Explainer: Why is America's largest crypto exchange Coinbase in trouble?
Jul 29, 2022, 14:25 IST
The dumping of over 1.4 million shares of Coinbase earlier this week by crypto evangelist Catherine Wood’s investment firm has added fuel to the already raging fire engulfing America’s largest cryptocurrency exchange.
The company had listed on Nasdaq last April to much fanfare, with the shares opening at $381 apiece. However, at the time of writing this report, the share price of Coinbase stands at $62, a steep drop of 83% from its opening price last year.
So, how exactly did the company get here? We explain.
Coinbase cuts workforce by 18%
Coinbase’s Co-founder and Chief Executive Officer Brian Armstrong said in a note in June that the company was laying off about 18% of the workforce, or 1,100 employees, due to the tough economic conditions.
Armstrong admitted in the note that the company ‘grew too quickly’ during the bull run of the cryptocurrency market in 2021 and it had over-hired.
“Our team has grown very quickly (>4x in the past 18 months) and our employee costs are too high to effectively manage this uncertain market,” he said.
Insider trading charges
In the first ever cryptocurrency insider trading case, the U.S. Department of Justice on July 21 charged Coinbase’s former product manager Ishan Wahi, his brother Nikhil Wahi and friend Sameer Ramani with wire fraud in connection with a scheme to commit insider trading in cryptocurrency assets. Ishan Wahi allegedly tipped the other two regarding crypto assets that were to be listed on Coinbase and the three are alleged to have gained about $1.5 million through illegal trades. The brothers were arrested in Seattle on July 21.
The chief security officer of Coinbase Phillip Martin declared on his official Twitter handle that they had terminated the employee and were cooperating with the Department of Justice.
SEC launches probe against Coinbase
The US Securities and Exchange Commission (SEC) was separately probing Coinbase on whether it improperly let Americans trade digital assets that should have been registered as securities, Bloomberg reported.
The SEC’s scrutiny of Coinbase has increased since the platform expanded the number of tokens in which it offers trading. The report said that the SEC probe predates the agency’s investigation into the alleged insider trading scheme mentioned earlier.
The SEC has alleged that Nikhil Wahi and Ramani purchased “at least 25 crypto assets, at least nine of which were securities”, another Bloomberg report said.
On July 22, the chief legal officer of Coinbase Paul Grewal, in a blog said, “Coinbase does not list securities on its platform. Period.”
Seven of the nine assets included in the SEC’s charges are listed on Coinbase’s platform but none of them were securities, he added.
Coinbase, in a statement on July 21, asked the SEC to clearly define the digital assets regulatory framework.
ARK Investment dumps Coinbase
Crypto evangelist Catherine Wood’s investment firm ARK Investment Management dumped 1.4 million shares of Coinbase when the share price dropped to $53 on July 26. According to a Bloomberg report, ARK Invest was Coinbase’s third largest shareholder, holding 9 million shares by the end of June.
These are the series of events that has brought Coinbase to its current state. The latest Fed rate increase announced on July 27 is expected to impact the crypto market as investors pull out in fear of inflation and recession. Only time will tell how Coinbase will weather the oncoming storm.
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The company had listed on Nasdaq last April to much fanfare, with the shares opening at $381 apiece. However, at the time of writing this report, the share price of Coinbase stands at $62, a steep drop of 83% from its opening price last year.
So, how exactly did the company get here? We explain.
Coinbase cuts workforce by 18%
Coinbase’s Co-founder and Chief Executive Officer Brian Armstrong said in a note in June that the company was laying off about 18% of the workforce, or 1,100 employees, due to the tough economic conditions.
Armstrong admitted in the note that the company ‘grew too quickly’ during the bull run of the cryptocurrency market in 2021 and it had over-hired.
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“Our team has grown very quickly (>4x in the past 18 months) and our employee costs are too high to effectively manage this uncertain market,” he said.
Insider trading charges
In the first ever cryptocurrency insider trading case, the U.S. Department of Justice on July 21 charged Coinbase’s former product manager Ishan Wahi, his brother Nikhil Wahi and friend Sameer Ramani with wire fraud in connection with a scheme to commit insider trading in cryptocurrency assets. Ishan Wahi allegedly tipped the other two regarding crypto assets that were to be listed on Coinbase and the three are alleged to have gained about $1.5 million through illegal trades. The brothers were arrested in Seattle on July 21.
The chief security officer of Coinbase Phillip Martin declared on his official Twitter handle that they had terminated the employee and were cooperating with the Department of Justice.
SEC launches probe against Coinbase
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The US Securities and Exchange Commission (SEC) was separately probing Coinbase on whether it improperly let Americans trade digital assets that should have been registered as securities, Bloomberg reported.
The SEC’s scrutiny of Coinbase has increased since the platform expanded the number of tokens in which it offers trading. The report said that the SEC probe predates the agency’s investigation into the alleged insider trading scheme mentioned earlier.
The SEC has alleged that Nikhil Wahi and Ramani purchased “at least 25 crypto assets, at least nine of which were securities”, another Bloomberg report said.
On July 22, the chief legal officer of Coinbase Paul Grewal, in a blog said, “Coinbase does not list securities on its platform. Period.”
Seven of the nine assets included in the SEC’s charges are listed on Coinbase’s platform but none of them were securities, he added.
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Coinbase, in a statement on July 21, asked the SEC to clearly define the digital assets regulatory framework.
ARK Investment dumps Coinbase
Crypto evangelist Catherine Wood’s investment firm ARK Investment Management dumped 1.4 million shares of Coinbase when the share price dropped to $53 on July 26. According to a Bloomberg report, ARK Invest was Coinbase’s third largest shareholder, holding 9 million shares by the end of June.
These are the series of events that has brought Coinbase to its current state. The latest Fed rate increase announced on July 27 is expected to impact the crypto market as investors pull out in fear of inflation and recession. Only time will tell how Coinbase will weather the oncoming storm.