Coinbase Wants to Pay Interest on Crypto Coins, Sort Of

By November 6, 2019Bitcoin Business
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A pattern of piggy banks with coins
Illustration: Elena Lacey; Getty Images

This June, as the news bristled with headlines about Facebook’s cryptocurrency-to-be and the price of bitcoin once again soared, the mood in the San Francisco offices of Coinbase was subdued. In 2017, the cryptocurrency exchange was near the frenetic epicenter of the bitcoin boom. Millions of people used its app to dip their toes into cryptocurrency speculation. Then came the crash. By now, says Coinbase COO Emilie Choi, the company had weathered a few such cycles, and drawn an important lesson from the highs and lows: Booms don’t last. “It’s a roller coaster ride here,” she said. “There’s no two ways about it.”

Sure enough, bitcoin plummeted that afternoon, as cryptocurrency prices are liable to do.

Coinbase has remained one of the biggest exchanges for buying and selling crypto—making it an $8 billion business, at last valuation. Despite increased wariness of overvalued unicorns after recent high-profile flameouts, CEO Brian Armstrong said last month that Coinbase has actually turned a profit three years running. But Coinbase’s fortunes, built around the fees users pay for trading, remain closely tied to rollicking price of bitcoin, and to a lesser extent the nearly two dozen other tokens it supports. Profitable, yes, but precarious.

So today Coinbase will begin offering a service, known as staking, that it hopes will convince users to stick around even when prices aren’t spiking. Under the new system, if you hold particular cryptocurrencies in your Coinbase account, you’ll receive set returns independent of market fluctuations. Coinbase is starting with a coin called Tezos. The returns—roughly five percent to start—come in the form of tokens that Coinbase receives for participating in the network that keeps the Tezos blockchain secure. Similar to how new bitcoin are distributed based on how much computing power is contributed to network, Tezos doles out new coins based on how many coins each participant has “staked.”

Basically, it’s interest. Just don’t call it that. Coinbase prefers the ersatz term “staking rewards.” That distinction is rooted in regulatory questions. While staking has become a common choice for newer coins, it’s unclear where the process falls under investing rules. Because of those concerns, staking was made available to wealthy investors in March, but held back from ordinary Coinbase users until now. The company says it now feels confident that it has worked out an arrangement that falls within the SEC’s good graces. Coinbase is the first major exchange to open up staking to all US customers.

Rhetorical contortions aside, Coinbase bills staking as a step in the direction of looking more like a bank, with the diverse revenue sources they enjoy. That includes generating fees from custodying assets and facilitating lending and consumer payments. “We’re just doing it in our own crypto way,” Choi says.

Beyond the risks of depending on bitcoin prices for revenue, the company faces growing competition. “They’re fighting a two-front battle,” says John Sedunov, a professor of finance at Villanova University. Coinbase has been seen as uniquely approachable in an industry known for shady actors. But others now compete for that mantle. Rival exchanges like Binance have grown in the US, and there are now a raft of startups that specialize in safe offline storage for your crypto coins. New offerings from the legacy world of finance, like Bakkt, which shares a common owner with the New York Stock Exchange, and Fidelity Digital Assets, are also entering the fray with existing financial relationships and trusted brands. “If I’m thinking about who I trust, do I trust JP Morgan to be the custodian of my cryptocurrency or a website that’s been operating for a few years?” Sedunov asks.

Sedunov says it’s no surprise to see big exchanges getting into edgier aspects of crypto that legacy businesses won’t yet touch. It’s a familiar playbook. During the so-called “crypto winter,” the long period of low prices after the 2017 bitcoin boom, a common way for exchanges to bolster bottom lines was to add more esoteric coins for trading. Tezos, listed on the exchange this August, is one of Coinbase’s newest additions.

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