The debut of the first spot Bitcoin exchange-traded funds ended up being a “sell the news” moment—not just for digital assets but for
Global stock. But for all of last week’s hype, Coinbase’s real challenges are still on the way.
The first of those tests comes Wednesday, when a federal judge will hear oral arguments in a lawsuit between Coinbase and the Securities and Exchange Commission. The SEC last year sued Coinbase for allegedly operating an unregistered securities exchange. Coinbase on Wednesday is attempting to convince the judge to dismiss those allegations in the case’s early stages.
“Motions to dismiss are rarely won, but we think it’s an important day where both sides can continue to express their views and get closer to the facts,” Coinbase Chief Financial Officer Alesia Haas told Barron’s on the sidelines of the World Economic Forum in Davos, Switzerland. “Our legal arguments are on our side: These are not securities.”
Whether the case is successfully dismissed or proceeds could have big ramifications for Coinbase’s business. Its stock has dropped about 23% so far in January after quadrupling in 2023. Last year’s run-up came as the crypto market shook off the bankruptcy of competitor FTX and as the chances of a Bitcoin ETF approval increased. The approval finally came to pass last Wednesday.
The court case is arguably even more important to the platform. The SEC’s complaint alleges that at least 13 assets Coinbase allows to trade are securities that should have been registered with the agency. It also said that Coinbase’s “staking as a service” product—in which investors post tokens in exchange for yield—should have been registered.
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SEC Chair Gary Gensler in a statement accompanying the agency’s approval of Bitcoin ETFs warned that the funds’ approval shouldn’t be taken as an indication the agency is backing off crypto enforcement.
“Today’s action does not approve or endorse crypto trading platforms or intermediaries, which, for the most part, are noncompliant with the federal securities laws and often have conflicts of interest,” Gensler said.
Haas noted that “alt coins”—not including Bitcoin or Ether—account for about a third of Coinbase’s trading volume, meaning that the tokens targeted by the SEC specifically are an even smaller fraction of that.
However, alt-coin trading could become a more important part of Coinbase’s revenue. The Bitcoin ETF approval, for example, makes it easy for retail investors to buy Bitcoin with no trading commissions on brokers such as Fidelity and
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with a very low annual expense ratio. That could draw Bitcoin trading from Coinbase, where retail investors can pay fees and spreads well in excess of 1%.
“The pending litigation with the SEC as well as a broader ongoing lack of regulatory clarity remains an overhang for COIN,” wrote Bank of America analysts led by Jason Kupferberg in a research note last week. The analysts in their note reiterated an “Underperform” rating on the stock, while raising their price target to $79 from $66 on the back of stronger crypto-trading volumes.
The judge in the U.S. District Court for the Southern District of New York isn’t expected to make a ruling on Wednesday, and the case, including appeals, could drag out for years.
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With Congress in an election year unlikely to give Coinbase the regulatory relief it has long sought, 2024 could be a bumpy ride.
Write to Joe Light at joe.light@barrons.com and Jack Denton at jack.denton@barrons.com
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