What happened
Shares of cryptocurrency exchange Coinbase Global (COIN +0.11%) plunged on Tuesday, which has become a regular occurrence for the stock considering it's now down more than 80% from its high. However, whereas many previous drops are attributable to volatility in the cryptocurrency space, today's drop is due to something that's potentially far more serious. As of 10:30 a.m. ET, Coinbase stock was down 15%.
So what
According to a Bloomberg report last night, the Securities and Exchange Commission (SEC) is investigating Coinbase. At the heart of the investigation is a debate on what qualifies as a security and what qualifies as a digital asset. Coinbase is allowed to list and facilitate transactions of digital assets, not securities.
NASDAQ: COIN
Key Data Points
This reported investigation comes days after the SEC formally charged a former Coinbase employee with insider trading. These charges have ignited some controversy considering the SEC said, "a number of the crypto assets at issue were securities." To this, Coinbase's chief legal officer wrote a blog post entitled, "Coinbase does not list securities. End of story."
On July 21, Coinbase CEO Brian Armstrong announced the company had petitioned the SEC, criticizing it for its supposed antiquated rules and requesting clarity on digital assets and securities. However, it should be noted that if the Bloomberg report is true, Armstrong likely already knew the company was under investigation at the time of the petition.
Now what
While the market is interpreting Bloomberg's report as a negative for Coinbase, it's premature to say that definitively, in my opinion. First, it's not known how severe its punishment would be in the case of wrongdoing. And second, more up-to-date regulation for the cryptocurrency space could possibly be a long-term positive.
That said, this investigation could result in an outcome that's entirely negative for Coinbase. The SEC does indeed throw a curveball at a Coinbase investment thesis. Therefore, I understand fully why some might want to avoid Coinbase stock until there's greater clarity with the regulatory landscape.
