The SEC had warned Coinbase it could face a lawsuit for offering unregistered securities.
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Crypto lending won’t be coming to Coinbase Global, as regulators get tough on the booming market for interest-bearing cryptocurrency accounts.
Coinbase (ticker: COIN) said on Friday that it was cancelling plans for its “Lend” platform after the Securities and Exchange Commission threatened to sue the company over the product. It’s a setback for the company as commissions on crypto trading, a key source of revenue, come under pressure.
Coinbase promoted Lend as a means for investors to earn interest on their crypto holdings, starting with a 4% yield on USD Coin, a stablecoin. That drew a rebuke from the SEC, which issued a so-called Wells notice to Coinbase on Sept. 1, warning the company that it could face a lawsuit for offering unregistered securities.
Coinbase stood its ground for a while, with CEO Brian Armstrong tweeting “some really sketchy behavior coming out of the SEC recently.” But the company has backed off, saying in a blog post Friday night that “we’ve made the difficult decision not to launch the USDC APY program.”
Crypto lending has taken off on platforms like BlockFi, where investors can earn high yields by lending their holdings to other traders. Now the practice is facing a regulatory pushback.
BlockFi has been ordered by securities regulators in New Jersey to stop offering new interest-bearing crypto accounts. Texas, Alabama, Kentucky and Vermont have brought similar actions against the company.
“We believe that our products and services are lawful and appropriate for crypto market participants,” BlockFi says on its website.
Celsius Network, another lending platform, is also facing regulatory pushback in Alabama, New Jersey, and Texas, according to Bloomberg. The company has said it believes its products are lawful. It didn’t immediately respond to a request for comment.
The crypto lending market is vast and growing. A funding round for BlockFi in March valued it at $3 billion. The company says it has 450,000 retail clients and more than 200 institutional clients, with $10.3 billion in assets held in interest-bearing accounts. BlockFi says it has originated $20 billion in “digital-asset related loans.”
Celsius says it has more than 1 million users with $24.3 billion in “community assets.” Yields on cryptos held through its accounts include 8.88% on Tether and USDC. It is also offering 6.2% on Bitcoin and 5.35% on up to 100 Ethereum tokens.
Investors can earn interest on crypto in a few ways. They can “stake,” or delegate, their tokens to a network, pledging their assets to network operators that use them to help validate transactions in “proof of stake” protocols. Investors can also lend their holdings to “liquidity pools” on exchanges, making them available for crypto traders or other investors to borrow.
Coinbase now appears to be backing off from some lending, though it is still offering yields on a few cryptos through staking, according to its website. The company is also developing new revenue streams. It recently applied for regulatory approval to offer crypto futures.
Lending revenues would have been gravy for Coinbase, generating another revenue stream on top of trading and other crypto services.
Whether it would have moved the needle on the stock is debatable. The big numbers that matter to investors now are trading volume and revenues from commissions, says Mizuho Securities analyst Dan Dolev. Those revenues may look healthy now, but pricing is under pressure from brokerages like Robinhood Markets (HOOD), where investors can trade Bitcoin and a few other cryptos commission-free.
“Long-term, Coinbase’s stock will be under pressure because their commissions will eventually come down,” says Dolev, who has a Hold rating and $220 price target on the shares. “You can’t compete where Robinhood is doing it for free and that’s where crypto commissions are heading.”
Other analysts disagree with Dolev. The average rating on the stock is Overweight with a target of $378, according to FactSet. On Tuesday afternoon, shares were around $239.
Coinbase also faces a tougher regulatory outlook on crytpo trading and lending overall. SEC Chairman Gary Gensler again reiterated his view on Tuesday that cryptos should be more tightly regulated.
“I don’t think there’s long-term viability for five or six thousand private forms of money,” Gensler said at a Washington Post forum on Tuesday. “History tells us that private forms of money don’t last long,” he added. And he compared stablecoins to “poker chips at the casino.”
Coinbase stock is also tied to broader dynamics in the crypto space, which haven’t been positive lately. A sell-off has been triggered recently by concerns about a spillover from China’s overheated property market.
Lending might have helped Coinbase hit Wall Street’s price target, but now the company will now have to find other ways to meet expectations.
Write to Daren Fonda at daren.fonda@barrons.com
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