Coinbase Global, Inc. (NASDAQ:COIN), the leading cryptocurrency exchange in the U.S., has entered troubled waters with the Securities and Exchange Commission (SEC). The SEC filed a lawsuit against the company, alleging it acted as an unregistered securities exchange, brokerage, and clearing agent.
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The SEC’s lawsuit not only targets the staking business of Coinbase (staking refers to locking up cryptocurrency to support operations on a blockchain network) but its core trading business as well, which took the market by surprise last week. I remain bullish on the long-term prospects for Coinbase as the company enjoys a long growth runway, but the stock will likely remain under pressure in the foreseeable future.
The Lawsuit and Coinbase’s Reaction
The SEC’s lawsuit alleges that Coinbase has acted as a broker, clearing agency, and exchange since 2019 without registering with the SEC to provide these services to its clients. By avoiding registration, the company has allegedly failed to provide investors with the safety associated with registered brokers. The SEC also alleges that Coinbase has not met the reporting requirements usually expected from a registered broker conducting similar businesses.
Coinbase’s staking business is also being targeted by the watchdog on the grounds that Coinbase is engaging in business practices that mimic the sale of securities without registering these securities. Although staking revenues accounted for less than 5% of Coinbase’s revenue last year, the company has been aggressively marketing this product to its customers to diversify its revenue streams.
The SEC’s crackdown on the staking business, therefore, is a direct attack on the company’s mission to build a diversified business that does not entirely depend on trading fees.
In response to this lawsuit, Coinbase Chief Legal Officer Paul Grewal told Bloomberg that the company is looking forward to this court case, where he believes a decision will be reached in Coinbase’s favor given that the SEC’s registration process lacks clear guidance for the registration of digital assets. In a tweet, Coinbase CEO Brian Armstrong also voiced a similar opinion confirming that he is confident about the case that his team is building to defend Coinbase’s business practices in court.
Wall Street’s Reaction
Coinbase stock finished about 12% lower on June 6 as investors weighed in on the potential impact of this lawsuit, and Wall Street’s reaction to this development has been mixed so far.
Moody’s (NYSE:MCO) downgraded Coinbase in light of the expected impact of this lawsuit but affirmed the B2 corporate family credit rating assigned to the company. Meanwhile, Cathie Wood’s ARK funds snapped up more than 400,000 shares of Coinbase last week amid the collapse of its stock price.
Elaborating on this decision, Cathie Wood commented that recent regulatory decisions offer more clarity on the policy framework for cryptocurrencies and other digital assets. She went on to claim that a lack of clarity on regulation will drive digital asset businesses away from the country.
The Long-Term Outlook Remains Promising
Coinbase charges higher fees compared to many of its peers, which is an indication that the company is enjoying competitive advantages that possibly stem from its clean safety track record. Although it is too early to predict whether the company will benefit from such competitive advantages in the long term, it’s evident that Coinbase is well-positioned to grow with the continued adoption of digital assets, including cryptocurrencies.
To build a sustainable, less-volatile revenue stream, Coinbase is focused on growing its subscription business. In the first quarter of 2023, Subscription and Services revenue grew more than 138% to $361.7 million, which highlights the strong momentum behind this business segment. An increasing proportion of revenues coming from subscriptions will help the company weather crypto market downturns better in the future.
Coinbase’s 360-degree product portfolio is another growth driver. Although Coinbase began business as a crypto exchange, the company has branched out to offer crypto debit cards, lending products, NFTs, and payment solutions, expanding its addressable market opportunity.
These business expansions are helping the company to cater to the complex demands of both individual and institutional customers. With digital assets growing in popularity, Coinbase is well-positioned to grow in the long term.
Is Coinbase a Buy, According to Analysts?
Based on the ratings of 24 Wall Street analysts, COIN stock comes in as a Hold. Further, the average Coinbase stock price target is $58.85, which implies upside of 11.8% from the current market price.
As recently as last month, Coinbase stock was trading above $60. The SEC’s lawsuit has resulted in Coinbase stock crashing back to around $53, which leaves investors with some upside potential. However, investors will have to monitor analyst activity closely as there could be more downgrades in the coming weeks as the market receives more updates from Coinbase and the SEC.
Takeaway: Short-Term Volatility Masks the Bigger Picture
Volatility is on the cards for Coinbase stock, with the market eagerly anticipating more details about the SEC’s lawsuit. Nonetheless, long-term-oriented investors might find increasing volatility a new opportunity to invest in Coinbase, as the long-term outlook still looks bright despite short-term setbacks.
