Over the last year, Coinbase (NASDAQ: COIN) is up more than 180%. Zooming out even further, since the beginning of 2023, it's up a whopping 530%. And if I had to bet, it's going higher.
But the reason behind this isn't what you might normally hear. While the crypto market keeps growing and deep-pocketed institutional investors have dipped their toes into crypto, which will undoubtedly benefit Coinbase, there's another reason the company has yet to reach its full potential and why I am buying this gem of a company hand over fist: an increasingly favorable regulatory environment.
Image source: Getty Images.
In the SEC's crosshairs
Before delving into why Coinbase is on an upward trajectory, it's crucial to understand the current situation between Coinbase and the Securities and Exchange Commission (SEC), particularly concerning the Wells notice issued to Coinbase in March 2023.
A Wells notice is a formal notification that the SEC is planning to bring enforcement action against a company or individual for suspected violations of securities laws. In Coinbase's case, the SEC alleges that certain digital assets traded on its platform are securities, which would require Coinbase to register as a securities exchange.
The Wells notice has undoubtedly cast a shadow over Coinbase, causing concern among investors and stakeholders about the company's future. The potential regulatory crackdown could limit Coinbase's ability to list and trade various cryptocurrencies, stifling its growth and innovation. Additionally, the looming threat of legal battles and compliance costs could strain the company's financial resources and divert attention from its core business operations.
However, as is natural in the dynamic world of crypto, things change quickly. Since the SEC issued the Wells notice, the landscape has shifted significantly. One development in particular could upend the agency's pursuit of regulating crypto via enforcement: the recent decision by the Supreme Court in Loper Bright that struck down a key legal precedent and dramatically limited the power that regulatory agencies have in interpreting laws.
Chevron what?
That legal precedent is known as Chevron deference because of the prior Supreme Court that established it. Chevron deference is a legal doctrine under which courts deferred to a federal agency's interpretation of ambiguous laws within its jurisdiction. In the cryptocurrency realm, it has given agencies like the SEC considerable leeway in interpreting and enforcing regulations.
The Loper Bright decision effectively rescinded this doctrine, and so federal agencies, including the SEC, will now face stricter scrutiny from courts when interpreting statutes. In the cryptocurrency arena, the decision effectively nullifies several of the SEC's arguments regarding its belief that crypto assets fall under its purview. By removing Chevron deference, the Supreme Court has made it more challenging for the SEC to claim that it holds the authority to regulate digital assets.
The rescission of Chevron deference is a game changer for the crypto industry. It paves the way for more permissive regulatory frameworks, encouraging innovation and development in the U.S. crypto market.
Summing it up best was Coinbase's Chief Legal Officer Paul Grewal, who recently said on X (formerly Twitter) that "the writing is on the wall," alluding to the inevitable victory that Coinbase will have in courtrooms against the SEC.
The stars aligning for Coinbase to shine
In light of the current crypto-legislative landscape, it's likely safe to assume that Coinbase has been walking on eggshells when it comes to innovation and business development. There have probably been several initiatives that have been tabled due to fear that they would lead to additional lawsuits from the SEC, such as not releasing a native token on its new blockchain, Base.
However, progress will not only directly benefit Coinbase but all of crypto as a more favorable regulatory environment could unleash a wave of innovation and growth across the industry. Naturally, since Coinbase's business model is deeply intertwined with the health of the broader crypto market, what's good for crypto is good for Coinbase.
Considering how far Coinbase has come in this challenging environment, imagine what it could achieve when the tides begin to turn. As the regulatory clouds clear, Coinbase is well positioned to capitalize on the next wave of growth and remains one of the best ways for investors to gain exposure to the burgeoning potential of crypto without having to pick individual tokens. With favorable legal precedents, supportive legislation, and the removal of Chevron deference, Coinbase's future looks brighter than ever.
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RJ Fulton has positions in Coinbase Global. The Motley Fool has positions in and recommends Coinbase Global. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
