Credit rating agency Moody’s has said that it has placed Coinbase [NasdaqGS:COIN] on review for a possible downgrade, including senior unsecured notes. The rating action reflects what Moody’s is calling “the increasingly challenging operating environment within the crypto sector.” It also flags up the decline in crypto asset prices as a source of worry for market participants.
“Although Coinbase has a strong liquidity profile, the recent sudden collapse of FTX has heightened the level of uncertainty in the crypto operating environment, leading to increased challenges for all firms operating in the sector, with an increasing possibility of sustained reductions in trading volumes and client engagement,” said Moody’s Vice President and Senior Analyst Fadi Abdel Massih.
Moody’s said all these factors would be important for Coinbase’s overall revenue.
What is Moody’s looking at?
Moody’s said it would review the extent to which Coinbase’s fortunes are linked to the overall crypto operating environment. This will include the extent to which any further market dislocations or market participant failures could adversely affect “sectoral customer sentiment.”
This all relates to the collapse of FTX of course and how that collapse has shaken investor confidence in the market. There remains the possibility of further failure on the part of entities linked to FTX, although the further away we move from the event itself, the less likely this becomes as funds and platforms move to secure or ringfence their FTX-related risks.
Crypto hedge funds are ringfencing risks
The Armchair Trader spoke to one crypto hedge fund on condition of anonymity last week, who said they had successfully ringfenced their FTX-related risk and were trading as normal. They had succeeded in successfully back pedalling out of a situation where the bulk of their cryptocurrency-related trading was being carried out on FTX and forecast that they would be closing the year up.
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Moody’s itself said there were some significant differences between FTX and Coinbase which affected its own calculations. Coinbase operates a different business model to FTX with trading venues and its custody platform at its heart. It has a number of credit positive characteristics that have to date shielded it from failures across crypto asset platforms. This includes the failure of Celsius Network and Voyager Digital earlier this year.
What makes Coinbase different to FTX?
Coinbase does not engage in retail client lending activities that could expose it to a material asset-liability mismatch, misappropriation of customer assets, related liquidity risk or other bank-like concepts or risks. Coinbase does not issue its own digital token, unlike FTX, which used its own digital token to leverage its trading positions.
Coinbase continues to maintain a strong liquidity position – with over USD 5bn of cash or cash equivalents – and over $623m in cryptocurrency assets. It also has custodial account overfunding balances which may be an incremental liquidity source. The exchange also has USD 3.4bn in long term debt including $2bn in rated senior guaranteed notes that are due in 2028 and 2031.
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Importantly, Coibase continues to invest heavily in its risk and controls framework and as a listed public company with related standards of corporate governance and a broad investor base, is subject to significantly more ongoing scrutiny and oversight than appears to have been the case with FTX.
Moody’s said that Coinbase’s ratings could be downgraded should the ratings agency conclude that there is an increased likelihood that the crypto operating environment could further lower trading volumes or transaction revenue, or lead to regulatory restrictions that could adversely affect Coinbase. This could make it increasingly challenging for Coinbase to return to a position of profitability.
