Coinbase chases the Binance model — at what cost?
There was a great deal of consternation this week, as Coinbase advised on plans to list up to 31 new cryptoassets and subsequently announced the listing of MANA, DNT, LOOM and CVC.
Despite the meteoric rise of Binance, Coinbase listings remain the pinnacle for any cryptoasset; the exchange acts both as a badge of honour owing to its reputation for compliance and diligence, whilst also being synonymous with catering to retail investors.
It is because of this that Coinbase listings remain so controversial; they are held to a higher standard than the likes of Binance because that is the image they have so diligently crafted over the years.
However, there have been a number of missteps. The Bitcoin Cash listing saw initial suspicious trading patterns giving way to a stratospheric rise in prices before trading was ultimately suspended. The farcical nature of the listing led to an internal investigation into insider trading, although all employees were ultimately cleared by the firm.
The first ERC-20 token to be added was ZRX, which again raised eyebrows. As reported by The Block:
After much speculation that it would join the exchange, $ZRX began trading on Coinbase earlier this month. Scalar Capital is led by former Coinbase employees Linda Xie and Jordan Clifford. Xie is an adviser to the 0x project and is married to the project’s cofounder Will Warren. Furthermore, Maksim Stepanenko, an engineer at Coinbase, advises Scalar Capital. Stepanenko was involved in the development of Coinbase’s listing procedures along with Clifford and Xie in 2017.”
This wasn’t the first instance of close ties between Coinbase and a listed asset. The founder of Litecoin, Charlie Lee, was a long time Coinbase employee and LTC was added to Coinbase while Lee still worked at the firm.
If there is any pattern that defines Coinbase’s listing policy, it is that it seems completely arbitrary. For all the bluster of the methodology of how new assets are added, it really seems to be a case of at best the assets they know most intimately or at worst simply the ones they have increased access to. There also seems to be a correlation between the holdings of Barry Silbert’s Digital Currency Group and Coinbase listings. Silbert noted in July that:
We have 50% in Bitcoin, 25% in Ethereum Classic, 15% in Zcash, 5% in Decentraland, and our newest one is 5% in ZenCash.
Its subsidiary Grayscale Investments has eight single asset investment vehicles; six of those are currently listed on Coinbase, with just ZenCash and Ripple left off. The latter was included in the announcement of 31 under consideration. As such, don’t be surprised if ZenCash ultimately finds its way to Coinbase.
But so what? I don’t blame Coinbase for wanting to add more assets to their platform. These recent moves are ultimately a tacit confirmation that the company has to become more like Binance to survive a potentially multi-year bear market, and will therefore loosen its listing policy in order to generate revenues.
However, this could be a potentially a dangerous move for a company that styles itself as wanting to be “the most secure and compliant digital currency exchange in the world”. Binance is so profitable in part because of its lack of care for regulation. It is a difficult balancing act to both emulate Binance whilst simultaneously trying convince people you are more trustworthy.
Normal stock exchanges are forced to vet companies who wish to list. The reasoning for this is two-fold:
Protect the reputation of the exchange
Retail investors aren’t stupid, not in the long term. Neither are regulators inclined to overlook exchanges which facilitate the exploitation of investors. Any exchange can be duped by rogue companies. However, there is a limit to tolerance when such ill behaviour was foreseeable as failures needn’t be constrained to rogue companies.
If a company lists with no utility or potential to generate revenue, questions would likely be asked. Does an exchange like Coinbase have a responsibility to only list tokens which have actual utility? If the answer is yes, then a token like ZRX — as much as everyone may like the project, and as good as their product may be — has no place in such company, given it has no real utility or current usage. Will Decentraland or Civic ever deliver on their promises? I find it unlikely.
The problem, of course, is that there is scarcely a token with utility among the thousands out there. Which leads us back to our original premise, that Coinbase has made a clear decision to risk its reputation in order to draw on some of the lucrative trading Binance and others have drawn away.
It will be interesting to see what happens when the inevitable happens and one of the assets they list falls prey to its own inadequacy — it is a matter of when, not if. I would imagine Coinbase offers a far easier target for litigation than other less regulated and more geographically flexible exchanges.
Note: I hold BTC and ETH of assets listed above (and have been buying both, on Coinbase, this week).