Coinbase addresses risk disclosure as shares plunge

Coinbase shares cratered after earnings yesterday afternoon on declining revenue, fewer monthly users and a drop in cryptocurrency prices.

Details: But it was a new risk disclosure contained in its SEC filing about the potential safety of user assets that sent the company to Twitter.

By the numbers: The crypto exchange's $1.17 billion in revenue for the quarter was around $300 million below expectations and was down 27% from a year ago.

• Monthly transaction users (MTUs) also fell by 19% since the fourth quarter, to 9.2 million. Total trading volume dropped by over 43% to $309 billion.

Meanwhile, it reported a decline of Assets on Platform, which stood at $256 billion at the end of the first quarter, down from $278 billion at the end of 2021.

• The decline was driven by lower crypto asset prices, partially offset by billions of dollars in net inflows.
• Decreases in price were larger for assets with high concentration on its platform – notably ETH and SOL – compared to the market overall.

What they're saying: Coinbase tried to shrug off the effects of crypto price volatility in its results, saying now is a time to focus on its business.

• "We believe these market conditions are not permanent, and we remain focused on the long term," it said in its release.
• "In fact, our investment in our business now is especially critical — these periods of low volatility can provide the opportunity to focus more intently on product development (as opposed to peak periods, when we are more focused on meeting high demand).

The intrigue: Some news reports focused on language in the company's 10-Q filing with the SEC, which said customers with crypto assets held on the platform could be treated as "general unsecured creditors" in the event of a bankruptcy, implying customers would have no direct claim to their assets.

Coinbase CEO Brian Armstrong took to Twitter to play down the significance of the disclosure.

• The company included the statement as a new "risk factor" based on a newly required disclosure for public companies that hold crypto assets for third parties, he said.
• "We have no risk of bankruptcy," he said to begin the thread.

Armstrong said the company believes its Prime and Custody customers have "strong legal protections in their terms of service that protects their assets."

• Yes, but: He acknowledged that these protections have not yet been tested in court for crypto assets.

"For our retail customers, we’re taking further steps to update our user terms such that we offer the same protections to those customers in a black swan event," he said.

• "We should have had these in place previously, so let me apologize for that."

Our thought bubble: Coinbase allows users to withdraw crypto to their own wallets (self-custody). In a bear market, it might make sense for those who don't plan to actively trade to do so, Axios' Brady Dale writes.

Coinbase shares have fallen more than 85% since their high on Nov. 12, trading this afternoon at below $51.