Coinbase: Arbitration Case Against Firm Could Open The Door To Substantial Financial Exposure

A seemingly garden variety arbitration demand brought against Coinbase Global, Inc. (NASDAQ: COIN) by about 100 of its customers could have serious negative implications for the company. The investors lost about US$21 million because, in their judgment, Coinbase did not provide sufficient protection from scammers.

The customers’ assets were held in a “Coinbase Wallet” which allows users freedom to invest in almost any crypto transaction. In contrast, Coinbase’s conventional wallets are structured such that Coinbase acts much like a bank and securely holds the assets.

A third party convinced an affected customer to purchase a “voucher” by clicking on an innocuous-looking link on a computer screen. The voucher was really a smart contract that allowed the third party to transfer the crypto assets out of the customer’s Coinbase wallet without the owner’s knowledge or approval.  

In their arbitration claim, the aggrieved parties stated that Coinbase should have provided them some warning this was occurring; moreover, they say the rules that force banks to reimburse debit card users for unauthorized transactions should apply here.

This fairly narrow claim really takes aim at a much broader issue: whether the crypto industry’s largely laissez-faire attitude toward security, based almost exclusively on a software-based governance system, will be permitted to interact with a heavily regulated conventional financial system in the U.S. and other western countries.

Phrased more simply, will the strict rules of the financial system be imposed on crypto companies? If so, crypto players like Coinbase could have substantial financial exposure. Stories of scammers and hackers stealing assets are legion.

READ: Coinbase Suggests 3Q 2022 Results Will Be Weak, Investors Shrug

In addition, and in some ways related to this, Coinbase continues to grapple with the potential implications of a civil suit brought by the SEC in July 2022 against three men, one a former Coinbase manager. The suit contends that nine cryptocurrencies, including seven that can be bought and sold on Coinbase’s platform, are actually securities that should have been registered with the SEC under the Securities Act of 1933 (1933 Act). The SEC contends they are securities because “each of the crypto asset securities were offered and sold by an issuer to raise money that would be used for the issuer’s business.”

After rallying sharply from late July through mid-August, Coinbase has retraced those gains. Its enterprise value is around US$14.5 billion even though its combined adjusted EBITDA over the first half of 2022 was negative US$131 million, and business trends may be even worse in 3Q 2022 than 2Q 2022. (Coinbase plans to release 3Q 2022 results on November 3.) Furthermore, the arbitration claim and the SEC’s questions about the company’s business practices add to the uncertainty.

Coinbase Global, Inc. last traded at US$63.59 on the NASDAQ.

Information for this briefing was found via Edgar and the companies mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

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