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One of the world’s largest pure-play cryptocurrency exchanges, Coinbase, just added a risk disclosure to its quarterly earnings report that deeply concerned both users and investors as assets held with the company may be treated as part of the firm’s state rather than property owned by customers.

According to the SEC filing published by the company yesterday, Coinbase stated that “in the event of a bankruptcy”, the crypto assets it has in custody “could be subject to bankruptcy proceedings and such customers could be treated as our general unsecured creditors”.

The disclosure added: “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”.

Professional investors typically monitor the addition of new risk disclosures to financial reports as they could hint at potential changes in the situation of the business and the inclusion of this clause comes at a time when the value of cryptocurrencies is dropping sharply amid the confluence of several negative catalysts.

The CEO of Coinbase Shares Reasoning Behind Disclosure

For crypto enthusiasts and investors who turn to digital assets due to their decentralized nature, the fact that they do not fully own the cryptocurrencies held with the exchange was the cause of some heated discussions and comments on social media as the firm practically stated that they would seize the assets and use it to pay down its debts in case they go out of business.

To clarify the situation, the Chief Executive Officer of the crypto exchange, Brian Armstrong, emphasized that the company was not at risk of bankruptcy and that the management was just complying with a mandate from the SEC that required firms that hold crypto assets to disclose potential scenarios that could take place if bankruptcy occurs.

“This disclosure makes sense in that these legal protections have not been tested in court for crypto assets specifically, and it is possible, however unlikely, that a court would decide to consider customer assets as part of the company in bankruptcy proceedings even if It harmed consumers”, Armstrong stated.

He added: “We should have updated our retail terms sooner, and we didn’t communicate proactively when this risk disclosure was added. My deepest apologies, and a good learning moment for us as we make future changes”.

Coinbase Stock Declines Sharply Following Quarterly Update

coinbase stock
Coinbase (COIN) price chart – 1-day candles with multiple indicators – Source: TradingView

The price of Coinbase stock is dropping sharply this morning as it is currently losing 22.3% at $567 per share following the release of the company’s latest quarterly earnings report.

During the three months ended on 31 March, Coinbase’s revenues fell to $1.2 billion compared to $1.8 billion the firm produced a year ago. This figure was disappointing for market participants as the consensus estimate for the period stood at $1.5 billion as per data from Capital IQ.

Moreover, the company swung to losses as it reported negative earnings per share of $1.98 that were far worst than the market’s consensus estimate of minus $0.25 per share for the period.

“The first quarter of 2022 continued a trend of both lower crypto asset prices and volatility that began in late 2021. These market conditions directly impacted our results for the first quarter of 2022”, the company stated to explain its disappointing financial performance during the period.

So far this year, Coinbase shares have lost 78% of their value and are currently trading almost 85% below their 52-week high of $368.9 from November last year.

Cryptoassets are a highly volatile unregulated investment product. No UK or EU investor protection.