Coinbase has earned a reputation for itself as the most trusted cryptocurrency exchange in the U.S. And last week the six-year-old San Francisco-based company made key strides towards mainstreaming cryptocurrency use.
The company announced early in the week that it has been given the go ahead to purchase Keystone Capital Corp., Venovate Marketplace, Inc., and Digital Wealth LLC — acquisitions that would give it broker-dealer status. The announcement got the crypto community excited because having this licence would mean Coinbase could start offering cyrptocurrencies defined as securities by the SEC (as opposed to those considered to be “utility” coins), which would give the average individual U.S. investor the opportunity to buy into a wider variety of cryptocurrencies.
What is a Security Token?
Security tokens are, quite simply, tokens that derive their value from some other underlying asset which is external to it and tradable. Given that they are tied to the value of this other asset (security), they are subject to federal security regulations. They are different from “utility tokens” in that utility tokens are not designed for investment purposes. They give the holder the ability to access a company’s future product or service.
The scope for securitization and tokenization of any asset is quite vast. Theoretically, one could tokenize real estate, equity, commodities, or debt.
A number of cryptocurrency projects are actively embracing the move to blockchain securities and creating their own protocols. One such project is the Polymath Network, which raised an ICO last year to become a platform for issuing a range of security tokens. They are working on their a security token standard called the ST-20 standard — basically a security token counterpart to Ethereum’s ERC20 standard. “We’ve seen the benefits [security tokens] have over traditional forms of ownership like paper share certificates,” Polymath VP Graeme Moore told me. “With tokens, you can have markets open 24/7/365 (instead of being open weekdays 9:30am-4pm), trade fees that approach zero over time (instead of a minimum $5), instantaneous settlement (instead of t+2 or t+3), and you can make it much easier to raise capital.”
Why is the Coinbase announcement important?
Coinbase’s potential move into security tokens is significant because it is one of the most important exchanges in the cryptocurrency industry. To give you an idea of its, in May of this year, it had 20 million user accounts. That is about the size of Fidelity investments. It also has the largest cryptocurrency trading volume of any exchange in the U.S.
Given this size, the potential for mass adoption of a token listed on Coinbase is immense. New token listings on Coinbase lead to massive rallies in the price. This happened last December with Bitcoin Cash and more recently with Ethereum Classic.
Even the speculation of a potential listing could be enough to impact price. For example, Ripple’s XRP rallied at the beginning of the year on speculation it could be listed.
“Coinbase listing security tokens would be amazing for the adoption of security tokens. With the amount of customers Coinbase has, coupled with their very simple and easy-to-use design, this would be huge for security tokens, and all of the players in the security token realm,” Polymath’s Graeme said.
Which security tokens will we see on Coinbase
Although Coinbase hasn’t provided any details on which securities might be added to its exchange, there are a few likely candidates.
One of the most notable tokenized securities currently gaining interest is the tZERO token. This is being sold to accredited investors by tZERO, a subsidiary of Overstock Inc. and is one of the first tokens to be actively sold as a security.
There are also those tokens that currently straddle the legal line between utility tokens and securities. One prominent example is Ripple’s XRP token, the third most valuable cryptocurrency. It has fallen into this legal grey area, and it is uncertain whether the SEC will view it as a security. Ripple has apparently been courting Coinbase for months.
However, the real potential for listings lies in the range of traditional assets that could be tokenized and sold on Coinbase. For example, Nasdaq has been testing the possibility of placing shares on the blockchain. Once these certificates are tokenized they can be bought and stored just as easily as you can currently buy Bitcoin or Ethereum.
Asiff Hirji, Coinbase’s president and COO, said last month:
“Ultimately, we can envision a world where we may even work with regulators to tokenize existing types of securities, bringing to this space the benefits of cryptocurrency-based markets — like 24/7 trading, real-time settlement, and chain-of-title.”
And that’s not all
Other news from Coinbase last week speaks of a larger move to make cryptocurrencies mainstream in the U.S. Despite Facebook’s ban on cryptocurrency ads due to the preponderance of scams, Coinbase tweeted on Friday that its ads have now been whitelisted by the social network, reinforcing its status as one of the most trusted names in crypto. And news also broke Friday that the company has created its own political action committee, presumably to push forward the regulation and mainstreaming of cryptocurrencies at a national level.
By being more active in the American political scene, Coinbase will be able to support crypto friendly legislation, which could be a boon for numerous cryptocurrency initiatives.
With the company possibly positioning itself as a trustworthy exchange for tokenized securities, we could see it spearhead significant adoption of blockchain-based tokens across the U.S. over the coming months.
How quickly things will progress from here is uncertain, but the remainder of the year will no doubt be interesting as Coinbase rolls out what look to be ambitious plans.
Nic Puckrin is founder of UK-based cryptocurrency news and education site Coin Bureau. He previously worked in investment banking at Goldman Sachs in London.