Cathie Wood's ARK Invest fund bets more on Coinbase despite SEC crackdown

ARK Investment Management has doubled down on Coinbase surviving an SEC lawsuit and is betting the crackdown will bring regulatory clarity to cryptocurrency.

Regulators on Tuesday accused the California-based crypto exchange of violating federal securities laws, and shares of the company plunged 20%.

But while other investors were cashing out, ARK Invest spent $21 million snapping up over 400,000 Coinbase shares that day. As of this week, ARK holds approximately 7% of Coinbase stock, on par with Vanguard, the second-biggest holder of COIN at 13.5 million shares, according to Bloomberg data.

Coinbase is one of the few publicly traded cryptocurrency plays held by institutional investors.

U.S. pension funds, including New York State Common Retirement Fund, Wisconsin State Board of Investment and the State Board of Administration of Florida Retirement, Tallahassee, also hold shares of Coinbase.

California Public Employees' Retirement System and California State Teachers Retirement System owned 242,922 and 234,492 shares, respectively, as of March 31. Each was worth about $16 million at the end of the quarter, a minute portion of their equity portfolios of $107.8 billion and $59.3 billion, respectively.

International pension funds, including Japan's Government Pension Investment Fund, Norges Bank, and the Kingdom of Sweden are also investors.

"Action against Coinbase was going to be inevitable," said ARK Investment's director of research, Frank Downing. "Coinbase has been preparing for this day and is ready to challenge the SEC in court. So when we saw the stock trading down in the pre-market, we were ready in the open to be there when it was down 15-20%."The SEC accused Coinbase of operating as an unregistered securities broker, exchange and clearing agency since 2019. The suit against Coinbase came just after SEC charges against the world's largest crypto exchange, Binance. Like Coinbase, Binance was accused of operating as an unregistered broker, exchange and clearing agency, as well as violating securities laws. But the SEC also named Binance CEO, Changpeng "CZ" Zhao, and accused the company of serious wrongdoing, including commingling and improperly diverting customer funds — including buying a $11 million yacht from an account that had access to customer funds — and artificially inflating trading volumes.

Though both exchanges have vowed to fight the SEC's allegations in court, Mr. Downing claims that there is a "sharp contrast" between the allegations against Binance and Coinbase, the former which he called "much more dubious."

Another investor, Alex Tapscott, the managing director of Ninepoint Partners' Digital Asset Group, a Toronto-based asset management firm with C$8 billion ($5.9 billion U.S.) in AUM, said the Coinbase situation is "very, very different."

"They allege that Coinbase has been operating as an unregistered securities exchange, broker and clearing agency since 2019. They didn't really go much further than that. There's no allegation of wrongdoing, per se," he said.

Ciamac Moallemi, a professor at Columbia University's Graduate School of Business, seconded that allegations against Coinbase are "more regulatory."With Binance, "I think it goes much more into, you know, things that would be in the realm of fraud," Mr. Moallemi added. "There's quite a difference in the magnitude between those two sets of lawsuits because of the seriousness of the accusations."

Coinbase received a Wells notice — a heads-up that the regulator is planning a future enforcement action — from the SEC earlier this year.

"When we look at the charges brought against Coinbase, there weren't too many surprises to us," Mr. Downing said. "Coinbase received a Wells notice last year, and, you know, we knew generally what the scope of that would be, and we've been informed by the various cases the SEC has brought (against other exchanges) over the last year or so."Other SEC enforcement actions against crypto companies — like California-based exchange Kraken, which paid $30 million to settle securities-related charges in February — gave investors "insight into likely action" for Coinbase, he said.

The suits could help shepherd in the regulatory clarity that many, including Coinbase, have been begging for.

The SEC and other federal regulators, including the Commodity Futures Trading Commission have ramped up crypto-related enforcement efforts over the past year, but crypto companies say they've been given little to no regulatory guidelines.

Coinbase could benefit in the long run.

"Coinbase has always gone to great lengths to try and be a good actor in the United States," Mr. Downing said.

"They're based in the United States, their executive team is American, they employ thousands of people. They went public on the Nasdaq, and they have hired former regulators and people who are knowledgeable about the law to structure their business in a way that they think makes them compliant," he said.

"We can see regulatory clarity coming and it could be through this case," he added.