Coinbase claims it had “no financing exposure” to failed crypto firms Celsius Network, Three Arrows Capital (3AC), or Voyager Digital, hoping to soothe concerns that the exchange might have been at risk of a liquidity crunch.
“Many of these firms were overleveraged with short-term liabilities mismatched against longer duration illiquid assets,” the company said in a blog post on July 20.
Each of the above firms filed for bankruptcy after a crash in crypto prices led to liquidations of massively leveraged positions.
“We have not engaged in these types of risky lending practices and instead have focused on building our financing business with prudence and deliberate focus on the client,” Coinbase added.
Shares of Coinbase rose 15% to $75.68 after the news. The stock has slumped 70% year-to-date, falling from $251 at the beginning of January.
Coinbase notes ‘non-material investments’ in Terra
Coinbase also revealed its venture capital arm made “non-material investments in Terraform Labs,” the South Korean company behind Terra. The $60 billion blockchain collapsed like a deck of cards in May, spreading dangerous contagion across the industry.
The U.S. exchange has been the focus of much market speculation. Observers pointed to Coinbase’s recent decision to suspend its affiliate program as an indication that the firm was insolvent. Its latest statement is meant to ease such worries.
Coinbase said solvency concerns at Celsius, Three Arrows, Voyager, and other similar counterparties “were a reflection of insufficient risk controls.” It added that the “issues were foreseeable and actually credit specific, not crypto specific in nature.”
On its part, the exchange clarified that it does not engage in lending or other activities with customers’ assets. Any lending activity is done “at the discretion of the customer and backed by collateral, which serves as the first layer of protection against potential default contagion.”
“Coinbase always holds customer assets 1:1,” it stated, meaning user funds are available for withdrawal around the clock.
It said that it “always required 100%+ collateral…[so] we have a record of no losses from our financing book and no exposure to counterparty insolvencies.”
Crypto markets have dropped sharply since the multi-billion collapse of the Terra ecosystem in May. Amid the rout, which saw bitcoin (BTC) plummeting more than 70% from its all-time high, crypto heavyweights like Celsius and 3AC began to suffer a shortage of liquidity.
Overleveraged, the entities were forced to suspend withdrawals as investors rushed to take their funds out. The value of assets held by the firms fell so sharply that they were unable to honor withdrawal requests.
Eventually, Celsius, 3AC, and Voyager filed for bankruptcy protection. The market downturn has also led to the halting of withdrawals at Zipmex, a popular crypto exchange operating out of Singapore targeting the Asian market.
As Be[In]Crypto reported, Coinbase invested millions of dollars in the exchange in June.