Coinbase, a public-listed U.S. crypto exchange, has troubles with the U.S. Securities and Exchange Commission (SEC), which has threatened to sue Coinbase over some of the crypto exchange’s products. The regulator gave Coinbase a Wells notice, typically one of the final steps before the SEC formally issues charges. The SEC qualifies some of the company’s assets and services as securities, including its staking services.
Disappointed With The Regulator
In a blog post, Coinbase Chief Legal Officer Paul Grewal wrote: “we are disappointed to share that the SEC gave us a “Wells notice” regarding an unspecified portion of our listed digital assets, our staking service Coinbase Earn, Coinbase Prime, and Coinbase Wallet after a cursory investigation.” Staking crypto enables investors to generate returns by locking their tokens into various platforms. Coinbase is the intermediary for its staking customers and receives a fee for its services.
Many long-term crypto holders look at staking as a way of making their assets work for them by generating rewards, rather than collecting dust in their crypto wallets.Coinbase website
The Staking Issue
Staking is employed by several blockchains, including Ethereum, Cardano, and Solana. The SEC, other regulators, and law enforcement agencies consider staking an investment product. The providers of staking would therefore have to be registered accordingly. In a recent lawsuit against the KuCoin crypto exchange, New York Attorney General Letitia James claimed that the second-largest cryptocurrency, Ether, would also be a security due to its “proof-of-stake” validation mechanism.
The SEC recently ordered the crypto exchange Kraken to pay $30 million in disgorgement, prejudgment interest, and civil penalties because it failed to register its crypto asset staking-as-a-service program. Kraken agreed to immediately cease offering staking services to U.S. customers but will continue its staking programs outside the U.S.
Coinbase Business Implications
In 2021, Coinbase earned $3.6 billion in net income. 2022 was a disaster year for crypto, with massive price drops and bankruptcies. The trading volume of all crypto exchanges collapsed. Coinbase ended the year with a net loss of $2.6 billion. Analysts project significant losses for Coinbase in both 2023 and 2024.
In 2022, trading in Ether accounted for 25% of the total trading volume and generated 22% of the transaction revenue. If Coinbase has to stop offering staking services and thus trading Ether, it will look bad for the company’s finances.
Against the backdrop of the impending SEC enforcement action and the classification of Ether as security, Coinbase‘s business model and profitability would be massively threatened. Coinbase could face the need to reinvent itself. At the end of 2022, Coinbase still had $5.9 billion in “total available resources.” This should give the company enough liquidity to finance the difficult years until 2025. But who knows?