I guess it depends on if those balances are kept on the books as “assets” or not. They may be subject to money transfer laws though, in which case they can’t spend ANY of the deposits.
Each US state has their own laws, and I’m sure some of them are vague enough to not specify the currency in order to regulate transfers of foreign currencies… so that could get interesting if anyone notices that they are money transfer services…
> if those balances are kept on the books as “assets” or not
Yes, they appear as a "customer custodial funds" current asset and "custodial funds due to customers" current liability on Coinbase's balance sheet [1]. Under current law, Coinbase's customers have a claim to those assets.
Look at a brokerage's balance sheet, on the other hand, and you see special line items for segregated cash and securities. If a broker-dealer goes under, "it ordinarily is liquidated under SIPA, not the Bankruptcy Code," where the SIPC "asks a federal court to appoint a trustee to liquidate the firm and protect its customers" [2]. The first priority is customer assets. Creditors second. Coinbase isn't similarly regulated, in part because it has fought tooth and nail against being needed to.
I get that's true in some situations, but is it true in all cases? Say I rent a safe deposit box, put valuable personal property in it, and the bank goes bankrupt. Does the bankruptcy court sell the box-holders' personal property until the bondholders are made whole?
It seems like depositors should be one of the first in line, certainly before bondholders.
The property in the box was never the bank’s property. They’re just renting a space for you to keep your stuff. In a bankruptcy, that contract could be sold to a third party who takes over the management of the boxes, but the contents are yours.
When you send money to Coinbase, it’s not like that. This latest disclosure makes it clear assets held at Coinbase (or other exchanges) aren’t yours in any sense.
When you get right down to it, as a purely virtual asset the crypto isn't anyone's property. Coinbase holds some keys which give it the ability to sign transactions on the blockchain, a service which has value. They owe their depositors the service of signing such a transaction on request transferring some quantity of deposited crypto to a suitable withdrawal address; the value of this service to the customer is the market value of the crypto. However, it does not seem likely to me that this service Coinbase owes to its depositors would be prioritized over their other debts, especially if that meant selling off other property to buy crypto so they could complete the transfers.
The difference here is that the bank never has any ownership of what’s in the safe deposit box.
When you buy crypto with coinbase, they hold that crypto in a custody account they have keys to. It’s not guaranteed how the court would rule on distributing those assets in case of bankruptcy.
From the article “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”.
What if you received your pants, but they were defective so you sent them back to be repaired? Do you then lose them during bankruptcy, and they get auctioned off?
“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…”
Pithy, but also not true. If a bank goes belly up, your average Joe’s bank account is first in line (via deposit insurance), as are employee entitlements.
Coinbase is most decidedly not a bank, which is why the former doesn’t apply.
Actually bond holders eat first in US bankruptcy law. Then employees, and shareholders last. So in this case, under capitalism, billionaire investors eat last. [0]
