Today’s price action for centralized exchange Coinbase Global (COIN 2.08%) has certainly been intriguing to watch. As of 2:15 p.m. ET, Coinbase stock had rallied 1.6% higher. This move reflected today’s bullish momentum in the crypto sector, which had inched 0.7% higher over the past 24 hours.
That said, investors are closely watching a number of headwinds that have materialized with Coinbase right now. Today, Nikhil Wahi, the brother of a former Coinbase product manager, pleaded guilty to charges tied to wire fraud. Wahi has confirmed that he placed trades with insider knowledge gained from his brother and another Coinbase employee. This plea confirms what regulators alleged, providing investors with a certain degree of uncertainty with respect to how rampant this problem may be within the company.
Additionally, Coinbase has reportedly funded a lawsuit against the U.S. Treasury Department over its sanctions of crypto mixing service Tornado Cash. This aggressive tone the company has taken in pushing back against regulators is one that may prove contentious as regulatory scrutiny picks up for digital assets.
There’s certainly a bullish angle to any piece of headline news. For Coinbase bulls, a guilty plea in this insider trading case could spell the end of this unfortunate chapter in Coinbase’s history. While some may suggest that this will only provide regulators with more ammunition to launch future probes, there’s also the possibility this could be a one-and-done scenario. If that’s the case, it’s bullish for Coinbase stock.
Additionally, one can take the view that Coinbase’s aggressive stance on regulatory policy is a positive for the company and this sector as a whole. Coinbase has garnered some goodwill with regulators, having worked with them, pushing for more regulation in the past. If Coinbase and other parties succeed in their lawsuit, much is to be gained for crypto exchanges such as Coinbase.
These two recent events may seem like small footnotes in the relatively robust history of Coinbase. Perhaps the regulatory scrutiny that comes along with being a centralized exchange is the cost of doing business. If so, the dramatic decline Coinbase stock has seen since its initial public offering may be a great buying opportunity for investors.
That said, regulatory risks tied to digital assets have ratcheted up. Insider trading allegations and sanctions for crypto mixing services appear to be only the beginning of what could be an onslaught of scrutiny thrown at Coinbase and its peers. Securities and Exchange Commission Chairman Gary Gensler has said as much, equating the “vast majority” of digital assets to securities. For exchanges peddling these securities, such as Coinbase, it’s more likely than not that more scrutiny will mean business will get a lot more difficult, if not more costly, to continue as usual.
I think Coinbase stock remains a relatively high-risk bet right now, relative to owning the underlying digital assets provided on its exchange. Those looking for exposure to this sector have thousands of options to play the capital appreciation upside of this sector with (perhaps) less regulatory risk.
Chris MacDonald has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Coinbase Global, Inc. The Motley Fool has a disclosure policy.