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Coinbase Hit by Bad News And a Famous Short Seller

The most popular platform for buying and selling bitcoin, crypto, and other digital currencies is affected by two unexpected problems.
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The clouds seem to be gathering on Coinbase  (COIN) - Get Free Report

Scarcely has one difficulty been removed then the second presents itself. 

The most popular of the crypto exchanges was recently facing political pressure to block the accounts of Russian individuals and entities following sanctions imposed by the United States, the European Union, and their allies. Authorities fear Russians are using crypto to circumvent sanctions and launder their assets. 

But within a few days, this problem gave way to two others.

Coinbase is facing a class-action lawsuit brought by three platform users/customers --Plaintiffs Louis Oberlander, Henry Rodriguez, and Christopher Underwood--  who accuse it and its CEO Brian Armstrong of having a list of cryptocurrencies that can be considered securities.

The complaint says that 79 tokens, which can be considered securities, have been offered by Coinbase since October 8, 2019. However, the platform is not registered with the Securities and Exchange Commission (SEC) as a national securities exchange.

Unlike crypto exchanges, stock exchanges are considered national securities exchanges because they offer investment contracts or securities. The status also means more reporting requirements and more supervision.

Therefore, they want Coinbase to reimburse all investors who invested in these cryptos and lost money. The list of crypto includes Aave, Solana, Dogecoin, Compound, Avalanche.


Coinbase Sued for $5 Million in Damages

"What Coinbase has not disclosed is that the tokens are in fact securities, and Coinbase is selling these securities despite the fact that there is no registration statement in effect for these securities and despite the fact that Coinbase has refused to register either as a securities exchange or as a broker-dealer," the plaintiffs alleged in their lawsuit.

"Because Coinbase’s sale of these tokens violates both federal and state law, plaintiffs, individually and on behalf of all persons or entities who transacted in the tokens on the Coinbase Platform" or the Coinbase Pro Platform during the class period "bring claims to recover damages, consideration paid for tokens, and trading fees, together with interest thereon, as well as attorneys’ fees and costs, to the fullest extent permitted by law."

They are asking Coinbase and Armstrong for some $5 million in damages.

Contacted by TheStreet, Coinbase did not wish to comment.

In addition to this class action lawsuit, Coinbase also faces another threat. This one comes from financier Jim Chanos, the founder of Kynikos Associates.

Chanos announced on Friday that he had shorted Coinbase in an interview with CNBC. He didn't disclose the size of his position but called the crypto exchange a "bubble stock."

“So Coinbase is what I’m kind of talking about. Coinbase is what we would call one of the bubble stocks. Obviously, it’s got a unique market niche as the, pretty much the only public crypto exchange and consequently has the valuation to go with it,” Chanos said.

Coinbase's Fees Would Diminish

The famous short-seller believes Coinbase's valuation is stretched because it's one of the few publicly-listed crypto exchanges.

“We basically think Coinbase is over earning,” Chanos said. “If you do the numbers, their revenue base is roughly 3% to 4% of their custodian assets, their customer assets.”

Compared to similar exchanges, said revenue base percentage is very high, he noted. 

"We think as competition increases amongst the exchanges, you're going to see fee compression and as it is Coinbase will probably not be profitable this year," Chanos said before highlighting the company's $40 billion market cap.

He, therefore, believes that with the arrival of new crypto exchanges listed Coinbase will have competition, which means that his income will decrease. Furthermore, said Chanos, even with Coinbase's stated intention to expand its activities, particularly in NFTs, the platform cannot really lift the clouds surrounding the crypto industry as a whole this year.

The Russian invasion of Ukraine and other geopolitical events will prevent investors from investing in risky assets like crypto until the political tensions subside.