Is Coinbase FDIC Insured?

Is Coinbase FDIC Insured?

Billions of dollars were wiped off the cryptocurrency market in recent months and investors are coming to the realization that there are few safeguards in play when it gets down to digital assets.

When Bitcoin dropped more than fifty percent from its highs last fall and TerraUSD and Luna, which were tied to the price of the U.S. dollar, fell to almost nothing, some investors panicked. Many people sold their shares, and the prices went down even more. The result was the biggest crypto crash in history.

Crypto investors complained about their huge losses on social media. Some even demanded restitution from Luna’s developer. And during the same week, a phrase that was hidden deep inside an annual report published by the cryptocurrency exchange Coinbase cautioned customers that if the company went bankrupt, they may lose all of the cryptocurrency assets that were stored in their accounts.

The bad news for cryptocurrency investors is that there is no government agency that protects or regulates investments in digital tokens. Crypto is a very risky investment, with nothing to rely on if the price falls.

Does the FDIC Protect Crypto?

Cryptocurrency isn’t the same as cash in a multitude of ways, but one big difference is that funds kept in banks are safer in case those institutions fail. The Federal Deposit Insurance Corporation, or FDIC, provides consumers with this peace of mind.

During the Great Depression, when people all over the country tried to get their money out of banks at once, causing widespread panic, the FDIC was created. This was because the U.S. financial sector did not have enough cash reserves to get through the crisis.

Before the FDIC, if a bank failed, it was likely that customers would end up losing all their money. But since 1934, when the agency started insuring deposits, “no depositor has lost a single penny of insured funds because of a bank failure,” according to the agency’s website.

Today, the FDIC insures almost 4,000 banks. It will cover up to $250,000 for each depositor, each insured bank, and each type of account. If your bank is FDIC-insured, then you already have coverage since it is built into the system.

The government promises to return your money (up to $250,000) if your bank fails. You can get more coverage if you have more than one type of account or if you have accounts at more than one bank. Jointly owned accounts may also be eligible for additional coverage.

However, the FDIC will only cover certain kinds of deposits. Cash held in various bank accounts (such as checking, savings, money market, and CDs) is one example. Neither stocks nor bonds nor annuities nor U.S. Treasury bills nor cryptocurrency are covered by the agency’s insurance policies.

Is Coinbase FDIC Insured?

Yes, Coinbase is protected by the Federal Deposit Insurance Corporation (FDIC), but the FDIC only covers a portion of 98% of the exchange’s assets that are stored in places other than “hot wallets.”

All cash deposited by US customers is not kept in a single location. According to Coinbase, the total cash deposited is either kept in custodial accounts at banks or invested in stable U.S. Treasury securities in compliance with state regulations governing the transmission of money. But funds from outside the United States are kept in separate “dedicated custodial accounts.”

The FDIC protects US consumers; Coinbase says cash is housed in FDIC-insured pooled accounts.

“FDIC pass-through insurance protects funds held on behalf of a Coinbase customer against the risk of loss should any FDIC-insured bank(s) where we maintain custodial accounts fail.”

Coinbase Help Center.

However, users’ cryptocurrency assets are not covered by the FDIC since the institution does not recognize cryptocurrencies as legal currency.

“Cryptocurrency is not legal tender and is not backed by the government. Cryptocurrency, (including but not limited to tokens such as bitcoin, litecoin and ethereum, and stablecoins such as USDC), is not subject to Federal Deposit Insurance Corporation (“FDIC”).”

Coinbase Help Center.

To summarize, the FDIC protection is only applicable to cash that is kept in banks that are guaranteed by the FDIC; it does not apply to cryptocurrencies that are placed with the exchange.

What Kind of Protection Does Coinbase Offer?

If you’ve been wondering how San Francisco-based crypto exchange Coinbase protects its customers’ money, you might be interested to know that it does offer some insurance. But the insurance policies of the company only cover a certain amount and type of funds.

Coinbase has confirmed that it does, in fact, have criminal insurance that will safeguard “parts of digital assets” that are deposited and held with them from being stolen due to a breach in their cybersecurity. It is important to keep in mind that this exact insurance policy only protects a “portion” of the digital assets that users deposit to the exchange and does not cover the whole amount.

According to a statement released in 2019 by the head of security for the exchange, Philip Martin, this insurance policy only provides coverage of up to $255 million for all cryptocurrencies held in hot wallets by Coinbase. These wallets are the ones that are most vulnerable to being hacked.

In the event that the cryptocurrency exchange experiences a network breach at the present time, this, however, would not be sufficient to protect all of the coins that are now held in Coinbase’s hot wallets. Coinbase only keeps 2% of its customers’ assets in “hot wallets,” but this 2% is worth a lot of money (over $2.5 billion), according to the exchange’s recent earnings report, in which it said it keeps $256 billion in fiat currencies as well as cryptos on behalf of its customers.

Therefore, “in the event of a protected security occurrence, we will make you whole,” the exchange promised. Unfortunately, the cost of the damage may exceed the amount covered by insurance, and you might still lose money.

So, Coinbase users shouldn’t expect to get back all the money they put in the exchange if it loses all the money in their hot wallets because of a cyberattack. It is important to note that this insurance coverage does not cover individual losses. This means that users who have lost cash on their individual accounts “due to a hack or loss of your credentials” shouldn’t expect the exchange to compensate them for such losses or to cover those losses.

Is Coinbase Solvent?

Even though the company has denied the rumors and is actively growing its business overseas, people still talk about Coinbase going bankrupt.

Coinbase stopped running its Affiliate Program in July 2022. One month prior to the shutdown of its sophisticated trading arm, Coinbase Pro, the company released a comparable feature dubbed Advanced Trade. Coinbase Pro was known as the company’s professional trading platform.

Because of these two revelations and the fact that Coinbase merged its USD and USDC order books, there were a lot of rumors that Coinbase might go bankrupt.

In addition, the financial performance of Coinbase in 2022 was a huge knock on the cryptocurrency exchange after turbocharged bull runs for the majority of the cryptocurrency industry in 2021. 

The company revealed severe losses totaling over $1.1 billion in its Q2 financial report. This represents a decline of nearly 60% in terms of income, which is mostly attributable to macroeconomic issues as well as systemic concerns in the cryptocurrency sector, which led to reduced trading volumes on the exchange.

As far as we could tell, the cryptocurrency community was split down the middle, with some people believing Coinbase is on the verge of bankruptcy (a claim that the exchange has consistently denied) and others saying this is all just fear, uncertainty, and doubt (FUD). 

Following the failure of many cryptocurrency firms, including Celsius, Three Arrows Capitals, and Voyager—all of which had direct connections to Terraform Labs and the failed UST/LUNA—rumors and disputes began to circulate in the industry.

What is Next for Coinbase?

The Securities and Exchange Commission is presently putting pressure on Coinbase. The regulatory agency has sent numerous subpoenas to the exchange, demanding papers and any relevant information pertaining to its yield-generating products, token listing procedure, and staking program. The SEC has already confronted the exchange, saying that 9 out of 10 of its cryptocurrencies are securities, which they have repeatedly denied.

Due to the heat from US regulatory organizations, Coinbase decided to push back and help Grayscale in its lawsuit case against the SEC. Grayscale is a digital asset management. The latter is taking the former to court over the SEC’s decision to reject a Bitcoin exchange-traded fund (ETF), claiming that the SEC “fails to apply consistent treatment to similar investment vehicles.”

Aside from the political tension in the United States, Coinbase has been concentrating on the development of new goods and services in both the United States and internationally. One example of this is a crypto scorecard that enables Coinbase users to learn the positions of US legislators on cryptocurrencies depending on where they reside in the United States.

Coinbase recently made a deal with Google so that users can use cryptocurrency to pay for cloud services. Both companies said that starting in 2023, this partnership would help promote Web3 technology.

Coinbase makes most of its money from the fees traders pay to use its platform, but it will also get a cut of payments made in cryptocurrency for Google’s cloud services. The exchange will switch from Amazon Web Services to Google for its data-related applications.

According to recent reports, the multinational technology company is also looking into the possibility of using Coinbase Prime, a service that offers safe storage for companies’ cryptocurrencies and enables them to carry out transactions. Zavery says that Google will try out managing cryptocurrencies and “see how we can participate.”

Coinbase is also making it easier for small investors in Australia to buy, sell, and trade cryptocurrencies by expanding its services.

The company is implementing a new payment system called PayID, which will allow customers to make deposits straight from their individual bank accounts. This makes Australian Dollar deposits and withdrawals possible, in addition to providing access to more than 200 different crypto assets. The company also said that professional traders would be able to use its Advanced Trading interface.

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