Is Coinbase Part Of 'Unhealthy Regulatory Climate'? 3 Analysts React To SEC Notice, See Upside, Downside Risks Increasing 'Substantially'

Cryptocurrency platform Coinbase Global Inc COIN announced  hasit received a Wells Notice from the Securities and Exchange Commission. The announcement came Wednesday after the market close, which sent the stock down.

Here’s what analysts are saying about the potential regulatory hurdles ahead for Coinbase.

The Coinbase Analysts: KeyBanc analyst Alex Markgraff has a Sector Weight rating on Coinbase and no price target.

Oppenheimer analyst Owen Lau downgraded shares from Outperform to Perform and removed an $84 price target.

Needham analyst John Todaro has a Buy rating and $73 price target.

Related Link: Coinbase Q4 Results And Guidance 'Encouraging' But Regulatory Risks Remain: Why Analysts Are Mixed On Ratings, Price Targets

The Coinbase Takeaways: Markgraff said the Wells notice indicates the SEC could file enforcement action against Coinbase, but the action is “somewhat vague” at this time.

“No charges/enforcement action were presented against Coinbase connected to the Wells Notice as of March 22, 2023, though such notices generally precede future charges/enforcement action per our understanding,” the KeyBanc analyst said. 

Coinbase indicated the regulatory action could impact its spot market, staking service and several other product offerings, he said. 

“We can’t assess the model impact with high confidence at this juncture given the apparent lack of detail from the SEC and obvious lack of explicit charges/enforcement action though do recognize the materiality of certain products/services mentioned in the Company’s announcement as it relates to revenue/adjusted EBITDA contribution.”

The analyst said this will not be a “non-event” for Coinbase and could see Coinbase receive charges, enforcement action and monetary penalties.

Lau said he is supportive of blockchain and digital asset development in the U.S., but sees regulatory efforts increasing and potentially hurting Coinbase and others.

“Following the Wells Notice from the SEC and the recent Economic Report of the President criticizing the digital asset industry, we are downgrading COIN from Outperform to Perform,” the analyst said. “We raised concerns about the blockchain development in the U.S. after the demise of three banks.”

Lau said Coinbase’s stock is up over 100% year-to-date versus a 3% gain for the S&P 500, which could be reason to move to the sidelines.

“Under this unhealthy regulatory climate, we are increasingly worried about the fairness of the enforcement actions, and the ability for the ecosystem to grow with seemingly limited and shrinking support from the banking system in the U.S.”

The analyst said the cryptocurrency sector could be “scapegoated” for recent failures of specialized banks.

“Recent strength in Bitcoin indicates that people have called for alternative financial systems, but it could also become the victim of its success. While we downgrade Coinbase shares, we believe both upside opportunities and downside risk have increased substantially, and we may find an attractive risk/reward entry point in the future.”

Todaro said that cryptocurrency peer Kraken settled with the SEC last month on a staking product, which could be similar to what will occur with Coinbase in the future.

“While we think at least part of the notice was anticipated, we believe the concerns over asset listings were not,” Todaro said.

Todaro said the majority of Coinbase’s trading volume comes from Bitcoin BTC/USD and Ethereum ETH/USD at 40% and 15%, respectively. The notice is likely targeting alt-coins, which could have a lower impact, he said. 

COIN Price Action: Coinbase shares are down 9.88% to $69.52 late Thursday morning.  

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Photo courtesy of Coinbase.