ETF Speculation and Regulatory Battles: Is Coinbase the Savior or the Villain of Crypto?

The crypto markets have been placid lately, with notoriously volatile key asset bitcoin notably lacking in volatility, as it reaches something of an impasse at just below 30K. Seasoned observers are hinting that such tightly constrained passivity usually precedes a big move, although there’s a marked lack of agreement as to which direction a lengthy BTC candle might stretch, should it appear.

Don’t be fooled by the calm though, as currently lackluster chart action does not reflect the potentially momentous shifts taking place in the crypto industry as a whole, which revolve around institutional interest in BTC and ETH (and then perhaps, everything else too), and within which developments at Coinbase are important.

Bond Buyback

Following on from a Q2 earnings report that came out, in parts, better than expected and showing reduced expenses and higher than estimated revenue, Coinbase has announced plans to buy back some of its corporate bonds. Up to $150 million of senior notes may be repurchased, from a total of $1 billion bonds issued to mature in 2031, with the offer to buy expiring on September 1st.

Coinbase is offering $615 per $1000 principal for the 3.625% junk bonds, or $645 before August 18th, with the price of the bonds currently standing at around 64 cents on the dollar.

This move looks like a case of Coinbase acquiring its own debt cheaply at a discount to par, and may reflect a belief that with potential crypto catalysts lined up, spot BTC ETFs are waiting for approval and the Bitcoin halving is next year, the company’s earnings outlook is becoming more positive.

Coinbase as ETF Partner

When it comes to those spot BTC ETFs, there are multiple applications in process with the US Securities and Exchange Commission (SEC), and August 15th is an important date, as this is when ARK Invest is due a decision on its application, although the common expectation is that the SEC will take the option to delay its decision.

Another important factor is the judge’s decision in Grayscale’s legal case against the SEC, which is expected sometime in Q3. The asset manager, Grayscale is appealing against the SEC preventing it from converting its Grayscale Bitcoin Trust into a spot BTC ETF, and a win for Grayscale would significantly tip the balance in favor of approval for all spot BTC ETFs.

Meanwhile, Mike Novogratz, CEO of another ETF contender, Galaxy Digital, has been stoking expectations with suggestions made during an earnings call, about the possibility of incoming positive decisions.

BREAKING‼️ BlackRock insiders say spot #Bitcoin ETF approval expected in "four to six months" - Mike Novogratz pic.twitter.com/gXI8bE5GV9

— Bitcoin Archive (@BTC_Archive) August 8, 2023

This is all relevant to Coinbase not simply because spot BTC ETFs would be overall positive for crypto in general, but because Coinbase is the custodial and surveillance-sharing partner for BlackRock and several other spot BTC ETF applicants.

Base Onchain Summer

Coinbase is this week enjoying a celebratory mood around the public launch of Base, its new Ethereum Layer 2 network. Although it was already active and navigable by builders and early users, the mainnet public bridge officially launched on August 9th, and an opening event called Onchain Summer is taking place throughout August.

Today is an important day for accelerating a global, decentralized financial system and increasing economic freedom in the world:@BuildOnBase is now live and available for everyone https://t.co/LXa6qdFzhU

— Brian Armstrong 🛡️ (@brian_armstrong) August 9, 2023

This involves NFT mints and app launches, and some major brands are involved, including Coca-Cola, Atari, and OpenSea. Base is built on the Optimism stack, and can, potentially, address the issue of providing easy accessibility to blockchain-based app development, much as Coinbase the exchange addressed the issue of relatively easy on-ramping to crypto assets.

That said, prior to its official public launch, Base attracted negative publicity through what looked like a pump-and-dump style meme coin: a token called Bald which saw enormous gains over a couple of days before plummeting in value.

However, this in itself reflects the fact that Base is non-proprietary and decentralized, and does not operate as a walled-garden environment. What’s more, the network does not have, or plan to release, its own native token. This is rare in crypto, and (without tokenomics and price speculation to divert attention) places emphasis on the raw utility of the network.

Facing down the SEC

It shouldn’t be forgotten that everything occurring at Coinbase is happening against the backdrop of an ongoing legal wrangle with the SEC. While this creates uncertainty and the potential for future instability, it’s also the case that Coinbase appears buoyed by the July ruling in the case between Ripple Labs and the SEC, in which it was emphasized that the XRP token should not inherently be regarded as a security.

The case between Coinbase and the SEC also revolves around allegations of dealing in unregistered securities, but Coinbase has emphatically rejected this claim, and this month called for the case to be dismissed, stating with reference to perceived SEC overreach that “the subject matter falls outside the agency’s delegated authority.”

Coinbase’s position is that if the tokens on its platform are not investment contracts, then the SEC is in no position to take a regulatory interest in the company’s activities.

Ultimately, these are arguments that reach the core of what crypto actually is, and what purposes it serves. And, as the coming months play out, including legal decisions and ETF considerations, it appears that we’ll soon have a clearer picture of the roles that crypto can play, in finance, on the web, and wherever else its reach expands.