Money Rehab with Nicole Lapin - Decoding the Big Lesson from the Coinbase Catastrophe

Episode Date: May 27, 2022

Earlier this month, Coinbase users were shocked to read a new disclosure from the company that could cost users everything. Nicole breaks down this headline, and how it unlocks the answer to a key crypto debate. See omnystudio.com/listener for privacy information.

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Well, it doesn't. Charge for wasting our time. I will take a check. Like an old school check. You recognize her from anchoring on CNN, CNBC, and Bloomberg. The only financial expert you don't need a dictionary to understand. Nicole Lappin. Coinbase is a huge name in the crypto space,

and the finance world at large has historically considered Coinbase a company to watch. If you haven't heard of it, it's a platform where you can buy and sell crypto. And users can also sign up for a Coinbase wallet, which is a secure place to store cryptocurrency. Or at least that's what we thought. Earlier this month, Coinbase released their quarterly earnings report, also known as a 10K. This is a routine report that public companies are required to file, but the contents of Coinbase's report were anything but routine. Reporters at Fortune read the fine print of this report and blew the lid off a story that shocked and terrified, frankly, Coinbase users. Here's what they found. Coinbase

added a disclosure in their recent earnings statement that said that if the company ever filed for bankruptcy, they might pay off their debts with their users' assets. Let me say that one more time so it really sinks in. Coinbase is saying that in case of a financial emergency, they can literally reach into users' Coinbase wallets and take all of the cryptocurrency stored there. And I am not exaggerating. This is the exact language from Coinbase. Because custodially held crypto assets may be considered to be 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, end quote. So that's a whole lot of

jargon, but the wording that is particularly noteworthy is calling users general unsecured creditors. That means that users would be stripped from the right to their assets. Can you believe that? No one signed up for that. I can't even begin to explain how insane this is to me. It would be like your bank saying, yes, your money is safe here, but if we ever fuck up and stop doing our job or make a gigantic mistake, we'll play responsibility musical chairs and you will become the bank. In all of my years of reporting on financial news,

I have never seen anything like it. And I know you probably have a million questions. I mean, I had a million and one questions. So let's get to it. First of all, how likely is it that we are going to see this disaster play out? Well, Coinbase CEO Brian Armstrong says there's nothing to worry about. He tweeted this. Your funds are safe at Coinbase, just as they've always been. Armstrong also said explicitly that the company is not at risk of bankruptcy and explained that the company had to add that disclosure in the earnings report because of new requirements from the SEC. However, Armstrong wasn't all warm and fuzzy. He also tweeted this, quote, This disclosure makes sense in that these legal protections have not been tested in court for crypto assets specifically.

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, end quote. So how I read this is that Armstrong is ultimately saying Coinbase users don't have anything to worry about until they do. But let's not take Armstrong's word for it. Let's look at the numbers. On the plus side, on Tuesday, Coinbase became the first crypto company to become a Fortune 500 company. In 2021, Coinbase recorded a revenue of over $7.8 billion, which doesn't sound like a company on the verge of bankruptcy to me. However, in the now infamous earnings report, Coinbase reported a $430 million loss and a 19% drop in users per month. Fortune also noted that Coinbase shares fell 15.6% after the earnings report, dragging the company's stock price down to 80% below its

Nasdaq debut in April 2021. Bloomberg has also taken some swipes at Coinbase, too, calling out that Coinbase took months to launch their NFT marketplace. And now that the marketplace has launched, it hasn't been that successful. Bloomberg's analysts also expect that Coinbase will lose $1.4 billion this year. And there are some more signs that indicate there may be some more trouble ahead. For example, Coinbase is slowing down hiring, which is typically a precursor to layoffs. However, a spokesperson for the company said, quote, while Coinbase may be slowing down our hiring, we have no intention of slowing our pace of product development, end quote. But even if the company can introduce some major revenue generating projects, this controversy around the bankruptcy disclosure clause is doing some financial damage that's going to be hard to reverse. As I was writing some of my notes for this episode on Tuesday, I got a push notification that the price of Coinbase stock just dropped 6%.

Now, I'm sure the price will have changed in some way by the time you listen to this, but the price isn't the point. The point is that Coinbase's value is more volatile than other crypto companies. And that's not a great sign for investors. So what are the lessons from this story? Number one, earnings reports are important. I know that you probably can't set aside four times a year to go over the 10 Qs for all of your investments. And honestly, you probably don't want to and you don't have to. But if you have multiple investments, it is worth taking some time to at least check out the report filed by the company

that feels to be on the shakiest ground. If you don't have time for that, I'd recommend you at least look up the company's name after their earnings report comes out to find out if there's a fortune or another outlet that is spelling out the potential problems on the horizon. Number two, the decentralized currency isn't so decentralized. Since its inception, crypto has been praised for its decentralized format, meaning the way that crypto has allegedly cut out big banks acting

as middlemen has resulted in people gaining direct control over their assets. But as this story shows us, there is still a middleman with crypto. The crypto exchanges. And you know what? The house always wins. Number three. We now understand crypto. Since crypto has broken into the mainstream, everyone has been figuring out what to call it. And I do mean everyone, including financial institutions like the IRS, has struggled to classify crypto. Is it a currency like the U.S. dollar or is it an investment like Apple stock? I argue that this news story helps us determine once and for all that crypto is an investment, not a currency, because with other centralized currencies, you keep your assets in

a bank. And in the United States, for example, when you deposit your assets in a bank. And in the United States, for example, when you deposit your money in a bank, you're protected by the FDIC, the Federal Deposit Insurance Corporation. If that bank goes under, the FDIC protects accounts up to $250,000. Crypto exchanges do not offer that same insurance. And in the case of Coinbase, it's like they're offering the opposite of insurance. They're offering risk. This makes crypto much more similar to an investment. If you're an investor in a company that goes bankrupt, in most cases, you'll lose your investment. There's no FDIC insurance. And in fact, shareholders are the last to get paid in case of a liquidation event,

which is just the fancy way of saying that investors typically lose everything if a company they invested in goes bankrupt. I think this story finally helps us answer the question, what is crypto? It's not a currency. It's an investment. And it's not a foolproof one. For today's tip, you can take straight to the bank. Always be proactive at work. It doesn't matter if you're running a Fortune 500 company or if you're working night shifts at a starter job to put yourself through college. In business, be proactive, not reactive. I'm telling you, if your investors or your boss have to find out any bad news in the proverbial fine print, they will trust you less. And all successful relationships, professional or personal, are built on trust. Money Rehab is a production of iHeartRadio. I'm your host, Nicole Lappin.

Our producers are Morgan Lavoie and Mike Coscarelli. Executive producers are Nikki Etor and Will Pearson. Our mascots are Penny and Mimsy. Huge thanks to OG Money Rehab team, Michelle Lanz for her development work, Catherine Law for her production and writing magic, and Brandon Dickert for his editing, engineering, and sound design. And as always, thanks to you for finally investing in yourself so that you can get it together and get it all.