exchange them with each other on literally every financial system in the world in order to not have this problem.
Nope, no barriers to success in that model!
re: barriers to success (Score:2)
It sounds like you're still stuck in the mindset that the current crypto implementation is the only way it could ever be done?
It's actually quite easy to imagine a world where everyone has some sort of digital wallet or device that they know how to use to directly exchange funds with other users. We're not THAT far from being able to ditch the concept of carrying a physical wallet around in our pockets, as it is. What's actually in one anymore that can't go digital? States are currently moving towards a di
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Clearly my comments hit a little too close for you. I'm going to assume that means you're a Libertarian. So, I'm going to explain this next part like I would to my three year old niece.
The fact that centralized exchanges grew up organically (sorry, big word) on their own and people put their money into them without being forced to means that centralized exchanges are very useful and people like them. People like them because they make using money easy. But sometimes these exchanges will do bad things and
So the grandparents point still stands (Score:2)
The exchanges along with the mining pools represent that natural consolidation. Exchanges aren't just about convenience they solve a wide variety of technical problems that come with using cryptocurrency to make purchases.
Re: Rediscovering The Regulatory State (Score:2)
... and financial risk. Counterparty risk is very real and you should always check what happens if your bank/exchange/intermediary goes bust (think Lehman). It's also one of the reasons you should never short crypto via a crypto dependent issuer (like an exchange). If there is a crash, the issuer might go bust and you won't get any money anyway.
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Libertarians keep rediscovering the reasons for every aspect of the regulatory state one scam at a time. You'd think it would just be easier to learn from the past. But you'd need to not be a moron for that to work. So, that rules out Libertarians.
FWIW, I'm libertarian, and I think cryptocurrency is one of the worse ideas ever, and that fiat currency created by fractional reserve lending is one of the cleverest, most powerful and most beneficial things humanity has invented. Some of us -- many of us -- have brains and use them. We're just not the loud ones.
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The whole reason for the regulations are to prevent scams from paying off. If someone invents a new way to skirt regulations, it means they're trying to run a scam. Take credit default swaps as an example. They're just securities insurance by another name and with extra steps. They have those extra steps and another name so they aren't bound by financial regulations on securities insurance. Which means they are obviously a scam. And sure enough, they were a scam.
Banks (Score:2)
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thats what you get (Score:2)
for storing coins on an exchange wallet. not like gox taught anyone anything
meh (Score:2)
Seems VERY unlikely. Bankruptcy courts can't reach assets belong to others held by bankrupt entities.
Re:meh (Score:5, Informative)
They absolutely can. And always do, because *every* bankruptcy involves "assets belonging to others"; if none of your assets belong to other people, you're not in debt, and can't go bankrupt. The distinction is between "secured" and "unsecured" debt. "Secured" in this context means "you get paid first". Coinbase's outstanding debts -- the loans they took out to have enough money to operate -- will be secured debts. Customers' holdings will be unsecured debts. A bankruptcy court will definitely try their darnedest to settle debts without dipping into customer accounts; but if they can't, well, those customers chose to advance unsecured credit to Coinbase, and that comes with risk.
Re:meh (Score:4, Interesting)
The secured vs unsecured debt analysis only applies once you get to the bankrupt applicant's property. If it's not their property, the bankruptcy court can't reach it. . And nobody thinks of themselves as giving Coinbase a loan, they think of coinbase holding their assets.
The Supreme Court said it best in Pearlman v. Reliance:
"The Bankruptcy Act simply does not authorize a trustee to distribute other people's property among a bankrupt's creditors."
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Fly by dereg, fall by dereg (Score:1)
Regular banks used to have the same risk until they were required to have FDIC Insurance.
Not your keys, not your crypto (Score:2)
This has been standard advice since bitcoin was invented. Nothing has changed. Coinbase is fine to purchase crypto, just move it to your own wallet where you control the keys. It's not that hard.
LOL! Right now I'm so much enjoying how ... (Score:4, Interesting)
... these bulletins on cryptocurrency market disasters look like something straight from Neal Stephensons "Snow Crash" Cyberpunk novel. 8-)
Back in the day when the bitcoin craze started it was abundantly clear to me that if one would get into this sort of digital currency one would have to take care of ones own safety and disaster recovery, just like with any other professionally managed mission-critical software & data project. Which is why I never really got around to being involved. I might at some point in the future, but not as long as I can't handle an entire crypto-wallet and it's transactions on a rasberry pi that I own and completely control.
How anyone could let a commercial service be the single point of failure for any mission-critical data, let alone crypto currency, is totally beyond me. Especially with the whole point of crypto currency being that is is actually quite easy to secure it and move it around and you do not need a bank ... or something basically resembling a bank.
It appears that some people fundamentally don't 'get' crypto-currency.
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It appears that some people fundamentally don't 'get' crypto-currency.
Honestly, I think it is you that doesn't get crypto-currency. It is a successful get-rich quick scheme for a small number, a questionable and maybe failed, get-rich scheme for many and a multi-million dollar scam opportunity for a tiny number. The whole decentralized, autonomous, mathematical stuff is just the marketing for the investment / ponzi / scam.
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Thank you (Score:2)
I needed this story of comedy. It keeps getting better and better.
daily reminder (Score:2)
If you hold on an exchange, it isn't really yours.
How is this, in any way, suirprising? (Score:2)
And perhaps more concerning to me is why are they announcing it?
There's an implication that they know something bad is coming
Coinbase is not an exchange then. (Score:2)
Coinbase is like if the Nasdaq or NYSE held all the stocks that they exchange. That business model sounds like it is at high risk of ending badly for clients.
Here YOUR assets are deposited into Coinbase and they just shuffle the numbers around in their databa
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Unless you take physical possession of stock certificates, stock trading works basically the same way - your stocks are held on deposit with your broker and your only protection if they go bankrupt is through the Securities Investor Protection Corporation, or SIPC.
It is also worth noting that your broker doesn't generally have possession of stock certificates either, since the early 1970s they have generally been held on deposit with the Depository Trust Company and cleared through a related institution.
htt [wikipedia.org]
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can this happen with etrade? (Score:2)
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I get that there is one coinbase wallet that holds all the funds. I don't get how its that much different from something like an etrade, or any custodial account. are all these things subject to the same whims?
Brokerage accounts (like etrade) are insured by the SIPC. The SIPC insures any cash you have in your brokerage account up to $250,000 (like the FDIC does for bank accounts). The SIPC also insures any securities your brokerage is holding for you up to $500,000.
Coinbase also has SIPC insurance. That would protect any "real currency" (USD, Euros, etc) they are holding for you, but it doesn't protect crypto-currency they are holding for you.
Being your own bank sounds like fun (Score:5, Insightful)
The purported purpose of crypto (at least originally) was to create a way to conduct financial transactions without corrupt middlemen. One of the many phrases bounced around was "Be Your Own Bank".
It turns out that's hard, so people turn to exchanges like Coinbase, that aren't banks, to act like banks for them.
Did people think their funds were FDIC insured or something?
Only for buying/selling (Score:2)
I only use coinbase for buying bitcoin to spend - it's immediately transferred to my own wallet...never trusted exchanges, especially after mt gox...
Too Big to Fail 2.0 (Score:2)
Oh No (Score:2)
Anyway...
From a SuperBowl Commercial to the Frying Pan (Score:2)
Calm Down (Score:2)
This is just a standard "safe harbor" disclaimer, where the company lists every conceivable risk no matter how small the likelihood of occurrence. These are legally required in SEC filings. And anyone who thinks this represents the biggest risk of investing in cryptocurrencies, is out of their mind.