Stringent action in the form of lawsuits by regulators can be touted as detrimental for an array of reasons. While Binance is facing the wrath of the latest Securities and Exchange Commission [SEC] lawsuit, Coinbase is not far behind. The Brian Armstrong-led crypto exchange decided to take on this legal battle by not delisting certain assets like Binance. In the midst of this, the ratings of the crypto exchange seems to be taking a hit.
Moody’s, the credit ratings agency, has reacted to the recent lawsuit against Coinbase. This was done by downgrading the exchange’s rating from “stable” to “negative.” The decision was made due to the potential impact of the SEC’s actions on Coinbase’s daily operations. Moody’s stated that the lawsuit has introduced uncertainties and potential risks for the exchange, leading to the change in rating. The firm further wrote,
“The change in outlook to negative from stable reflects the uncertain magnitude of impact the SEC’s charges will have on Coinbase’s business model and cash flows.”
Factors that usually influence Moody’s to downgrade a firm’s rating include “an accelerated decline in the company’s liquidity position.”But, despite the downgrade, Moody’s noted that the liquidity position of Coinbase remains strong. The demotion has not affected Coinbase’s ability to maintain sufficient liquidity.
How can Coinbase get an upgrade?
Moody’s listed out a slew of standards that were required to be ticked off for Coinbase to get an upgrade back to “stable.” The firm wrote,
“Coinbase’s ratings could be upgraded should there be evidence of: 1) resolution of the SEC’s charges in a manner that does not significantly adversely affect Coinbase’s revenue streams, cost base and liquidity; 2) a substantial and sustained increase in trading revenue; 3) achieving revenue diversification through the strong and sustained development of non-transactional revenue streams, without adding significant incremental credit risk.”
Additionally, it remains unsure if the exchange will be back on top. The regulatory overhaul could make this process difficult.