Analysis Of The Week: Asset Management: Coinbase Lists on the NASDAQ​

By Alison Catchpole​

The Story

“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” reflected Coinbase’s CEO Brian Armstrong in the week that his company listed on the NASDAQ (Financial Times). By the end of the day, ex-Airbnb engineer Armstrong had made $291.8 million.

Coinbase is the largest cryptocurrency exchange in the US by trading volume (Finimize). Founded in San Francisco in 2012, it acts as a digital wallet, facilitating transactions between its 56 million users with new digital currencies such as litecoin, ethereum and bitcoin, and avoiding the costly process of ‘mining’ (creating new bitcoins). In 2020, the company introduced Coinbase Card, a Visa debit card that can be used at an ATM, or for online and in-store purchases.

Coinbase’s revenue rose by over 800% in the first quarter of 2021 compared to 2020, with most of this coming from retail customer commission trading fees. Subscription and services fees also boost its income, though the notorious volatility of bitcoin showed up in Coinbase’s 2019 $30 million annual net loss (Financial Times), when bitcoin averaged around $5,000-6,000, rather than the $64,000 high of the 2021 first quarter.

The NASDAQ stock index is an exchange and index of over 3000 companies. Its performance depends mainly on how tech stocks are doing, whereas the Dow Jones Industrial Average is a financial and business news company and consists of only the top 30 companies by sector. Like Palantir and Spotify before it, Coinbase went with a direct listing rather than a traditional IPO.

Coinbase shares opened at $381, over 50% more than the reference price of $250, for a valuation of $76 billion – a huge jump from its mere $8 billion valuation in 2018 (Financial Times). With $223 billion in assets stored on the platform and 11.3% of the world’s cryptocurrencies, the share price is predicted to rise 58% in a matter of months (Yahoo Finance).

What It Means For Businesses And Law Firms

Cryptocurrency regulation is still in its infancy. On 30 March, HMRC announced that passively earned cryptoassets will likely be subject to Corporation Tax or Capital Gains Tax when they are sold (DLA Piper). Coinbase’s reputation as a ‘safe harbour’ is rooted in the fact it has so far not been hacked, and that it falls under the legislative framework of the US Money Services Business, rather than the more onerously regulated ‘exchange’ or ‘prime brokerage’ categories (Financial Times). If this changes, the financial burden on Coinbase would be significantly increased.

Blockchain analysis is considered an effective intelligence tool, and in July 2020, the Sam.gov Database that tracks US government contracts showed that the US Internal Revenue Service (IRS) had signed a one-year contract for Coinbase’s Analytics platform for US$124,950. But that same month, a lawsuit was brought against the IRS “for allegedly obtaining information improperly from Coinbase about its accountholders” (Baker McKenzie). Indeed, a recent European Central Bank (ECB) consultation looking at the introduction of a digital euro raised concerns this could enable governments to spy on financial activity and companies to profit from payment data.

Coinbase turned to San Francisco’s Fenwick & West LLP for counsel and Latham & Watkins LLP provided legal advice to the financial advisors. As the Financial Times observes, “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 watershed arguably comes at a cost to cryptocurrency evangelists, whose original vision of disruption to centralised control of established economic systems is facing some challenges.