The debut of the first Spot Bitcoin exchange-traded fund was a “selling news” moment not only for the digital asset but also for Coinbase Global Stocks. But despite last week's hype, Coinbase's real challenges are still on the way.
The first test of that will come Wednesday, when a federal judge is scheduled to hear oral arguments in a case between Coinbase and the Securities and Exchange Commission. The SEC sued Coinbase last year for allegedly operating an unregistered securities exchange. Coinbase is trying to persuade a judge on Wednesday to dismiss these claims at an early stage in the case.
“While motions to dismiss are rarely successful, we believe this is an important day for both sides to continue to make their voices heard and get closer to the facts,” said Coinbase Chief Financial Officer Alecia Haas. Barons On the sidelines of the World Economic Forum in Davos, Switzerland. “Our legal claims are on our side. These are not securities.”
Whether the lawsuit is successfully dismissed or profits are made could have a major impact on Coinbase's business. The company's stock price has fallen about 23% so far in January after quadrupling in 2023. Last year's rally came as the cryptocurrency market shook off the bankruptcy of competitor FTX, increasing the likelihood of approval for a Bitcoin ETF. Approval was finally granted last Wednesday.
This lawsuit is perhaps even more important for the platform. The SEC's complaint alleges that at least 13 assets that Coinbase allows trading are securities that should be registered with the agency. He also said Coinbase's “staking-as-a-service” product, in which investors post tokens in exchange for yield, should have been registered.
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In a statement accompanying the agency's approval of the Bitcoin ETF, SEC Chairman Gary Gensler warned that the fund's approval should not be taken as an indication that the agency will backtrack on crypto enforcement. .
“Today's actions do not endorse or endorse crypto trading platforms and intermediaries, which in most cases do not comply with federal securities laws and often have conflicts of interest,” Gensler said.
Haas said that “altcoins,” excluding Bitcoin and Ether, account for about a third of Coinbase's trading volume, meaning that the SEC is specifically targeting only a small portion of them. Then he pointed out.
However, altcoin trading could become a more important part of Coinbase's revenue. For example, the approval of Bitcoin ETFs will make it easier for retail investors to buy Bitcoin with no trading fees at brokers like Fidelity or Robinhood Markets.
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Achieve a very low annual expense ratio. This could potentially pull Bitcoin trades from Coinbase, where retail investors can pay fees and spreads well above 1%.
Bank of America analysts led by Jason Kupferberg wrote in a research note last week that “pending litigation with the SEC and a lack of broad regulatory clarity continue to pose challenges for COIN.” said. In a note, analysts reiterated their “underperform” rating on the stock, but raised their price target from $66 to $79 on the back of increased crypto trading volume.
A judge in the U.S. District Court for the Southern District of New York is not scheduled to issue a ruling Wednesday, and the case could drag on for years, including appeals.
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Congress, in an election year, is unlikely to grant Coinbase the regulatory relief it has long sought, and 2024 could be a tumultuous year.
Email Joe Wright (joe.light@barrons.com) and Jack Denton (jack.denton@barrons.com).
