Authorities in four states have ordered Coinbase Global to halt any additional growth in its interest-bearing service for retail investors, representing a risk to revenue after months of regulatory heat on the crypto broker.
In June, the Securities and Exchange Commission and 10 states charged
(ticker: COIN) with offering unregistered securities through a so-called staking program, which allows customers to earn yield on crypto tokens. The latest action from four of those states, which limits revenue growth in a key area for the company, adds to the regulatory pressure that has hung over Coinbase for much of this year.
In a blog post published late Friday, Coinbase said that California, New Jersey, South Carolina, and Wisconsin have required Coinbase to prevent retail customers from staking additional assets while their proceedings go forward. The company said that it has been in active discussion with state agencies over the past several weeks, and that “the vast majority” of customers aren’t affected and remain eligible to stake crypto.
“We were disappointed to see some state regulators take this path, as we have offered our staking services transparently, safely, and reliably for nearly four years,” Coinbase said in its blog post. “In all ten states, Coinbase will vigorously defend our staking services in those proceedings.” The broker has said previously that it would continue operating and that it would defend itself against the SEC charges in court.
For Mark Palmer, an analyst at Berenberg, this is yet another sign of the regulatory risk that remains for Coinbase stock, which has torn higher this year. Palmer rates the shares at Hold with a target of $39 for the price.
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Coinbase stock opened at $104.57 on Monday, rising a further 1% in morning trading to bring its one-month jump to near 90% as investors appeared unfazed by the orders from the four states. The shares have marched higher despite regulatory scrutiny, gaining alongside crypto prices amid optimism over new applications for
exchange-traded funds with Coinbase as custodian.
The stock got a lift last week after a federal judge delivered a partial win to the token issuer Ripple in a case against the SEC, ruling that its XRP token didn’t, in and of itself, meet the definition of a security. The ruling represents rare clarity on a federal level over whether a digital asset is a security, with implications for how tokens—and companies that issue or facilitate trade in them, such as Coinbase—should be regulated. The Ripple case could include precedents for Coinbase’s own battle against the SEC.
Still, the orders from California and the other states “served as a reminder to investors who may have viewed Coinbase’s risk profile as significantly improved after last week’s court ruling on Ripple,” Palmer said in a Friday note. “The company’s challenges on the U.S. regulatory front remain significant while appearing far from being resolved.”
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The issue is particularly concerning because the staking service, called Coinbase Earn, is viewed by analysts as a promising area for growth. The broker has suffered in its core crypto trading business as trading volumes have declined across exchanges.
“We believe Coinbase Earn…appears particularly vulnerable to being defined as a security within the context of the [Ripple case] judge’s ruling,” Palmer said.
Write to Jack Denton at jack.denton@barrons.com
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Read More: Coinbase’s Revenue at Risk as States Act on Staking. Why the Stock Is Higher.
