Coinbase: Clarity Act Is Bad For Business (Rating Downgrade)

Summary Coinbase is downgraded from strong buy to hold due to rising regulatory risks from the pending CLARITY Act. The CLARITY Act threatens COIN’s ability to pay interest on stablecoin deposits, undermining a key future revenue stream. COIN trades at a steep premium—forward P/E of 30.52 and EV/EBIT of 37.31—despite increasing business model uncertainty. The GENIUS Act previously benefited COIN, but the CLARITY Act could reverse those gains and challenge its competitive positioning. Co-Authored By Noah Cox and Brock Heilig Investment Thesis Coinbase Global, Inc. ( COIN ) is often looked at as one of the most useful, practical platforms for investors to use to become involved in the cryptocurrency ecosystem. Founded in 2012 by Brian Armstrong and Fred Ehrsam, Coinbase has over 100 million users, is the largest U.S.-based cryptocurrency exchange, and is the world’s largest Bitcoin custodian. Coinbase has been a market leader in building one of the world’s premier cryptocurrency exchanges. Unfortunately, the US CLARITY Act, currently being refined in the US Senate, could upend this. I’ll dive into this more later, but in a nutshell, the CLARITY Act limits how much interest can be paid out in stablecoin deposits. The proposed act, under heavy lobbying from traditional banking organizations, would limit stablecoin interest to be paid out only on stablecoins deposited at financial institutions with a banking license. Coinbase has already stated it does not plan on becoming a bank, which means this could be a huge impediment to its stablecoin programs. I believe stablecoins will be the heart of the future of finance. The institutions that can pay interest on their stablecoin balances will be the institutions that win the next wave of financial innovation. Coinbase does not look like they’re going to be paying interest on stablecoin balances going forward if the CLARITY Act passes. With this, shares are downgraded to a hold. Why I’m Doing Follow-Up Coverage When I last wrote on Coinbase in late June, I gave the company a strong buy rating. This was based on resilient fundamentals, diversified revenue, strong growth, and what I thought was a tailwind powered by the GENIUS Act. Coinbase has been viewed as a blue-chip fintech given its extensive “policy first” approach to many of the key regulatory developments in the crypto space. Now, however, I think their policy-first approach is failing them. The risks of owning the stock have increased substantially, I believe. It’s now critical to reassess Coinbase’s involvement in the creation of the CLARITY Act. Unfortunately, I think the story has gotten worse. What The CLARITY Act Means First, let's dive into why we need the CLARITY Act in the first place. During the Biden administration, former SEC Chair Gary Gensler aggressively pursued tokens under the claim that they violated securities laws here in the United States. This seriously stifled innovation and forced many of the best crypto projects to move offshore in an attempt to escape the SEC’s crypto enforcement. Fast forward to 2026, and the new administration + Congress is taking a different approach. The SEC previously relied on interpreting investment regulations like the 1933 Securities Act (yes, an act almost 100 years old) for crypto regulations. Now, we have Congress working on the CLARITY Act, which pairs with the GENIUS Act passed last summer. I wrote previously on how the GENIUS Act could impact Coinbase. Unlike the GENIUS Act, I think the CLARITY Act has huge flaws for Coinbase. At the heart of this, the fight is over who can pay interest on stablecoins and their transactions. Currently, members of Congress appear to be leaning towards Senator Alsobrooks' compromise, which would allow rewards to be paid on stablecoin transactions but not on idle balances. The other proposed method would be for stablecoins to only receive interest if they are parked at a licensed financial depository institution. Coinbase has already stated that it does not want to become a bank. So the big issue is that Coinbase’s current business model is not built around excessive stablecoin transactions or licensed banking. Coinbase supports using stablecoins as a reserve before buying cryptocurrencies. But they will not see the potential transaction volume we could expect if a current fintech payment rail (like Visa) adopts stablecoins for transactions and then rewards customers on these transactions. In essence, the CLARITY Act could be a huge setback for Coinbase. So much so, the firm has even threatened to withdraw support from the act if the current proposed compromises hold. Valuation Something else that doesn’t help Coinbase’s case is that the company trades at a steep multiple compared to other firms, especially at a time when they are facing unique regulatory risk. This is concerning because there is little clarity on recurring, stable revenue that we would have hoped to expect from stablecoin deposits, so the company really has no business trading at such a steep premium. On a forward non-GAAP price-to-earnings basis, Coinbase has a ratio of 30.52 . Compared to the sector median of just 11.57, this is more than a 163.77% premium to its peers. Of course, Seeking Alpha Quant gives Coinbase a grade of an F on this metric. The forward EV/EBIT ratio is worse. With a sector median of just 12.55, Coinbase currently has a ratio of 37.31, which is more than a 197% premium to the peers. The company also earns an F grade on this metric, according to Seeking Alpha Quant. Coinbase has an overall valuation grade of an F. What concerns me about this premium valuation is that it implies that there will still be strong Coinbase adoption over the long term, even if their stablecoin offering is at risk. While it’s certainly possible that this could happen, I believe many future revenue lines are tied to this interest-bearing offering. Coinbase faces a huge business model risk here. I now believe the stock is a hold. With this, I’m no longer sure what shares are worth. If we were able to get clarity (no pun intended) on how this act will impact their stablecoin business, and the act is not as destructive as it appears, I could be motivated to upgrade shares back to a strong buy. The future of crypto runs through a cryptocurrency exchange like Coinbase. The question is whether it will run through Coinbase or one of its competitors. This bill means a lot for that. For now, shareholders are paying a strong valuation premium for legitimate regulatory risk. Bull Thesis While I am downgrading shares of Coinbase from a strong buy to a hold, this doesn’t mean that I entirely neglect the bull case. Going back to the GENIUS Act from over the summer, Coinbase actually did really well as a result of this act. In the GENIUS Act, Congress banned stablecoin issuers (these are different from cryptocurrency exchanges) from paying interest on their deposits. The loophole in this rule was that affiliated (or unaffiliated) exchanges could still conduct “rewards” programs on stablecoin balances they held. The result? Coinbase was able to (and to this day) offer yield on its stablecoin balances. Legally, this is called a rewards program, but it works like interest on a deposit. The bull case for Coinbase is that this new act, the CLARITY Act, either fails entirely or leaves this loophole carved out, allowing the exchange to take its current position and exploit it. Unfortunately, I think this is unlikely. Starting with the odds of passage, betting markets like Polymarket currently place the odds of passage at 68% . In essence, a better than 2 in 3 chance of passing. I think these odds are actually conservative. In my opinion, the GENIUS Act was only ½ of a complete regulatory plan. Congress knows this and wants to complete the picture. They are incentivized to do so and pass at least some version of the CLARITY Act. So the real issue is whether these harmful terms will come with the act. Unfortunately, I think they will. The act really needs to look bipartisan. With this, Democrats in the Senate are rallying behind Alsobrooks' compromise as a way to help protect community banks (smaller banks). Why do community banks need to be protected? Many community banks rely on loaning out funds they get from low-interest checking accounts they offer to their clients. If stablecoin checking accounts pay interest, this will create a competitive product that could produce what some are calling “deposit flight” from small community banks to these cryptocurrency platforms as consumers hunt for yield. Democrats in Congress see community banks as important. That is why they are fighting hard for this compromise. For Coinbase, however, this will be anything but a compromise. Takeaway I think Coinbase has a long way to go before it can prove that it can diversify away from transaction-driven revenue, and the recent actions related to the CLARITY Act do not help it achieve this. The GENIUS Act was largely a net positive for Coinbase when it passed Congress over the summer. Now, we face a new cryptocurrency bill that ironically will undo some of the best parts of the GENIUS Act. Coinbase needs to prove that it can thrive in a regulated market. Part of succeeding in a regulated market is advocating for yourself. Coinbase is struggling here a bit. That’s the risk people have if they choose to remain shareholders. I will be keeping a close eye on the cryptocurrency giant, but for now, I am downgrading shares from a strong buy to a hold. Coinbase has been a trailblazer in the industry for over a decade. The risk now is not whether what they do (crypto exchange) will be legal in 5 years; the risk now is whether they will be able to control the regulatory conversation. I am less confident in their abilities.