Key Takeaways

Coinbase was issued with a Wells notice this week and now awaits formal charges from the SEC
Regulators continue to move in on US crypto companies, hurting Coinbase’s prospects
The exchange laid off its second round of employees in January, shut down activities in Japan due to “market conditions”, and saw its share price plummet throughout 2022

Coinbase just can’t catch a break. 

I wrote a deep dive on the struggling crypto exchange last October, when founder and CEO Brian Armstrong sold 2% of its stake. But things have only gotten worse since then. 

It laid off 20% of its workers in January (I analysed what this meant for the company here), six months after it had already cut 18%. It also terminated its Japanese operations in January, citing “market conditions”. 

Despite this, the stock had been rebounding in 2023 as a softer forecast of the future path of interest rates was benefitting the tech sector at large. And then, the SEC waded in to end the party this week. 

1/ Today Coinbase received a Wells notice from the SEC focused on staking and asset listings. A Wells notice typically precedes an enforcement action.

— Brian Armstrong (@brian_armstrong) March 22, 2023

SEC alleges Coinbase is violating securities law

The SEC issued Coinbase a Wells notice, warning that it was potentially violating US securities law. The share price has fallen 24% in the two days since.  

“Based on discussions with the Staff, the Company believes these potential enforcement actions would relate to aspects of the Company’s spot market, staking service Coinbase Earn, Coinbase Prime and Coinbase Wallet,” Coinbase said in a regulatory filing. “The potential civil action may seek injunctive relief, disgorgement, and civil penalties.”

The market now awaits the exact charges becuase a Wells notice, as Armstrong noted in his tweet above, typically precedes legal action. 

Coinbase chief legal officer Paul Grewal also waded in, noting that Coinbase was confident in the face of the charges. 

“Although we don’t take this development lightly, we are very confident in the way we run our business – the same business we presented to the SEC in order for us to become a public company in 2021,” he posted. 

Regulatory environment continues to worsen for crypto

Despite Coinbase’s defiance, at least in public, the reality is that this marks just the latest move by US regulators to clamp down on crypto. 

Recent months have seen the dramatic shutdown of the Binance-branded stablecoin BUSD, a top 10 cryptocurrency, a fine for leading exchange Kraken relating to disclosures around its staking problem, and now this Wells notice for Coinbase. 

Then there is the banking turmoil. While not caused by crypto, the shutdown of SVB, Silvergate and Signature means the main crypto banks have evaporated into thin air. That starves the industry of vital fiat on-ramp and is an unquestioned headwind going forward. 

Whether you view any of the above as unfair or not, the bottom line for Coinbase is that the country in which it is headquartered, the United States, is a significantly more hostile environment for the crypto industry than it was a few months ago. That is obviously bad news for investors, and for the business as a whole. 

What happens next?

Going forward, it is hard to know what will happen. It does appear, however, as if regulators are intent to rein crypto in after the series of scandals that shook the market (and caused billions of losses for customers) last year, including LUNA, Celsius and most recently FTX. 

Before this latest move, the Coinbase share price had been reaping the positivity around a bounceback for Bitcoin, which is currently trading at $28,000, nearly double what it was in the aftermath of the FTX collapse in November. 

That follows the wider tech resurgence, as the market is betting that the Federal Reserve is largely done with interest rate hikes and the uber-tight monetary policy of the last year. 

Ultimately, Coinbase’s fate will be tied to those macro conditions, as well as the Bitcoin price, as it always is. But so too will it depend on regulators pulling back from their punitive stance over the last few months, and right now that doesn’t appear likely.