Cryptocurrency Roundtable

[JohnCM]

Bitcoin's Regulatory Future Is Darkening. Wall Street Still Likes the Business.

BY Dow Jones & Company, Inc.
07/01/2021

Bitcoin and other cryptocurrencies are looking shakier from a regulatory standpoint on reports that India's central bank is cracking down. But Wall Street still sees plenty of profit for exchanges like Coinbase Global ( COIN ) and others in the crypto economy as "staking" digital tokens opens up new revenue streams.

The latest regulatory hurdle for crypto appears to be India, where the Reserve Bank of India, or RBI, is " informally asking" banks to avoid digital currency transactions, Reuters reports.

Indian banks have been in a quandary over crypto; the RBI banned crypto transactions in 2018, but the Indian Supreme Court ruled against the ban in March 2020. Financial regulators in India may now be seeking alternate means to quash the crypto market, forcing exchanges to use other payment gateways and processors.

India's crackdown follows one in China, where much of Bitcoin is mined, or processed. Financial authorities in May ordered a "crackdown on Bitcoin mining and trading behavior," aiming to maintain financial market stability and " severely punish" illegal financial activities. That has triggered an exodus of mining operations out of the country.

Yet Wall Street still sees large and rising profits in the crypto economy. J.P. Morgan, for instance, issued a note on Wednesday outlining a $40 billion revenue opportunity in crypto "staking," a method of validating blockchain transactions that generates income for exchanges and holders of a crypto token.

Staking is now a $9 billion business, according to J.P. Morgan and will grow to $20 billion as the two large Ethereum networks complete their merger later this year, switching to a "proof of stake" protocol from "proof of work." The overall staking market will hit $40 billion by 2025, the Wall Street firm estimates.

"We think staking will make the cryptocurrency marketplace increasingly attractive relative to other asset classes, yield-generating or not," J.P. Morgan's Kenneth Worthington wrote in a note.

Exchanges stand to benefit by earning fees and commissions from customers that stake their tokens. Coinbase could generate $200 million from staking in 2022, up from about $10 million in 2020, Worthington estimates. Staking could hit a $500 million annual run-rate for Coinbase by the end of 2025, he forecasts.

Proof-of-stake is also more energy efficient than proof-of-work protocols and could help reduce the steep energy- consumption and environmental toll of Bitcoin and other blockchain networks.

The Ethereum network merger could be a game-changer for staking, vastly expanding the market for tokens that run on proof-of-stake (POS) protocols. Worthington estimates that the merger will increase the market-cap of POS tokens by $250 billion, boosting POS tokens to 27% of the overall crypto market.

Staking tokens is also a way for crypto owners to earn income--essentially by pledging their tokens to validate transactions on blockchain networks.

Owners of the Ethereum 2.0 token can earn a 5% yield for staking on Coinbase. The Kraken exchange is offering 5% to 7% yields on Ethereum staking. Other tokens may yield more. Staking USD Coin--an Ethereum-based stablecoin pegged in value to the dollar--on the Binance exchange can generate a 9.49% annualized yield.

Coinbase, for one, could clearly use the revenue with Bitcoin prices in a rut at around $33,472, well below peaks around $65,000 earlier this year. Coinbase plans to start staking Ethereum tokens after the network merger, potentially creating a new revenue stream.

Wall Street expects Coinbase's revenue to decline to $5.6 billion in 2022 from $6.2 billion this year, according to consensus estimates. If J.P. Morgan is right, and staking takes off, it would lift revenue next year by 3.6% above the consensus. With crypto's extreme volatility, however, it is difficult to say whether that would move the needle on the stock.

Worthington has an Overweight rating and $371 target on Coinbase. The shares were at $247, down 2.6% in trading on Thursday.