Crypto trading platform
Coinbase
just took the next step in a crucial court battle that may take years to play out. But investors should be wary of a less closely watched action that could come to a head in mere weeks.
Late Wednesday, Coinbase (ticker: COIN) filed a response in court to allegations from the Securities and Exchange Commission that it is operating illegally as a securities exchange without making the proper registrations. As expected, the trading platform’s lawyers argued in the filing with the U.S. District Court for the Southern District of New York that the tokens it allows investors to buy and sell aren’t securities, putting the company outside the SEC’s purview. The attorneys also argued that the SEC hadn’t made its own rules clear, or given Coinbase the proper notice that the agency believed the company was violating the law.
The SEC didn’t immediately respond to a request for comment.
The court battle could take months or even years to play out, as the agency and the crypto platform spar over what crypto tokens are securities. After the SEC sued the company on June 6, Coinbase Chief Legal Officer Paul Grewal said the company would “continue to operate our business as usual.”
But investors also should pay attention to a lesser known action that could come to a head as soon as the first week in July. On the same day the SEC sued Coinbase, a group of 10 state securities regulators including those of Alabama, California, and New Jersey brought a coordinated set of actions against the company alleging that its “staking” product is a security that needs to be registered. With staking, Coinbase allows investors to post tokens they own in exchange for yield, which the company takes a cut of.
Some of those state actions require Coinbase to show that its product isn’t a security within 28 days or to cease offering it, which would put the deadline at July 4.
The regulators can extend the deadline, but the elimination of staking would be a substantial hit to the platform’s revenue.
“We think it is highly unlikely that COIN will be able to convince the states that their concerns are misplaced,” wrote Berenberg Capital Markets analyst Mark Palmer in a research note on Thursday, noting that staking was nearly 10% of the platform’s net revenue in the first quarter. Berenberg has a Hold rating on the stock.
Coinbase didn’t respond to a request for comment. Executives in the past have said the company doesn’t believe the staking product is a security and that, in any case, the company is seeking to diversify revenue sources so that it makes profits even as crypto goes through various cycles and regulatory difficulties.
Coinbase wouldn’t be the first company to halt staking services in the U.S. In February, competitor Kraken agreed to end staking for U.S. customers and pay a $30 million fine to the SEC. Coinbase executives at the time said they believed their company’s product was substantially different from what Kraken offered.
Write to Joe Light at [email protected]
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