For all those bitcoin true believers who survived the crypto winter of 2017-2020 with their holdings intact, the listing of digital currency exchange service Coinbase must have felt a vindication.
Not only did its $75.9bn listing on Nasdaq mark the biggest cash-out in crypto history, many would say it unequivocally established digital currencies as a force to be reckoned with on Wall Street. For crypto boosters the world over, more simply, it marked the day they were finally proven right.
“It feels like a shift in legitimacy not just for Coinbase but the whole industry. Crypto has a shot at being a major force in the financial world,” observed Coinbase’s chief executive Brian Armstrong.
The group’s valuation came hot on the heels of a stellar set of first-quarter earnings. The group posted revenues of $1.8bn for the period compared with $191m last year. It made net income of as much as $800m. That, the Street said, made it worthy of comparisons to the New York Stock Exchange’s parent company ICE, which has a valuation of around $67bn.
A more objective analysis would note this is not a fair comparison. Yes, ICE posted revenues of $1.6bn in the first quarter of 2020, putting Coinbase well in the same ballpark. But Coinbase is a very different beast from the Wall Street establishment that is ICE.
Coinbase is highly sensitive to super-volatile crypto valuations. A strong bull-market performance in the first quarter of 2021, when bitcoin rose above $60,000, should be contrasted with the fact Coinbase posted a $30m annual net loss in 2019, a year when bitcoin averaged around $5,000-$6,000.
As it stands, Coinbase is also regulated and licensed under the US Money Services Business legislative framework, not as an exchange or so-called prime brokerage for services such as credit for trading. This gives Coinbase a big advantage over its more heavily regulated counterparts like ICE or the CME.
If that changed, there could be big consequences. Were it indeed regulated as an exchange, its capacity to generate earnings from prime brokerage, over-the-counter brokerage and principal trading would be firmly clipped back. If overseen as a prime broker or a bank, its capital burden would be increased significantly.
While the IPO might validate the importance of cryptocurrencies as a speculative asset, it’s a noteworthy irony that so-called bitcoin maximalists also consider the platform a brazen sellout. They believe it has forsaken crypto’s true principles for the golden goose offered by Wall Street. It’s a fair argument.
Bitcoin came to market touting promises of “trustless” banking, cheaper payments, privacy and — most famously of all — the end of the public’s dependency on financial middlemen. But in both wooing Wall Street and embracing regulation, especially know-your-customer and anti-money laundering rules, Coinbase has not only abandoned the role of challenging the traditional state-controlled fiat currency system but also the privacy of crypto transactions envisaged by inventor Satoshi Nakamoto.
The group’s transmutation into just another middleman operator has been fascinating to watch. It’s unclear if the platform’s 56m users understand or even care that they are not holding coins but Coinbase IOUs, or that most transactions on the platform are not even settled through any public blockchain.
The IPO comes at a time when the original challenger vision of Nakamoto is being rattled in other ways. Last week a former deputy director of the CIA, Michael Morrell, officially endorsed the bitcoin network, arguing “blockchain analysis is a highly effective crime fighting and intelligence gathering tool”. It was also a week when famed libertarian Peter Thiel warned that China, a mass-surveillance state with big digital currency ambitions, was using bitcoin as a financial weapon against the US.
If this signals anything at all it is that the state, not crypto, has won the day in terms of control of the financial system. Rather than celebrate the Coinbase listing, those who thought crypto would up-end the public’s dependency on central banks or financiers, should be lamenting it. All indicators imply crypto has acted less as a liberator and more as a honeypot designed to lure users into greater surveillance and not less.
izabella.kaminska@ft.com
