Coinbase 'jurisdiction shopping' amid US regulatory risk, analysts say

Quick Take

  • Coinbase could launch an offshore derivatives exchange as soon as next week after the crypto exchange was approved for a license to operate in Bermuda. 
  • Analysts think it will be difficult for the exchange to replicate its U.S. dominance overseas

Coinbase's announcement yesterday that it secured a license from the Bermuda Monetary Authority was likened to "jurisdiction shopping" that has the potential to damage the U.S.-based exchange's brand by analysts.

Coinbase, which lauded Bermuda as "a highly respected and experienced financial regulator" in a blog post, is also in discussions with the Abu Dhabi Global Market regarding a license for a registered exchange. The moves come as Coinbase and other crypto exchanges struggle with a turbulent and uncertain U.S. regulatory environment.

TD Cowen analysts led by Stephen Glagola said in a note Wednesday that Coinbase's moves were "more akin to jurisdiction shopping amid SEC/U.S. regulatory risk" than anything else.

"We think it will be difficult for Coinbase to replicate its U.S. dominance overseas," the analysts said. "These moves could adversely impact the company's brand and/or reputation post-FTX."

Coinbase did not immediately respond to a request for comment.

Last month, Coinbase was issued a Wells Notice by the U.S. Securities and Exchange Commission notifying the company of investigations into several offerings and continuing a string of regulatory warning shots fired at crypto firms. U.S. regulators have been cracking down on crypto companies including the Commodity Futures Trading Commission suing Binance and its Chief Executive Changpeng "CZ" Zhao, also announced last month.

Just this week, the regulator charged Bittrex and one of its co-founders, alleging it was operating as an "unregistered national securities exchange, broker, and clearing agency."


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Coinbase perpetual swaps platform

Coinbase has been exploring an offshore platform to trade perpetual swaps tied to cryptocurrencies, The Block reported last month. Now a source familiar with the matter said that exchange could come as soon as next week. 

"While international derivatives exchanges in crypto have been real revenue generators, such as Binance, it is still early to determine how material this offering would be for COIN," Needham analyst John Todaro said.

The Cowen analysts said the company's strategy reaffirms the "elevated risk of potential SEC enforcement action across multiple prongs of Coinbase's business in the U.S."

The investment bank also noted that Coinbase ditched Japan earlier in the year, which has one of the more "strict crypto regulatory frameworks."

Securities and Exchange Commission Chair Gary Gensler was clear at a commission meeting last week: "Make no mistake: many crypto trading platforms already come under the current definition of an exchange and thus have an existing duty to comply with the securities laws. As I've said numerous times, the vast majority of crypto tokens are securities." 

Coinbase share price dips

Shares in the exchange were facing downward pressure before the Bermuda announcement and have slipped further during today's session.

Coinbase was trading at $63.20 by noon in New York, down about 1.9% today, according to TradingView data. The exchange has been one of the leading large-cap stocks since January, and, despite this dip, is up 73% year-to-date.

“We are underperform on COIN with a $36 Price Target (~43% downside vs. current price) on incremental risk to operations from the SEC Wells Notice and crypto banking crackdown,” TD Cowen analysts said.

Trading volumes on the platform have dwindled, despite a rally in crypto prices. TD Cowen said the regulatory crackdown on crypto banking in the U.S. "could be playing a role here." 

CORRECTION: The setting of Gensler's exchange rule remark was an SEC open meeting.

© 2023 The Block. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

About Author

Adam Morgan is a reporter covering cryptocurrency, financial markets, and economics – anything from price movements, earnings reports, and inflation to the U.S. Federal Reserve interest rate decisions and everything in between. Adam is based in London.


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