Nasdaq-listed cryptocurrency exchange Coinbase Global Inc (NASDAQ:COIN)’s latest quarterly results were met with enthusiasm on the market, with pre-market trades popping 9% higher on Friday morning.
Although the leading institutional exchange posted a net loss, underlying EBITDA pumped into positive territory on the back of stringent austerity measures and much-improved bitcoin spot prices.
That is not to say Coinbase is out of the rough; trading volumes are still half that of the first quarter of 2022, while monthly transacting users (MTUs) fell around 9%.
Putting that aside, one of the most hotly anticipated numbers being watched by investors was staking rewards.
Labelled under the balance sheet as ‘blockchain rewards’, staking rewards have become a lucrative revenue stream for Coinbase over the years, but they’ve also become a source of controversy.
Staking is the process of locking your cryptoassets up in order to help with the smooth running of a particular blockchain network.
In return for contributing to the network, stakers receive yielding rewards, varied according to lock-up size and duration.
Coinbase provides this as a service, taking a cut of the yielding rewards in turn. This has become a big deal for Coinbase in recent years.
In the third quarter of 2020, Coinbase generated just US$3.3mln in revenues from staking, or roughly 1.1% of total revenues.
By the third quarter of 2021, this figure was US$81.5mln, or a sixfold increase to 6.6% of total revenues, rising to over 10% of revenues during the 2022 market down spiral.
Enter Gary Gensler
However, the US Securities and Exchange Commission (SEC) has been trying its best to crash the party in 2023.
Under crypto permabear Gary Gensler, the SEC has come down hard on staking, firstly by slapping a US$30mln fine on cryptocurrency exchange Kraken in February, forcing it to permanently shut down its staking programme.
It is the SEC’s belief that staking rewards amount to an unregistered securities violation, contending that they qualify as investment contracts under the Howey Test.
Coinbase investors got thoroughly spooked by this development, fretting over a similar enforcement action against the only publicly listed crypto exchange.
On the day of the Kraken fine, Coinbase shares plummeted over 15%.
Staking power
Thursday’s earnings call showed that, despite regulatory uncertainty, staking remains a significant piece of Coinbase’s revenue pie.
Though down year on year in real terms – grossing US$73.7mln compared to US$81.9mln – staking rewards have increased to 10% of Coinbase’s revenue mix against 7% in the first quarter of 2022.
Put another way, net losses would have effectively doubled this quarter without this revenue stream.
Thus it comes as no surprise that Coinbase remains extremely anxious over the SEC’s next move.
The group has a Wells Notice hanging over its head, generally seen as a precursor to an SEC enforcement action.
But the regulator has yet to disclose what the enforcement action will entail.
“Despite our ongoing engagement with the SEC, they have not shared their specific concerns with Coinbase or provided any clarity or workable path forward for the industry,” Coinbase told investors on Thursday.
“While we hope to avoid litigation, we are fully prepared to defend ourselves and advocate for the entire crypto industry if necessary,” the group continued.
Coinbase is also taking steps to cement its international presence through a registration in the offshore jurisdiction of Bermuda, subsequently launching the Coinbase International Exchange on May 2.
This exchange will enable institutional users in eligible jurisdictions outside of the US to trade perpetual futures, beginning with bitcoin and ether.
Depending on the outcome of the Wells Notice, Coinbase’s staking-as-a-service product may be next in line for a trip to the Caribbean.