Updated: Jul 23
Cryptocurrency exchange Coinbase (NASDAQ: COIN) may have violated public securities rules by failing to warn investors of potential legal action filed by Bitcoin creator Dr. Craig Wright.
The exchange made a direct listing on the Nasdaq exchange in April, briefly soaring to nearly $429 before closing out its first day of trading at $381 per share. Within a month, the stock tumbled to $224 but began regaining lost ground this autumn (thanks to crypto’s Tether-fueled pumping), topping $357 on Tuesday.
However, the shares slipped 8% to $328.60 on Wednesday following a less than stellar Q3 earnings report. Revenue was about one-quarter shy of analysts’ estimates while profit fell nearly three-quarters to $406m. The cryptocurrency exchange stressed that things have picked up in Q4 as the BTC token’s artificially inflated value lured customers back and the exchange hopped on the NFT bandwagon.
BTC accounted for 19% of Coinbase’s Q3 trading volume, down from 32% in Q3 2020, reflecting the ongoing public fascination with a host of meme coins. BTC also accounted for slightly more than one-fifth of Coinbase’s Q3 transaction revenue, a not insignificant slice of the pie that the company isn’t eager to see go away anytime soon. (Foreshadowing alert.)
Missing from the Q3 report or the ensuing earnings call was any mention of the two letters Coinbase Global Inc was sent at the end of October by solicitors working on behalf of Dr. Wright, the individual behind the Satoshi Nakamoto pseudonym credited with authoring the Bitcoin white paper released in 2008.
The letters put Coinbase on notice that Wright assigned his intellectual property rights to both the ‘Bitcoin’ name and the Bitcoin blockchain database to Wright International Investments (WII) in 2009. Wright says the name Bitcoin now applies solely to the Bitcoin Satoshi Vision (BSV) protocol and the letters go on to state that WII intends to protect and enforce its rights to these intellectual properties.
It’s worth noting that an independent research report by MNP, a top 5 Canadian consulting firm, underscores why only BSV represents “Satoshi’s Vision” for Bitcoin, and only BSV runs on the original Bitcoin protocol.
Coinbase has yet to publicly acknowledge receipt of these letters. There was no mention of them in the Q3 earnings report, no reference made in the analyst call and—crucially—no formal 8-K filing with the U.S. Securities and Exchange Commission (SEC), which requires listed companies to issue notices of unscheduled material events or corporate changes that could result in significant impact to shareholders.
This “interesting” omission was noted by Dr. Wright on a Slack channel, along with a warning that Coinbase was “opening themselves to a class action lawsuit and leaving the directors and company officers personally liable for damages.” Wright further warned that “the failure to report a material event of this size is a felony offence” and could result in the SEC taking action that might include Coinbase’s delisting from the Nasdaq.
Coinbase is a founding member of the Crypto Open Patent Alliance (COPA), a cabal of BTC backers that initiated proceedings in the U.K. High Court in April aimed at undermining Wright’s claim to authorship of the Bitcoin white paper. So meeting Wright in court—or threatening to, at least—should be old hat by now.
Wright’s ongoing civil suit—aka the Satoshi Case in Florida—with the brother of his late friend and colleague Dave Kleiman is another legal front that Coinbase is monitoring with more than a little unease. The whole premise of Ira Kleiman’s case is that Wright is Satoshi, and Coinbase’s Nasdaq prospectus cited public confirmation of Satoshi’s true identity—and potential movement of the 1.1 million BTC Satoshi is believed to control—as major risk factors that could let some of the air out of Coinbase’s balloon.
Putting the lout in sellout
While its Wright-related 8-K was nowhere to be found, Coinbase did make nine SEC filings since the letters were sent, seven of which related to directors and senior staff selling shares in the company since the calendar flipped over to November.
As certain options vested, Chief Product Officer Surojit Chatterjee sold a total of 60,000 shares worth around $20.7 million, while Chief Legal Officer Paul Grewal—of the infamous ‘our in-house securities aren’t securities’ blog post—sold a comparatively paltry 10,900 shares worth $3.8 million. Both execs have been among Coinbase’s most avid sellers since the Nasdaq debut, with Grewal unloading over $60 million worth of shares while Chatterjee has sold a whopping $154 million.
But it was Coinbase co-founder Fred Ehrsam who claimed the early lead in the November fire sale, having dumped around $99 million worth of stock since the month began.
Ehrsam’s post-listing tally is now over $400 million, well ahead of the $292 million sold by co-founder/CEO Brian Armstrong. (On Tuesday’s analyst call, Armstrong continued to display his traditional inability to read the regulatory room, declaring at one point that “it’s going to become politically unpopular to ever tax crypto.”)
This week’s insider sales could reflect a desire to take advantage of a temporary bump in the company’s stock or it could be a reaction to other forces that until today remained unknown to the great unwashed masses of rank-and-file investors. The answer to that riddle may yet prove, as Dr. Wright observed, interesting.