Coinbase has launched a new derivatives exchange in Bermuda, a totemic act showing the largest U.S. crypto exchange means business when it says U.S. crypto regulations are increasingly nonviable. The exchange, which has been publicly feuding with the U.S. Securities and Exchange Commission (SEC) over a range of issues, received its license to operate in the island nation last month as it looks to test the international waters.
Founded by CEO Brian Armstrong in 2012, Coinbase has grown to become the second-largest crypto exchange – trailing only the HQ-less Binance – by trading volume, largely by working closely with U.S. regulators. Its IPO in 2021 came at the end of a lengthy diligence process with the SEC, leading many to think that the agency had endorsed its business model. But over the past couple of years, under Gary Gensler's regime as chairman of the SEC, the company has found itself at an impasse with the regulator.
The watchdog agency has blocked a number of new services Coinbase wanted to bring to market, including a crypto lending program called Earn and a "staking-as-a-service" platform that would offer U.S. users dividend-like yield payments. Despite being asked numerous times to "register" with the SEC as an official securities exchange, Coinbase has instead fought a definitional battle over which crypto tokens do and do not count as securities (the exchange maintains it does not list "investment contracts").
The new Bermuda-based Coinbase International Exchange is starting small – an attempt to gain a sliver of the share of professional investors and traders outside the U.S. At writing, the "exchange" is basically just an API, without a dedicated app or website, Axios reported. Only bitcoin (BTC) and ether (ETH) derivatives contracts will be offered at launch, with leverage option capped at 5%.
But the new vertical is also a sign of the exchange's increasingly global perspective. Although Coinbase has operated across Europe and parts of Asia, Africa and Latin America for years, it has recently become more vocal about building internationally. In an April blog post, the exchange said it has begun talking with financial regulators in Abu Dhabi (which is building a crypto/fintech tech sandbox) while Armstrong, following a conversation with the U.K.'s Economic Secretary and City Minister, Andrew Griffith, said the country is "moving fast on sensible crypto regulation."
Other exchanges have pulled out of the U.S. such as Bittrex, which recently shuttered its stateside operations shortly before being sued by the SEC. Eric Voorhees' Shapeshift didn't exactly exit the country, but did move further into the ether when it closed its corporate entity to become a decentralized autonomous organization (DAO).
However, by most accounts, many have seen Coinbase's messaging as an empty threat.
Despite attempts to diversify its revenue streams, the exchange essentially only makes money by charging U.S. crypto users above-average trading fees (which people seem to happily pay for Coinbase's trusted brand reputation and easy-to-use interface). In its most recent SEC filing, the exchange said the U.S. represents roughly 40% of its customer base, with another 25% in the EU and U.K.
"As more and more markets are moving forward with regulatory frameworks to become crypto hubs, we believe the moment is right to launch this international exchange," Coinbase said in its most recent announcement. "We would like to see the U.S. take a similar approach instead of regulation by enforcement, which has led to a disappointing trend for crypto development in the U.S."
It's worth saying that Coinbase spelled out in plain language that it has no immediate attempts to flee the U.S. "Rest assured that Coinbase is committed to the U.S.," its blog post said. This might be because the exchange thinks it has a sound argument when it comes to its increasingly fraught relationship with the SEC. The agency recently sent Coinbase a "Wells Notice," tipping it off that the agency is building a case against the exchange.
Coinbase said it would fight the SEC in the courts if it is sued. But at this point the exchange's lawyers may just be attempting to wait out Gensler's tenure. Although there's no guarantee the next SEC chair would be any less lenient, the exchange does have allies at the securities agency.
SEC Commissioner Hester Pierce, for instance, broke ranks and recently published her dissenting opinion stating the commission's attempts to redefine what an "exchange" legally means to apply it to crypto firms was an attempt "to solve problems that do not exist." Further, she said the SEC's antagonistic stance against crypto would drive the industry overseas or towards harder-to-police areas of decentralized finance (DeFi).
Coinbase can prefer to continue operating in the U.S. while building up operations elsewhere. But the SEC needs to get the message soon that at some point the U.S. market may just not be worth it. This is especially as other jurisdictions take a more collaborative approach towards regulating crypto.
– D.K.
@danielgkuhn
daniel@coindesk.com
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