Coinbase Is Facing an ‘Existential Risk’ as SEC Reins In Crypto
News Source: Bloomberg.
Coinbase, the premier cryptocurrency exchange in the United States to go public on the Nasdaq, was initially hailed as a welcomed addition to the financial mainstream by American regulators. Nevertheless, it has come to light that the Securities and Exchange Commission (SEC) might decide to categorize some of the tokens that Coinbase trades on its platform as securities, thereby subjecting them to the same regulations as stocks and bonds. This outcome was flagged as a significant risk in the documents provided to Coinbase’s investors.
Now, two years have passed, and the SEC is taking steps to tighten its grip on a market that has been plagued by scandals and bankruptcies. This has resulted in a legal battle over an enforcement push that could have far-reaching implications for the cryptocurrency exchange company and the wider cryptocurrency industry, which has long existed in legal grey areas.
Stephen Glagola, a TD Cowen analyst who rates the exchange’s shares as underperforming (equivalent to a sell recommendation), stated that the company acknowledged that the SEC’s actions “could potentially require Coinbase to jettison its entire customer-facing business. There’s just existential risk.”
The SEC’s actions reflect its eagerness to clamp down on the cryptocurrency industry since the collapse of rival exchange FTX due to alleged fraud late last year. The regulator has since sued other crypto-trading platforms, including Beaxy.com and Bittrex Inc., for allegedly operating unregistered exchanges, brokerages, and clearing businesses. It has also reached a settlement with Kraken over its US staking program, a service that allowed customers to earn rewards in exchange for letting their tokens be used to order transactions on blockchains.
CEO Brain Armstrong
Coinbase, currently one of the largest cryptocurrency exchanges, is reportedly preparing to fight a potential enforcement action by the US Securities and Exchange Commission (SEC) over its cryptocurrency lending program. The SEC has issued a Wells notice, indicating that it plans to take action against Coinbase. While the details of the allegations are not yet publicly known, analysts estimate that around 35% of Coinbase’s net revenue could be at risk depending on the SEC’s course of action.
Some experts believe that the cryptocurrency industry has become more resistant to regulation because of the threat it poses to their businesses. Coinbase has indicated that it plans to fight the SEC’s allegations and maintain that the tokens traded on its platform are not securities. Coinbase’s CEO, Brian Armstrong, has previously met with regulators and lawmakers in the US capital and emphasized the company’s commitment to compliance with regulations.
The outcome of the SEC’s push could have significant implications for Coinbase, which has already experienced diminished revenue and a falling stock-market valuation since the cryptocurrency market downturn. Coinbase recently reported a smaller-than-expected net loss of $79 million in the first quarter of 2023, although revenue was still down by about one-third from the previous year.
In 2021, Coinbase faced a threat from the SEC regarding its planned lending product, which resulted in the company canceling the launch. Later, it suspended trading in XRP after the SEC sued Ripple Labs Inc. over securities offerings that should have been registered with the agency. Currently, the cryptocurrency exchange platform is preparing to face a potential lawsuit from the SEC while continuing to operate normally. Paul Grewal, Coinbase’s chief legal officer, argues that the current rules required for registered securities exchanges don’t work for blockchain and would only add to the cost of trading.
The cryptocurrency exchange has also launched a campaign called “Stand with Crypto” to rally public support and has backed a lawsuit against the US Treasury Department over the sanctioning of Tornado Cash. In addition, they have sued the SEC for allegedly failing to respond promptly to its rule-making request. However, some industry experts are critical of Coinbase’s approach and believe that fighting with regulators is not a wise strategy.
In the meantime, the crypto exchange is expanding overseas, recently launching an international derivatives exchange with a license from Bermuda. Coinbase’s CEO, Brian Armstrong, has said that if the US remains hostile to crypto, the company will invest more money overseas.
What is your take on the issue between SEC and the cryptocurrency industry, seeing that even the so-called banking system is collapsing in on itself despite having the SEC’s supervision?
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