What’s in a name? Plenty. The Securities and Exchange Commission has opened an official investigation into Coinbase Global (ticker: COIN), Bloomberg reports, probing whether the crypto exchange wrongly facilitated transactions in digital assets that should be designated as securities under the law.
Precipitating that formal inquiry: Coinbase’s decision last year to expand its crypto offerings beyond the likes of bitcoin and ethereum into more obscure digital assets like dogecoin, which was launched as a joke yet inexplicably retains an $8 billion market value following a 90% pullback from spring 2021.
Today’s salvo follows Uncle Sam’s leveling of wire fraud and insider trading charges against former Coinbase product manager Ishan Wahi and a pair of co-defendants last week, marking the first such U.S. enforcement action within the crypto industry.
Prosecutors allege that Wahi acted on advance notice of imminent crypto listings on the platform to garner illicit profits. Part and parcel with that legal action, the SEC contends that seven cryptocurrencies available for trading on Coinbase are unregistered securities.
“We 100% disagree with the SEC’s assertion that any of the crypto assets we list are securities,” chief legal officer Paul Grewal tweeted Thursday. “We are confident that our rigorous due diligence process – a process the SEC has already reviewed – keeps securities off our platform.”
That’s not the first time that Coinbase management opted for the confrontational route via social media. "Some really sketchy behavior coming out of the SEC recently," co-founder and CEO Brian Armstrong proclaimed last September at the onset of a 21 tweet thread accusing the regulator of obstructing the rollout of Coinbase’s crypto lending platform. Once more, the question at hand was whether cryptocurrencies constitute securities under the SEC’s purview.
Coinbase may be raising its voice because it feels its business depends on it, to judge by language from risk factors in the company’s May 10-Q filing is any indication:
If the SEC, state or foreign regulatory authority, or a court were to determine that a supported crypto asset currently offered, sold, or traded on our platform is a security. . . we could be subject to judicial or administrative sanctions for failing to offer or sell the crypto asset in compliance with the registration requirements, or for acting as a broker, dealer, or national securities exchange without appropriate registration.
Such an action could result in injunctions, cease and desist orders, as well as civil monetary penalties, fines, and disgorgement, criminal liability, and reputational harm.
Customers that traded such supported crypto asset on our platform and suffered trading losses could also seek to rescind a transaction that we facilitated as the basis that it was conducted in violation of applicable law, which could subject us to significant liability. We may also be required to cease facilitating transactions in the supported crypto asset other than via our licensed subsidiaries, which could negatively impact our business, operating results, and financial condition.
The course correction in asset prices hasn’t been kind to COIN, with shares off 84% from their mid-November highs. On the bright side, that volatility afforded Coinbase’s c-suite the opportunity to show off its own trading bona fides. Over the past year, management sold upwards of $600 million of stock into the open market (more than all but seven domestic firms in the financial sector over that stretch) at an average price of $289 per share, compared to $53 today.
Still sporting a $10 billion enterprise value following the selloff, Coinbase will post negative $311 million in adjusted Ebitda this year if the sell side is on the beam, on the way to generating $1.2 billion in that well-groomed earnings figure by 2024. Yet growth has stalled, with first quarter revenues slipping to $1.2 billion from $1.6 billion year-over-year. Meanwhile, non-cash expenses percolate, as stock based compensation expense leapt to $352 million over the three months ending March 31, from $104 million in the prior-year period
What might the future hold for the crypto exchange? After Coinbase warned in a May filing that customers “could be treated as general unsecured creditors” in the event of a corporate restructuring, Armstrong took to Twitter once more to declare that “we have no risk of bankruptcy.”
Mr. Market harbors his doubts. Coinbase’s double-B-plus/double-B-rated, senior unsecured 3 5/8% notes due 2031 have struggled mightily since their September issuance, changing hands at 64 cents on the dollar yesterday (prior to news of the SEC investigation) for a 690 basis point option-adjusted spread over Treasurys. That compares to a 235 basis point pickup at issuance ten months back and is well wide of the 530 basis points on offer for the single-B-rated segment of the Bloomberg High Yield Corporate Bond Index.