Think Your Cryptocurrency on an Exchange Account Belongs to You? Not Necessarily

Vyacheslav Dvornikov

Feb 27, 2025

In the report presented two weeks ago by Coinbase, one of the largest crypto exchanges in the world, there was a peculiarity: the size of assets dropped from $291 billion to $22.5 billion, although it had been constantly growing before. 

To understand why this happened, we need to go back to 2022, when client funds were lost by many crypto platforms, including BlockFi, Celsius Network, Genesis Global Capital, and Voyager Digital Holdings. At that time, judges handling bankruptcy cases ruled that clients were unsecured creditors and that the stored crypto assets belonged to the companies in bankruptcy. 

The fact is that cryptocurrencies were reflected on the balance sheets of crypto platforms as if they were deposits on a bank's balance sheet, which, although belonging to clients, are included in the general bankruptcy estate in the event of a bank's bankruptcy. Providing custodial services for crypto assets implies storing the cryptographic keys necessary to access them. In this respect, crypto assets are similar to bearer shares, where the person holding the document confirming the issuance of the share is essentially the owner of the share itself. This logic was followed by the judges.

Until 2025, Coinbase displayed the balance in accordance with the interpretation of accounting rules published by the SEC in 2022. In this document titled Staff Accounting Bulletin No. 121, agency staff referred to risks and uncertainties inherent only to crypto assets, which are absent for custodians of traditional financial assets like stocks and bonds.

The bulletin also mentioned the lack of legal precedents regarding how to deal with clients of cryptocurrency platforms in bankruptcy. Therefore, judges followed the logic that included crypto assets in the bankruptcy estate.

In January 2025, after a change in leadership due to the presidential elections, the SEC repealed the previous accounting bulletin. This gave Coinbase the license to stop complying with the previous bulletin and no longer account for client crypto assets as its own liabilities, reducing its balance sheet.

But does this mean that users of Coinbase and other crypto exchanges can sleep peacefully, because now cryptocurrencies will be regarded as stocks and bonds held in depositories, which are not included in the bankruptcy estate of the custodian? Not at all!

In February, Coinbase informed investors that the issue of accounting is still unresolved — even though the accounting method has changed.