There are still many unknowns about the warning notice Coinbase Global Inc. this week received from the U.S. Securities and Exchange Commission, but at least one analyst deems the notice an “ominous” sign for the cryptocurrency exchange.
Shares of Coinbase
COIN,
were off more that 13% in premarket trading Thursday after the company disclosed Wednesday that it received a “Wells notice” from the SEC concerning “an undefined portion of our listed digital assets”, the company’s staking service, and its Coinbase Prime and Wallet products.
“We are prepared for this disappointing development,” Coinbase said in blog post, adding that it welcomed a “legal process to provide the clarity we have been advocating for and to demonstrate that the SEC simply has not been fair or reasonable when it comes to its engagement on digital assets.”
But analysts saw reason for concern alongside the latest notice, with Jefferies analyst Trevor Williams saying it represented an “ominous sign.”
“We believe the notice is a likely precursor to an enforcement action, which could put revenue from alt. coin trading and staking in jeopardy if required to register with the SEC as securities,” he wrote. “We est. ~35% of net revenue is potentially at-risk, depending on the SEC’s course of action.”
Mizuho’s Dan Dolev came up with a similar estimate, positing that up to a third of Coinbase’s revenue could be impacted by potential SEC actions.
“This is a significant overhang to the stock, in our view,” he wrote. “Even if there is no near-term disruption, alt-coins may ultimately require registration, and risk of application denial could significantly weigh on COIN’s ability to generate revenue. For perspective, alt-coins and staking accounted for 30-35% of total revenue in 4Q.”
Oppenheimer’s Owen Lau downgraded the stock in the wake of the SEC’s notice, also highlighting that the stock had more than doubled on the year as of the publication of his note.
“While we remain highly supportive of blockchain/digital asset development in the US, under this unhealthy regulatory climate, we are increasingly worried about the fairness of the enforcement actions, and the ability for the ecosystem to grow with seemingly limited and shrinking support from the banking system in the US,” Lau wrote.
He lowered his rating on the stock to perform from outperform.
Bernstein’s Harshita Rawat offered that it was “very hard to quantify impact given limited details available” at this stage. She noted that Kraken settled with the SEC earlier this year around its own staking service, and paid a $30 million fine while ending that service.
“We, however, note that Kraken’s staking service was quite different from that of Coinbase,” she wrote, adding that staking allows users to obtain rewards for staking crypto assets on the blockchain. “While Wallet (also discussed in the 8-K) is likely currently small for COIN (in terms of revenue exposure), it is very important for long-term growth as Coinbase aims to become the on-ramp to the cryptoeconomy.”
She agreed that the SEC’s interest in the company represents “a key overhang for Coinbase stock” and noted that a potential legal battle could be “protracted.”
Barclays analyst Benjamin Budish also cautioned that it was “difficult to quantify what the impact could be to the company, other than by examining prior enforcement actions and settlements.”
He hypothesized that the notice “may be regarding the selling of unregistered securities, given Chair Gensler’s recent comments reiterating his view that many of the tokens and products offered by crypto companies are securities and need to be registered with the SEC” and given other recent actions by the agency.
In the “most onerous” scenario “if various crypto assets are deemed securities, Coinbase would therefore need to register as a securities exchange, in order to keep offering trading in those asset,” and Coinbase might have to split the exchange and brokerage parts of its business to company with rules for exchanges,” Budish noted.
