Coinbase shares fell after the SEC sued the crypto exchange. However, Lisa Ellis, Senior Equity Analyst at MoffettNathanson (a division of SVB Securities), says it could present a buying opportunity for some investors. Ellis tells Yahoo Finance Live why the suit provides clarity for Coinbase and its investors.
BRAD SMITH: Several Coinbase this morning.
JULIE HYMAN: Let's do it.
BRAD SMITH: Yeah.
JULIE HYMAN: Go ahead.
BRAD SMITH: Is this you or me? Coinbase stock extending declines after the SEC filed a lawsuit against crypto exchange accusing it of violating securities laws despite turning other investors away. Cathie Wood's Ark has picked up over $20 million in shares in the last 24 hours, and our next guest seems to be on the same page in a note. She says the pullback could be an attractive entry point for some investors.
Joining us now is Lisa Ellis, MoffettNathanson partner and senior equity analyst. Lisa, great to have you here with us this morning. Always a pleasure to get your insights around this space. So what makes it an attractive entry point?
LISA ELLIS: Well, look, this is a necessary step that the industry has been waiting for. We've needed regulatory clarity in the United States for many years now. And it's been-- the SEC in some ways has been sort of holding the industry hostage over the last year, year and a half by sort of trickling out these enforcement actions. But not having a constructive dialogue about what issues they're really concerned about or not and kind of narrowing that and moving it forward in terms of establishing the right set of regulations.
And Coinbase in particular struggles with this or has struggled with this because they operate as a regulated entity and have tried to be a leader in the industry engaging very constructively with the SEC. Now it's been evident, for a year now, that the SEC was preferring to go down the enforcement path. OK, fine. It is what it is.
But there's sort of been this waiting for the shoe to drop, so to speak, for months and months now. And now, at least, we know what the SEC is focused on, and I was pleasantly surprised, actually, by how narrow and specific it is. It really gets down to the exact questions Coinbase has been asking about how to exactly define securities in the digital asset world. And now this, well, not ideal ever, of course, to have a lawsuit with the SEC, at least provides a path for finally getting clarity on that.
In addition, there are several bills that are fairly advanced in Congress to establish more regulatory clarity over exactly who's got purview for what. And I think that these recent SEC actions will accelerate the timeline in which we'll actually get the Congressional support and clarity, which is a really critical step that the industry has been looking for.
So you know what I mean. We're not out of the water. There's still a lot of uncertainty, but, at least, it's a step moving along the path to a point of clarity for this industry.
JULIE HYMAN: Lisa, I got to ask, though. But isn't the clarity that, effectively, Coinbase is-- a lot of its business in the US is just going to be-- it's going to stop because of that clarity? I mean, if they can deal in these various tokens within the confines of the US?
LISA ELLIS: Well, one, I mean, that's not clear. Obviously, they put their own very rigorous test to these things. And the CFTC, of course, has also come out with directly conflicting statements with the SEC. It's sort of a turf war, sort of theoretical debate, but no.
I mean, just more from a quantitative perspective, 55% of Coinbase's volumes are Bitcoin and Ethereum. Those are definitively not considered securities. That's over half their volume.
JULIE HYMAN: How much of their revenue and profits though?
LISA ELLIS: Oh, overweight. Overweight because a lot of that, they're lucrative. Consumers like you and me that probably just buy a few tokens here and there and pay very high yields on spreads on those. So if anything, it punches above weight on terms of revenues and profits.
And then a lot of their S&S revenues, which are now 30% or 40% of the revenues in any given quarter, their subscription and services revenues, the non trading revenues, with the exception of staking, which has always been controversial but is only 3% of net revenue.
The other S&S, which a lot of that is interest on stablecoins and other types of generating interest, essentially, was not under scrutiny. So, I mean, truly 13 Coins out of 260 on the platform are under scrutiny and the staking business. We don't know exactly how much of their revenue and profit all that is, but it's certainly no more than 5% to 10%. Maybe even less than that.
And if it came to it, now they're obviously planning to just simply continue to operate as they are while they sort of wait for this to get resolved. I mean, they have certainly delisted tokens in the past like XRP, when XRP came under scrutiny. So it wouldn't be that they would shut down the business, they would just simply delist 13 tokens out of 260 on the platform for a period of time while this is getting sorted out.
So, look, it's not pleasant. They didn't want an enforcement action. They've been very proactive with the SEC. But, at least, it moves us forward in some way.
BRAD SMITH: What does this do to sentiment around crypto as a whole right now, Lisa?
LISA ELLIS: Well, look, there's some level of a sentiment in the context that it's already been in the toilet for the last year.
BRAD SMITH: And Ice Age to put it euphemistically.
LISA ELLIS: There has been an increased level of frustration around this-- to put a, what I would call, impasse-- that's probably a good word for it, impasse in the US on the regulatory front with. The SEC over here chirping, the CFTC saying a conflicting thing, Congress putting bills forward, pulling them back, right?
Meanwhile, the EU has put forth very constructive, clear, comprehensive legislation as have about 30 other jurisdictions around the world. So Coinbase, like many other US crypto companies that we do not want, as Americans moving out of this country have been starting to invest out of necessity in areas like Europe or Hong Kong, Singapore, where there's regulation.
So there's been an increased-- you can probably hear it in my voice, too, frustration with this logjam that, at least, maybe perhaps the law. So some level of pain relief that maybe this logjam will start to clear and that over the long term, we'll finally get to a clear and constructive regulatory regime.
In the meantime, we've got a little bit of an odd push, pull with volumes in crypto land, which, I think, we'll have to see how it shakes out because, of course, understandably, there will be some investors that will just pull back on any crypto activity for a period of time while they watch how this plays out.
On the other hand, Binance, that SEC lawsuit that was filed on Monday, is far more broad sweeping and egregious and has been a much, much needed thing in the industry because Binance is one of these dodgy, unregulated, offshore exchanges that gives the entire industry a bad name. But has had a huge amount of volume.
And so with Binance now really under the microscope, that would naturally shift some amount of volume to the onshore exchanges, including Coinbase. So we're sort of TBD. I'm sure there'll be a period where things kind of go quiet. But I mean, the industry's already been very quiet now for a year. And the companies have demonstrated their ability to kind of slow down their-- bring down their expenses, slow down their investments to kind of wait this out, and we'll continue to see that happening.
BRAD SMITH: Lisa, while we have you, I'm going to end on a fun curveball note, because I see the golf book always behind and on the mantel behind you. We see it, and I've been dying to ask you as well because I don't know if you're as flabbergasted as I. But just following this PGA LIV deal. I mean any thoughts on it, the golf fan that you are?
LISA ELLIS: You're right. I am a big golfer, yes. Hence the book in the background. I was as shocked as the rest of the world yesterday. I still have to say I don't fully understand-- I mean, I get that there was a lot of litigation and that there's this constructive perspective of like avoiding a lot of just ongoing nastiness and legal fees and trying to come to a constructive outcome.
But I really do not understand either the process by which this happened or the premise of it, especially given that the tourists were already under a bit of regulatory scrutiny for antitrust related issues. This seems to only potentially exacerbate that. And then, of course, there's the whole sort of philosophical thing about the sportswashing and whatnot. So I do-- I am still flabbergasted. I don't get it.
JULIE HYMAN: Lisa, as a fan, you're going to-- You're not going to stop watching golf, I assume?
LISA ELLIS: Look, I'm a huge fan. I watch all the time. I love good golf. I will be happy if this sort of narrative can settle its way down. And we can just sort of get back to focusing on the really good players and having all the really good players play in the same forum and, of course, I'll still watch.
But I'm huge fan of folks like Rory and Jon Rahm, who have stuck with the tour through all of this. And I care a lot for them personally that they personally come out of this with it being a positive for them personally, who really went out on a limb and passed up huge amounts of money in support of the tour.
So, yeah, I feel like it's that group of individuals in particular that this kind of comes across as a bit of a slap in the face. But who knows? We don't really know what's going on behind the scenes. Maybe there's more to it than we do understand that will come out, I'm sure, in the coming days.
BRAD SMITH: Lisa, I knew that you would be as impassioned, if not more than I on this. I've been trying to figure out a way to weave it in.
LISA ELLIS: But golf is [INAUDIBLE]
BRAD SMITH: Exactly. My goodness.
JULIE HYMAN: He's trying to weave it into every discussion that we have today, basically.
LISA ELLIS: I have to say yesterday morning, I'm standing in the hallway dealing with-- trying to triage the Coinbase, SEC thing, and then someone jumps up and says LIV in the PGA are merging. What?
BRAD SMITH: What a time to be alive. Lisa Ellis, MoffettNathanson partner and senior equity analyst, thanks so much, Lisa. We appreciate the time as always.
LISA ELLIS: Thanks guys.