The highly anticipated launch of the first-ever spot Bitcoin exchange-traded funds (ETFs) has taken a toll on Coinbase Global stock, leading to a “sell the news” moment for both digital assets and the exchange. However, the real challenges for Coinbase are still on the horizon.
This Wednesday marks a significant test for Coinbase, as a federal judge will listen to oral arguments in a lawsuit between the exchange and the Securities and Exchange Commission (SEC). The SEC had filed a lawsuit last year, accusing Coinbase of operating an unregistered securities exchange. In these early stages of the case, Coinbase aims to persuade the judge to dismiss these allegations.
Although motions to dismiss are rarely successful, Coinbase’s Chief Financial Officer, Alesia Haas, believes that it is a crucial day where both sides can present their arguments and approach closer to uncovering the facts. Haas stated, “Our legal arguments are on our side: These are not securities.”
The outcome of this case, whether it is dismissed or proceeds further, could have significant implications for Coinbase’s business. Currently, its stock has experienced a 23% decline in January after surging four-fold in 2023. The surge occurred amidst the crypto market’s recovery from FTX’s bankruptcy and an increased likelihood of Bitcoin ETF approval. Finally, the approval was granted last week.
However, the court case holds even greater importance for Coinbase. The SEC’s complaint suggests that at least 13 assets available for trading on Coinbase should have been registered as securities. Additionally, the complaint claims that Coinbase’s “staking as a service” product, which allows investors to earn yield by staking tokens, should have also been registered.
In a statement accompanying the agency’s approval of Bitcoin ETFs, SEC Chair Gary Gensler warned against interpreting the approval as a signal of reduced crypto enforcement efforts by the agency. The outcome of the lawsuit against Coinbase will undoubtedly shape the platform’s future.
Crypto Trading Platforms Facing SEC Scrutiny
In a recent statement, Gary Gensler, the Chairman of the U.S. Securities and Exchange Commission (SEC), expressed concerns over the compliance and conflicts of interest among crypto trading platforms and intermediaries. While he did not endorse or approve these platforms, Gensler highlighted their noncompliance with federal securities laws. This scrutiny from the SEC specifically targets certain tokens, referred to as “alt coins,” which make up a smaller portion of Coinbase’s trading volume compared to Bitcoin and Ether.
Interestingly, alt-coin trading could play a more significant role in Coinbase’s revenue in the future. The recent approval of a Bitcoin ETF has made it easier for retail investors to purchase Bitcoin without paying trading commissions on platforms like Fidelity and Robinhood Markets, where the annual expense ratio is noticeably low. As a result, Coinbase may experience a decline in Bitcoin trading as retail investors seek more cost-effective options.
The pending litigation between Coinbase and the SEC presents an ongoing challenge for the company. Despite recent strong crypto-trading volumes, the lack of regulatory clarity surrounding the industry remains a concern for financial analysts at Bank of America. They have reiterated their “Underperform” rating on Coinbase’s stock while raising their price target to $79 from $66.
However, it should be noted that the lawsuit filed in the U.S. District Court for the Southern District of New York is unlikely to reach a resolution in the near future. Moreover, considering that it may involve multiple appeals, this legal battle could potentially extend over several years.
Given the current political landscape and the unlikelihood of regulatory relief for Coinbase, this innovative crypto trading platform may face a challenging journey throughout 2024.
