Crypto exchange Coinbase addressed the insolvency rumors which have emerged over the past week. These claims stated that the U.S. publicly traded company was exposed to the failed hedge fund Three Arrows Capital (3AC). The latter has defaulted on over $3 billion in debt from its creditors.

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As a consequence, many big companies in the crypto industry have had to file for bankruptcy, halt operations, and engage in legal battles with their clients or former employees. Coinbase claimed it has no exposure to 3AC, Celsius, Voyager, and “other similar counterparties”.

The crypto exchange claims the events that led to the bankruptcy of 3AC and some of these companies were “foreseeable and actually credit specific”. In that sense, Coinbase argued that similar events have occurred in traditional finances, such as the downfall of Lehman Brothers and Archegos Capital Management.

In aftermath of the chain of bankruptcy filings due to the downside price action across the crypto market, government officials and regulators have been using it to discredit digital assets. Thus, Coinbase is trying to separate the nascent industry from the actions of “overleveraged” firms.

The company stated the following:

We believe these market participants were caught up in the frenzy of a crypto bull market and forgot the basics of risk management. Unhedged bets, huge investments in the Terra ecosystem, and massive leverage provided to and deployed by 3AC meant that risk was too high and too concentrated. These events are, unfortunately, more common in traditional financial markets (…).

Coinbase claims it has introduced risk management as a “first principle”. Therefore, they claim to be protected against “potential default contagion”. Coinbase stated the following on the criteria the company uses to manage risk:

This time isn’t different. This environment isn’t different. That’s why we rely on our risk team, which consists of professionals with decades of experience risk-managing financing businesses across a range of economic cycles (…).

Did Crypto Exchange Coinbase Have Exposure To Terra (LUNA)?

Since its inception, Coinbase claims it has never suffered losses from its financing book, suffered from counterparty insolvencies, or had to close access to credit for its clients. The company said it runs simulations and mitigates liquidity risk when taking counterparty risk.

Each of the practices exercised by the exchange is dynamic as they believe “the environment can change” at all times. This is part of their “leave room for Murphy’s law” principle, which reads as leave room for the things that can go wrong and the mistake that can be made.

Coinbase concluded:

Ultimately, it may still take time for the broader industry to learn the right lessons from the systemic deficiencies we have seen (…).

Coinbase clarified it has no exposure to 3AC but made a small note at the end of its statement. The company did have exposure to Terraform Labs, the developers of Terra (LUNA), and stablecoin UST.

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If there was a trigger leading to the downfall of 3AC that was the collapse of the Terra ecosystem. The exposure was obtained via Coinbase’s venture program but the company claims it “did make non-material investments”.