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Comment by eatonphil | Hacker News Reader

I do wonder why he's allowed to say on Twitter there is no risk of bankruptcy [0]. While the risk could be minimal and maybe negligible saying "no risk" means zero chance. That can't be true of any company. For a public company ceo to say that, isn't that securities fraud?

I guess even if it is fraud and they do get prosecuted by the SEC they'd just get fined for it. And maybe the fine here would be much less than the price of a run on coinbase.

[0] https://mobile.twitter.com/brian_armstrong/status/1524233602...

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The SEC can't prosecute anyone, they have no criminal enforcement power. However they can bring civil actions for fraud or other violations of securities law, and refer criminal fraud cases to the Justice Department.

Thanks for the clarification, makes sense.

If you don't have significant liabilities you can't really go bankrupt.

(I didn't look to see if that was the case, just making the point in general)

They just posted a quarterly loss of $430 million.

Okay, but that isn't a liability in an accounting sense, it is a cash flow.

Edit: looking at the 10K, other than customer assets (where they have a net holding), they have like $6 billion in cash and equivalents against less than $5 billion of debts and other obligations).

So if they shut it all down, there would be funds left over.

> they have like $6 billion in cash and equivalents against less than $5 billion of debts and other obligations...if they shut it all down, there would be funds left over

Every company that ever went bankrupt had more assets than obligations before they went bankrupt.

Coinbase's quick ratio [1] adjusted for custodial assets, as of 31 March 2022, was 6.6 [2][a]. That's good. Don't adjust for custodial funds, and it's 0.15. Virtually bankrupt. With $6.2bn cash on the balance sheet and $830mm cash burned by operations in Q1, they have over 2 years of runway assuming Q1's terribleness continues. That's good. But were they to suffer a hack, that margin of safety could rapidly collapse. And in that case, customers could be left behind secured lenders. (Where USDC holders would wind up is a mystery.)

[1] https://www.investopedia.com/terms/q/quickratio.asp

[2] https://d18rn0p25nwr6d.cloudfront.net/CIK-0001679788/89c60d8... page 5

[a] (6,116,388, cash and cash equivalents + 346,048, accounts receivable + 1,333,333, crypto assets held) / (10,921,823, current liabilities - 9,742,961, custodial funds due to customers)

Right, I compared cash to liabilities, not assets.

Could you explain how you got 0.15? (6,116,388, cash and cash equivalents + 346,048, accounts receivable + 1,333,333, crypto assets held) / (10,921,823, current liabilities) = 0.71

What this means in layman's terms if they don't dip into custodial funds they can't cover their current liabilities?

On paper, you have and can report a lot of assets. However, many companies go bankrupt with current ratios greater than one with either overinflated or overvalued assets or undervalued or understated debts or some combination. Financial reports a la 10-Ks and 10-Qs are 'boring,' difficult for most people to read, contain specialized jargon, and contain significant lag time where a going concern is, well, a concern. Audits are almost always annual and not quarterly. Disclosures may be required, but they can be broad or nonspecific enough as to delay broader acknowledgement of bankruptcy level problems. I'd take information from financial reports with a bit of salt, even if they are often our best, or only, source of information.

If "cash and cash equivalents" is wrong, that's fraud, not something I should have taken with a grain of salt.

Cash and cash equivalents can be very wrong, even when audited by firms such as Ernst and Young, one of the big four accounting firms. Wirecard is a good example. https://www.ft.com/content/bcadbdcb-5cd7-487e-afdd-1e926831e...

Grant Thornton audits Coinbase last I checked. Hopefully they do a better job than EY. I doubt a "stablecoin" holding would count as cash equivalents, but not all cash equivalents are equal and the definition has changed over the years. Commercial paper, 1-3 month maturing Treasury notes, certificates of deposit, money market accounts, and savings account funds can all be counted as cash equivalents. For example, if you hold a two month commercial paper of another cryptocurrency company as Coinbase, this might qualify as a cash equivalent. Cash equivalents are not all equally liquid or risky. Even if all of the cash and cash equivalents are there and solvent, the definition of a cryptocurrency in a bankruptcy might not be settled in a court of law in such a way that it favors account holders of Coinbase held cryptocurrency over stockholders or bondholders.

All had been set up by Wirecard executives to dupe the auditors and help disguise what Munich prosecutors now call “a fraud in the billions”.

Yeah, that's what I said, fraud.

Do you have an example where it was wrong without fraud?

Would that be 5 billion in customer assets and associated liabilities, leaving about 1 billion of equity for Coinbase? At a burn rate of 430 million per quarter that only leaves a runway about 7-8 months.

No, I left custodial holdings out of those numbers.

The dead reply to my comment at the top of the thread makes a good point that loss of the custodial holdings in a hack would bankrupt them.

Wouldn't a hack of the custodial holdings just mean their customers lose their money but the business is otherwise a going concern (for that few moments until everybody stops paying them)?

They get a lot/most of their money from fees with ongoing transactions. If you look at the ‘5 minutes ahead’ picture if there is a hack that either 1) steals all customer assets, or 2) requires them to freeze all activity for a serious length of time, it’s a ‘no longer going concern’ type situation.

No transactions? No income. No trust/willingness for people to continue doing transactions? No future income.

According to Coinbase 98% of their crypto is stored in offline wallets. So hacking won’t work. You’ll have to break into wherever they have the coins stored and hope the key isn’t destroyed when you unplug the device.

There are 14 billion tether in circulation, don’t they need enough to back it?

Every single user account is a liability.

Every single user account is an IOU.

There is - as some people seem likely to discover - a difference.

The vast majority of bankruptcy courts place customer accounts ahead of creditors.

Nonsense. They can get hacked or introduce a bug into their stack and go bust in under an hour. That's extremely unlikely, but not impossible.

Just like it was for all the other crypto brokers that went down, exactly like that ;-)

I might tone it down just a bit to "Somewhat unlikely to happen. Today."

I would say that's extremely likely. Make a list of your favorite tech companies from 1990 or 2000, and see how many still have technology teams qualified to tie their own shoelaces today, exist, and haven't turned into sleazeware companies.

You can calculate your annualized failure rate. That's a best-case on the odds your funds will continue to exist next year. Move fast / break things / fail fast / developer sprints / etc. speeds this process up even further. Crypto companies also have a giant target painted on their backs for hackers (including rogue state-level actors, some of whom just had large sums confiscated by Western institutions).

Tulips, anyone?

That actually does sound kinda impossible, 98% of their crypto is in secured cold storage, and it’s spread across distinct coins and different wallets.

I’m not saying it’s risk free, but what exchange or broker is? Does anyone else match Coinbase for security? Gemini seems at best equivalent.

He probably has a disclaimer somewhere saying his tweets are "not forward looking statements" so he is only saying that as of right now in this moment there is no risk of bankruptcy

I wouldn't be sure what the man on the clapham omnibus thinks of that kind of disclaimer. He'd be exposing himself to considerable risk by relying on it

The last time I was on a Clapham omnibus, there was an old chap in the back seats in the process of taking his trousers off

Ah, an institutionalized investor.

But obviously recently escaped from the institution, if he is on the omnibus...

Escaped the regulatory framework.

Couldn't the same be said of any company that isn't currently filing for bankruptcy ?

Does anything have a zero chance of happening?

Yes. You can only compute probabilities with respect to a probability model. There exists a model M and an outcome x, such that x has zero probability under M. For example, the probability of getting 2 heads in one coin toss has zero probability under the standard binomial model.

There are all kinds of way out of this in case he would get sued: he could say that with 'there is no risk', he just meant shorthand for 'there is no more than a negligible risk'. Or he could say that with 'there is no risk' he was merely expressing his strong personal opinion based on the vision and faith he had in his company.

Officers of a company are held to a different standard when it comes to public statement.

Declaring it as personal opinion would not likely absolve him. 'Funding Secured' was also a personal believe, from the SEC standard it had to be substantiated in a meaningful way though, or gets fined.

>> For a public company ceo to say that, isn't that securities fraud?

Cryptocurrencies are not regulated securities.

What laws protect cryptocurrency "investors"?

Coinbase is publicly traded, OP is clearly referring to securities fraud as it relates to public statements that could have material impact on Coinbase stock.

Coinbase shares are a regulated security. The poster is suggesting that the statements by the CEO are securities fraud for those shares not for crypto.

Their product isn't regulated, but the company is still subject to securities law as it's public.

If I was a CEO and saw how few and far between (as well as toothless) the repercussions have been for Elon Musk, I wouldn’t fear tweeting whatever I wanted either.

If you were a CEO, you'd often be set up for life with some level of financial prudence, and everything else after achieving that level of wealth seems like it'd just be for a lark or some pursuit of satisfaction/happiness.

To be a bit pedantic, there are CEOs of all sorts of organizations, many of which are tiny nonprofits that bring in very little money. You could be a CEO and bring home $60k a year.

Honestly I was being somewhat tongue-in-cheek, but I guess it didn’t go over well. Lesson learned.

I'm bad at recognizing sarcasm online I guess. It was my mistake and misunderstanding. I don't think it was you at all.

“everything is securities fraud” —Matt Levine

You can see I read him too much.

Do you think it would be okay for him to say there's no risk of bankruptcy to some friends in a public bar? How about at a BBQ in his backyard? Would it be okay for him to say this on a flyer stapled to a public board?

Why is twitter special?

> Why is twitter special?

The SEC's Rule FD [1].

[1] https://www.sec.gov/news/press-release/2013-2013-51htm

Oh, that's backwards from what I thought the situation was. Thanks!

Apparently such information has to be released in a way that all the public, generally, can see it at once and twitter with it's faked high user numbers and famous people fulfills this. Releasing it on a small local poster board would be illegal because it is limited, where twitter is legal because everyone theoretically has access to twitter.

Eh not entirely true. Twitter throws up a login screen if you try to view more than a couple tweets. There’s probably an argument there since an account (and PII) is required.

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