As per coinbase reports, in a statement, it revealed that it has no Financing Exposure to Failed Crypto Firms named celsius network. It hopes to soothe the concerns that the exchange might be at risk of a liquidity crunch.
As per Coinbase blog post on July 20th, it reported that these firms were overleveraged with short-term liabilities which were mismatched against their long-term illiquid assets. These firms filed for bankruptcy after a fall in the crypto prices leading to the liquidation of massive 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.
The Exchange further said it had never got into such risky lending practices and had been focusing on building its own business by focusing on clients. After this triggering news, its shares rose by 15% to $75.68.
Non-Material Investments in Terra
Coinbase also said that one of the venture capital arms made a “non-material investment in terraform labs” which is a South Korean company backing Terra. The $60 billion blockchain collapsed like a deck of cards in May, spreading dangerous contagion across the industry.
Spectators kept an eye on the U.S Exchange suspecting that the firm is the leading indicator of being Insolvent. But its latest statement eased such worries. As per its statements, Coinbase gave a view that solvency issues arising in Celsius, 3AC, and Voyager were just out of the risks due to insufficient controls in these companies.
It further added that these issues were credit specific not Crypto specific in nature. It also clarified that no lending is done with the assets of the customers. Every lending is done at the discretion of the customers by keeping proper collateral for that which serves as a protection layer against defaults.
It stated that “Coinbase always holds customer assets 1:1,” which means the funds of the users are always available for withdrawal at any time by the users. Also, it clarified that it always requires 100% plus collateral so as to get rid of all the losses and insolvencies.
In May, markets dropped drastically after the multi-billion dollar collapse in the Terra ecosystem. Amidst this crunch, the value of the BTC plummeted by 70% from all-time high values. Crypto heavy-weight firms like Celsius and Three Arrows began suffering from a shortage of liquidity.
Overleveraged, the investors ran to withdraw the funds which led to the suspension of withdrawals. The value of assets held by the firms fell so sharply that they were unable to honor any such withdrawal requests.
Eventually, as the value of the assets fell, these firms Celsius, 3AC, and Voyager filed for their protection under the bankruptcy code.
The market crunch also led to the termination of withdrawals at Zipmex also which is a popular crypto exchange operating out of Singapore targeting the Asian market.