The Coinbase model: profit from the crypto assets it lists

In December, a cryptocurrency issued by social network start-up Decentralized Social rose in value after Coinbase allowed it to start trading on the company’s stock exchange.

The listing shocked the start-up’s fortunes, briefly doubling its symbolic price to a high of $ 187. It also boosted the fortunes of another key partner, Coinbase, which had supported the startup as part of a $ 200 million round of funding announced three months earlier.

DESO, as the token is known, is one of at least 20 cryptocurrencies that Coinbase has listed for trading while investing in a related project, according to a Financial Times analysis of the company’s revelations, PitchBook data and public announcements.

The results show that of these 20 projects, Coinbase listed only 12 as holdings on the website of its internal investment arm, Coinbase Ventures, as recently as this week.

Andreessen Horowitz, one of Silicon Valley’s leading venture capital groups, is an early investor in Coinbase and has a seat on the company’s board. The VC firm has also invested in at least a dozen projects whose tokens were later approved to trade on Coinbase.

The analysis shows how freewheeling cryptocurrency exchanges obscure divisions that are more strictly enforced in traditional capital markets. Coinbase is the largest cryptocurrency exchange in the United States, making it a key player in the past year’s boom in digital asset trading, with more than 7 million monthly transaction users.

Trading Volume Bar Chart ($ Billion) Showing New Crypto Tokens Launches on Coinbase

After FT sent a detailed list of questions to Coinbase last week, the company published a blog post on Saturday, promising to make its holdings “even more transparent.”

Coinbase said it did not coordinate listing decisions with its board of directors or external investors. The company added that Coinbase Ventures, its start-up investment arm founded in 2018, has “no influence” on asset listing decisions.

After FT subsequently posted this week a list of eight projects that had not been revealed as receiving support from Coinbase Ventures and listing their tokens on the stock exchange, Coinbase added seven of them to its website, including Decentralized Social.

“In the securities world, conflicts of interest need to be identified, revealed and managed,” said Tyler Gellasch, CEO of investor trading group Healthy Markets. “In crypto, it seems to be free for everyone.”

A Coinbase spokesman said the company maintains policies to mitigate conflicts of interest and all assets in which it has a financial interest are “evaluated based on exactly the same criteria as all other assets”.

Coinbase’s investments may attract attention as the company pursues CEO Brian Armstrong’s goal of becoming the “Amazon of assets”.

Shares in Coinbase have fallen more than half since the company was listed on the Nasdaq exchange in April, reducing $ 50 billion from market value. The roller coaster has increased pressure on Coinbase to list new digital assets that bring in fresh sources of revenue from traders who are hungry to invest in speculative cryptocurrency projects.

Business executives have stepped up the pace of new investment from Coinbase Ventures. Coinbase had $ 280 million in strategic investments at the end of the third quarter, more than 10 times the amount it had at the end of the previous year.

In announcements of new token lists, Coinbase includes a disclosure statement stating that Coinbase Ventures “may be an investor in the crypto projects mentioned here”, which links to a web page showing investments made by the venture arm.

Earlier this week, the website listed fewer than 90 investments without giving specific details on whether Coinbase owned shares or tokens in each of the projects. By Friday, dozens more investments had been added to the website. Coinbase has publicly said it has more than 200 investments through the venture arm.

A Coinbase spokesman said it was “active in the process” of updating the website, but not all investments would be made public, citing “common practice in the venture capital community”.

For years, Coinbase used a conservative approach to listing new cryptocurrencies, offering less than half a dozen available for trading as late as 2018.

However, the boom in decentralized financing apps and other cryptocurrency projects has spawned a litter of new digital assets, forcing Coinbase to catch up with software programs such as Uniswap that allow anyone to list tokens without permission from central government. Offshore exchanges like Binance and FTX have also moved quickly to list the new tokens.

Last year, Coinbase began automating parts of the listing process, reducing its legal reviews and developing what it calls an “experimental zone” to “appropriately identify risks to customers and enable them to make informed decisions” about new tokens.

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Coinbase listed 59 new assets through September last year, and at least dozens more in the fourth quarter, according to registrations and company announcements.

The strip has alerted some lawyers and cryptocurrency watchdogs, who said the listings could attract attention from financial regulators. Chairman of the Securities and Exchange Commission, Gary Gensler, said last year that several U.S. cryptocurrency exchanges appeared to offer trading in unregistered securities.

“I think there will eventually be millions of cryptocurrencies out there,” Armstrong said in a call discussing Coinbase’s earnings in the second quarter of August.

While some tokens backed by Coinbase and Andreessen have yielded large returns for traders who bought on the listing day, they have on average underperformed bitcoin and ethereum after joining the exchange, according to research by Faisal Khan, an independent cryptocurrency analyst.

Cryptocurrencies that Coinbase had considered listing before 2020 but did not approve have, on average, outperformed those it chose to list, he said.

“I think it raises a lot of questions about whether insiders are dumping on retail investors, as well as conflicts of interest between VCs and stock exchanges working together unsupervised,” Khan said.

Coinbase said the company had not sold any of its token holdings since they were listed on the stock exchange. Andreessen declined to comment.

Marco Di Maggio, an associate professor at Harvard Business School who has written a case study on Coinbase, said the company’s disclosure practices surprised him because traders were usually sensitive to perceived conflicts of interest.

“Since the crypto community is not very open to these types of things,” Di Maggio said, “I would have expected them to be very careful about this.”

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