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MarketsJul 20, 2018

Coinbase is one of the largest individual investors in the United States to buy cryptocurrencies such as Bitcoin and Ethereum. The San Francisco-based company employs a group of former Wall Street executives. These executives are working to address a big pain point in the cryptocurrency market, namely the lack of a comprehensive primary broker.

Coinbase attracts $20 billion in hedge funds to enter, and experts worry – Coinbase吸引200亿美元对冲基金入场,而专家对此表示担忧_巴比特_服务于区块链创新者

$20 Billion for Coinbase

On Wall Street, the middleman is called a broker. Brokers are between institutions and investors, such as hedge funds or fund managers, as well as exchanges and other trading venues.

In the field of cryptocurrency, it is difficult to operate like the traditional financial sector because the threshold for entry is too high.

However, Coinbase is working hard to overcome these obstacles.

Earlier this year, the company launched a prime brokerage business, Coinbase Prime, as part of Coinbase’s business across asset management, venture capital investments and retail transactions. Coinbase Prime, a software service launched by Coinbase to provide trading cryptocurrency tools for organizations. Coinbase intends to provide loan and margin financing products to qualified customers, as well as high-contact and low-contact execution services similar to over-the-counter (OTC) and algorithmic orders.

Previously, the company had explained this business, Coinbase will provide some services of traditional main brokers, including hosting services for large institutional clients.

However, according to people familiar with the matter, the latest situation is that Coinbase is preparing to provide margin financing as early as the end of this year.

People familiar with the matter said that this would allow institutional investors to borrow funds to trade, which would help to amplify returns or use short positions. In the future, Coinbase’s brokerage business may help customers find the best place to trade, even if it means sending it to a competitor’s trading institution.

Greenwich Associates consultant Richard Johnson said:

Coinbase is looking to implement many different initiatives that make sense. These initiatives have made Coinbase closer or more similar to traditional finance, including hosting, financing, loans, securities-based tokens, and institutional portals. They have enough resources to fund, and certainly can achieve some success.

People familiar with the matter said the company had already received $20 billion in hedge funds through its main brokerage business, but the insider declined to give details of the fund.

The Coinbase team is working to get other large hedge funds into their trading platforms.

At the same time, Coinbase is actively building its own team in New York, Chicago and London. In addition, it is worth noting that the company hired Christine Sandler, a former member of the New York Stock Exchange, to take charge of its institutional sales team and hired Hunter Merghart from Barclays as a trader.

The main brokerage business in the stock market began in the early 1990s, and at about the same time, the hedge fund sector began to take off. According to research by the banking research firm Coalition, in the first quarter of 2018, the main brokerage business brought $4.9 billion to 12 major banks, the highest level in three years.

Colleen Sullivan, head of CMT Digital, a cryptocurrency venture capital firm, said the lack of end-to-end prime brokers is one of the big problems that hinders large Wall Street firms from entering the cryptocurrency sector.

Every exchange must self-finance, which makes Wall Street risk above average.

Colleen Sullivan believes that the lack of primary brokerage services in the cryptocurrency sector is CMT Digital’s “maximum pain point.”

She said:

If there is no main broker, the companies involved in the transaction will be directly affected by the events suffered by the exchange, such as hacking, regulatory issues, operational issues, technical issues and many other issues. All of this can result in a loss of cash and digital currency for the companies involved in the transaction.

The decision of Coinbase to enter the brokerage business is a bit ironic. Bitcoin, the largest digital currency on the market, was established after the financial crisis. It is another point-to-point financial system on Wall Street that would make middlemen useless.

Coinbase’s entry into the agency brokerage business has also led some market observers to see some dangerous signals. David Weisberger, market structure expert and CEO of CoinRoutes, said: “There are many potential conflicts of interest in this vertical integration model.”

According to Weisberger, the SEC has been working to set strict barriers between different businesses on Wall Street due to various conflicts that may arise. Weisberger said he was concerned about the disclosure of confidential trading information, such as who is trading and what funds are on their accounts. In the past, institutional exchanges have taken corresponding measures to resolve potential conflicts of interest. The New York Stock Exchange Group sold its brokerage subsidiary Wave Securities. In 2005, the NYSE Group sold Wave Securities when it acquired Arca.

Insiders said that there are similarities between the two situations, and the cryptocurrency market is still in its infancy and may take some time.

Kyle Tuskey, a former Wave technologist and chief operating officer of financial technology company Deep Systems, said:

Now, with so many mature players, it may be a good thing for Coinbase because it fills a bigger gap.

Since Coinbase is not a registered stock exchange, it is unclear whether the SEC has the right to intervene and create a firewall, or simply ban the business of Coinbase operations. The reporter was unable to contact the SEC spokesperson or other staff to comment on Coinbase’s ambitions. However, Robert Hockett, a law professor at Cornell University, said:

The SEC is likely to be interested in Coinbase’s intention to provide such a primary brokerage service. But this is a conflict because Coinbase is also trading in digital currencies.

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