Coinbase Shares Drop 7% on Customer Breach and Lingering SEC User Count Probe

Quick overview

Cryptocurrency giant Coinbase is grappling with two significant challenges that have sent its stock tumbling ahead of its landmark inclusion in the S&P 500 index next week. The company’s shares dropped by more than 7% to $244.44 in morning trading on Friday after revelations of both a customer data breach and an ongoing SEC investigation.

Insider-Assisted Data Breach Leads to $20 Million Ransom Demand

Affecting less than 1% of its daily transacting users, the San Francisco-based crypto exchange revealed Thursday that fraudsters had effectively bought overseas customer service personnel to pilfers private user data. Later on, the hackers insisted on a $20 million payment to stop the public revelation of the hack.

“These attackers have been contacting our overseas customer support agents, looking for a weak leak, someone who would accept a bribe in exchange for sharing some customer information with them,” Coinbase CEO Brian Armstrong said in a video message. ” Sadly, they came upon a few bad apples.”

Instead of paying the ransom, Coinbase has promised to fully reimburse any consumers who lost money after being duped into moving bitcoin to bogus accounts. The business projects customer reimbursements and remedial expenses could run from $180 million to $400 million. Coinbase has also set up a $20 million reward fund for data that points to the arrest and conviction of the accountable offenders.

SEC Continues Probe into 2021 ‘Verified Users’ Claim

Complicating these security issues, Coinbase also verified an ongoing Securities and Exchange Commission inquiry on its former reporting methods. The investigation is on whether Coinbase exaggerated its user counts in past releases, especially with regard to its assertion in 2021 marketing materials and IPO papers of “100+ million verified users”.

“This is a hold-over inquiry from the previous administration about a metric we stopped reporting two and a half years ago, which was fully disclosed to the public,” said Paul Grewal, Coinbase’s Chief Legal Officer. “We also revealed – and still reveal – the more pertinent statistic of’monthly transacting users.'”

Declining reporting of its “verified users” metric in 2022, the company said in financial filings that it no longer felt the figure gave accurate picture of company performance. To help in its response to the SEC investigation, Coinbase has engaged legal practice Davis Polk & Wardwell.

Timing Coincides with Coinbase’s S&P 500 Inclusion

These difficulties arise at a critical juncture for Coinbase as it gets ready to enter the S&P 500 index next week, a mark of increasing popular acceptance of the bitcoin sector. Included will be Coinbase stock into many index-tracking funds.

Industry analysts point out that these security events mirror more general difficulties the fast changing crypto market faces. Research company Chainalysis estimates that in 2024 alone, hacks connected to cryptocurrencies will cost around $2.2 billion.

“Unfortunately as our fledgling sector grows rapidly, it attracts the eye of bad actors, who are becoming increasingly sophisticated in the scope of their attacks and harnessing new AI tools and techniques to bypass fraud prevention measures,” said Nick Jones, founder and CEO of crypto platform Zumo.

Notwithstanding these losses, Coinbase has kicked the hacked staff members, sent them to law enforcement, and is adding extra consumer protections to stop like events in the future.

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Arslan Butt

Lead Markets Analyst – Multi-Asset (FX, Commodities, Crypto)

Arslan Butt serves as the Lead Commodities and Indices Analyst, bringing a wealth of expertise to the field. With an MBA in Behavioral Finance and active progress towards a Ph.D., Arslan possesses a deep understanding of market dynamics. His professional journey includes a significant role as a senior analyst at a leading brokerage firm, complementing his extensive experience as a market analyst and day trader. Adept in educating others, Arslan has a commendable track record as an instructor and public speaker. His incisive analyses, particularly within the realms of cryptocurrency and forex markets, are showcased across esteemed financial publications such as ForexCrunch, InsideBitcoins, and EconomyWatch, solidifying his reputation in the financial community.

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