Coinbase warns of crypto crash, shares fall

Although staking does not exist for Bitcoin, it does for Ethereum, one of the largest blockchains. Holders of Ether – Ethereum’s token – can unlock or stake their tokens as collateral in a process that validates transactions and secures the network, earning money in the process. Current returns for betting Ether are upwards of 5%. “Validators” must unlock at least 32 Ether, or about $52,000, to participate in the stake on Ethereum.

Enter Coinbase (ticker: COIN), which itself is a validator and has a service that allows investors to stake smaller amounts of Ether. There is no minimum amount required, thus opening up the possibility of returns to a larger group of people.

Investors earn crypto returns that would otherwise be out of reach, and Coinbase receives a fee: 25% of Ether returns. Analysts say that’s the kind of diversification that Coinbase needs, given that revenues from crypto trading have fallen in line with Bitcoin prices over the past year.

However, this business model may be under review by regulators

“We’re hearing rumors that the SEC wants to get rid of crypto betting in the US for retail clients,” Armstrong said Wednesday on Twitter. “I hope that’s not the case, as I think it would be a terrible path for the United States if it were allowed to happen.”

The SEC declined to comment.

In its second-quarter financial filings last summer, Coinbase disclosed that the betting program was under scrutiny from the SEC, which it said had sent investigative subpoenas and other document requests.

A potential ban on staking would be negative for both Coinbase and Ether. Coinbase will lose a source of high-margin revenue that appears to be a pillar of growth. Ether would lose out on the participation of US retail investors – a group that played a major role in crypto’s recent bull run – in staking. It would not be crushing to Ethereum’s ability to operate, but rather a hit to the wider use of the network, which would support prices.

Armstrong, for his part, does not want this to happen.

“Staking is a very important innovation in crypto,” the Coinbase CEO said on Twitter. “It allows users to directly participate in running open crypto networks. Staking brings many positive improvements to the space, including scalability, increased security, and reduced carbon footprints.”

Armstrong, and others, say that staking does not make Ether a security, which would put the coins under the SEC. But the agency and the broker have had this argument before: The SEC has said some tokens Coinbase says aren’t securities just that.

Without confirmation from the SEC, these concerns are just concerns for now, but the market is taking them seriously. Coinbase shares have fallen 11% on Thursday as concerns add uncertainty to cryptocurrencies and crypto companies already facing threats from a bear market in prices, other regulatory pressures and waning investor interest.

Write to Jack Denton at [email protected]