Coinbase, one of the largest and most well-known cryptocurrency exchanges, is facing a company defining risk if the SEC bans them from offering staking services to their customers. Staking is the process of using your cryptocurrency to support the security and functionality of the network, earning token yield as a reward. Coinbase was betting the future of the company on growing their “subscription revenue” by handling much of the overhead of staking for their customers.
Essentially, Coinbase would handle all of the complicated technical work and allow investors to stake their cryptocurrencies with a single click. In return, they would take a cut of the staking rewards. While the exchange’s trading volume-based revenue is very cyclical and volatile, staking has proven to be more predictable–though it is dependent on the value of the underlying asset versus the trading volume.
The recent move by the SEC forcing Kraken to stop offering staking services to its customers has investors raising serious concerns about Coinbase’s future. If the SEC were to extend this ban to Coinbase, it would be a major blow to their business model. This ban would also mean that Coinbase would lose a significant source of income, as the subscription revenue from staking is a crucial part of their revenue stream and growth strategy.
Subscription revenue was 36% of Coinbase’s total revenue last quarter.
This isn’t news to anyone at the SEC. There should be no doubt that they are keeping up with cryptocurrency news, listening to every quarterly earnings call from Coinbase, and closely watching how strong the crypto sector is. The SEC made this move knowing companies in the space were weak, and knowing this was critical to Coinbase.
The risk to Coinbase does not just stop with the loss of subscription revenue, but it also affects their ability to retain and attract new customers. Staking services have become a popular way for cryptocurrency investors to earn passive income and has become an important factor for many in choosing a cryptocurrency exchange. If Coinbase were to lose this service, they may struggle to retain their current customers and attract new ones, as the competition in the cryptocurrency exchange market is fierce.
On face value though, I don’t think the SEC banning exchange-custodied staking is such a big deal for individual investors, or the crypto ecosystem. There are a lot of other ways to do this without involving centralized exchanges, like RocketPool. Honestly, I think the SEC has a reasonable point of view. I disagree with it, but it’s not absurd.
The reason I care about this is because if the SEC comes after Coinbase for custodied staking, I believe this will be an existential problem for Coinbase. So far Coinbase and the SEC have had a few conflicts, but I think Coinbase CEO Brian Armstrong will bet the company and finally have a full on war with the SEC.