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> ... with Coinbase it is the investors funds at risk, not the customers funds Oh boy are you in for a surprise: "In its quarterly report, Coinbase added a ri

> ... with Coinbase it is the investors funds at risk, not the customers funds Oh boy are you in for a surprise: "In its quarterly report, Coinbase added a risk disclosure: if the company were to file for bankruptcy, the court might treat customer assets that the exchange is custodian for -- their Bitcoin, Dogecoin or whatever -- as Coinbase’s assets. And they’d be at the back of the line for repayment, forcing normal people, unaccustomed to the ins and outs of federal bankruptcy court, to claw back their money along with everybody else owed money by the exchange." From Bloomberg: https://www.bloomberg.com/news/articles/2022-05-11/coinbase-gives-256-billion-reminder-about-agonies-of-bankruptcy#xj4y7vzkg https://www.bloomberg.com/news/articles/2022-05-11/coinbase-...

jacquesm 4y ago
Ouch. Thanks for that. I wonder why the normal customer funds segregation rules do not apply to crypto assets.
- cj 4y ago
  See the full text from the SEC filing: "due to the novelty of crypto assets, courts have not yet considered this type of treatment for custodied crypto assets" Basically, there's no legal precedent. It's anyone's best guess.
  - vineyardmike 4y ago
    > Basically, there's no legal precedent. We’re about to find out soon.
- exogenousdata 4y ago
  It may not hold up in court. But at that point, you’re trying to claim assets back from a bankrupt entity.
  - rayiner 4y ago
    The disclosure isn’t a statement of what Coinbase would want to happen, but rather what a bankruptcy court might do. Bankruptcy law is very pro-debtor. An entity in bankruptcy court is like a Hoover, aggressively sucking any nearby assets into the bankruptcy estate.
- Animats 4y ago
  Go read FTX's statement to Congress from a few months back on why crypto exchanges should not be hobbled by all those old rules about separation of functions. There's nothing prohibiting a crypto exchange from having a separate company to hold customer's assets. In a bankruptcy, the custody company should still be solvent. That's required in Japan.[1] Customers of FTX Japan still have their assets. [1] https://www.coinfirm.com/blog/japan-crypto-asset-regulations/ https://www.coinfirm.com/blog/japan-crypto-asset-regulations...
  - jacquesm 4y ago
    I work a lot with trustees that hold third party funds, there isn't a single one of them that would ever commingle funds to the degree that these exchanges do (or even any degree at all other than to separately invoice customers for work and fees), and all of the rules around such third-party monies should be mandatory for any exchange. But as was pointed out elsewhere in this thread even that may not be enough if an exchange goes bankrupt.
  - FormerBandmate 4y ago
    Japan had the first real test of this with Mt. Gox. Regulations are written in blood, unfortunately
- danaris 4y ago
  Basically, because cryptocurrencies aren't considered "money", and what they are is still kind of up in the air...and because, as so many of its proponents are so proud of (despite it being extremely obviously a temporary state of affairs), cryptocurrency is not yet subject to very many laws and regulations. You can't have the protections of "money" without the regulations of "money". As long as everything was going fine and government was still dragging its feet catching up to technology, the people who got in early got to pretend there was something special about cryptocurrency that made it possible to have their cake and eat it too. Now, they're starting to find out why that's not the case.
cj 4y ago
Here's the un-editorialized full text from their SEC filing: > Moreover, because custodially held crypto assets may be considered to be the property of a bankruptcy estate, in the event of a bankruptcy, the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings and such customers could be treated as our general unsecured creditors. This may result in customers finding our custodial services more risky and less attractive and any failure to increase our customer base, discontinuation or reduction in use of our platform and products by existing customers as a result could adversely impact our business, operating results, and financial condition. > Further, we place great importance on safeguarding crypto assets we custody and keeping them bankruptcy remote from our general creditors, and in June 2022 we updated our Retail User Agreement to clarify the applicability of UCC Article 8 to custodied crypto asset — the same legal protection that our institutional custody and prime broker clients also rely upon. UCC Article 8 provides that financial assets held by Coinbase are not property of Coinbase and not subject to the claims of its general creditors. In light of UCC Article 8, we believe that a court would not treat custodied crypto assets as part of our general estate; however, due to the novelty of crypto assets, courts have not yet considered this type of treatment for custodied crypto assets Source: page 96: https://s27.q4cdn.com/397450999/files/doc_financials/2022/q3/a2c76620-9756-4268-9d08-4c7856f25a14.pdf https://s27.q4cdn.com/397450999/files/doc_financials/2022/q3...
- guipsp 4y ago
  You call it uneditorialized, but it is simply editorialized in a different direction.
  - jacquesm 4y ago
    I fail to see what this contributes.
    - guipsp 4y ago
      I'll expand: it is in the interest of the writer of this "uneditorialized" document to downplay the risk.
ivalm 4y ago
For all brokers, margin accounts can be rehypothecated if broker fails. This is as true for Fidelity as for Coinbase.

jacquesm 4y ago

Ouch. Thanks for that. I wonder why the normal customer funds segregation rules do not apply to crypto assets.

cj 4y ago
See the full text from the SEC filing: "due to the novelty of crypto assets, courts have not yet considered this type of treatment for custodied crypto assets" Basically, there's no legal precedent. It's anyone's best guess.
- vineyardmike 4y ago
  > Basically, there's no legal precedent. We’re about to find out soon.
exogenousdata 4y ago
It may not hold up in court. But at that point, you’re trying to claim assets back from a bankrupt entity.
- rayiner 4y ago
  The disclosure isn’t a statement of what Coinbase would want to happen, but rather what a bankruptcy court might do. Bankruptcy law is very pro-debtor. An entity in bankruptcy court is like a Hoover, aggressively sucking any nearby assets into the bankruptcy estate.
Animats 4y ago
Go read FTX's statement to Congress from a few months back on why crypto exchanges should not be hobbled by all those old rules about separation of functions. There's nothing prohibiting a crypto exchange from having a separate company to hold customer's assets. In a bankruptcy, the custody company should still be solvent. That's required in Japan.[1] Customers of FTX Japan still have their assets. [1] https://www.coinfirm.com/blog/japan-crypto-asset-regulations/ https://www.coinfirm.com/blog/japan-crypto-asset-regulations...
- jacquesm 4y ago
  I work a lot with trustees that hold third party funds, there isn't a single one of them that would ever commingle funds to the degree that these exchanges do (or even any degree at all other than to separately invoice customers for work and fees), and all of the rules around such third-party monies should be mandatory for any exchange. But as was pointed out elsewhere in this thread even that may not be enough if an exchange goes bankrupt.
- FormerBandmate 4y ago
  Japan had the first real test of this with Mt. Gox. Regulations are written in blood, unfortunately
danaris 4y ago
Basically, because cryptocurrencies aren't considered "money", and what they are is still kind of up in the air...and because, as so many of its proponents are so proud of (despite it being extremely obviously a temporary state of affairs), cryptocurrency is not yet subject to very many laws and regulations. You can't have the protections of "money" without the regulations of "money". As long as everything was going fine and government was still dragging its feet catching up to technology, the people who got in early got to pretend there was something special about cryptocurrency that made it possible to have their cake and eat it too. Now, they're starting to find out why that's not the case.

cj 4y ago

Here's the un-editorialized full text from their SEC filing: > Moreover, because custodially held crypto assets may be considered to be the property of a bankruptcy estate, in the event of a bankruptcy, the crypto assets we hold in custody on behalf of our customers could be subject to bankruptcy proceedings and such customers could be treated as our general unsecured creditors. This may result in customers finding our custodial services more risky and less attractive and any failure to increase our customer base, discontinuation or reduction in use of our platform and products by existing customers as a result could adversely impact our business, operating results, and financial condition. > Further, we place great importance on safeguarding crypto assets we custody and keeping them bankruptcy remote from our general creditors, and in June 2022 we updated our Retail User Agreement to clarify the applicability of UCC Article 8 to custodied crypto asset — the same legal protection that our institutional custody and prime broker clients also rely upon. UCC Article 8 provides that financial assets held by Coinbase are not property of Coinbase and not subject to the claims of its general creditors. In light of UCC Article 8, we believe that a court would not treat custodied crypto assets as part of our general estate; however, due to the novelty of crypto assets, courts have not yet considered this type of treatment for custodied crypto assets Source: page 96: https://s27.q4cdn.com/397450999/files/doc_financials/2022/q3/a2c76620-9756-4268-9d08-4c7856f25a14.pdf https://s27.q4cdn.com/397450999/files/doc_financials/2022/q3...

guipsp 4y ago
You call it uneditorialized, but it is simply editorialized in a different direction.
- jacquesm 4y ago
  I fail to see what this contributes.
  - guipsp 4y ago
    I'll expand: it is in the interest of the writer of this "uneditorialized" document to downplay the risk.

ivalm 4y ago

For all brokers, margin accounts can be rehypothecated if broker fails. This is as true for Fidelity as for Coinbase.