Is Coinbase’s mega-bucks flotation really a watershed moment for cryptocurrencies?

Coinbase’s rapidly approaching market debut has been touted as a coming of age for the cryptocurrency industry.

If it were a film in that genre, it would be one with a production budget high enough to make Avengers: Endgame look like an indie flick. 

In some quarters, valuations as high as $100bn have been talked about for the business when it joins the Nasdaq, eclipsing the likes of a BP or GlaxoSmithKline. 

From the windows of the hype train, you could even see the company rising above the combined value of Intercontinental Exchanges, which owns the New York Stock Exchange among others, and the London Stock Exchange Group. Together the two are currently worth around $120bn. 

Riding the cryptocurrency boom, Coinbase made more money in its first quarter than it did in the whole of last year. Growth like that helps to explain some of the excitement. 

“Digital currency right now is having its Netscape moment,” founder and CEO Brian Armstrong said, fanning the flames at a summit devoted to Ethereum, a rival to Bitcoin, in New York. He was alluding to the flotation that kicked off the dot-com boom. 

But while cryptocurrencies are increasingly being accepted as an asset class on Wall Street, where even the sceptics have been coming round of late, does Coinbase’s float really represent a watershed moment? 

The company may be growing like Japanese knotweed in an English garden but it is not an exchange like those mentioned above. 

Exchanges match buyers with sellers of quoted securities and are underpinned by clearing and settlement organisations, all of which are highly regulated. 

Coinbase and its peers – there are several and it isn’t long before rival Kraken is expected to go public too – are not. At least not yet. 

The oversight of these companies is actually a bit of a mess. Some are not regulated in any meaningful fashion. But Coinbase isn’t in that position. Like several others, it’s registered as a money service business. They have to sign on with watchdogs.

But that does not mean their trading or activities as exchanges are subject to oversight in the way the NYSE, London Stock Exchange or Nasdaq are, nor do they operate in quite the same way. 

Writing for the London School of Economics, Martin Walker, director of banking and finance at the Centre for Evidence-Based Management, described the regulation of cryptocurrencies as “highly concerning”. 

Watchdogs, for which the whole industry is a headache, have largely focused on anti-money-laundering on the one hand, and warning consumers on the other. 

An example of the latter was the Financial Conduct Authority’s “watch out you could lose everything” alert at the beginning of the year. It has also banned  the sale of crypto derivatives and exchange-traded notes (ETNs) to retail investors. Critics argue that’s unfair on retail investors if they have been warned of the risk, not without justification.

“In general, cryptocurrencies lack anyone that is genuinely accountable for core processes such as transfers of ownership, trade validation and creation of cryptocurrencies. A concern that can ultimately only be dealt with by acceptance of the situation or outright bans,” Walker said. 

Let’s be honest: the latter ship has sailed. Cryptocurrencies are here to stay, which means regulators are going to have to accept the situation and deal with it as best they can. 

But Walker offers them an opening there: “The almost complete lack of regulation of the highly centralised cryptocurrency exchanges should be an easier-to-fill gap.”

Life would get an awful lot more complicated for a Coinbase if the world’s watchdogs decided to make a meaningful attempt at doing that. 

There’s a very good reason regulation takes up a very substantial chunk of the 60 pages (count ’em) of risk warnings in the company’s prospectus. 

For cryptocurrencies as an asset class, proper oversight of crypto-exchanges might actually be a very good outcome. It would genuinely represent a watershed moment.

Coinbase shareholders would have fewer reasons to be cheerful. Its (relatively) youthful management team would have to start grappling with things such as trade settlement oversight, capital requirements and more besides. 

This is the biggest US flotation since a certain Facebook went public. That company went on to squash all its doubters, justifying its exalted valuation several times over. Coinbase may find it harder to repeat the trick.