Coinbase Inc. became the best-known cryptocurrency exchange in the U.S. by bringing Bitcoin to the masses. Now it’s looking to crack Wall Street.
The San Francisco-based company is developing several tools to lure institutional investors onto its platform. They include custodial services where investors can store large amounts of digital currencies, as well as enhanced trading capabilities, such as risk management and margin trading, which allows customers to use borrowed money.
While some of the products will be available to everyone, most will focus on institutional clients. One such service, called Coinbase Prime, will offer lending, margin financing and over-the-counter trading.
The custody question — how to securely hold digital coins in an era of rampant hacking — has bedeviled money managers ever since cryptocurrencies emerged as an asset class. Coinbase began outlining efforts to provide a solution in November. Coinbase now tells Bloomberg it’s forging a partnership with Electronic Transaction Clearing Inc., a so-called qualified custodian for securities designated by the U.S. Securities and Exchange Commission.
The regulator requires large investment advisers to keep customer assets at qualified custodians to protect clients from theft or losses. Banks and broker dealers are common examples of such safe houses for securities. However, authorities haven’t offered clear rules around what it means to have custody of crypto-assets.
Coinbase’s new partner, Electronic Transaction Clearing, settled with the SEC in March over an alleged violation of customer-protection requirements and was fined $80,000. The agency accused ETC of improperly parking some securities belonging to customers at a clearing firm in late 2015. The firm didn’t admit or deny wrongdoing.
While Coinbase has said it doesn’t consider tokens on its exchanges to be securities, the regulatory view on that is hazy. The lack of clarity from financial watchdogs could explain why Coinbase hasn’t attracted big names to its custody product. The company said it’s holding more than $20 billion in digital assets, and custodial services will be available to investors with at least $10 million in deposits.
Just three years ago, Coinbase was working out of a one-bedroom apartment, and the startup struggled to keep up with the surge in cryptocurrency interest last year. Problems have persisted. Some 1,500 complaints have been filed by customers on the Consumer Financial Protection Bureau’s website since the start of 2018 over slow trading times, delays in processing transactions, high fees and other issues.
Coinbase now has more than $200 million in funding from backers such as Andreessen Horowitz and the New York Stock Exchange. Coinbase recognizes it’ll need to prove the service is reliable if it hopes to win over hedge funds or Wall Street’s elite, said Adam White, vice president of Coinbase Institutional, a division setup to oversee the Wall Street business.
“We realized there is a very different set of expectations between institutions and individuals,” he said. “We just get one shot, one first impression, and we need to make sure it’s a good one.”