Now that the Securities and Exchange Commission’s crypto crackdown has targeted Coinbase Global Inc., the only US-listed exchange in the digital currencies business, a question arises: Should the company have been permitted to go public?
When Coinbase listed in 2021, riding a wave of retail-trading hype with an $86 billion valuation worthy of Netflix Inc., I warned the company looked less like the next Big Tech stock and more like a speculative moonshot akin to Bitcoin or Cathie Wood’s ARK Innovation. It turns out even that was too optimistic.
Coinbase’s 85% price drop from its 2021 peak to a current market value of $12.5 billion is in a league of its own, underperforming both crypto and ARK. As the FOMO on digital currencies evaporated, so did Coinbase’s trading volumes and revenue. As the exchange tried to implement a “master plan” to roll out new products and apps, regulators slapped it down for potentially running afoul of securities law. Its revenue fell 57% last year and it’s expected to be unprofitable through 2024. It’s not a “picks-and-shovels” play — it’s the hole in the ground.
Obviously, there’s nothing in a stock-market listing that precludes an overpriced valuation, a share-price slump or even being sued for running an unregistered exchange. Investors were explicitly warned, across some 60 pages of “risk factors” in the prospectus, that a lot of things could go wrong despite Coinbase’s utopian promise of ushering in “an internet of value.” Regulatory scrutiny, investigations, fines and other penalties are all listed as potential threats, on top of the fickle nature of crypto trading and the risk that the SEC might one day deem tokens on Coinbase’s platform to be unregistered securities, which the regulator did earlier this week. Investors might agree or disagree, but they were clearly informed.
Yet maybe we should debate a more fundamental requirement when it comes to an IPO like Coinbase. Given those identifiable dangers, does this look like a company that’s suitable for investor consumption — a sustainable business model, with non-material compliance risks, that serves some kind of utility beyond speculative trading? In hindsight, maybe not. Martin Finnegan, a partner at Punter Southall Law, says that while it’s obviously Coinbase’s responsibility to not break the law, it’s also true that stock exchanges are a “first line of defense” when it comes to the suitability of an IPO — and that, in this case, the legal risks might have deserved more than just a list of red flags.
The counter-argument might be, as Nasdaq Inc. Chief Executive Officer Adena Friedman said this week, that deciding whether listed companies abide by securities-trading rules is “really a job for the SEC” — and that in the case of Coinbase, there seems to have been some beefing up of the disclosed risk factors, presumably to highlight again that tokens on Coinbase might fail the Howey Test, which refers to a US Supreme Court case for determining whether a transaction qualifies as an investment contract. And one can empathize with SEC boss Gary Gensler’s plight: Allowing a major crypto exchange to list and be based in the US might have seemed a better alternative than seeing it go offshore beyond regulators’ reach.
But again, considering the array and severity of all those risks, this rings a little hollow. It’s Coinbase’s responsibility not to break the law, yes, but with such an obvious risk of non-compliance, there’s a clear threat to the public market’s reputation here, which the stock’s dismal track record hasn’t helped. Crypto wouldn’t be the first industry to get a regulatory bucket of cold water after a stock-market frenzy — online gambling and weed spring to mind as industries that went through speculative booms and busts despite a lack of legal clarity. But at a time when consumer protection and investor protection are paramount in the face of a crypto industry that’s abetted scams, criminal activity, and ransomware targeting critical infrastructure, business as usual isn’t good enough.
TradFi didn’t cover itself in glory with Coinbase’s listing: Bankers, analysts and investors were clearly drinking the Kool-Aid as much as some of DeFi’s most vociferous bank critics. As the regulatory stand-off gets bogged down in the Howey Test, maybe the industry should think more about suitability — before the next hot industry comes to town.
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