Shalini Nagarajan

Ratings agency Moody’s slashed Coinbase’s outlook to “negative” from “stable” two days after the Securities and Exchange Commission alleged that the exchange <a href="https://blockworks.co/news/sec-sues-coinbase">operated as an unregistered broker</a> and sold unregistered securities since 2019.



A negative outlook suggests that the agency could downgrade Coinbase’s rating in the future.



Moody&#8217;s decision to change the outlook stems from uncertainty about how much the SEC&#8217;s charges will affect Coinbase&#8217;s business model and cash flows, the agency said in a <a href="https://ratings.moodys.com/ratings-news/403841?mod=article_inline" target="_blank" rel="noreferrer noopener">statement</a> published Thursday.



The commission also alleges that Coinbase&#8217;s staking-as-a-service products break the Securities Act of 1933 because &#8220;the Staking Program has five stakeable crypto assets, and each of these assets is considered an investment contract and therefore a security.&#8221;



The SEC further claims that Coinbase didn&#8217;t make sure that the crypto assets it sold were not considered <a href="https://blockworks.co/news/ava-labs-howey-test-wrong">securities according to the Howey test</a>.



After the lawsuit, regulators from 11 states, including California and Washington, <a href="https://blockworks.co/news/us-states-are-going-after-coinbase-following-sec-lawsuit-heres-how">sent Coinbase a show cause order</a>. The order requires Coinbase to explain why it shouldn&#8217;t be told to stop selling cryptocurrencies in those states within 28 days.



Moody&#8217;s warned that Coinbase could face some serious consequences from the regulators.&nbsp;



These might involve returning any money earned unlawfully, paying fines and penalties, and suffering setbacks in its staking rewards business and other activities.&nbsp;



The agency also noted that it&#8217;s unclear when and how these issues will be resolved and what it means for Coinbase&#8217;s finances.



Moody’s isn’t the only one warning about Coinbase’s rating. Berenberg analyst Mark Palmer <a href="https://blockworks.co/news/coinbase-shares-uninvestable">slashed the company’s price</a> target on Thursday from $55 to $39.



Coinbase has reacted to the SEC&#8217;s lawsuit by stating that the agency <a href="https://blockworks.co/news/coinbase-responds-sec-lawsuit">conducted a review of its business</a> in 2021 and granted permission for the company to go public, despite the 2019 allegations made in the lawsuit.



Coinbase Chief Legal Officer Paul Grewal previously told Blockworks: “The solution is legislation that allows fair rules for the road to be developed transparently and applied equally, not litigation. In the meantime, we’ll continue to operate our business as usual.”



<hr class="wp-block-separator has-alpha-channel-opacity"/>



Get the news in your inbox. Explore Blockworks newsletters:



<ul class="wp-block-list">
<li><a href="https://blockworks.co/newsletter/the-breakdown">The Breakdown</a>: Decoding crypto and the markets. Daily.</li>



<li><a href="https://blockworks.co/newsletter/0xresearch">0xResearch</a>: Alpha in your inbox. Think like an analyst. </li>
</ul>

Coinbase

Moody’s warns Coinbase faces serious consequences

Crypto users can soon provide their credit scores when making blockchain-based credit applications via major US credit bureau TransUnion.



TransUnion’s new crypto-focused service will provide individuals’ credit scores to blockchain dapps when they apply for DeFi loans. Their scores will be based on their credit histories.



“Credit scoring is an important tool for lenders to help mitigate risk regardless of the platform being used,” Jason Laky, TransUnion’s executive vice president of financial services, said in a <a href="https://newsroom.transunion.com/transunion-spring-labs-and-quadrata-partner-to-deliver-credit-scoring-to-blockchain/" target="_blank" rel="noreferrer noopener">statement</a>. 



Blockchain data platform Spring Labs and Web3 identity solution provider Quadrata partnered with TransUnion on the initiative. In 2021, TransUnion led a <a href="https://techcrunch.com/2021/05/11/why-transunion-led-blockchain-fintech-spring-labs-30m-series-b/" target="_blank" rel="noreferrer noopener">$30 million</a> investment in Spring Labs’ Series B.



Consumers can request their credit data from Chicago-headquartered TransUnion, which they will then choose to share with the relevant dapp. TransUnion says user privacy will be preserved in the process.



The partnership will allow DeFi lenders to access “critical information when making their lending decisions with confidence, ultimately minimizing their risk, and providing borrowers more opportunity for better terms,” Laky added.



<h2 class="wp-block-heading">TransUnion crypto push strengthens case for DeFi</h2>



TransUnion’s crypto move comes after <a href="https://blockworks.co/news/ftx-not-worst-bad-thing-in-crypto-this-year" target="_blank" rel="noreferrer noopener">one of worst sell-offs in history</a> following the collapse of algorithmic stablecoin ecosystem Terra last year.



Roiled markets exposed lenders to unsecured loans threatening their balance sheets. This type of high-risk lending led to a wave of defaults that left several crypto companies anxious about the ensuing domino effect. 



The transparent nature of DeFi could <a href="https://blockworks.co/news/can-defi-handle-new-wave-of-users" target="_blank" rel="noreferrer noopener">mitigate those concerns</a> in future scenarios, proponents say.



“As more consumers and lenders move to blockchain to conduct business, it’s important to ensure that the balance is struck between the information that lenders need to assess risk and the privacy and anonymity expected by users of the technology,” said John Sun, CEO of Spring Labs, in a statement.



“This new product featuring TransUnion’s identity and credit data at its core is a big step toward achieving that balance and allowing more lending opportunities on blockchain while minimizing risk.”



Credit scores in Web3 aren’t a new concept. Quadrata previously <a href="https://www.businesswire.com/news/home/20230126005065/en/Quadrata-Brings-Digital-Identity-to-DeFi-Through-Partnerships">partnered</a> with nine DeFi protocols including TrueFi and Cred Protocol to provide KYC and anti-money laundering risk scores. 



And last year, a credit risk assessment startup Spectral raised <a href="https://techcrunch.com/2022/08/24/spectral-raises-23m-to-help-create-web3-credit-scores/">$23 million</a> to build and refine its credit scoring network.



<hr class="wp-block-separator has-alpha-channel-opacity"/>



Get the news in your inbox. Explore Blockworks newsletters:



<ul class="wp-block-list">
<li><a href="https://blockworks.co/newsletter/the-breakdown">The Breakdown</a>: Decoding crypto and the markets. Daily.</li>



<li><a href="https://blockworks.co/newsletter/0xresearch">0xResearch</a>: Alpha in your inbox. Think like an analyst. </li>
</ul>

credit rating

Borrowing Crypto With DeFi? TransUnion Shares Real-world Credit Scores

Casey Wagner

<div id="highlights-block_627976653708e" class="highlights">
 <ul>
 <li>The DeFi protocol is the first to receive a credit rating from S&amp;P Global Ratings</li>
 <li>Low capital base, increasing regulatory scrutiny and return obligations were areas of concern for credit raters</li>
 </ul>
 
</div>



The first institutional DeFi company rated by S&amp;P Global received a B-, or junk, grade.



S&amp;P Global Ratings has assigned Compound Prime a B- long-term credit rating. It is the first time an institutional DeFi (decentralized finance) offering has been rated by the agency,&nbsp;



Compound Prime, a Compound Labs subsidiary, has a stable outlook, but ratings issuers cited uncertain regulatory conditions around stablecoins and Compound Treasury’s currently “very low” capital base — as well as its 4% return obligation — as concerns.



Compound Prime oversees Compound Treasury, the company’s security offering that converts US dollars to stablecoin USDC and secures accredited investors a 4% return, according to Reid Cuming, Compound Treasury’s general manager.&nbsp;



The Treasury offering was first announced in June 2021.&nbsp;



A B- rating, a junk rating six levels below investment grade, means the business is more vulnerable to adverse financial conditions, although it “currently has capacity to meet financial obligations,” S&amp;P Global Ratings said in its <a href="https://www.spglobal.com/ratings/_division-assets/pdfs/guide_to_credit_rating_essentials_digital.pdf?utm_medium=cpc&amp;utm_source=google&amp;utm_campaign=Brand_S" target="_blank" rel="noreferrer noopener">explanation</a>.



“As part of ongoing discussions with S&amp;P, Compound Treasury’s ratings could be upgraded in upside scenarios such as greater regulatory clarity for the digital asset industry, or a longer track record of stable performance,” Cuming said in a <a href="https://medium.com/compound-finance/compound-treasury-sp-credit-rating-897aff3a6f8c" target="_blank" rel="noreferrer noopener">statement</a>.



S&amp;P choosing to assign a DeFi protocol a rating, which Compound said is a first, shows that greater adoption is coming, Cuming said.&nbsp;



“Over time, traditional financial markets and DeFi will converge,” Robert Leshner, Compound’s founder, <a href="https://twitter.com/rleshner/status/1523671242922147840?s=20&amp;t=53W-DwecPjQVgf7gkS7Fug" target="_blank" rel="noreferrer noopener">tweeted</a>. “Compound Treasury is one of the products accelerating this transition, by offering institutions a cash-management product powered by the Compound protocol.”



Ratings will become more common, Lesher added, which will help to foster institutional demand.



<hr class="wp-block-separator has-alpha-channel-opacity"/>



Get the news in your inbox. Explore Blockworks newsletters:



<ul class="wp-block-list">
<li><a href="https://blockworks.co/newsletter/the-breakdown">The Breakdown</a>: Decoding crypto and the markets. Daily.</li>



<li><a href="https://blockworks.co/newsletter/0xresearch">0xResearch</a>: Alpha in your inbox. Think like an analyst. </li>
</ul>

credit rating

Newsletter

Blockworks Research