Coinbase initiated at junk levels by Moody’s, citing ‘uncertain regulatory environment and fierce competition’ in crypto

Moody’s Investors Service initiated a debt-issuer rating of Coinbase Global Inc. at noninvestment grade, or junk, citing an “uncertain regulatory environment and fierce competition” as a key reason for not rating the crypto exchange an investment grade debt issuer.

“Coinbase’s financial profile suggests investment grade credit strength, but for now the uncertain regulatory environment and fierce competition offset these strengths,” wrote Moody’s analysts Fadi Abdel Massih, Donald Robertson and Ana Arsov, in a report published Tuesday.

The credit rating agency rates Coinbase
COIN,
+0.42%

at a stable Ba2, which is a non-investment grade, or speculative rating, equivalent to BB at S&P Global Ratings and Fitch Ratings.

The debt-issuer rating for Coinbase follows an announcement by the cryptocurrency exchange of a prospective $1.5 billion sale of bonds, which the company said it would use for general corporate purposes, such as investments in product development or future acquisitions of other companies or technologies. The private debt offering will see notes issued due in 2028 and 2031.

The Moody’s analysts say that Coinbase is vulnerable to price fluctuations in bitcoin
BTCUSD,
+3.18%
,
Ether
ETHUSD,
+2.44%

on the Ethereum blockchain and meme assets like dogecoin
DOGEUSD,
+0.34%
,
but notes that its strong market share may help to offset those in the short term. The credit-rating firm also notes that Coinbase is aiming to expand its revenue streams into other areas that aren’t as vulnerable to the vagaries of the volatile crypto markets and the mood of its investor base.

“Instead of charging a fixed dollar amount per trade, Coinbase earns
a percentage of the notional value of trades matched on its platform,” Moody’s note.

“In an up market this can be very lucrative. However, when prices decline, the notional traded amount and the firm’s transaction revenue will also decline unless volumes increase,” the analysts write.

“To address this reliance on transaction revenue, Coinbase is diversifying its list of tradable products and expanding its subscription-based revenue, but it will take time for this strategy to have a material effect,” Moody’s researchers said.

Indeed, one such product has been met with pushback from the U.S. Securities and Exchange Commission.

Coinbase has been attempting to launch a lending platform that would allow customers holding a stablecoin called USD Coin to earn interest by lending it to other traders. Coinbase planned to sell the borrowed coins to traders and eventually expand the program to include other cryptocurrencies.

However, the SEC is charging such a program securitizes the crypto and would therefore need to be registered with the SEC and sold through a registered broker/dealer.

Regulatory uncertainty poses a big risk to its business, Moody’s writes.

“Given the novelty of crypto assets, many questions remain unanswered relating to the future regulatory frameworks of the plethora of tokens, blockchains and products and services that are part of decentralized finance,” the analyst said.

Shares of Coinbase were up 0.8% midday Tuesday, but down 1.5% so far this week, FactSet data show. By comparison, traditional markets were faring slightly better, with the Dow Jones Industrial Average
DJIA,
-0.74%

down 0.6% and up 0.2% on the week, while the S&P 500 index
SPX,
-0.43%

was down 0.3% on the session but trading less than 0.1% lower on the week.

On Monday, Moody’s assigned a Ba1 rating to Coinbase’s proposed offering of $1.5 billion in senior guaranteed notes.

Moody’s says that three factors could lead to an upgrade of Coinbase’s overall rating: 1) increased regulatory clarity; 2) a big expansion of its product offerings and services that boost revenue; 3) prudent cost management during fallow periods in crypto markets