In a significant blow to leading cryptocurrency exchange Coinbase, rating agency Moody’s has revised the company’s outlook from “stable” to “negative,” indicating potential future downgrades.
This development comes just two days after the Securities and Exchange Commission (SEC) filed a lawsuit against Coinbase, accusing the platform of operating as an unregistered broker and selling unregistered securities since 2019.
Moody’s decision to revise the outlook stems from the agency’s concerns regarding the uncertainty surrounding the impact of the SEC charges on Coinbase’s business model and cash flows. In a statement released on Thursday, Moody’s highlighted the need to clarify how the allegations will affect the exchange’s financial standing.
One of the key aspects of the SEC’s lawsuit is the accusation that Coinbase’s staking-as-a-service products violate the Securities Act of 1933. The commission argues that the program, consisting of five stackable crypto assets, qualifies as an investment contract and, therefore, a security under the Howey test. Additionally, the SEC alleges that Coinbase failed to ensure that the crypto assets it sold were not classified as securities.
Coinbase’s troubles have further escalated, as regulators from 11 states, including California and Washington, have issued a show cause order to the exchange. This order demands that Coinbase provide an explanation within 28 days as to why it should not be compelled to cease cryptocurrency sales in those states.
The repercussions from the regulators’ actions could be severe for Coinbase, potentially resulting in the return of unlawfully earned funds, fines, penalties, and setbacks in its staking rewards business and other operations.
As noted by Moody, the uncertainties surrounding resolving these legal and regulatory challenges pose a significant threat to Coinbase’s financial stability. The agency emphasized that the timing and outcome of these issues remain unclear, leaving investors and stakeholders in a state of heightened concern.
Moody’s cautionary stance is not the only sign of growing unease regarding Coinbase’s future. Mark Palmer, an analyst at Berenberg, has reduced the company’s price target from $55 to $39 in response to the SEC lawsuit. This downward revision reflects a dimmer outlook for Coinbase’s performance after the legal and regulatory turmoil.
Responding to the SEC’s allegations, Coinbase has defended its position by highlighting that the agency conducted a comprehensive review of its business in 2021 and granted permission for the company to go public, despite the ongoing 2019 allegations cited in the lawsuit. Coinbase maintains that it has been transparent and cooperative with regulators and intends to contest the charges brought against it vigorously.
As the legal battle and regulatory scrutiny intensify, Coinbase finds itself at a critical juncture, grappling with its financial standing and reputation potentially eroding. The outcome of these challenges will shape Coinbase’s trajectory and serve as a bellwether for the broader cryptocurrency industry’s evolving relationship with regulatory authorities.
