Coinbase admits users may lose crypto if exchange goes bankrupt

There is an update on the risks hidden in the disappointing first-quarter earnings report of the U.S.'s largest coin exchange.

If the exchange goes bankrupt, users of the exchange could lose all their money.

In its earnings report Tuesday, the company said that it holds $256 billion in both cryptocurrencies and fiat currency. The exchange noted that in the event that it ever declared bankruptcy, the assets it holds in custody for its customers could be subject to proceedings. Their funds wouldn't be accessible.

That shouldn't happen.

One of the key selling points of the industry is that an individual's ownership of cryptocurrencies is guaranteed to be absolute. A person giving away at least part of their control over their own funds is what happens when a user creates a Coinbase account.

A long string of characters called a private key is used to control access to a wallet. Without the key, the wallet can't be accessed. Users can access the funds within the wallet using a more conventional password on the exchange. It is easier for users to remember an easier password with the setup.

It means that when push comes to shove, Coinbase decides whether a user gets access to those assets.

The disclosure was made due to new rules set by the Securities and Exchange Commission regarding public companies that hold.

It is possible that a court would consider customer assets as part of the company in bankruptcy proceedings even if it harmed consumers, despite the fact that these legal protections have not been tested in court for the specific case of cryptocurrencies.

In which users know their private key, and a Coinbase wallet, is not required to trade on Coinbase.

Deposit insurance is offered by the Federal Deposit Insurance Corporation. Depositors up to $250,000 are protected by the FDIC in the event of a bank failure. The main reason why investors should hold their coins in a personal wallet is because the exchanges don't offer the same protection.

After the exchange released its earnings, the stock price of the exchange fell to 80% below its initial public offering price. In the first quarter of this year, the trading volume on the Coinbase exchange declined from $547 billion to $309 billion, as a result of a declining user base and lower than expected revenue. In the current quarter, trading volume is likely to decline further.