Coinbase Stock Shares Fall After Reports of Regulatory Scrutiny From SEC

No-moat Coinbase (COIN) has fallen further on reports in Bloomberg and other media that the SEC is investigating the company over whether some of the cryptocurrencies that have been listed on its platform should have been registered as securities before issuance. This carries risk for Coinbase as the firm cannot allow its users to trade unregistered securities, and is not an official securities exchange.

When Ripple’s XRP token was accused by the SEC of being an unregistered security in 2020, Coinbase delisted the cryptocurrency immediately, despite an ongoing court case. This represented a material loss of revenue for the firm, as XRP was the third-most-traded token at Coinbase at the time.

Since then, Coinbase has substantially increased the breadth of its listing, currently offering trading in over 200 tokens, adding to the risk that many of the assets on its platform could run foul of the SEC. Determinations that some of these cryptocurrencies are, in fact, securities could lead to a further loss of revenue for Coinbase, which the firm can ill afford given existing market conditions, or lead to outright fines.

This has been a regulatory gray area for some time as current SEC Chairman Gary Gensler and his predecessor Jay Clayton have been public in their belief that many cryptocurrencies are securities and should be registered with the SEC. Despite these statements, clear-cut regulatory rules have been missing with only limited enforcement.

However, with the high-profile failures of cryptocurrencies like Luna, as well as cryptocurrency-related firms, the focus on cryptocurrency regulations from the SEC and other parties have increased, adding to already substantial risks for Coinbase.

While Coinbase does trade well below our fair value estimate, we empathize over the very high levels of risk facing investors as the company faces weak cryptocurrency prices, along with our expectations for deep losses in 2022, and now increased regulatory attention.