Crypto regulatory uncertainty 'creates a significant overhang' for companies: Strategist

MoffettNathanson Partner Lisa Ellis joins Yahoo Finance Live to weigh in on how cryptocurrencies are reacting to the Russia-Ukraine crisis and the outlook for crypto regulation.

Video Transcript

RACHELLE AKUFFO: --red all day. Markets managed to get back in the green. But how did cryptocurrencies fare? To break that down, we're going to be talking to Lisa Ellis, MoffettNathanson-- a partner at MoffettNathanson. Thank you for joining us today.

LISA ELLIS: Hi, thank you.

RACHELLE AKUFFO: So first, I want to talk about the reaction that we've seen from cryptocurrencies. Obviously, we used to see them as a safe haven, but now they're trending more with equities. Were you surprised by the response of crypto to the conflict in Ukraine?

LISA ELLIS: Not unexpected, no. A couple of specific things about that region-- Russia is the third largest crypto miner as a country globally, after the US and Kazakhstan, which is where a lot of the China crypto mining capacity moved after China cracked down. So Russia is a major crypto miner.

And then also, the Ukraine recently legalized crypto and has been a very crypto-- they legalized Bitcoin and other cryptocurrencies. It's been a very pro-crypto environment. So this conflict, you know, is sort of viewed as a negative for the crypto ecosystem more broadly, in addition to just it driving a bit of, like, risk-off behavior and so flight to lower volatility and lower risk assets.

RACHELLE AKUFFO: So then is it a safer bet to then invest in some of these companies that are instead more focused on blockchain technology, rather than sort of taking your eye and looking at Bitcoin and Ether as well?

LISA ELLIS: Yeah, I would say-- I mean, you know, the-- directly investing in the cryptocurrencies themselves, especially a basket of the major ones, is a very good way to get direct-- very direct pure exposure to the technology and to the evolution of the space. But that said, yeah, I think the appeal of owning some of the companies like a Coinbase is that they're much-- you know, they're not as subject to the volatility.

And they're beginning to diversify their businesses into other revenue streams more related to, you know, developer environments and Sas kind of models and things that are a little bit less volatile. And in those cases, you're betting more on just crypto as a technology versus, like, individual coins and the success of those individual coins.

BRAD SMITH: Lisa, as we're amid this international conflict, a major question that investors might be asking themselves on the cybersecurity front for those very names that engage with the platform plays in crypto is how they're taking efforts to mitigate what is the risk of some of those cyber attacks or those malicious actors amid some of the threats that have now emerged.

LISA ELLIS: Yeah, I mean, fighting fraud and various criminal activities has been and continues to be a challenge for the crypto world. I'd say the recent events and-- certainly shine a spotlight, again, on the importance of the crypto companies that do really good custody, digital asset custody. So really do very good KYC, AML, so very good identifying capabilities, like unique identifier capabilities, but then also are very good at securely storing crypto.

That's-- in my view, that is, like, the kind of keys to the kingdom of the cryptocurrency ecosystem succeeding. The linchpin of it is very effective custody of crypto assets. And I'd say some of these recent headlines around, again, theft, criminal activities, et cetera, shine a spotlight back on that. And that's where players like Coinbase, but also some of its peers in the US, like a Paxos, for example, are very strong and pro-regulation in that area, which I think over time will benefit those companies.

BRAD SMITH: Say we get regulation in the near future. We already know that there are going to be some of the regulatory bodies that are moving forward with their own studies. Congress is even trying to put together working committees.

And so with all of that in mind, how much do you believe that not just cryptos will rally on that, but especially some of the annexed publicly traded or equity market names? We just had two of them report after the close here today, and Coinbase and Square, which had actually taken a loss in its own Bitcoin holdings. It's perhaps a different conversation, but how much they're indexed to the regulatory framework that could move forward over the course of this year or even into next year.

LISA ELLIS: Yeah, it is a major overhang on the US-listed-- well, it's true globally as well, but particularly on the US-listed companies directly exposed to crypto. Because of that level of uncertainty and because these are long-term holdings, investors feel like they can wait. And so they're sitting on the sidelines, waiting out the regulatory uncertainty.

Frankly, clarity of almost any kind will be positive. Right now, you're just stuck with the enormous amount of uncertainty, meaning, you know, there's uncertainty, like, well, are a whole bunch of existing coins going to be treated as securities from a regulatory perspective, in which case then subject to SEC regulation, which is just a whole different animal and would throw the space into turmoil for a period of time, right? Like, it's that kind of level now.

Is that likely to happen? Probably not, but there's so little visibility and so much uncertainty that it definitely creates a significant overhang on all of these companies that in my view, you know, there's a lot of work to do. But even just getting any level of clarity, even if it's not the ideal outcome from the crypto community's perspective, will help move us forward.

EMILY MCCORMICK: And Lisa, Brad was talking about some of the crypto company earnings that we got this afternoon. Coinbase fourth quarter results were better than expected on the top line. The question is, though, how does this company fare in the first quarter and this year, given the slide that we've seen in Bitcoin and other crypto prices for the year to date, which does tend to drive down user engagement, as we've seen previously? Now is there a way to protect against this exposure to underlying crypto price volatility for Coinbase and other companies like it?

LISA ELLIS: Yeah, the major thing that Coin-- because you're right. I mean, you've seen the stocks bouncing around like crazy after market because the in-quarter performance was actually a blowout quarter on pretty much every measure. But then their outlook for 2022 is quite cautionary because of the rising rate environment and the geopolitical uncertainty, which, again, kind of brings off all these risk assets, brings the volatility down in the space, which is not good for their trading volumes.

The number one thing they're doing to address that is their subscription and services revenues are a major source of investment for them. These are basically the revenue stream that is not tied to direct trading in crypto. It's kind of low double digits percentage of revenues. And they're investing very heavily in those service lines in order to grow that revenue stream. And I think if that can get up above 20%, 25% of revenues, then we'll start to see the stock less directly correlated simply with the movement in crypto [INAUDIBLE].

BRAD SMITH: Lisa, we've got to leave things there on the day. Got to continue this conversation in the future. That's Lisa Ellis, who is the MoffettNathanson partner, joining us here this afternoon.