Coinbase Global (COIN -0.79%) has been on a tear recently as crypto enters a new bull market. Over the last year alone, its stock is up a whopping 300%. However, there is one looming possible problem: A potential lawsuit with the Securities and Exchange Commission (SEC).
Initially, it seemed like a death blow for Coinbase, as the SEC made some serious accusations that could jeopardize the company's operations here in the U.S. However, as is natural in crypto, things change quickly.
Since last year, the regulatory and political landscape around crypto has made a near 180-degree turn and appears to be increasing Coinbase's chances of escaping. With an exploration of the SEC's allegations and breaking down recent developments, it will be easy to see how a potential victory in the courtrooms is not likely but would be a catalyst for Coinbase in the long term.
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A brief overview
In March 2023, the SEC issued Coinbase a Wells Notice. While not an official lawsuit (yet), the Wells Notice provides the recipients with an outline of allegations that the SEC plans to pursue. The details of the Wells Notice claim that Coinbase was operating as an unregistered securities exchange, broker, and clearing agency.
In other words, the SEC believed that several crypto assets listed on Coinbase's platform qualified as securities, thus requiring Coinbase to register them with the SEC. The potential repercussions are severe, as a ruling against Coinbase could force the company to overhaul its business model, delist numerous assets, and pay hefty fines.
Before getting into more details, it's worth noting that the SEC was the agency that allowed Coinbase to go public in 2021, making these allegations appear contradictory. If Coinbase operated as an unregistered securities exchange, why would the SEC allow it to go public?
As hypocritical as this seems, it's a conversation for another day -- and one that Coinbase's lawyers can't seem to get an answer to. What is of more importance, though, is how the lawsuit has evolved over the last year and why recent developments appear to benefit Coinbase's argument.
Could the changing landscape be tilting in Coinbase's favor?
While this battle is far from over, much has changed in the last year. Most notably, cryptocurrencies have gone from obscure assets to getting a new home on Wall Street. In January, for example, the SEC approved spot Bitcoin ETFs. This was a milestone moment for the digital asset class, as it served as a de facto stamp of approval that crypto isn't going anywhere anytime soon. More recently (and most importantly), the SEC is in the process of approving a spot Ethereum ETF, a landmark decision for the world's second most valuable cryptocurrency and one that has significant implications for Coinbase.
As digital assets have risen to prominence over the years, the SEC has been skeptical about Ethereum (ETH 1.97%), largely due to its proof of stake (PoS) consensus mechanism. Unlike Bitcoin's (BTC 3.03%) proof of work model, which involves miners solving complex mathematical problems to validate transactions, PoS relies on validators who stake their tokens to secure the network and validate transactions. The SEC has argued that cryptocurrencies utilizing PoS mechanisms make them securities, as staking could be viewed as an investment in a common enterprise with an expectation of profit.
However, the approval of a spot Ethereum ETF could signal a notable shift in the SEC's stance as it would put Ethereum in the category of commodity, like Bitcoin, and thus, beyond its purview. But the implications of this decision go beyond just being a bullish development for Ethereum.
Today, the majority of cryptocurrencies in circulation operate on proof of stake or proof of stake-like systems. As the most valuable PoS cryptocurrency, if Ethereum isn't a security, then it's plausible to assume that the majority of the other PoS cryptocurrencies listed on Coinbase's platform are also beyond the SEC's control, thereby undermining the allegations.
A catalyst for Coinbase in the long term
For Coinbase, the approval of Ethereum ETFs provides a glimmer of hope. And should it get past this obstacle, it holds the potential to be more than just a regulatory win; it is a potential catalyst for growth.
Admittedly, only time and the courts will tell how the SEC lawsuit against Coinbase will resolve, but if Coinbase can emerge unscathed from these allegations, it will result in the most regulatory clarity Coinbase has received since going public in 2021. With this clarity, Coinbase can expand its product offerings, grow its profits, and pursue its goal of becoming the go-to platform for all things crypto more aggressively without having to walk on eggshells.
