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Staking revenues under threat as Coinbase shares tumble 22%

Quick Take

  • Staking revenues at the exchange are threatened amid the SEC clampdown on rival Kraken.
  • Coinbase shares were trading at $57 at the close, down 22% since Monday. 

U.S. regulators set their sights on crypto-staking services this week, and Coinbase shares tumbled 22%.

Shares in the exchange began to trade lower following comments from CEO Brian Armstrong, who said Wednesday that it would be a “terrible path” for U.S. regulators to restrict crypto staking. Coinbase shares traded lower throughout Thursday, extending losses into Friday’s session. 

Shares in the crypto exchange were trading at $57 at the close, down about 22% since Monday, according to Nasdaq data. 

COIN chart by TradingView

Staking wars

Rival exchange Kraken settled charges brought by the Securities and Exchange Commission on Thursday that related to the exchange failing to register the offer and sale of its “crypto asset staking-as-a-service program.” It agreed to pay a $30 million fine, and SEC Chair Gary Gensler said the action against Kraken should put people “on notice.” 

Coinbase’s program was not affected by the news, Coinbase Chief Legal Officer Paul Grewal said, adding that Coinbase’s staking services are “fundamentally different” than Kraken’s. Staking is not a security under the U.S. Securities Act, nor under the Howey Test, he then argued in a blog post on Friday evening.

“Trying to superimpose securities law onto a process like staking doesn’t help consumers at all and instead imposes unnecessarily aggressive mandates that will prevent U.S. consumers from accessing basic crypto services and push users to offshore, unregulated platforms,” he said. 

Staking-as-a-revenue line

Coinbase noted in financial statements that staking revenue makes up a large portion of what it calls “blockchain rewards.” As the company considers itself the principal in transactions with blockchain networks, it presents blockchain rewards earned on a gross basis.

Those blockchain rewards were $63 million in the third quarter of 2022, about 11% of total net revenue. Analysts covering the firm believe it could be a significant revenue line in the future.  

“While staking is still a small portion of COIN’s overall revenue today, it is an important piece to diversify revenue away from trading and is seen as a potentially high-growth vertical,” John Todaro of Needham Co. wrote. 

Needham estimates staking revenue could top $135 million in the fourth quarter of this year and reach $414 million for the entire year.

KBW estimates 13.4% of the company’s net revenues for 2023 will come from staking, with a large majority driven by retail — which also is crucial to understanding the firm’s staking revenues.

A significant portion of those revenues — about 75% of retail staking revenues — are passed back to clients as staking rewards. “Therefore, we model staking to only contribute 3.5% to COIN’s 2023 gross profits,” analysts at KBW, led by Kyle Voigt, said. 

Earnings watch

The crypto exchange is set to deliver earnings on Feb. 21, with trading volumes and monthly transacting users expected to be down significantly, year-on-year, according to FactSet estimates. 

Blockchain rewards are expected to come to $63 million for fourth quarter, in line with the third quarter. FactSet estimates show this to rise to $197 million by the fourth quarter of this year, slightly above Needham estimates of $135 million.

The exchange’s expenses were down in the third quarter, falling to $1.1 billion from $1.8 billion in the previous period. Trading volumes were lower, in line with industry competitors.