Berenberg Research Report: SEC Enforcement Action Against Coinbase

The Securities and Exchange Commission (SEC) is expected to take enforcement action against cryptocurrency exchange Coinbase (COIN), following a similar pattern to its actions against rival exchanges Bittrex and Kraken, according to a research report by Berenberg released on Monday. Berenberg, a bank, initiated coverage of Coinbase with a hold rating and set a price target of $55. On Monday, Coinbase shares closed 6% higher at $60.77.

SEC Enforcement Action

Berenberg estimates that a significant portion of Coinbase’s first-quarter net revenue, at least 37%, came from transaction fees and spreads associated with trading cryptocurrencies other than bitcoin (BTC), as well as fees from its staking services. Analyst Mark Palmer wrote in the report that the SEC is likely to target these revenue sources in the enforcement action it is expected to file soon. Furthermore, other revenue streams of Coinbase, such as interest income from USD Coin (USDC) and custody services, may also face scrutiny from the SEC in the near future.

The report highlights that successfully shifting its operations away from the United States would pose a challenge for Coinbase. Approximately 86% of Coinbase’s net revenue generated in the 12 months leading up to March 31 came from its U.S. operations, making it heavily reliant on the domestic market.


Shorting Coinbase Shares

Berenberg cautioned against shorting Coinbase shares, as it is considered a risky trade. Currently, around 23% of Coinbase’s free float has already been sold short. Shorting involves borrowing a security, selling it with the anticipation that its price will decline, repurchasing the security at a lower price, and returning it to the lender. The potential profits or losses depend on the accuracy of the price prediction.

Earlier this month, Wall Street firm Citi downgraded its rating on Coinbase to neutral from buy and reduced its price target for the cryptocurrency exchange from $80 to $65. Citi cited regulatory uncertainty as the reason for its cautious stance.

The anticipated SEC enforcement action against Coinbase underscores the growing regulatory scrutiny faced by cryptocurrency exchanges and highlights the challenges associated with navigating the evolving regulatory landscape in the industry.