Coinbase under investigation by the SEC

Coinbase is an American publicly traded company that operates a cryptocurrency exchange platform. On July 21st ex-Coinbase manager Ishan Wahi was arrested and charged for alleged insider trading. Following the arrest the SEC has started looking into some of the digital assets that have been listed on Coinbase. The DOJ described the arrest as the “first-ever cryptocurrency insider trading” scheme. It is not the first time Coinbase has been investigated by the DOJ and SEC. Since its inception Coinbase has been on a turbulent journey, with regulatory pressure from the US government all along the way. 

Let’s have a look at Coinbase’s history and how the company got to the position it is in now. 

Coinbase’s history

Being one of the oldest crypto exchanges, it was founded in June 2012 by Brian Armstrong, a former Airbnb engineer, and former Goldman Sachs trader Fred Ehrsam. In October 2012 the company was the first to launch services to buy and sell bitcoin through bank transfers.

Coinbase was funded by several venture capital firms in its Series A and B rounds. Coinbase used the funding to expand its business across the US and the rest of the world, and to acquire other companies that complemented its business. According to Coinbase UK CEO Zeeshan Feroz, the company's non-American businesses generated close to one-third of its total income by 2018.

During the COVID-19 epidemic in May 2020, the business declared it will completely transition to remote employment and stop recognizing a formal headquarters. It is arguable if this decision has contributed to Coinbase’s decline in market share compared to other crypto exchanges.

The firm announced a nine-fold increase in Q1 2021 revenue to $1.8B, up from $190.6M the previous year, with its penultimate results announcement prior to its April 14 public offering. The jump in revenue has been attributed to the increase in the price of Bitcoin over that time period. 

$COIN Stock

On April 14, 2021, Coinbase became a public company on the Nasdaq exchange via a direct stock listing. Prior to the offering, Nasdaq established a reference price of $250 per share, giving the firm an estimated worth of $47 billion. Coinbase's stock price ended its first day of trading at $328.28 per share. Following its listing $COIN dipped slightly towards its reference price of $250, but went on to climb to its all-time-high of ~$366 in November 2021. 

Following the decline of the stock market, $COIN has come down to a price of $58 per share after bottoming around $45. One of the driving factors behind $COIN’s climb to its ATH was Cathie Wood’s ARK ETF. Cathie Woods publicly endorsed $COIN as a great investment. It’s estimated that ARK bought $COIN at an average cost of $254.65. After Coinbase came under fire from the SEC, ARK decided to sell all of their $COIN shareholdings at a price of approximately $53 per share. This means the fund lost approximately $285 million on its investment. One might refer to such events as capitulation.

SEC Probe

The U.S. Securities and Exchange Commission has reportedly begun investigating some of the digital assets listed on Coinbase, according to a Tuesday Bloomberg article.

The SEC launched an investigation into cryptocurrency insider trading last week after charging an ex-Coinbase manager with leaking information to help his brother and a friend buy tokens moments before they were posted on the exchange.

The SEC claimed to have found nine tokens traded by the trio that met all the criteria for a security based on the now-famous Howey Test, but it did not bring any legal action against the massive cryptocurrency exchange at the time. Seven of the nine cryptocurrencies mentioned by the SEC are still available on Coinbase.

According to three people with knowledge of the situation who spoke to Bloomberg, the SEC has been closely monitoring Coinbase since it started providing a wide range of crypto assets for trade. Since the investigation has not been made public, the sources have been urged to maintain their anonymity.

Bitcoin and Ether are not considered securities, according to earlier statements from the SEC. However, the US securities regulator asserted that the cryptocurrency XRP used by Ripple is a security when it sued the business for $1 billion back in December 2020.

Due to some of the digital assets it lists, SEC Chair Gary Gensler urged Coinbase to register with the organization as a securities exchange.

Conclusion

Coinbase started off right in 2012 as one of the first legitimate cryptocurrency exchange platforms. Since inception it has had plenty of regulatory trouble and has not been performing well compared to its competitors. Its decline in market share can be largely attributed to mismanagement of the company. If Coinbase wants to compete with Binance or FTX, they will have to rethink their strategies, because for now they seem to be losing.