Over the past couple of weeks, Coinbase (NASDAQ:COIN) has been in the news following a new product that it was trying to launch. After the Securities and Exchange Commission (SEC) threatened to file lawsuits against the company, Coinbase announced earlier this week that it wasn’t going to be proceeding with the deposit product after all. Through all of this, Coinbase shares have been choppy, reacting as developments came out. So what does this news actually mean for its future?
The new product
First, it’s good to understand what the fuss is all about. Coinbase is a cryptocurrency exchange platform, and one of the largest globally. When customers move funds in, they have the option to transfer the funds into a USD stablecoin, known as USDC. This essentially is worth $1 and should track this value, hence why it’s known as a stablecoin.
What Coinbase was looking to do was offer a high-yield interest rate for clients depositing USDC, which the company would then lend out. Rates were expected to start at 4%. Considering the interest rate in the US is at 0.25%, this is a considerable premium.
The product (known as Lend) has been known about by the public for some time. I think this is one of the reasons that Coinbase shares have held above $200, a lofty valuation. Investors could rightly expect this product to be a big win for the business. After all, it would be a great way of diversifying revenue away from crypto transactions.
Issues with the SEC
The SEC had issues with the product, although it’s not entirely clear why. It could be relating to the regulations around taking and lending out client funds, or if it deems USDC as a security. Regardless, news of a lawsuit has forced Coinbase to backtrack, with the company announcing the launch would not be going ahead.
Over the past month, Coinbase shares are down around 5.7%. It’s hard to decipher how much of this move is down to the SEC news versus general crypto movements. Most major coins have moved lower in recent weeks. For example, Bitcoin traded around $50,000 at the start of the month and $44,000 currently.
There’s a correlation between the movements in Coinbase shares and major coins. This is to be expected given that the company is a cryptocurrency exchange. So some of the negative returns on Coinbase shares could be from this. This correlation is the main risk I see when thinking about buying the shares.
Positive on Coinbase shares
Looking forward, I don’t see the news regarding the Lend product as being a big deal for the long term. The SEC is clearly cautious about the growing crypto industry and how to regulate it. I think Coinbase could do very well in pushing such products in the future and could have the client base to really make a success of it.Â
Personally, I think it’s only a matter of time until the industry gets more regulation, but I see this as a good thing for the shares. It should attract more cautious new investors to the market, if more protection is in place. On balance, I’d look to buy Coinbase shares despite the bad news, as it shows positive thinking for the future.
The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of investment advice. Bitcoin and other cryptocurrencies are highly speculative and volatile assets, which carry several risks, including the total loss of any monies invested. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.