U.S. Federal Officials Want Cryptocurrency Exchanges to Separate Client and Corporate Funds

U.S. Federal Officials Want Cryptocurrency Exchanges to Separate Client and Corporate Funds

Following Coinbase’s disclosure to the U.S. SEC, Federal officials now want cryptocurrency exchanges to separate client and corporate funds.

May 19, 2022


U.S. federal officials will press Congress to demand cryptocurrency exchanges in the country segregate client and corporate funds.

Coinbase Filing to the SEC Triggers Federal Action

According to sources familiar with this push, comments from Coinbase about their ability to provide safety nets for impacted users if it goes under jolted federal officials into action.

In a recent 10-Q disclosure filed with the U.S. SEC, Coinbase, which is a NASDAQ-listed public firm, said that in case they declare bankruptcy, users would be treated as general unsecured creditors.

An extract read:

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.

Brian Armstrong has since reassured users that the change in disclosure language shouldn’t be a cause for alarm. Instead, this was due to SEC’s new requirement. He asserted that the exchange is in a solid financial position with no risk of bankruptcy.

Coinbase Bankruptcy

Additionally, their Prime and Custody customers have strong legal protections for their assets. This is regardless of whether there is an ecosystem-damaging black swan experience.

Federal Officials want Cryptocurrency Exchanges to Segregate Funds

Segregation of user and corporate funds is a standard rule for regulated financial firms under the U.S. SEC and other agencies. However, crypto exchanges have been left off the hook. Worse, some have been taking advantage of this loophole to comingle their funds with those of clients.

It is a situation that can be disastrous to the stability of crypto and permanently dent capital flow into the sphere. As such, this is the primary reason why federal officials now want it ended by a suitable regulatory framework.

Should Congress pass laws and other guiding policies and demand crypto exchanges and other players to demonstrate that they have separate clients and operation accounts, the move could constrain how business is conducted.

However, it would be a massive boost for crypto investor confidence. It is considering the relative nascence of the state and previous painful lessons learned in the past with Quadriga CX.

Quadriga CX

Coinbase’s shares, COIN, have been in a downtrend since launch, as BlockMagnates reports. The exchange plans to introduce new models to boost its revenue and build its user base.

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Dalmas is an active cryptocurrency content creator and highly regarded technical analyst. He’s passionate about blockchain technology and the futuristic potential of cryptocurrencies.

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