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In December 2020, cryptocurrency exchange Coinbase submitted a draft registration for an Initial Public Offering (IPO) to the US Securities and Exchange Commission (SEC).
Should the SEC approve the filing, the San Francisco-based cryptocurrency exchange would be the first cryptocurrency exchange to be listed on the US stock market.
We have confidentially submitted our draft registration (Form S1) with the Securities and Exchange Commission. https://t.co/U6d0sVz0aX
— Coinbase (@coinbase) December 17, 2020
An IPO would mean that anyone could buy and trade shares in Coinbase. That would draw a lot more investors into the industry. IPOs offer investors a stake in the company under the beam of the SECs regulatory headlamps. It would also give Coinbase a lot of money, which they could use to hire staff, grow their crypto empire and beef up their tech.
Its filing of the Form S-1 with the SEC kicks that process off. The application is subject to the scrutiny of the SEC.
The regulatory agency has acted against crypto companies in the past. It has chased after several companies for running unregistered securities sales (called ICOs in crypto-speak) and repeatedly blocked applications for a Bitcoin exchange-traded fund (ETF) on the grounds that the crypto market is prone to manipulation.
Will the SEC, then, approve Coinbase’s IPO, given that its fate is so intimately tied to the rest of the market?
Representing Coinbase is, reportedly, Goldman Sachs, which has been enlisted to help convince the US Securities and Exchange Commission that public investors would be protected against manipulation by sinister whales in the unregulated cryptocurrency market.
Coinbase: the basics
Coinbase opened to the public in 2012. With the backing of about half a billion dollars from venture capitalists, the crypto exchange grew and grew, so far attracting over 35 million customers (according to data from July 2020). In December 2020, crypto market analysis firm Messari valued the exchange at $28 billion.
Following Coinbase's IPO announcement, we value the company at $28 billion. Coinbase is one of the most prominent exchanges with $1 billion daily volume in Dec-20.
Check out our model and edit it to your own assumptions. https://t.co/BQeSAxUd5j— Mira Christanto (@asiahodl) December 18, 2020
But what… is it?
Coinbase offers two services. The first, known simply as ‘Coinbase,’ is the cryptocurrency wallet and brokerage service so popular among the public. On Coinbase, users can buy and sell crypto within Coinbase using fiat currencies (i.e. ‘regular’ currencies like the dollar, sterling, or euro). It’s a brokerage, meaning that you technically buy and sell from and to Coinbase itself.
Then there’s Coinbase Pro, a more advanced exchange where users can buy and sell cryptocurrencies from other users, comparable to the dozens of other exchanges.
How does Coinbase make money?
To make money, Coinbase charges several different fees on its brokerage app. There are purchasing fees, more expensive for smaller purchases, trading fees and transaction fees, the latter of which apply to those wishing to move funds out of Coinbase.
These fees also apply to Coinbase Pro. It’s more expensive than its main competitor, Binance, but its selling point is its compliance with regulators. The US won’t allow Binance to operate in the US; it does so under an independent company, Binance.US.
Coinbase also has a venture capital arm, Coinbase Ventures, which invests in companies such as CoinTracker, Compound and BlockFi.
When will the Coinbase IPO happen?
Given that the registration is currently under review and confidential, it's currently impossible to know when Coinbase's IPO might happen or exactly how it will be structured.
In July 2020, Reuters reported that Coinbase could pursue the listing "later this year or early next year" (meaning 2021), prior to the company's filing of the Form S-1 in December 2020.
In a recent interview with Fortune, co-founder Fred Ehrsam argued that the company is "spiritually" built to go public via some form of tokenized offering—though whether the SEC would sign off on such an arrangement is open to debate.
What the Coinbase IPO means for crypto
Coinbase’s IPO offers investors and traders another way of playing the booming cryptocurrencies market, though with the peace of mind of regulation from the SEC.
In this sense, investors gain access to a regulated company whose success tracks the crypto market without the need to custody specific tokens. And unlike buying crypto, shares in Coinbase would pay dividends.
Coinbase has taken care to play nice with regulators. It’s shied away from listing privacy coins due to US regulators' hard-nosed attitude against them; it's also declined to list controversial coins like Tether, the US dollar stablecoin that's currently under investigation by the New York Attorney General.
The timing of Coinbase’s submission of Form S-1 last December is noteworthy. Around that time, the SEC was making headlines for filing a lawsuit against Ripple over the XRP cryptocurrency, alleging that XRP constitutes a security, and that Ripple was distributing securities in unregistered sales.
Like many other exchanges, Coinbase has since suspended trading of XRP on its platform. In Coinbase's case, the exchange is likely aiming to ensure that it's fully compliant with the SEC in a bit to avoid any potential hiccups as its IPO looms.
Coinbase is also looking to address a recurrent issue that's plagued it, and other exchanges: downtime during periods of cryptocurrency price volatility. Recent record trading volumes have driven traffic to the exchanges to new heights, putting their infrastructure under strain and causing outages. Coinbase is reportedly planning to break its "monolithic" infrastructure into "separate discrete services" in order to better scale in the event of load surges.
FTX's pre-IPO market for Coinbase
Although the general public needs to wait for the outcome of the SEC review before buying shares in Coinbase, customers on crypto exchange FTX can skip the line with a pre-listing futures contract market for the shares.
FTX is once more collaborating with CM-Equity, a German capital markets firm that FTX partnered with to launch tokenized stock markets in October, to gauge market compliance.
To buy an early stake in Coinbase, customers need to sign up for FTX and purchase some of the US-dollar-pegged stablecoin USDC, a coin which is incidentally run by Centre, a consortium that includes Coinbase and Circle.
USDC can be bought straight from exchanges like Coinbase in exchange for fiat currencies, or other cryptocurrencies, like Bitcoin and Ethereum. The USDC can then be traded for FTX’s tokenized Coinbase IPO stock.