Coinbase could lose 30% of its revenue this week

During the hearing, both Coinbase and the SEC will each have a two-hour window to present their arguments. The focus will be on the SEC’s allegations that Coinbase violated securities laws by offering unregistered securities through its staking program. Coinbase, however, firmly opposes these claims, asserting that its staking services do not constitute securities and challenging the SEC’s authority over cryptocurrency regulation.

Lisa Bragança, a lawyer and former SEC enforcement branch chief, believes that it will be challenging for Coinbase to prove that the listed assets on its platform are not securities, suggesting the case is unlikely to be dismissed. Adding to its woes, Mizuho Securities analyst Dan Dolev pointed out that nearly one-third of Coinbase’s revenue is potentially at risk. This is because a negative ruling could force Coinbase to separate its array of services, which currently includes trading, staking, custody, and serving as the custodian for eight spot Bitcoin ETFs.

The lawsuit filed by the SEC in June 2023 alleges that Coinbase has been operating without proper registration as a broker, national securities exchange, and clearing agency since 2019. This move mirrors a similar lawsuit against many crypto platforms including Binance, the world’s largest cryptocurrency exchange.

Coinbase has seen a decline in market share within the growing ether (ETH) staking sector, driven by increasing regulatory scrutiny on its staking service. Regulatory authorities in four states have directed the exchange to cease any further expansion in its interest-bearing service for retail investors. Coinbase, which charges a 25% commission on user rewards from staking, faces reduced revenue with a decrease in the quantity of staked tokens.

Most recently, the agency denied a petition from Coinbase in December to establish new regulations tailored for the digital asset sector. This decision was made in a 3-2 vote by the SEC’s five-member commission, which fundamentally disagreed with Coinbase’s stance that existing regulations are unsuitable for cryptocurrencies.

However, Coinbase challenges this view and notified to a federal court of appeals in Philadelphia, with the company labeling the SEC’s move as “arbitrary and capricious” and an “abuse of discretion”. The court filing, shared on social media by its chief legal officer, contests the SEC’s denial of Coinbase’s request for a bespoke regulatory framework for the crypto industry.

In a letter to the U.S. Court of Appeals for the Third Circuit, the crypto exchange’s lawyer insisted that the court’s intervention is necessary to prompt action from the SEC. The letter highlighted the SEC’s lack of progress since Coinbase’s initial petition for rulemaking, which sought clear regulations for digital assets. Despite the SEC’s promise of a further report by December, Coinbase sees this as mere procrastination.

A key point in the SEC’s lawsuit is that crypto tokens traded on Coinbase qualify as securities under U.S. law, which would subject their trade to strict regulatory controls. The SEC is also targeting Coinbase’s “staking-as-a-service” feature, arguing it directly infringes on securities regulations.

Central to the dispute is the application of the Howey test, a legal standard that determines whether an instrument qualifies as a regulated security. However, lawyers representing America’s largest crypto exchange allege that the SEC exceeded its jurisdiction by labeling certain cryptocurrencies listed on the exchange as securities.