In the last few days, from Bittrex to Gemini, there have been reports of crypto exchanges and platforms in the U.S planning to leave the U.S or set up outside the U.S. Most recently, there is word in the street that crypto exchange Coinbase will leave the U.S. Is Coinbase leaving the U.S?
No, Coinbase has not disclosed any intention to leave the U.S. Due to the regulatory issues that Coinbase presently has with U.S. regulators—particularly the Securities and Exchange Commission (SEC) under Gary Gensler—Coinbase CEO, Brian Armstrong, said Coinbase is considering investing more outside the U.S.
Notably, Coinbase is the biggest centralized crypto exchange in the U.S and the second-largest centralized crypto exchange in the world. Founded in 2012, San Francisco, Coinbase has become the go-to platform for Americans mostly who want access to the crypto market. As a publicly listed company in the U.S, Coinbase relatively enjoys a high level of trust in the crypto space.
The U.S. regulators—particularly the SEC—has become a pain in the neck for Coinbase
The U.S. regulatory climate has been a challenge for Coinbase. The U.S. regulators, including SEC, insist that there is clarity and certainty in the U.S. regulatory environment for crypto businesses.
But crypto operators, including Coinbase, don’t think so. Crypto operators and some industry stakeholders continue to decry the lack of clarity and certainty in the U.S. In fact, a good number of crypto operators have accused U.S regulators—particularly the SEC—of regulation by enforcement. Regulation by enforcement means that regulators are enforcing unclear and broadly worded statutory provisions by taking administrative and legal actions against crypto operators on a case-by-case basis instead of passing a regulation that would specifically and sufficiently apply to the crypto industry given its uniqueness.
Armstrong’s position seems to be simple: “Regulators should come up with the rules, tell everybody the rules and we follow them”. As far as Armstrong is concerned, the “current laws are not clear and we would like to get more clarity”.
So what really did Armstrong say Coinbase would do about leaving the U.S?
To be sure, Armstrong didn’t say that Coinbase would be leaving the U.S.
What Armstrong does say is that considering that—in Coinbase opinion—the U.S. is lagging behind in crypto regulation by adopting regulation by enforcement instead of creating clear rulebooks, Coinbase is looking at other markets. In Armstrong’s words during a CNBC interview 18 April 2023:
Like every business, we have a budget and we have to decide where to allocate it. That means what products we want to build. But it also means what countries we want to invest in in any given year. With the U.S. kind of lagging a little bit, having this regulation-by-enforcement approach instead of creating clear rulebooks so everybody has to play on a playing field. We are looking at other markets.
Amid a tough U.S. regulatory climate, Coinbase has in fact been expanding outside the U.S. Recently, Coinbase was licensed as a digital asset business by the Bermuda Monetary Authority, Bermuda, where Coinbase is opening an offshore derivatives exchange. Apart from Bermuda, Coinbase has expanded to Bahamas, Abu Dhabi, Canada, Brazil, and Singapore. According to Coinbase, its approach globally will be consistent with its approach in the U.S.
The SEC is going to charge Coinbase for allegedly violating U.S. federal securities law.
The SEC has questioned Coinbase’s staking platform and come against the USDC stablecoin, declaring them securities that must be registered with the SEC.
Coinbase has received a Wells Notice from the SEC. A Wells Notice is one of the final steps taken by the SEC before formal charges are issued against a company.
In response to the Wells notice, Armstrong says Coinbase is prepared to fight regulators whose administrative and enforcement actions have become a threat to Coinbase businesses in the U.S.
Meanwhile, due to the regulatory issues Coinbase is presently facing, it is reportedly difficult for Coinbase to get banks to take its deposits. This difficulty is not however peculiar to Coinbase. Binance and other exchanges are also experiencing this. And this is particularly after the recent Silvergate Bank, Signature Bank, and Silicon Valley Bank failures.
Read also: Paxful Suspension/ Shutting Down: Will the P2P crypto market also shut down
But what does Coinbase really want? Two things, for now.
First, for a start, Coinbase wants to see a comprehensive legislation for centralized actors (exchanges, custodians, etc) in crypto in the U.S. Being a centralized exchange, Coinbase would be interested in a regulation that achieves clarity and certainty as much as possible.
Second, Coinbase wants more roles for the U.S. Congress starting with stablecoin regulation. Notably, Coinbase has 50% ownership of Centre, the consortium co-founded with Circle in 2018, that runs the a fiat-backed stablecoin, USDC. This has been one of Coinbase’s major sources of revenue. And speaking of revenue, Coinbase has also shifted from relying on trading fees from its crypto exchange as its only revenue towards subscriptions and services.
Implications for the U.S crypto industry and the globe, if Coinbase leaves the U.S.
First, if Coinbase leaves the U.S, this is expected to significantly impact the growth and development of the crypto industry in the U.S, given Coinbase’s status as “the most trusted exchange in the U.S”. A number of other centralized exchanges, custodians, and wallet providers are bound to panic, and may most likely also leave the U.S. or at least begin to invest more outside the U.S.
Second, Coinbase leaving the U.S. will impact on where Web3 and the future of tech is built. The European Union (EU) and the U.K. will certainly take advantage of the gap in the U.S. to position their markets as the go-to jurisdictions for crypto innovators. The EU’s newly passed Markets in Crypto-Assets (MiCA) regulation is already starting to secure this future for the EU.
Third, affected Americans may protest against U.S. regulators and the government. This will most likely have political implications too for the Biden administration. Today, more and more Americans are beginning to feel that current U.S. regulatory restrictions often shut the window of opportunities in the digital economy, including the crypto economy, against them. Americans have reportedly resorted to using VPNs in order to access a number of crypto platforms unlicensed in the U.S.
How about impact on Coinbase stock COIN and the crypto market?
Interestingly, from a COIN stock perspective, there is no sign that investors are reacting to this development. Even bitcoin and altcoins, including Ethereum, have been largely rallying. An explanation for this is that the market saw this coming sometime back and already adjusted.
In fact, Coinbase itself may have been adjusting by introducing a decentralized product, Base. In February 2023, Coinbase launched Base. Base is described by Coinbase as “a secure, low-cost, developer-friendly Ethereum L2 built to bring the next billion users to web3”. According to Coinbase, the reason it launched Base is because “to bring in billions of users to the cryptoeconomy, dapps need to be easier, cheaper, and safer to interact with”. Base is open source and decentralized, features that will help Coinbase play in the decentralized finance (DeFi) space where there are no centralized authorities.
The point is this: more centralized platforms will continue to explore opportunities in DeFi and becoming layer-2 blockchains like Polygon, Solona, etc. A similar trend we pointed out in our recent Paxful Crypto Q&A piece is that more crypto platforms, whether centralized or peer-to-peer (P2P), may start exploring the idea of adopting self-custody wallets hosted on their own platforms. This is more decentralization.
What happens from here?
From this point forward, we can expect that Coinbase will fight the SEC and other regulators in court. Armstrong believes that Coinbase has a strong case. And Coinbase is looking to win. As far as Armstrong is concerned, the situation in the U.S. is an abdication of responsibility by U.S. regulators:
It’s an abdication of responsibility. The regulator’s job is to publish a clear rulebook and allow that market to be safe [and] also to flourish in that country.
When the legal battle starts however, the COIN charts as well as the crypto market may begin to react significantly. It is the eventual result of that legal battle between Coinbase and SEC with other relevant U.S. regulators that will determine whether Coinbase would be leaving the U.S.
This court case—as we have seen with Ripple—will likely be years long. It is a long way off.
Read also: Is the bankrupt crypto exchange FTX going to relaunch?
