Coinbase On Brink of Collapse As SEC Lawsuit Threatens To Derail Business: Report

Key Points:

• The SEC’s lawsuit against Coinbase threatens the cryptocurrency exchange’s business model and revenue, which generates over 80% of its revenue in the US.
• The lawsuit could force the exchange to stop providing custody and trading of coins considered securities, putting a big chunk of its business at risk.

Coinbase’s business model is threatened as it faces a near existential threat from the SEC’s lawsuit. The company plans to challenge the SEC, but the potential reputational damage could lead to users pulling funds. The revenue at risk could be over 50%.

Coinbase, the largest US cryptocurrency exchange, is facing a near existential threat to its business model after being sued by the US Securities and Exchange Commission (SEC) for failing to register as a broker, an exchange, or a clearing firm. The SEC also alleged that Coinbase’s staking program violates securities laws.

This push from the SEC is particularly fraught for Coinbase, which generated over 80% of its revenue in the US last year. Ashok Ayyar, counsel at Ashbury Legal, said: “Expect Coinbase to litigate this vigorously—it is alleged that virtually their entire US business is illegal.” Coinbase CEO Brian Armstrong indicated that the company plans to challenge the SEC to get more legal clarity for his industry. One major issue will be which of the thousands of cryptocurrencies on the market are considered securities.

Oppenheimer & Co. analyst Owen Lau anticipates a long-term legal battle. While the company may operate normally in the short term, the potential reputational damage caused by the SEC’s claims could lead users to pull their money from the platform. During the first quarter, Coinbase’s revenue was already less than a third of its late 2021 peak. Over the past two days, its shares have tumbled 20%.

This lawsuit could force Coinbase to stop providing custody and trading of coins considered securities, threatening a big chunk of its business. According to Lau, the revenue at risk could be over 50%. However, it’s possible the SEC may not prevail on all of the charges. The caveat is the probability of losing everything could be very low.

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