(Bloomberg) -- A deeper look beyond the anticipated fourth-quarter results of Coinbase Global Inc. helps to explain the recent ratcheting up of tensions between Chief Executive Officer Brian Armstrong and US regulators. 

The largest US cryptocurrency exchange is forecast by analysts to report a loss of nearly $600 million in the three months that ended in December, and a plunge in revenue for a fourth consecutive quarter after the close of regular trading Tuesday. 

What may be more daunting is the darkening outlook for three key businesses that Coinbase has been counting on to help jump-start growth: coin custody, stablecoins and staking - sectors that have all come under increased regulatory scrutiny. 

Earlier in the month, rival exchange Kraken entered in to a settlement with the US Securities and Exchange Commission to close its US staking business, where customers earned yields on tokens. Under pressure from New York regulators, Paxos Trust Co. stopped issuing a Binance-branded USD stablecoin. The SEC also floated a proposal last week that would toughen regulation of crypto custody. While Coinbase hasn’t been touched directly, it’s unclear if it will continue to go unscathed. Coinbase has said repeatedly that its services differ from those offered by the impacted companies and should not be affected.

Coinbase receives about 3% of its total revenue from staking fees, according to Owen Lau, an analyst at Oppenheimer & Co. It also gets revenue from stablecoin USDC, which it helped create as part of a consortium, and from offering coin custody services. Coinbase is trying to diversify to lessen its dependence on trading fees, which are susceptible to the wild price swings in the crypto market. 

“We think Coinbase’s revenue diversification strategy is still intact, but there are heightened concerns with two and possibly all three of these segments as it relates to regulation,” said John Todaro, an analyst at Needham & Co., who has a buy rating on the shares. Even Coinbase’s bread-and-butter trading revenue could suffer if the SEC designates more coins as securities, he said. 

The uncertainly is already having an impact: Coinbase has erased market-share gains it made since the collapse of rival FTX exchange in November. While its share rose from 5.9% in November to 6.5% in January, it has dropped to 4.1% in February so far, according to researcher CryptoCompare. Binance is the world’s biggest crypto platform, with a market share of about 60%.

“Obviously tough time for the industry, drawing negative sentiment from investors, regulators, politicians,” said Chris Brendler, an analyst at DA Davidson & Co., who downgraded the company’s shares last week to neutral. “A time of uncertainty for the company and stock price.”

Coinbase’s shares have surged more than 80% since the beginning of the year, buoyed by the general rally in risk assets such as tech stocks and Bitcoin, the world’s biggest cryptocurrency. That’s after tumbling 85% in 2022. The stock is down about 80% from its closing record high in April 2021. Coinbase fell 1.6% to $64.19 as of 10:26 a.m. in New York.

Armstrong said last week he’d “happily defend” the company’s staking service — which lets users earn yields on coin deposits — “in court if needed.” He also recently traveled to Washington to talk regulation, saying online that he was eager to meet with anyone.

One prong of Coinbase’s strategy that could potentially yield positive results is international expansion, particularly into countries with more favorable crypto regulations. Coinbase and others may be “forced to go offshore and expand operations outside of the US,” Lau said. 

There are bright spots. Coinbase is expected to report slightly higher revenue in the first quarter ending in March, according to Bloomberg data. Analysts polled by Bloomberg expect revenue of $594.8 million and a loss of $427 million in the period ended in March. 

While crypto asset prices and spot trading volumes have increased materially in the new year, data indicates the pickup is not being driven by retail activity, Barclays analysts including Benjamin Budish wrote in a Feb. 14 research report.

Coinbase has said it would lose no more than $500 million in adjusted earnings before items such as taxes in 2022. Some analysts expect the company, which had already gone through several rounds of layoffs, to cut expenses further.

“They should be able to weather the storm given their cash balance,” Brendler said, pointing to Coinbase’s $5 billion in cash and equivalents at the end of September. “My approach is, with caution into the earnings. Although the expectations have been low, they still may not be low enough.”

Read more:

  • If Stablecoins Are Stable, Why Are Regulators Tense?: QuickTake
  • Crypto’s $92 Billion Staking Industry Is in Line for a Shake-Up
  • Crypto Exchange Kraken Ends US Staking Program in SEC Deal

(Updates the share price.)

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