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What could happen to crypto users if Coinbase goes bust

In its first-quarter earnings report, the platform said that if the company went bankrupt, a bankruptcy court could treat customers’ assets as the organization’s assets.

June 23, 2022 08.00

A month ago, in early May, Coinbase he told investors – and, indirectly, his account holders – that if they ever go bankrupt, the cryptocurrencies held on their exchange could be their own.

In its first quarter earnings report, Coinbase said if the company gone bankrupt, a bankruptcy court may treat customer assets as company assets.. That’s news for many people. As of December 2021, about 80 million individual cryptocurrency wallets were in use worldwide, and last April it reached 82.2 million, according to Statesman.

Coinbase held a couple of US $ 256 billion in client funds at the end of the first quarter. Imagine that some of that amount has disappeared to pay off venture capitalists and global bond lords.

Large investors who manage their cryptocurrency accounts often have professional money managers. These have their own guardians to maintain security. But this is not the case for retail investors. There is a professional version of Coinbase and some exchanges allow you to contract hosting accounts for greater security. But if Coinbase keeps your funds in escrow and goes bankrupt, as the Securities and Exchange Commissionthen crypto investors could be used to pay off creditors in the worst case.

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Assuming this is a plausible risk, should retail investors get individual wallets to hold their cryptocurrencies? There is no Federal Deposit Insurance Corporation for cryptocurrency accounts.

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“Exchanges do everything they can to make the whole encrypted user experience more comfortable. But convenience is a double-edged sword. To store everything on an exchange, you have to trust the mechanisms of the platform, in the market situation and on the way, they comply with the regulations, ”he says Michael Gord, board member of the Everscale Foundation in Canada.

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“If you are the only person you really trust in terms of your personal finances, you are sure to find your own wallet.” Everscale has its own wallet, the EVER Wallet.

Holders of a single wallet cryptocurrency typically want to interact with a specific blockchain ecosystem. It makes it easier to own a wallet.

For those who do not intend to use the tokens for anything other than speculative investment, it is important to know that cryptocurrencies that pay for yield are best kept in your own individual wallet. Otherwise, Coinbase will skim about 25% of those profits. More developed investors who participate in promising and yield farming programs associated with those token-paying signals will have their own wallets.

Coinbase

During the height of the initial coin offering phase, hard wallets became the new way to store Bitcoin and Ethereum. they propagated as a solution. They are basically like flash drives. Ledger brand wallet became ubiquitous. But, like any other portable drive, they get cluttered in an office desk drawer or kept in a backpack somewhere. A rigid wallet should be in a place that is as recognizable and secure as a safe traditional combination that holds family treasures.

“They are a good idea, but there is always the risk of being lost or broken,” he says. Mike Ermolaev, spokesman for ChangeNOW, a Georgian cryptocurrency exchange.

Hard wallets are not very convenient for regular merchants, who have to remember to store themselves on disk, and are slower to use than a mobile app. “

Hard wallets are not very convenient for regular merchants, who have to remember to store themselves on disk, and are slower to use than a mobile app. “

Most people think of cryptocurrency centralized exchanges as their E-commerce account. It is impossible to keep individual corporate stocks, cash, and bonds in a safe house, so investors have long turned to banks or broker-dealers for service and safe.

Cryptocurrency is different. Investors who hold their cryptocurrency holdings on an exchange are giving their private keys to the exchange, and “hence their money,” Ermolaev says.

According to a blog post from blockchain data group Chainalysis in February, about $ 2.66 billion has been stolen from exchanges since 2012, with the most common method of attack being private key theft. In theory, it would be much harder (and safer) to steal an individual’s digital assets hidden in many different wallets.

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cryptocurrencies

The use of individual digital wallets is on the rise, according to a report from market research firm Mercator titled “Digital Wallet: Moving Older Payments With Expanded Choices,” published June 15.

Universal Wallet – which supports multiple unrelated items that are part of a particular blockchain – and merchant-backed wallets, which are exclusively brand-specific wallets, their user base is growing.

Mercator said this was primarily due to branded portfolios, from high – tech branded companies like PayPalPYPL + 2.2%, and was more of a consumer story than an investor story.

“The market (for digital wallets) continues to be defined as use cases evolve and consumers develop more sustainable options. These payments and serve as a gateway for digitization. Other features typically found in physical wallets “, said Jordan Hirschfield, Director of the Investigacin Advisory Group of Mercator.

Cryptocurrency.

Safety is paramount, but so is comfort. Is it worth having 10 different wallets and access accounts? Following the previous comparison with banks as custodians of cash and securities, no one has 10 different bank accounts.

Brian Armstrong, CEO of Coinbase, said in a series of Twitter posts on May 10 that customers will be protected in the event of bankruptcy. “Your funds are safe on Coinbase, just as they always have been,” he tweeted.

Article published in Forbes USA.


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