Coinbase shares surged on Ripple’s partial court victory this week. Why the decision matters for the crypto exchange

Published Fri, Jul 14 20233:20 PM EDT

This week Coinbase joined the cryptocurrency rally after a federal judge ruled that Ripple Labs' private XRP token is not a security when sold on an exchange, but is a security when it's sold to institutional investors. Thursday's judgment was only a partial win for Ripple, but significant nonetheless for both the company and the wider crypto market. Coinbase shares rallied more than 24% the day of the ruling on optimism that it might prevail in its own battle with the SEC. Regulators in June sued Coinbase, alleging it was operating as a broker, an exchange and a clearinghouse for unregistered securities – and named 13 such securities. "Ripple is the first case the SEC has lost under its regulation-via-enforcement strategy and thus puts in doubt other actions it has underway, perhaps most notably its case against Coinbase," Canaccord Genuity's Joseph Vafi said in a note Thursday. COIN 5D mountain Coinbase rallies after court ruling in SEC's case against Ripple and XRP "We have viewed the SEC suit versus Coinbase a bit like a double-edged sword — some medium-term risk to the business offset by a good chance of a legal victory and vindication for the company as well," Vafi added. "In our view, [the] decision in the Ripple case helps tip the scale even more toward a favorable outcome for Coinbase." Wall Street is split, however, on how investors should tiptoe around Coinbase from here. Wedbush Securities, which has an outperform rating on the stock and raised its price target to $110 on Thursday, from $96, said it's "specifically encouraged by the suggestion that 'XRP sale on the public exchanges did not involve securities.'" Needham has a buy rating on Coinbase and on Friday raised its price target to $120 from $70. Its analyst, John Todaro, called this week's ruling a "positive read-through to Coinbase," one that "sets precedent that crypto token sales through exchanges, at least in the XRP case, did not violate securities laws." The effect is to "moderately de-risk the regulatory pressure on the stock." Compass Point and Canaccord Genuity also have buy ratings on Coinbase. Others are less convinced. Raymond James, which has an underperform rating on Coinbase, said Thursday that the decision "may not be the final word on this issue" since it's likely the SEC will look to appeal it. Berenberg Capital Markets said "a close reading of the ruling shows that the judge specifically did not reject" the argument that many tokens sold on secondary exchanges are unregistered securities, concluding that "the extent of [the] rally in COIN's shares was not warranted." Berenberg has a hold rating on the stock. Cowen issued a note to investors reminding them that the Coinbase "case is unlikely to be heard until the fall at [the] earliest" and, even with some clarity about XRP, it's still true that "any non-BTC altcoin is at risk of being deemed a security by the SEC." Cowen reiterated its underperform rating on Coinbase. Barclays analyst Ramsey El-Assal, while leaving his opinion on Coinbase at underweight, wrote that he nonetheless saw "the ruling as incrementally positive for Coinbase, given it sets additional legal precedence that in some cases a token may not be a security (though admittedly two of the three issues will still go to trial)."