Coinbase (NASDAQ: COIN) dropped substantially overnight - 8% after hours, another 12% this morning - on changes the SEC announced last night. We're all aware that the crypto market has its problems currently but this is over and above the more general market background. Until now coins - crypto itself - have existed in something of a regulatory netherland, not entirely one thing nor the other according to the law. This means that to a great extent coins and activities surrounding them have been outside that regulatory thicket which determines who may do what.
Coinbase has now received a Wells Notice from the SEC and this looks like it will tighten the regulations. The point specifically at issue is whether coins, products built upon crypto, are securities or not. The general understanding has been that cryptocoins, as simply cryptocoins, are not securities. Which, as they're not securities, seems reasonable enough. But then it's also true that dollars are not securities - but things that are built upon dollars may become securities. Which is where the action and the Coinbase problem is now. Certain products built upon crypto may be securities - which means being regulated. And, if we're honest about this, quite possibly regulated out of existence.
Coinbase stock price from NASDAQ
The specific issues in the Wells Notice relate to “exchange, staking service Coinbase Earn, Coinbase Prime and Coinbase Wallet.” All products built on top of crypto rather than being the crypto itself.
The SE has a fairly strong case to actually look at these products too. If something is said to have a value, a return is paid upon it, people trade it with the aim of gaining that return then, well, it's certainly pretty much like a security even if it's not actually one. Therefore the SEC seems reasonable enough in warning that it's going to have a very good look. The problem for Coinbase is that if these are determined to be securities then they've been issuing and or trading in securities without the necessary permissions. Which would/could lead to disgorgement - which means give the SEC everything you made by doing this - plus fines and an agreement not to do it again.
Yes, of course, it does depend upon which way the SEC adjudication goes. But it is possible that this could rip the heart out of Coinbase's operations - no wonder the stock is down on the news.