Crypto investors face total wipeout if major exchange declares bankruptcy

Investors in cryptocurrency are facing the prospect of losing everything if a major crypto exchange goes under.

Fortune reports that crypto exchange Coinbase posted a horrific earnings report in the first quarter of 2022 that included a quarterly loss of $430 million and a 19 percent plunge in monthly users.

Making matters worse, Coinbase warned its clients this week that they could lose all of their cryptocurrency assets if the exchange is forced to file for bankruptcy.

Specifically, the exchange told users that they would become "general unsecured creditors" in the event of a bankruptcy, which means that their assets could be used by the company to settle debts.

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That said, Coinbase CEO and founder Brian Armstrong said that the exchange currently faces "no risk of bankruptcy" and he said that Coinbase issued the warning to users because of new regulations on crypto exchanges created by the Securities and Exchange Commission.

Nonetheless, Fortune notes that the revelations may surprise many Coinbase clients who assumed that they were in complete possession of their cryptocurrencies.

"An individual's ownership of cryptocurrency is supposed to be immutable and absolute; that's one of the key selling points touted by blockchain evangelists everywhere," the publication writes. "But when a user creates a Coinbase account, they often end up storing their cryptocurrency in a wallet controlled by Coinbase, which means the individual is giving away at least part of their control over their own funds."