Coinbase stock falls amid SEC storm clouds. Fallout for Robinhood and Crypto.
Coinbase Global shares fell on Thursday as analysts soured on the stock after the cryptocurrency broker revealed that serious US regulatory enforcement was on the way. There are important implications for rival Robinhood Markets and the broader crypto space.
Coinbase (ticker: COIN ) shares fell 13% in U.S. premarket trading on Thursday following a disclosure on Wednesday that the Securities and Exchange Commission (SEC) had sent the group a “Wells Notice.” This means the regulatory agency’s staff has decided to recommend an enforcement action, and Coinbase said it believed it would target its core trading business as well as an interest-bearing service, institutional trading solution and custody business.
An SEC action would not only deal a blow to a company at the heart of US token trading, but has the potential to reshape the regulatory backdrop for US digital asset companies, with global implications for crypto markets.
“This is a significant overhang to the stock, in our view,” Mizuho Securities analyst Dan Dolev said in a Wednesday note. “While there is no near-term disruption, alt-coins [which are tokens other than Bitcoin] may ultimately require registration, and the risk of application denial could significantly weigh on Coinbase’s ability to generate revenue.”
Mizuho reiterated its Underperform rating on Coinbase and its stock price target of $30. Shares closed at $77.14 on Wednesday. Other analysts may soon follow suit and become more bearish on the stock, with Oppenheimer not least
‘s
Owen Lau downgrades Coinbase to Perform from Outperform following the SEC news.
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“We continue to see regulatory risk as meaningful for Coinbase given significant (high quality) revenue growth potential from services like efforts that are at risk of regulatory elimination,” JP Morgan analysts led by Kenneth B. Worthington wrote in a Wednesday note. The group rates Coinbase as Neutral.
While scrutiny of Coinbase’s interest-bearing “staking” service and other business areas would be detrimental to revenue, the most important pressure is on trading operations and an existential question of whether digital assets are securities.
Coinbase and the SEC have differed on this point before, but a definition hashed out in a legal battle could ultimately put crypto trading and markets under regulatory oversight, challenging the decentralized structure of crypto markets and blockchain networks.
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At Coinbase, Mizuho’s Dolev specifically estimates that 25% of altcoin registration applications could be denied by the SEC, which — combined with the impacts of dried-up staking revenue — could lower the broker’s top line by as much as 20%.
For rival broker Robinhood (HOOD), it looks like it could be a mixed bag. While shares of the company rose 0.2% in pre-market US trading, Robinhood could also come under pressure. While the broker doesn’t offer the kind of interest-bearing services that have repeatedly attracted scrutiny from the SEC, it has significant business as a crypto-trading platform for tokens that the agency may eventually classify as securities.
In the short term, regulatory scrutiny of a rival could provide some lift to Robinhood stock. In the longer term, it can cause pain – but not nearly as much as for Coinbase. While Robinhood doubled down on crypto throughout the recent bull run, digital assets are not a core part of the business, which is still dominated by options trading and, to a lesser extent, stocks.
After a year of falling prices and increasing regulatory scrutiny, this is bad news for the crypto markets at large. Should a handicap on Coinbase’s trading operations spread to other exchanges, it could further cut off US crypto companies from the global digital asset space – a risk that has already threatened the collapse of two crypto-focused banks in recent weeks.
This has the potential to hit liquidity in crypto markets, especially tokens other than
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Bitcoin,
which already tend to be more volatile – but it also increases another risk.
Crypto is not going away anytime soon, and US investors are likely to look offshore if their ability to trade digital assets is limited in the US. This can only further concentrate market risk in the likes of Binance – by far the world’s largest crypto exchange – which is based offshore and not as well regulated. The SEC and others concerned about financial stability should pick their poison.
Write to Jack Denton at [email protected]
