Coinbase Under Pressure as Signature Bank Failure Adds to Crypto Banking Woes

“The spectacular fallout of Silicon Valley Bank, the voluntary liquidation of Silvergate, and the abrupt shut down of Signature Bank have seriously impacted not only the ecosystem of digital assets but also the ecosystem of Silicon Valley,” said Owen Lau, an analyst at
Oppenheimer,
in a note Sunday.

Luckily, depositors at both Silicon Valley Bank and Signature Bank will get their money back, and the Federal Reserve said additional emergency funding would be made available to other eligible banks in a backstop. 

The former point is of particular importance to the crypto industry, since Circle Internet Financial—issuer of the dollar-pegged USD Coin—kept more than 3% of its assets backing the stablecoin at Silicon Valley Bank. Worries over USDC’s backing sent it tumbling below 90 cents on the dollar in secondary markets over the weekend, before it rebounded, and knocked its market capitalization down by some $3 billion, or 7%. 

Crypto companies made up almost 20% of deposits at Signature Bank, so the safety of deposits at that institution similarly save the digital asset sector from losses. 

More troubling is that Signature’s collapse means the end of its Signet interbank transfer system, a piece of crypto market infrastructure that was one of the few options left after Silvergate discontinued its SEN service. The absence of both networks, which were used by crypto market participants to send funds for trading, has already impacted liquidity for Bitcoin and is likely to make digital assets more volatile.

“While the emergency [Fed] backstop will likely stabilize the financial system, these failures have already broken some key infrastructures of the public blockchain/digital assets industry in U.S., namely SEN and Signet,” said Lau. “We expect liquidity and trading volume to decrease until someone fills the void, and the uncertainty will linger in USDC and the industry.”

That’s likely to weigh on
Coinbase,
one of the largest listed crypto companies and a primary venue for U.S. crypto trading. Oppenheimer slashed its price target on Sunday for Coinbase (COIN) to $70 from $84, reflecting “revenue and ecosystem risks.”

The wobbles in USDC and reduction in its market cap, are further trouble for Coinbase, which has a revenue-sharing agreement in which Circle pays Coinbase to hold customers’ dollar balances and its corporate cash in USDC. In an environment of higher interest rates, this business is increasingly attractive—and it is also the type of diversification that analysts have called for at Coinbase, which is otherwise largely reliant on revenue from crypto trading.

When Oppenheimer’s Lau talks about revenue risks at Coinbase, this is what he’s referring to. And he’s not alone on Wall Street. Coinbase did not immediately respond to a request for comment.

“We estimate that if USDC market cap remains at current levels, this could drag on Coinbase’s 2023 revenue by ~2%, with an even greater impact on profitability,” analysts led by Dan Dolev wrote in a Sunday, before USDC’s market cap had recovered slightly and was 10% lower.

“We remind investors that USDC is critical to Coinbase,” said Dolev. “In 4Q, USDC revenue accounted for ~80% of COIN’s interest income and 23% of its total revenue.”
Mizuho
rates Coinbase at Underperform with a $30 price target.

It’s just one more thing for investors to worry about as the
Dow Jones Industrial Average
and
S&P 500
 swing around to start the week. Coinbase stock, for its part, was 2.5% higher—likely boosted by a major relief rally in
Bitcoin
and other cryptos—though it had dipped into the red in volatile trading early Monday.

Write to Jack Denton at jack.denton@barrons.com