Coinbase (NASDAQ:COIN), with 56 million users, is a cryptocurrency trading platform now fighting an important legal battle with the Securities and Exchange Commission (SEC). Remarkably, the future of crypto trading and the entire private digital currency marketplace could be forever altered based on the outcome. So far, it looks like the SEC won the first round.
What Investors Should Know About the Coinbase Legal Battle
Coinbase’s legal fight and its implications are worth understanding as they shed light on the U.S. financial markets’ top cop’s views on crypto and the exchanges that support it. At issue for Coinbase, is that it, and other crypto exchanges, could lose their independence. Many crypto enthusiasts want exchanges to remain free from the same regulator overseeing public market stock exchanges and bond trading.
The legal face-off between the SEC and Coinbase began when the SEC filed suit in June 2023. The Commission alleges that Coinbase operates an unregistered securities exchange. Interestingly, the SEC claims most transactions in cryptocurrencies, excluding Bitcoin (BTC-USD), should be subject to its oversight. In sharp contrast to the SEC, Coinbase differs in its view of the still-young industry.
Instead, Coinbase has refuted the allegations and argues that cryptocurrency transactions are not securities and therefore cannot be under the SEC’s jurisdiction.
Is the SEC Winning Against Coinbase?
In a court decision this week, U.S. District Judge Katherine Polk Failla was asked by the Coinbase team to dismiss the SEC’s charges. Judge Failla denied all but one of the Coinbase claims, it was related to its wallet product. Failla allowed the rest of the SEC’s claims to move forward.
Consequently, the ruling against the company is seen as a significant blow to Coinbase and even the broader crypto industry. The reason it’s damaging is that it increases the likelihood that the company and others like it may be forced to restructure their operations in the worst-case scenario. Additionally, there is also the possibility that COIN and other crypto companies may be forced to severely limit the products they offer in the U.S. Perhaps it could even lead to Coinbase ditching its San Francisco headquarters and heading offshore.
The legal battle could be long. There are no easy answers as to how judges should treat crypto assets as highlighted by a divide among lower courts on the treatment of digital assets. This has resulted in judges issuing contradictory opinions on whether crypto asset transactions should be considered “investment contracts” and should hence be under the SEC’s regulatory control.
Finally, the outcome of this case may set a precedent for how digital assets are regulated in the U.S. But it won’t be soon. It could take years for any appeals to play out, with the possibility that appellate courts or even the Supreme Court will ultimately decide the issue.
Is Coinbase a Buy, Sell, or Hold?
COIN stock sits near its annual peak and has skyrocketed by more than 300% over the past year. Analysts remain sidelined on COIN stock with a Hold consensus rating based on nine Buys, 10 Holds, and four Sells. The average COIN price target of $192 implies a downside potential of 25.2%, suggesting that the stock could be overvalued at current levels.
The Current Score in the SEC vs. Coinbase Battle
Coinbase lost the first round in its legal battle with the SEC, but a battle still rages. Meanwhile, the future of cryptocurrency trading and regulation in the U.S. sits in limbo. The eventual outcome of the tussle between the SEC and Coinbase could have a lasting impact that could either help or hinder the crypto industry.
