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Are Customers' Crypto Safe in a Custodian's Bankruptcy Filing?

If a crypto custodian files bankruptcy and is in custody of its customers' crypto, would that crypto be considered property of the bankruptcy estate? The answer is not clear and there are many considerations that would need to be addressed in reaching an answer.

Coinbase Global, Inc. sent a chilling message to institutional and individual investors and customers, alike, on May 10, 2022, when it filed its first quarter report with the Securities and Exchange Commission, disclosing that, in case of bankruptcy, cryptocurrencies and other digital assets that Coinbase holds for its customers' accounts potentially could become property of its bankruptcy estate — and its customers treated as general unsecured creditors.

In this Westlaw Today article authored by Loeb & Loeb Restructuring & Bankruptcy partners Schuyler Carroll, Daniel Besikof and Bethany Simmons and associate Noah Weingarten, the writers discuss issues created by a crypto custodian's potential bankruptcy filing and the impact it may have on its customers' accounts.