There are few companies in the crypto industry with as notable and impressive a reputation as Coinbase (COIN -3.24%). For more than a decade, the company has weathered multiple crypto winters and continues to provide users with an innovative and accessible way to invest in cryptocurrencies. In just the last year, Coinbase has made significant strides to diversify its revenue streams even as a bear market carries on.
New business models progress
One of the main ways Coinbase has attempted to combat its dependence on trading fees, its primary means of revenue, was with staking. In recognition of how staking can be complicated at times, Coinbase has revamped its staking services, which allow users to earn passive income while holding their crypto assets. In doing so, Coinbase generates profits by serving as the middleman to help facilitate the sometimes tricky staking process.
The company has also built out its products tailored toward institutional investors. Unlike retail investors, institutional investors typically have deeper resources, and Coinbase recognizes this potential as a way to pad profits. Coinbase offers products like Coinbase Custody and Coinbase Prime in an effort to provide institutional investors with easy and seamless ways to manage their crypto holdings.
Coinbase has also been busy developing its technological offerings. Just this February, it announced that it would be unveiling its own layer 2 blockchain. Referred to as "Base," the blockchain is built upon Ethereum, which makes transactions and speeds on the Ethereum network cheaper and faster.
Further showing its commitment to innovative technology, in a recent announcement, Coinbase called on developers to help build an inflation-pegged cryptocurrency, referred to as a flatcoin. The goal would be for a flatcoin to keep pace with inflation and be built on the layer 2 Base blockchain. Whether or not it'll come to fruition remains unknown, but it deserves recognition as it looks to be quite the endeavor.
Usually, when a company remains as committed as Coinbase has to building and tailoring its services while in a bear market, it presents investors with a significant opportunity to invest in a company with serious long-term potential once a bull market returns.
However, there is just one problem preventing even me from calling Coinbase a buy today: looming regulation.
Image source: Getty Images.
Legislators ratchet up regulatory efforts
Since the start of 2023, U.S. federal agencies such as the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) have been busy at work with a multitude of fresh lawsuits against companies in the crypto industry.
In just the last few months, the SEC fined another notable cryptocurrency exchange, Kraken, and forced it to shut down its staking service, one very similar to Coinbase's. More recently, the CFTC targeted the world's largest cryptocurrency exchange, Binance, with a fresh lawsuit alleging that the company was offering unregistered derivatives.
Now Coinbase is in the crosshairs of regulators. On March 22, the SEC provided Coinbase with a Wells Notice, a formal document saying that the agency is planning to bring enforcement actions against the company. While receiving a Wells Notice doesn't automatically indict the company, it is not an encouraging sign.
What to make of Coinbase today
It's more than likely that, as in the Kraken lawsuit, the SEC is targeting Coinbase's staking products, as it believes Coinbase meets the definition of a security and is therefore subject to the agency's oversight.
Since it's one of the company's major sources of revenue and one Coinbase has prioritized to develop further, an implosion of staking could deal a serious blow to profits.
While Coinbase seems to be doing all the right things when it comes to developing innovative products and technology, the likelihood of a regulatory crackdown makes buying its stock incredibly risky today. Until the dust settles on these lawsuits, it might be best to avoid Coinbase until more clarity comes about.
