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Coinbase explores overseas venue as U.S. ramps up crypto scrutiny

March 17, 2023 Updated Fri., March 17, 2023 at 11:17 a.m.

Compliance problems at Coinbase were first detected during a routine examination in 2020, regulators have said.   (New York Times)
Compliance problems at Coinbase were first detected during a routine examination in 2020, regulators have said.  (New York Times)
By Eva Szalay and Yueqi Yang Bloomberg

Institutional clients of Coinbase have been contacted by the firm about plans to potentially set up a new crypto-trading platform overseas, according to three people with direct knowledge of the matter.

The talks with market makers and investment firms touched on the possibility of establishing an alternative venue – away from the main Coinbase marketplace – for global clients, said the people, who asked not to be named as the discussions are confidential.

The talks are occurring against the backdrop of an intensifying U.S. crackdown on cryptocurrencies.

Coinbase has yet to decide where the platform might be based, but it has been speaking to market makers about connecting to it, one of the people said.

A spokesperson for Coinbase declined to comment specifically on the discussions, but said that in line with its mission to increase global crypto adoption, it assesses geographic options and meets “with government officials in high-bar regulatory jurisdictions.”

The U.S. environment for digital-asset companies continues to sour following a string of regulatory actions and bank failures.

While Coinbase’s services are available in more than 100 countries, orders from clients around the world are currently routed to the same U.S. platform.

When asked on an earnings call last month if Coinbase would consider operating an offshore business, Emilie Choi, Coinbase’s chief operation officer, said that “international expansion is going to continue to be a very core part of how we operate.”

Coinbase is “encouraged” by regulatory developments in the European Union and U.K., and will continue to invest in Europe and the U.K., Choi said.

Founded in San Francisco in 2012, Coinbase is one of the oldest and most well-known trading crypto trading venues globally, with a rare U.S. public listing.

While its status as one of the most regulated exchanges in digital assets has enabled it to emerge as a steady presence throughout crypto’s turbulent history – and attract a solid base of U.S.-based consumer clients – that same status has also made it less flexible than peers operating in offshore jurisdictions.

The potential expansion by Coinbase follows an onslaught of regulatory action against crypto companies in the U.S., since the sudden collapse of digital asset exchange FTX late last year.

Over the past few months, regulators have taken aim at everything from stablecoins to staking, imposing millions of dollars in fines and shutting down products.

The crackdown has been coupled with the shuttering of crypto-friendly banks – including Silvergate Bank and Signature Bank – that digital asset firms have traditionally relied on to run their operations.

The two lenders ran real-time payments networks for the crypto industry that facilitated the flow of money to and from the sector.

These conditions have prompted crypto firms to search for friendlier shores, with Dubai, Hong Kong and Europe seen as more welcoming hubs due to incoming regulations, dedicated licensing processes and favorable tax regimes.

Capital has started moving offshore, with stablecoin operator Archblock recently transferring $1 billion in reserves backing token TrueUSD to the Bahamas from the U.S.

Coinbase executives have expressed concerns about the mounting regulatory clampdown in the U.S.

“Disappointingly, we are not seeing regulators necessarily welcoming transparency and public participation in their rulemaking. United States’ agencies, in particular, are demonstrating a disjointed stance regarding crypto that is pushing the industry overseas,” the company said in its fourth-quarter investor letter.

By launching an offshore trading platform, Coinbase would be able to hedge its bets against a hostile regulatory environment in the U.S. and give international clients access newer products that may be frowned upon by authorities in its home market, such as lending and trading in decentralized financial markets.

“I wouldn’t be surprised if U.S. exchanges spin off entirely offshore entities to unencumber those businesses from operating under what seems to be an increasingly more difficult U.S. regulatory regime,” said Michael Bucella, a longtime investor and former general partner at New York-based BlockTower Capital.

Coinbase’s heavy focus on the U.S. retail market has become a disadvantage during last year’s rout in prices, which prompted consumers to pull back from the nascent asset class.

The exchange has been losing market share, which dropped from 6.4% in December to 4.2% in February, according to CryptoCompare.

The world’s biggest crypto exchange, Binance, has gained share, reaching nearly 60% in February, according to the researcher.

Coinbase said in its investor letter that it gained overall trading volume market share in the last three months of the year.

An international platform could make it easier for Coinbase to diversify its revenue stream away from trading fees, should existing diversification efforts face regulatory challenges in the U.S.

The company’s three businesses – coin custody, stablecoins and staking – have all come under increased scrutiny in the U.S. Coinbase’s revenue fell sharply to $629 million in the fourth quarter of 2022 from $2.5 billion a year earlier, while its stock has fallen by more than 80% since peak in November 2021.

Coinbase said in its fourth-quarter earnings report that it was seeking “to expand access to a growing breadth and depth of crypto assets and fiat payment rails to our customers and expand access to more product experiences – both proprietary and third party, largely decentralized applications.”

Coinbase Chief Executive Officer Brian Armstrong recently told Bloomberg News that the company has been focusing on diversifying its revenue. He also said that the exchange is “embracing decentralization” and he called for more regulatory clarity in the U.S.

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