The Coinbase Case
It's the New York Stock Exchange of crypto. And now it's public. Coinbase is redefining finance, but risks abound.
Coinbase, a cryptocurrency exchange, is going public. While the date is yet to be released, the U.S. Securities and Exchange Commission (SEC) released the company’s S-1, the initial form required to go public. Is this a sign of the ever-growing prominence of cryptocurrency in the economy? If someone did not think cryptocurrency was legitimate before, they might want to rethink that now.
What is cryptocurrency?
Cryptocurrency is a medium of exchange that’s entirely digital and is not managed by a central body.
Bitcoin, a cryptocurrency coded in 2009, has the largest market cap among cryptocurrencies with a value of $952.2 billion. This accounts for approximately 65% of the global crypto market. When Bitcoin was first introduced in 2008 through a paper by Satoshi Nakamoto, it was described as “an electronic payment system based on cryptographic proof instead of trust.” The “cryptographic proof” includes a certain number of users and ledger holders verifying transactions. Long story short, users are chosen to verify transactions and rewarded for doing so. Two techniques for choosing users are called proof of work and proof of stake.
Even though the crypto market is over $1 trillion, it has yet to be accepted by many corporations and retailers as forms of payment. However, there are ways to work around this—one can exchange cryptocurrency for gift cards or sign up debit-like cards (i.e. BitPay) which, with a fee, converts your cryptocurrency into assets.
What is Coinbase?
Coinbase is one of the most used cryptocurrency exchanges, allowing people and businesses to purchase or invest in cryptocurrency, storing their savings in a crypto asset like Bitcoin. In layman’s terms, Coinbase is the New York Stock Exchange but with cryptocurrencies instead of stock; some have argued that cryptocurrencies can be treated as an alternative to stocks and bonds. Coinbase makes it easy for anyone to invest in the cryptocurrency market with a fee ranging from $0.99 - $2.99 depending on the size of the transaction, and has a reputation of only executing legitimate trades. If one purchases the Pro version, Coinbase will include different indicators and charts to help one make an investment decision.
According to the S-1 filed with the SEC, as of December 31, 2020, Coinbase has 43 million users with $90 billion worth of assets available on the platform. Since its founding in 2012, Coinbase has generated $3.4 billion worth of revenue, with 96% of it being attributed to the transaction fees and it growing from $483 million in 2019 to $1.14 billion in 2020. Coinbase’s extreme revenue growth is just one indicator of the growing cryptocurrency economy. Overall, going public makes Coinbase and cryptocurrency more transparent. Of course, now that the financials of Coinbase are public, the S-1 also addresses Coinbase’s risks which correlate to risks associated with any cryptocurrency like having to adapt to new regulations and cyberattacks.
What is the SEC doing about it?
Currently, cryptocurrency is not classified as a security, and therefore does not fall under the purview of the SEC, which has a mission of protecting investors. Instead, it is labelled as a commodity and is regulated by the Commodities Future Trading Commission. However, this does not mean the SEC can ignore cryptocurrency. Many companies are investing in cryptocurrency, like Bitcoin, yet there is not an accounting standard on how to present this investment on a financial statement.
This may change though with a new chairperson being nominated for the SEC. President Biden has nominated Gary Gensler, former head of the Commodities Future Trading Commission. Well-equipped with knowledge on cryptocurrencies, Gensler has acknowledged the potential issues of individual investors, stating “Bitcoin and other cryptocurrencies have brought new thinking to payments and financial inclusion, but they've also raised new issues of investor protection that we still need to attend to."
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