“The downgrade displays our view that weakened buying and selling volumes within the aftermath of FTX’s collapse will proceed to stress Coinbase’s profitability,” S&P stated, including that the sector additionally faces heightened regulatory dangers.
The failure of FTX Buying and selling Ltd. amid allegations of fraud “has severely hit the crypto business’s perceived credibility,” inflicting a drop in retail investor curiosity within the sector, which has resulted in a pointy drop in buying and selling volumes at different platforms, together with Coinbase, S&P added.
“Coinbase’s revenues rely closely on buying and selling volumes, with transaction revenues representing roughly 80% of whole revenues within the first 9 months of 2022,” it stated.
Within the face of income pressures, Coinbase has slashed its workforce in an effort to scale back its working bills. However these cuts will solely partially offset Coinbase’s income decline, “within the absence of a significant uptick in retail engagement,” S&P warned.
The ranking company famous that its destructive outlook on Coinbase’s scores “signifies continued uncertainties in regards to the depth and period of the crypto market downturn, inadequate visibility across the path of buying and selling volumes following the collapse of FTX, and heightened regulatory threat.”
Earlier this month, the corporate’s U.S. subsidiary was sanctioned by the New York Division of Monetary Providers (NYDFS) for compliance shortcomings. In a settlement with the regulator, the agency agreed to pay US$50 million in penalties, and to speculate one other US$50 million to beef up its controls.
“The consent order settlement is credit score destructive for Coinbase as a result of it sheds additional gentle on the regulatory prices of conducting a digital belongings enterprise and the extra efforts wanted to bolster its compliance features even after its important investments and hiring over the previous few years,” Moody’s Traders Service stated in a report.
Whereas the compliance points at Coinbase pre-dated the FTX debacle, Moody’s predicts the FTX failure will “sluggish crypto adoption and mute person exercise at Coinbase.”
But, regardless of the destructive impact on revenues, “slower crypto adoption could possibly be a possibility for Coinbase to give attention to bolstering its compliance program,” it stated.