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Coinbase continues to execute at a world-class level.
The company announced yesterday they will be drastically increasing the number of digital assets they support in the coming months. The plan is to begin listing digital assets on a jurisdiction-by-jurisdiction basis. This means tokens available for trading in one country may or may not be available in another country.
The logic here is that Coinbase will be able to list tokens compliantly in one jurisdiction that may not be legal according to a separate jurisdiction’s securities law. If executed correctly, the company will have found a way to expand the supply side of their exchange business, without exposing themselves to additional regulatory risk.
The downside to the jurisdiction-by-jurisdiction compliance strategy is that it is more expensive and time-consuming. Today there are 1,800+ tokens in existence, with thousands more estimated to launch in the coming years, so the work could become quite tedious to vet and approve/disprove such a large number of applications across 100+ jurisdictions.
In an attempt to remove bias and create efficiency, Coinbase announced three criteria for approving a digital asset application:
Is the digital asset legally compliant in this jurisdiction?
Is it technically secure and innovative?
Do our customers want it?
These three questions are relatively straightforward but they highlight an interesting point — Coinbase appears to be following the platform strategy that Facebook previously implemented so effectively.
In the crucial years of Facebook, the social network was able to build a two-sided marketplace between content creators and content consumers (and eventually between advertisers and users). This platform strategy paid off in the long run because it allowed Facebook to benefit from each business, game, ad, and content creator who built something on top of Facebook’s platform. For instance, instead of focusing on building each game themselves, Facebook gave game developers the tools necessary to create, launch, scale, and monetize their own games on Facebook. This strategy led to faster growth and more profitability.
Two-sided marketplaces scale easily, are highly profitable, and create significant network effects that make the marketplace defendable. If Coinbase is working towards a true platform strategy, it wouldn’t surprise me to see them scale their ~$1 billion in 2017 revenue to $10+ billion within 24-36 months. This estimation does not include the impact of including tokenized securities on the Coinbase platform in the future.
There are still many unanswered questions during this important time for the company though. Are they growing frustrated with US securities law and using this strategy to scale faster internationally? If they find success outside the US, would Coinbase ever move their headquarters out of North America? How do they ensure that US investors are not participating in non-compliant trading in other jurisdictions? And if the platform strategy resonates with digital asset teams, will Coinbase accelerate their move to support tokenized securities?
It is unlikely that we will have answers to these questions in the short term, but that is okay. We are watching one of the most talented teams in crypto move from startup phase to scaling phase. If Coinbase successfully pulls this off, they have a chance to become the biggest threat to the traditional financial system in decades.
If Wall Street won’t adopt digital assets, people will find a way to fire Wall Street. Remember, the larger they are, the harder they fall.
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Nothing in this email is intended to serve as financial advice. Do your own research.