Coinbase, the biggest and best-known U.S. cryptocurrency exchange, filed its confidential form with the SEC in December to go public. By some measures, the timing looks impeccable: Bitcoin rose 296% in 2020, the overall crypto market topped $1 trillion last week for the first time, and digital assets are back in the conversation on Wall Street.
The company will pursue a direct listing, it said on January.
Whether the listing happens as soon as this month, or takes many months (Lyft and Uber filed their confidential forms in December 2018, then took until March and May 2019, respectively, to debut), shares are likely to enjoy a big pop, if recent unicorn listings like Airbnb and DoorDash are any indication.
Coinbase has 35 million customers, an $8 billion valuation when last reported in 2018 (likely much bigger now; crypto research firm Messari values the company at $28 billion), and has been profitable for years, a rarity amid the recent unicorn parade.
But Coinbase will also carry significant controversy for some investors—and not just crypto skeptics.
The SEC is known to move at a glacial pace with approving new listings, and Coinbase, the closest thing to a crypto household name in the U.S., presents a litmus test that regulators will want to get right, since there will be more to come. (Bakkt, the crypto exchange launched by Intercontinental Exchange in 2018, announced this week it will go public at a $2.1 billion valuation via SPAC, which means it will beat Coinbase to market, but with less fanfare, attention, and scrutiny.)
The Bakkt valuation is an interesting (read: insane) data point for the Coinbase IPO
— Barry Silbert (@BarrySilbert) January 11, 2021
Coinbase has already dealt with regulator interference over the years.
As a custodian of customer crypto funds, the site submitted information on 13,000 customers to the IRS in 2018, in compliance with a 2016 request for information on all customers who held more than $20,000 of cryptocurrency between 2013 and 2015.
In 2018, Mashable uncovered more than 115 Coinbase customer complaints filed with the SEC over issues ranging from missing funds to outages to lack of customer service. Over the years, Coinbase has not infrequently suffered website outages during key price rallies or crashes, at times when users were eager to sell or buy, not unlike stocks app Robinhood. The outages have become a reputation hazard for Coinbase.
Given this history, regulators might hold up the Coinbase listing with red tape.
On the other hand, many inside the crypto industry welcome imminent regulation, and some see the Coinbase IPO as a chance to start a new phase of cooperation with regulators.
“There’s been an increased focus on regulators, in terms of looking at this asset class,” says Flori Marquez, founder of crypto lender BlockFi, in which Coinbase is an investor. “To know that you have a crypto company in front of the SEC, having active conversations in terms of thinking, How do we make it easier for U.S. consumers to invest in this asset class, is just huge news for the space as a whole... I think it bodes extremely well for future development within bitcoin and what companies can do in the space going forward.”
Lawsuit over XRP
On Dec. 22, the SEC charged money-transfer software startup Ripple Labs with conducting a $1.3 billion unregistered securities offering in 2013 when it began selling the cryptocurrency XRP, the No. 4 token by market cap. Since then, XRP has fallen 35% in value. Ripple Labs has vowed to fight the lawsuit in court.
Here’s where Coinbase comes in: Coinbase added support for XRP trading in February 2019. In response to the SEC action, Coinbase will halt trading in XRP on Jan. 19. Now a Coinbase customer in St. Louis has sued the company in California for the trading fees it collected on XRP transactions, arguing that the company should have known XRP was a security.
READ MORE: Ripple CEO: 3 reasons XRP is not a security
The lawsuit, which seeks unspecified damages, is from a single customer, but it’s indicative of a larger liability Coinbase faces with every cryptocurrency it adds to its platform. Coinbase’s listing could get caught up further in problems stemming from the SEC labeling XRP a security.
Cryptocurrency is still new and nascent, even if the wild 2020 price surge makes it look otherwise. Bitcoin, the first cryptocurrency, has only been around for 12 years, and has had an active trading market around it for less than 10 years. Ethereum, the second-largest blockchain and the network on which the majority of new tokens created during the ICO boom were created, came around in 2015.
Most retail investors (not to mention sophisticated institutional firms as well) still find crypto confusing. It is a space with a multitude of misconceptions around it. Will investors want to rush in to buy shares of a company that represents an industry they don’t understand?
David Trainer, CEO of IPO research firm New Constructs, thinks they will.
“Given the stimulus-driven fever pitch we’re seeing, I think it’ll do great,” Trainer says. “It’ll be buoyed by the clamoring we’re seeing for all things current and popular—and popular doesn’t even have to be tech. DoorDash isn’t really tech. Is bitcoin tech, separated from blockchain? I don’t know that it is. Coinbase is a derivative of blockchain technology, which is a democratization of secure transactions to the greater public. And people make justifications for a lot of tech because they ascribe magical powers to things they don’t understand.”
In other words, Coinbase, which has been called the “Goldman Sachs of bitcoin,” could frame itself more as a financial services IPO than a tech unicorn IPO.
This is why it will be fascinating to see how Coinbase describes itself in its eventual public S-1 form: Will Coinbase say it’s a bank, and downplay the crypto part to the extent that’s possible? (Snap, infamously, led its S-1 by calling itself “camera company”; Casper was widely mocked for saying it created the “sleep economy.”) Coinbase’s current About page leads with: “Coinbase is how the world uses crypto.”
Politics and corporate culture
And then there’s the bad press.
In September, Coinbase CEO Brian Armstrong issued a public memo declaring that he wants Coinbase to be an apolitical company where employees don’t discuss politics or social issues. Tech media reports soon framed the memo as a form of further explanation after Armstrong was asked about his stance on the Black Lives Matter movement at an internal employee town hall. At a time when so many companies are actively taking a stance on divisive political issues, Armstrong’s attempt to stay out of it backfired; 60 employees, or 5% of the workforce, left the company after his memo.
Since the Coinbase Memo and the conversation it prompted about Coinbase’s culture, the New York Times has twice reported on internal culture problems at the company, including allegations from Black former employees of discriminatory treatment, and data that shows a larger pay disparity between men and women than the average gap at other tech companies.
It is possible that none of this reporting will damage the appeal of Coinbase stock. (In a preemptive Coinbase blog post before the first New York Times story ran, Coinbase declared, “We don’t care what The New York Times thinks.”) And investors focused on financial performance can take heart in Armstrong’s own line in his infamous memo: “We are a for-profit business... We shouldn’t ever shy away from making profit, because with more resources we can have a greater impact on the world.”
Considering all the newness of the business and the potential regulatory hurdles it could attract, it makes sense that Coinbase is going the direct listing route (a la Slack, Spotify, and Palantir), which involves no road-show, no new shares being offered, and less hype.
This story was updated on Jan. 28 at 2:28pm EST with the news that Coinbase will pursue a direct listing.
Daniel Roberts is an editor-at-large at Yahoo Finance and has covered bitcoin since 2011. Follow him on Twitter at @readDanwrite.