SEC sues Coinbase: What's next for the crypto industry?

also we got to talk about the SEC the SEC suing coinbase alleging the crypto exchange operator evaded regulations by trading unregistered Securities Shares are plummeting it's been under investigation by the regulator since last summer yesterday the satc took legal action against rival binance and its CEO CZ for what it called multiple Securities violations barenberg analyst Mark Palmer thought some action against coin was likely in the aftermath and guess what Mark joins us now so Mark great to have you here on set with us good to be here I mean you saw this coming essentially as as the rest of us were probably sensing was in was in the cards here for the SEC the SEC telegraphed this action we had seen prior actions brought against crypto exchanges bittrex bxc Kraken and now binance Each of which included elements that were consistent with the wells noticed that the SEC presented two coinbase back on March 22nd so in our of you nobody should have been surprised that this occurred and even the elements of the case lined up with what we expected the one thing that was a bit of a Twist is the fact that the SEC focused on 13 tokens in particular that it identified as Securities that coinbase trades big names in there Solana cardano polygon as well as 10 others that are a bit less well-known but the upshot here is that the Dragnet that the SEC has put out against crypto continues and we don't think it's going to stop anytime soon so obviously had been in discussions with the SEC about all of this has complained about the lack of clarity but I I have to wonder if if it I mean presumably the company also knew that this was coming Why didn't it stop doing what the SEC didn't want it to do well frankly I don't think it would be able to given the portion of its Revenue that is represented by these actions if you look at the unregistered or the trading of unregistered Securities which is what the SEC characterizes the crypto tokens that coinbase trades Bitcoin is the one big exception there that the SEC sees as commodity how much of trading on coinbase is Bitcoin uh Bitcoin is a significant portion it's about a third of its trading in terms of volume but it makes very little money uh on that Bitcoin trading if you look at Alternatives they offer Bitcoin trading fee free and so uh Bitcoin is effectively a way to bring consumers onto the platform it's not a way that the company makes money if you look at staking that represents about 10 percent of the company's Revenue that's targeted in the lawsuit so you put all of that together what we estimated was that if you looked at all the unregistered Securities I.E the tokens that coinbase trades other than Bitcoin add to that staking it was about 37 percent of the company's first quarter net revenue and so in in simple terms too because I was trying to as we were reading through the SEC allegations here in the suit I was trying to the best of my ability to figure out what they did wrong within their staking practice as well is it is clear is it evident what they were doing in in terms of the number of clients that they had marketed staking to seeing Revenue come in from and then then what essentially were they doing with those coins that they were staking well really it was just the fact that coinbase was involved in staking in general without registering a staking platform with the SEC got it in the eyes of the SEC uh staking you know the action through which proof of stake tokens are created is in itself a means through which Securities are created and exchanged there's really no way around that Kraken already settled with the SEC uh basically put its uh U.S staking operation to rest continues to operate overseas and and that really is one of the big questions now with regard to coinbase is will it be able to Pivot overseas the way that it has begun to do beginning uh with uh the launch of the derivatives Exchange in Bermuda and it's also looking at Dubai Singapore other geographies where it could set up shop but in the first quarter uh the U.S represented about 86 percent of coinbase's net revenue that is not an easy pivot to execute well and you you know you have a I think a whole recommendation on the stock that's correct so it's from that I'm implying that you think the jury's out on whether to be able to Pivot or what I mean what is the probability that they're going to make it through this even as a viable business it's first of all the the is going to be a pushback from coinbase in the courts and uh that is on multiple fronts in fact we uh believed it was possible that uh the SEC would hold off on uh bringing this action against coinbase until uh there was resolution of coinbase's request for a writ of manimus that would compel the SEC to bring rulemaking on uh cryptocurrencies uh that case is still pending in the third circuit uh but I think the confidence the SEC has that it will win was demonstrating the fact that they just pushed forward and and filed an enforcement action against coinbase um you know beyond that uh there's uh the the possibility that uh portions of the business beyond what we have identified uh could continue to operate but there are other portions that could be at risk for example The company generated about 27 of its net revenue in the first quarter uh from interest earned on usdc the stable coins uh now if you go back and look at the Federal Reserves rejection of custodia banks uh request to become part of the Federal Reserve Network back in January there was a lot of language in there that was very specific about their concerns about stable coins and the potential for their use to facilitate illegal activity frankly I think that same argument could be applied to usdc and we would not be surprised if usdc came within the sec's focus again that was 27 percent of the company's revenue on top of the 37 percent of the company's Revenue in the first quarter that we viewed as at risk at some point you know that's effectively two-thirds of the company's Revenue that we're talking about at some point you have to ask where are they going to be able to make this up you mentioned Kraken and the settlements that they went forward with with the SEC that one about 30 million dollars just for staking alone so now we were at to add any type of proportion to this for coinbase or even for binance what what does that look like as investors are trying to wrap their heads around how much the company might actually have to Pony up just to settle with the SEC or in fines with the SEC in the future well again if you look at the the Kraken situation um you know I think that that number is one that is the result of a settlement where they talk about what's big enough to make the SEC look like they took their pound of flesh but at the same time uh not something that's going to uh put the company out of business I think uh in this case uh this is more existential you know coinbase has basically said straightforward they cannot operate their business in the US if they have to register it with the SEC hence there's not a lot of Middle Ground there well and isn't there then also the idea that if I'm a U.S based investor with my assets at coinbase I already saw one sort of retail investor tweet this morning like take your money out so how big a risk is that that you see now flight of customers from the platform when they see these headlines I think based on what we saw happen in 2022 when so many different crypto platforms uh effectively trapped the assets of their customers on their platforms it's almost inevitable that you're going to see at least some reaction among consumers and that's prudent on their part you know the reality is that right now the only crypto token that is beyond the purview of the SEC or that the SEC has effectively blessed is Bitcoin so if you look at Bitcoin focused operations lightning Network which is the layer two built upon the the Bitcoin blockchain those operations I think are going to be able to operate and may flourish in the U.S simply because uh all of the other crypto operations are going to find it difficult to do so so industry have sort of painted as the SEC o is that accurate and what are the implications for not just coinbase not just Kraken in others you mentioned but really the whole U.S crypto industry right I think the way that you can characterize this is that the SEC is trying to bring crypto Under the Umbrella of its compliance and wants to see all tokens that it views as Securities and that's a big question which tokens are securities which are Commodities wants to see all of those tokens ultimately trade as registered uh Securities on platforms Bitcoin again because of its decentralized nature is an exception to that so yes Bitcoin will continue to exist in the U.S to be traded in the U.S we actually expect that one of the things that could occur as a result of what we're seeing is that the Bitcoin blockchain as an application layer could begin to thrive we're already seeing this uh recently with what are known as Bitcoin ordinal nfts the Bitcoin blockchain uh suddenly in the last few months jumped up to be the number two blockchain in terms of sales of NF tease what's the number one right now it's still ethereum okay and you know ethereum is uh is the Monster uh frankly one of the things that we were looking for in in this case to get a sense of what the SEC is thinking is would ethereum be or ether the the token of the ethereum blockchain be seen as a security as well it was not mentioned as one of the 13 in the case and just very quickly before we let you go you was talking about what sounds like almost Bitcoin maximalism reminded me to ask about microstrategy speaking of the Bitcoin maximalist of all maximalists uh Michael Saylor who's the chairman of the company um what does all of this mean for it and it's big Bitcoin stake uh we are bullish on microstrategy for all of these reasons the fact that we do believe that this could be uh bitcoin's moment in the Sun so to speak um and that microstrategy holding uh 142 500 Bitcoin on its balance sheet is well positioned to benefit from that especially because uh there is a catalyst here which in May 2024 we are expecting to see what's known as the Bitcoin having uh which is when the Bitcoin minor rewards are cut in half it has an effect on the supply of Bitcoin uh hence it has an effect on the price historically there have been three having so far and with each one there was a run-up in the price of Bitcoin six months before that event and six months after uh again that the next having is in May 2024 so we we view that as an important Catalyst for microstrategy and we think that uh amidst all of the chaos and crypto uh Bitcoin represents a safe haven microstrategy represents a way to play that Mark Palmer barenberg Capital Market senior equity research analyst Mark great to have you studio with us today

Channel: Yahoo Finance

Views: 11,563

Keywords: Yahoo Finance, Personal Finance, Money, Investing, Business, Savings, Investment, Stocks, Bonds, FX, Currencies, NYSE, Equities, News, Politics, Market, Markets, Yahoo FInance Premium, Stock market

Id: bTxzxZTI3G0

Length: 11min 28sec (688 seconds)

Published: Tue Jun 06 2023