Coinbase under pressure as signature bank failure adds to crypto banking woes

“The spectacular fallout of Silicon Valley Bank, the voluntary liquidation of Silvergate and the abrupt closure of Signature Bank have severely affected not only the digital asset ecosystem, but also the ecosystem of Silicon Valley,” said Owen Lau, analyst at Oppenheimer
,

in a note Sunday.

Fortunately, depositors at both Silicon Valley Bank and Signature Bank will get their money back, and the Federal Reserve said additional emergency funding will be made available to other eligible banks in a backstop.

The former point is particularly important to the crypto industry, as Circle Internet Financial – issuer of the dollar-pegged USD coin – retained more than 3% of its assets to back the stablecoin in Silicon Valley Bank. Concerns over the USDC’s support saw it fall below 90 cents on the dollar in secondary markets over the weekend, before rebounding to knock about $3 billion, or 7%, off its market value.

Crypto companies made up nearly 20% of deposits at Signature Bank, so the safety of deposits at that institution similarly spares the digital asset sector from losses.

More worryingly, Signature’s collapse means the end of the Signet interbank transfer system, a piece of crypto market infrastructure that was one of the few options left after Silvergate discontinued its SEN service. The absence of both networks, which were used by crypto market participants to send funds for trade, has already affected the liquidity of Bitcoin and is likely to make digital assets more volatile.

“While the crisis [Fed] Backstop is likely to stabilize the financial system, these failures have already destroyed some key infrastructures in the US public blockchain/digital asset industry, namely SEN and Signet,” said Lau. “We expect liquidity and trading volume to decline until someone fills the void, and the uncertainty will persist in the USDC and the industry.”

That will likely weigh on Coinbase
,

one of the largest publicly traded crypto companies and a primary arena for US crypto trading. Oppenheimer cut its price target on Sunday for Coinbase (COIN) to $70 from $84, reflecting “revenue and ecosystem risks.”

The fluctuations in USDC and the reduction in market capitalization are further problems for Coinbase, which has a revenue-sharing agreement in which Circle pays Coinbase to hold its customers’ dollar balances and corporate cash in USDC. In an environment of higher interest rates, this business is increasingly attractive – and it’s also the kind of diversification that analysts have called for at Coinbase, which otherwise relies heavily on revenue from crypto trading.

When Oppenheimer’s Lau talks about revenue risk at Coinbase, this is what he’s referring to. And he is not alone on Wall Street. Coinbase did not immediately respond to a request for comment.

“We estimate that if USDC’s market cap remains at current levels, this could drag on Coinbase’s 2023 revenue by ~2%, with an even bigger impact on profitability,” analysts led by Dan Dolev wrote on a Sunday, before USDC’s market cap had recovered slightly and was 10% lower.

“We remind investors that USDC is critical to Coinbase,” Dolev said. “In 4Q, USDC revenue accounted for ~80% of COIN’s interest revenue and 23% of total revenue.”

Mizuho rates Coinbase as Underperform with a price target of $30.

That’s just one more thing for investors to worry about

Dow Jones Industrial Average

and

S&P 500

swing around to start the week. Coinbase shares, meanwhile, were 2.5% higher — likely boosted by a big relief rally in the

Bitcoin

and other cryptos — though it had dipped into the red in choppy trading early Monday.

Write to Jack Denton at [email protected]