Bitcoin’s inception was a direct response to the banks which precipitated the financial crisis in 2007. These financial institutions issued high-risk sub-prime mortgages to individuals unable to make consistent monthly payments, used fractional reserve lending for extreme over-leverage, and facilitated a global crisis following the Lehman Brothers bankruptcy.
Lehman Brothers collapsed on September 15th, 2008, six weeks before the Bitcoin whitepaper was released. This new technology was explicitly targeted at the distribution of financial power; in the genesis block, Satoshi embedded a code that read “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.”
According to Nakamoto, by removing a centralized authority, the broader global economy would become less dependent on entities that “lend [money] out in waves of credit bubbles with barely a fraction in reserve.”
Exchanges follow in banking footsteps
In 2019, the majority of cryptocurrency trading (and fiat on-ramping) occurs via centralized exchanges, such as OKEx. At the time of writing, OKEx had a 24-hour trading volume of US $3.3 billion. On the other hand, the largest decentralized exchange, IDEX, had a 24-hour volume of merely US $2.2 million.
These exchanges are a key part of the crypto ecosystem, but they also introduce centralization. What if one of the biggest exchanges became too big to fail?
In October 2018, Coinbase raised $300 million in a Series E round, which increased the company’s valuation to $8 billion. Investors included “Tiger Global Management, with participation from Y Combinator Continuity, Wellington Management, Andreessen Horowitz, Polychain and others.”
In the announcement, Coinbase president and COO Asiff Hirji said the financing would be used to build a global infrastructure between fiat and crypto markets, implement USDC stablecoin trading, and add a Custody offering to onboard institutional funds.
Around this same time, Coinbase had around 25 million customers, a staggering figure that is comparable to traditional finance giants like Charles Schwab.
These are just the latest steps in Brian Armstrong’s goal of bringing everyday customers to invest, borrow, and save, building what Fortune describes as a “banking empire.”
Is Coinbase becoming a bank?
Coinbase is licensed as a Qualified Custodian under the regulations of the New York Department of Financial Services (NYDFS). This custodial agreement allows the company to “store large amounts of cryptocurrency in a highly secure way.” Further, the license allowed Coinbase to list new assets, and explore features such as staking.
In June 2018, Coinbase acquired Keystone Capital to become a fully SEC-regulated broker-dealer. If approved, Coinbase would be able to offer blockchain-based securities, under the oversight of the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).
Further integrating itself into traditional finance, Coinbase is purportedly seeking a banking license, and has met with the Office of the Comptroller of the Currency in early 2018 to discuss what that might entail.
A general bank license would allow Coinbase to exchange in merchant acquisition, asset management, and trading. However, the exchange has already begun establishing relationships with traditional banks at an international level.
Coinbase has integrated itself into the financial markets as well, by establishing an account with Barclays Bank, as well as obtaining an e-money license. This move makes it easier for UK-based customers to use the cryptocurrency exchange and withdraw fiat currency.
These features mean that “Coinbase has become a crypto bank,” says Nash Exchange co-founder Fabio Canesin.
“It’s much closer than [to a bank] than anything else because it is completely centralized,” Canesin told Crypto Briefing. “They even acquired [Neutrino], which means complete de-anonymization of the user. So if it’s it’s subject to [banking-like rules], it [is already acting like] a bank.”
Is that necessarily a bad thing?
The writing is on the wall: a leading cryptocurrency exchange is pushing towards becoming a traditional financial institution. That prospect might spook some decentralized die-hards, but compared to the likes of Lehman Brothers and Goldman Sachs, it may be less of a disaster than it seems.
Blockchain and cryptocurrency companies have to stand in front of the mirror and ask themselves a hard question: can businesses and practitioners who made their fortune from distributed ledger technology also help reform the financial elite?
Or will these new cryptocurrency banks cause their own “waves of credit bubbles?” That remains to be seen, but there’s a distinct possibility that crypto institutions could become the very thing they’re meant to replace.