Ratings agency Moody’s recently changed Coinbase‘s outlook from “stable” to “negative” following allegations by the Securities and Exchange Commission (SEC) that the exchange sold unregistered securities since 2019. This negative outlook indicates the possibility of a future downgrade in Coinbase’s rating.
The change in outlook arose from uncertainty surrounding the impact of SEC charges on Coinbase’s business model and cash flows. The SEC claims that Coinbase failed to ensure that the crypto assets it sold were not considered securities as per the Howey test. Consequently, regulators from 11 states, including California and Washington, sent show-cause orders to Coinbase, requiring it to explain within 28 days why it should not be told to stop selling cryptocurrencies.
Moody’s warned of serious consequences Coinbase could face from regulators, which may include returning unlawfully earned money, paying fines and penalties, and facing setbacks in its staking rewards business and other activities. It’s unclear when and how these issues will be resolved, casting a shadow of doubt over Coinbase’s financial future.
This has not only alarmed Moody’s, but also other market analysts. Berenberg analyst Mark Palmer slashed Coinbase’s price target from $55 to $39 on Thursday. However, Coinbase’s defense relies on the SEC’s review of its business in 2021, granting the company permission to go public despite allegations made in the lawsuit.
Coinbase Chief Legal Officer Paul Grewal suggested that legislation allowing fair rules to be developed transparently and applied equally, instead of litigation, is the solution. Coinbase intends to continue operating its business as usual despite these challenges.
While skeptics may argue that such incidents expose vulnerabilities in the cryptocurrency space and call for tighter regulations, proponents emphasize the need for clear legal frameworks that address the unique characteristics of cryptocurrencies. In the meantime, the crypto industry and investors will undoubtedly be watching the development of this situation closely.
Source: Blockworks
