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As US Scrutiny Of Cryptocurrencies Intensifies, Coinbase Considers Other Markets.

March 17, 2023
minute read

According to three persons with firsthand knowledge of the scenario, Coinbase Global Inc. has contacted institutional clients about potential intentions to launch a new symmetric encryption platform abroad.

The prospect of creating a different venue for international clients, apart from the main Coinbase marketplace, was discussed in meetings with market makers and investment firms, according to the people, who asked not to be identified because the conversations are private. The discussions are taking place as the US crackdown on cryptocurrency intensifies.

Coinbase hasn't decided where the platform would be located, but one of the persons said the company has been in contact with market participants about connecting to it.

A Coinbase representative declined to comment directly on the conversations, but noted that the company evaluates regional alternatives and talks "with government leaders in high-bar regulatory jurisdictions" as part of its objective to promote the adoption of cryptocurrencies worldwide.

In the wake of numerous regulatory action and bank failures, the American market environment for enterprises dealing with digital assets is still depressing. Despite the fact that Coinbase offers services in more than 100 nations, orders from consumers all over the globe are currently sent to the same US platform.

Emilie Choi, Coinbase's chief operating officer, said that "international expansion is going to stay to be a very core part of how we operate" on an earnings call last month when asked if the company would consider operating an offshore business. Coinbase is "encouraged" by review relevant in the European Union and the UK, and will keep investing in Europe and the UK, Choi said. 

One of the first and best-known cryptocurrency trading platforms in the world, Coinbase was established in San Francisco in 2012 and boasts an unique US public listing. While its position as one of the most regulated exchanges for digital assets has helped it maintain stability throughout the turbulent history of cryptocurrencies and draw a sizable clientele from the US, that same position has also limited its flexibility compared to rivals operating in offshore jurisdictions.

Coinbase's potential growth comes in the wake of a wave of regulatory actions against cryptocurrency companies in the US following the abrupt demise of digital asset exchange FTX late last year. Regulators have recently targeted staking and stablecoins alike, fining businesses millions of dollars and shutting down operations.

Along with the crackdown, crypto-friendly banks like Silvergate Bank and Signature Bank, on which digital asset startups had previously relied to conduct business, have been shut down. For the cryptocurrency industry, the two lenders established real-time payment networks that aided in the movement of funds into and out of the market.  

Due to new rules, specialized licensing procedures, and advantageous tax regimes, Dubai, Hong Kong, and Europe are considered as more hospitable centers by crypto businesses looking for friendlier shores. With stablecoin operator Archblock recently shifting $1 billion in assets underpinning token TrueUSD from the US to the Bahamas, capital has started to go abroad.

Executives at Coinbase have voiced their worries about the tightening regulatory environment in the US. Regulators are not always accepting to transparency and public input in their rule-making, which is disappointing. The industry is moving overseas as a result of the United States' agencies' inconsistent stance on cryptocurrencies, the company claimed in its fourth-quarter shareholder letter.

Covered Bets

Coinbase would be able to protect itself from a hostile regulatory structure in the US and give global clients access to newer products, like lending and trading in distributed financial markets, that might be looked down upon by regulators in its home market by trying to launch an offshore trading platform.

Michael Bucella, a long - time investor and retired commander partner at New York-based BlockTower Capital, said that he wouldn't be surprised if US exchanges spun off entirely offshore entities to free those companies from having to operate under what appears to be an increasingly onerous US regulatory regime.

Because consumers withdrew from the emerging asset class due to last year's price collapse, Coinbase's intense concentration on the US retail sector has become a liability. According to CryptoCompare, the exchange has been losing market share, which fell from 6.4% in December to 4.2% in February. 

According to the researcher, Binance, the largest cryptocurrency exchange in the world, increased its market share to about 60% in February. In its investor letter, Coinbase claimed that in the final three months of the year, it increased its market share in terms of overall trading volume.

If current efforts at diversification run into regulatory obstacles in the US, a global platform might make it simpler for Coinbase to transition away from trading fees as a source of revenue. Coin custody, stablecoins, and staking, the company's three business lines, have all come under heightened scrutiny in the US. In the fourth quarter of 2022, Coinbase's revenues plunged dramatically to $629 million from $2.5 billion a year earlier, and its stock price has dropped more than 80% since its November 2021 peak. 

In its report on fourth-quarter financial results, Coinbase stated that it aimed to "expand the increasing broad range of crypto assets and fiat billing rails to our clients and expand access to even more product experiences - both patented technology and third party, primarily decentralized applications."

Brian Armstrong, the chief executive of Coinbase, recently revealed to Trade Algo that the business has been concentrating on diversifying its revenue streams. Also, he declared that the exchange is "embracing decentralization" and urged the US to have clearer regulations. 

Editorial Board
Eric Ng
John Liu
Editorial Board
Bryan Curtis
Adan Harris
Managing Editor
Cathy Hills
Associate Editor

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