Cryptocurrency companies, facing challenges due to increased scrutiny from the U.S. Securities and Exchange Commission (SEC), are intensifying their efforts in Congress to garner backing for legislation that aims to address regulatory concerns and provide clarity for the industry. Several organizations, including the Blockchain Association, Chamber of Digital Commerce, Crypto Council for Innovation, and Coinbase Global (NASDAQ:COIN), are actively engaging with lawmakers to seek bipartisan support for a proposed bill in preparation for an upcoming crucial vote.

Lobbyists are currently directing their attention towards dialogue involving the Republican chairs of the House Financial Services and Agriculture committees, Patrick McHenry and Glenn Thompson. The objective of this discussion is to establish clear criteria for classifying cryptocurrencies as either securities or commodities. The proposed initiative aims to enhance the regulatory oversight of the crypto industry by expanding the authority of the Commodity Futures Trading Commission (CFTC), while simultaneously providing greater clarity on the jurisdiction of the U.S. Securities and Exchange Commission (SEC).

A prominent Republican lawmaker in the House has announced plans to hold a committee vote on a comprehensive bill aimed at establishing a regulatory framework for cryptocurrency products in the upcoming weeks. Representative Patrick McHenry, who serves as the chairman of the House Financial Services Committee, stated that he anticipates presenting the bill for the committee's consideration once lawmakers resume their work on July 11. During a hearing last month, McHenry expressed his intention to advance some version of the legislation following the July 4th recess. McHenry has been spearheading an initiative alongside fellow Republicans in Congress to pass a bill that provides clear guidelines for the crypto industry. A discussion draft, co-sponsored by McHenry and others earlier this month, seeks to define the regulatory responsibilities of various agencies overseeing crypto products, as well as establish a registration pathway for crypto companies and exchanges under those agencies.

Lobbyists acknowledge that the crypto industry has faced significant challenges and setbacks, particularly in the wake of the FTX scandal and the indictment of its prominent founder, Sam Bankman-Fried. These events have adversely affected the industry's credibility. In response, the industry has been actively working to repair the damage. In the first quarter alone, it allocated approximately $6 million for federal lobbying, indicating a potential record-breaking year after having spent $21.6 million in 2022, as reported by OpenSecrets. Notably, Coinbase emerged as the top spender during the first quarter.

This comes after the SEC’s lawsuits against Coinbase and Binance last month. If the lawsuits prove successful, they have the potential to bring about a significant transformation in the cryptocurrency / digital assets industry. By asserting the jurisdiction of the U.S. Securities and Exchange Commission (SEC) over the industry, which has long argued that tokens are not securities and therefore should not fall under SEC regulation, these lawsuits could challenge the prevailing notion and result in a shift in regulatory oversight. 

According to the complaint lodged in the federal court in Manhattan, the U.S. Securities and Exchange Commission (SEC) alleges that Coinbase has been operating as an intermediary in crypto transactions and generating significant profits since 2019. The SEC further claims that Coinbase has evaded disclosure obligations designed to safeguard investors. The regulatory body asserts that Coinbase facilitated the trading of at least 13 crypto assets that are considered securities and should have been registered. These assets include tokens like Solana, Cardano, and Polygon. 

Unlike other assets such as commodities, securities are subject to strict regulations and necessitate comprehensive disclosures to ensure investors are informed about potential risks. The definition of "security" was established in the Securities Act of 1933, but experts often refer to two landmark U.S. Supreme Court cases to assess whether an investment product qualifies as a security.

The U.S. Supreme Court has established two key cases that are frequently referenced to determine whether an investment product qualifies as a security. The first case is SEC v. W.J. Howey Co. (1946), which introduced the Howey Test. This test outlines the criteria for identifying an investment contract as a security. It focuses on whether an investment involves the contribution of money, participation in a common enterprise, and the expectation of profits primarily from the efforts of others. The second case is Reves v. Ernst & Young (1990), which introduced the Reves Test. This test further clarifies the definition of an investment contract, emphasizing an investment of money in a common enterprise with the expectation of profits derived from the managerial or entrepreneurial efforts of others. Both tests provide essential guidelines for determining whether an investment product falls under the regulatory purview of securities law.

With this in mind, we believe that it is a very interesting time to look into the fundamentals of Coinbase (NASDAQ:COIN) and see why some investors are bullish on Coinbase. Looking at Quiver Quantitative’s Institutional Holdings Dashboard, we can see that hedge funds and asset managers like Coatue Management, Sculptor Capital, and ARK Investment Management all have added to their COIN positions. Most notably, ARK Investment Management increased shares held by 3% (as filed on 6/30), bringing their total COIN holdings to a whopping 12,121,881 shares worth over $1 billion dollars at current market prices. You can check out all of Coinbase’s recent institutional holdings data with Quiver Quantitative.

Coinbase is a very cyclical business, with share prices very closely correlated to the price action of Bitcoin and other large cap cryptocurrencies like Ethereum. Due to this, Coinbase often gets beaten down by the market when the highly volatile cryptocurrency market falls, leading to a potential promising hidden value play.

Although it may seem implausible to consider Coinbase, a cyclical company with negative EBITDA and rising operating expenses, as a value play, there is a chance that the market is significantly underestimating the worth of Coinbase's non-cash assets. With an impressive $5 billion cash reserve and a substantial book value per share, Coinbase possesses valuable intangible assets, including a strong moat in the rapidly expanding digital assets industry, a robust brand value, and substantial growth prospects.

Coinbase has over $5 billion dollars worth of cash on hand, representing $21.39 of cash per share. If we subtract this cash per share from the current market price of Coinbase shares, that leaves us with around $68 dollars per share. However, looking at book value per share (which considers assets and liabilities and gives us an idea of what the company is worth if it shuts down operations today), we get around $24 dollars per share. If we subtract book value per share from current market prices, we get $65 dollars per share. That means the market is valuing Coinbase’s non-cash assets at around $15 billion dollars ($65 dollars a share multiplied by 234.56 million shares outstanding).

Looking more into their moat, it’s important to understand Coinbase’s strong brand name recognition in the cryptocurrency space. Coinbase serves as the starter point for individuals and institutions looking to gain exposure to cryptocurrency markets. Coinbase is among the largest centralized exchanges in the world and they are arguably the most transparent as a publicly traded company. One large worry for new investors into cryptocurrency markets is safety. Cryptocurrency markets, especially on-chain, are like the wild west, where scams run rampant and funds are constantly lost. However, Coinbase has stronger due diligence than many of its competitors when deciding which digital assets get listed on its exchange. Additionally, Coinbase’s 75%+ market share in the United States will only increase as exchanges (like Binance) look to stay away from the USA as regulators are beginning to crack down on the industry.

As more institutions like Blackrock, Fidelity, and WisdomTree enter the market through the formation of Bitcoin ETFs, it’s becoming clearer that cryptocurrencies may become a legitimate counterpart to “traditional finance”. If there is further increased institutional adoption in the future, we will likely see increased investor sentiment and confidence in digital asset markets, leading to larger inflows of capital. It is safe to assume that this capital injection into digital asset markets, whether from institutions or individuals, will flow into Coinbase in one way or another.

Looking at Quiver Quantitative’s Corporate Lobbying Dashboard, we can see that Coinbase has spent $1,850,000 dollars on corporate lobbying, with $980,000 of that corporate lobbying spend occurring in April. Specifically, they lobbied heavily for the Digital Commodities Consumer Protection Act, a proposed federal law that would provide the CFTC (Commodities Futures Trading Commission) the authority to regulate digital asset trading, as opposed to the SEC (Securities and Exchange Commission). They also lobbied for a slew of other issues related to the regulation of the cryptocurrency / digital assets industry. With Coinbase on track to spend some of the most on corporate lobbying ever this year, we can see that debates over how the cryptocurrency industry should be regulated are heating up in Washington.

We think that all of these government tension points make COIN an important stock to pay attention to in the coming months, so keep an eye out for COIN stock’s latest government data with Quiver Quantitative.