The shocks to the crypto credit environment over the last few weeks are seemingly a major inflection point for the industry. In a move to restore investor confidence, Coinbase reiterates its strong stance on keeping investor funds safe and secure.
Coinbase is an American publicly traded company that operates as a crypto exchange platform. The company was founded ten years ago by Brian Armstrong and Fred Ehrsam and today boasts over 108M verified users distribute in 100+ countries. With over $159B traded quarterly, the platform takes rigid measures to ensure stakeholder confidence.
Crypto Market Outlook
Solvency concerns surrounding crypto companies like Celsius, Three Arrows Capital (3AC), Voyager, and FTX are a reflection of insufficient risk controls, and reports of additional struggling firms are fast becoming stories of bankruptcy, restructuring, and failure.
For instance, Alameda and its parent company FTX group, the third largest crypto exchange by volume filed for bankruptcy after a week-long fiasco of liquidity crunches. The news shook the entire crypto industry resulting in a huge loss in investor confidence.
FTX reportedly loaned billions of dollars of investor funds to Alameda Research, a trading firm also controlled by the exchange’s former CEO, Sam Bankman-Fried (SBF). Another factor that led to FTX’s spiral was a report that Alameda’s biggest asset was FTX’s token, FTT, creating a situation where the company assumed its own stock as collateral.
Crypto exchanges in response are working hard to avoid falling into the same situation. What started out as an arbitrary withdrawal of funds by Binance from FTX quickly resulted in a week-long bear run as investors scrambled to withdraw their funds from the platform.
Binance, Kucoin, crypto.com and others have started to come clean on their finances. Binance CEO, Changpeng Zhao (CZ), recommended that all exchanges should publish their Merkle tree proof of reserves. A Merkle tree is a blockchain protocol that stores and verifies data in a large pool, it is public so all users can view it.
In view of the condition of the crypto industry, it has become a priority for exchanges to assure their stakeholders that their funds are not being used for other investments and are held in reserves.
So how does Coinbase ensure that investor funds are safe?
In their 3rd quarterly report, the exchange reported strong growth in our subscription and services revenue driven by their participation in USDC and higher staking subscriptions. They however noted a significant impact by strong macroeconomic and crypto market headwinds, as well as the trading volume moving offshore.
While the macro headwinds are beyond our control, we continue to focus on factors within our control: narrowing our product focus to deliver amazing customer experiences and reducing our operating expenses
Their financial reports are audited and confirm strong finances and liquidity with the lion’s share held in USD reserves. The report indicated a $5.6B liquid USD reserves, with $5B in cash and cash equivalents.
While the platform has not shared its Merkle tree proof, it assures stakeholders that their funds are redeemable in a 1:1 ratio.
In the FTX fiasco, investors’ funds were invested in Alameda research without proper consent. On 6th October, withdrawals from the platform topped $8B, days later liquid reserves fizzled out and withdrawals were disabled.
Coinbase assets are only utilised with consent and are readily redeemable. Funds led to the platform at user discretion
Their reserves serve as the first layer of protection against potential default contagion.
The platform has held its reputation since 2012 and boasts of the largest public-traded exchange in the world. It is regulated in the United States by relevant authorities with other over 100 jurisdictions in North and Central America, South America, Europe, Asia, Africa and the Middle East.
The exchange holds users’ private keys and is therefore responsible for safeguarding user funds. The company’s terms however do not allow it to use or lend, user assets without your consent.
They also offer industry-grade and multifaceted risk management programs designed to protect stakeholder assets.
The exchange has an active security team that constantly ensures investor funds are safe from threats topped up with industry-leading security and encryption protocols.
Principles adopted by the platform to mitigate risk include; thorough due diligence, stress tests, ready mitigation plans, and anticipation of deficiencies.