Coinbase logo displayed on smartphone screen with Bitcoin BTC on stack of cryptocurrencies

Coinbase’s overseas expansion seeks more swaps, fewer cops

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Coinbase (NASDAQ: COIN) is fed up with America’s refusal to let the digital asset exchange break the law with impunity, so it’s heading overseas to join its criminal rivals.

On Wednesday, Coinbase provided an update on its previously stated plan to “go broad and deep,” aka establish bases of operation in jurisdictions that will let it do what American authorities won’t let it do at home.

Coinbase paints its international expansion push as furthering its “mission of increasing economic freedom for every individual and business.” However, its primary aim appears to be engaging in activities that U.S. regulators like the Securities and Exchange Commission (SEC) insist are illegal, like offering unregistered securities to the public.

For instance, Coinbase said Thursday that it had received a Class F license under the Digital Asset Business Act from the Bermuda Monetary AuthorityFortune subsequently reported that Coinbase will launch a Bermuda-based derivatives exchange “as soon as next week.” The new platform will reportedly include perpetual swaps among its offerings.

Swaps and other ‘exotic’ derivative products have long been fixtures on sketchy exchanges such as Binance and FTX (pre-bankruptcy). Both exchanges offered customers leveraged bets over and above 100x until regulators started asking questions. Binance founder Changpeng ‘CZ’ Zhao said his exchange reduced its leverage primarily because he “didn’t want to make this a thingy.”

Bermuda’s past and present digital asset licensees include Bittrex (which recently got its own SEC charges), bankrupt digital lender BlockFi, and Coinbase’s USDC partner, Circle. Years ago, Binance signed a memorandum of understanding with Bermuda’s government to invest $15 million and create 40 local jobs, but like many Binance initiatives (particularly those that involve acquiring licenses), nothing ever came of it.

We USDC what you did there

Coinbase has been desperately seeking new ways to generate revenue as the lingering effects of 2022’s ‘crypto winter’ continue to deter retail traders—from whom Coinbase earns significantly greater commissions than institutional traders—from dipping back into the fetid crypto waters. Coinbase currently relies heavily on interest income generated from custodying customers’ USDC stablecoins (issued by Circle via the Centre consortium, in which Coinbase is a partner).

Worse, that USDC custody revenue—which is based on investing the cash reserves backing issued USDC in U.S. Treasury bills at much higher rates than the 1.5% Coinbase is paying its customers—is falling. It started falling a little more slowly on Thursday after the MakerDAO community voted to store an additional $500 million worth of its USDC with Coinbase, albeit at a higher 2.6% rate.

However, this new arrangement is valid for a maximum term of 364 days. MakerDAO clarified this was “an interim solution that will be terminated once the self-custodial solution is ready.” Coinbase also can’t “lend, pledge, hypothecate or rehypothecate” the custodied assets and has to permit withdrawals of the whole lot within 24 hours of such a request.

Following last month’s collapse of crypto-friendly banks and stablecoin wars with Binance, Circle was forced to sell plenty of T-bills to fulfill around $12 billion worth of USDC redemptions. Some of these USDC redemptions undoubtedly came from customers of Coinbase’s ‘rewards’ program. (Not a security, dammit!) Since that selloff began in mid-March, the impact won’t appear that severe when Coinbase releases its Q1 results on May 4. But the Q2 numbers? Well, as the movie says, there will be blood.

So…you can understand Coinbase’s eagerness to jump into the sketchy derivatives pool with both feet. But Coinbase will find it difficult to steal market share from its established international rivals unless CEO Brian Armstrong is willing to display the same blatant disregard for the law that CZ does.

Love it or leave it

Earlier this week, Armstrong went on CNBC to discuss his company’s ongoing issues with the SEC, which issued a Wells notice last month indicating an imminent enforcement action against Coinbase for, among other things, offering tokens the SEC considers to be unregistered securities.

Addressing the “unfortunate” SEC warning, Armstrong said that while “we never seek litigation,” his company is prepared to go to court “to get the clarity we need and create the case law.” Armstrong slams the SEC for having “completely abdicated responsibility” in establishing “a clear rulebook” for firms like his.

But as SEC chairman Gary Gensler has repeatedly observed—and did so again this week in his appearance before the House of Representatives’ Financial Services Committee—“nothing about the crypto markets is incompatible with the securities laws [already on the books] … Not liking the message isn’t the same thing as not receiving it.”

Armstrong was in the U.K. this week for London’s Fintech Week confab, pushing local authorities to compel banks to handle fiat transactions on behalf of exchanges like Coinbase. Armstrong also let it slip that, based on his view that the U.S. is now crypto-hostile, his company was mulling options “including relocating or whatever is necessary.”

Armstrong undercut his threat somewhat by noting that a relocation would depend on “if a number of years go by where we don’t see regulatory clarity emerge in the U.S.” But Armstrong told CNBC that “we have a budget and we have to decide where to allocate it. And so that means what products we want to build, but it also means what countries we want to invest it in any given year.”

Armstrong’s tough talk ignores his company’s utter reliance on the U.S. market—its 2022 annual report showed 84% of revenue came from U.S. customers. And if he thinks acting recklessly abroad while professing his love of regulations at home will win him any more fans with U.S. authorities, he’s in for one rude awakening.

If Coinbase’s international offshoots offer products that American regulators frown upon, it will only increase their scrutiny of Coinbase’s operations. And if Armstrong thinks he’s got problems now, wait until some SEC or Department of Justice agent manages to sign up and trade sketchy derivatives on Coinbase Bermuda from a U.S. IP address.

Compliance theater

Coinbase hasn’t completely given up on ‘Murica, as Barrons reported Thursday that the exchange is joining forces with crypto hedge funders a16z to throw a fundraiser for blockchain enthusiast Sen. Cynthia Lummis (R-WY) on April 28. ‘Suggested contributions’ range from $1,000-$3,000 per person.

Armstrong also spent Thursday in Washington, DC, “meeting with members of congress.” (Question: why do photos always make it look like Armstrong is carrying two invisible kettlebells?)

The ‘innovators will flee and America will flounder’ mantra recently adopted by Armstrong and his allies was openly mocked by Rep. Brad Sherman (D-CA) at Wednesday’s House hearing on stablecoins. Noting crypto’s predominant use case of facilitating crime, Sherman declared: “Peru’s ahead of us in cocaine cultivation. China’s ahead of us in organ harvesting. It’s time for America to catch up!”

Coinbase, Binance, and other exchanges love to publicly profess their fondness for regulation, but what they’re really after is a hands-off approach that allows them to ignore rules and maximize profit. All too often, when obliged to abide by the rules of the road, Coinbase has opted instead to take its ball and go home.

Lawyer up

Coinbase’s Wells Notice news didn’t help the company’s stock price, which closed Thursday down 6% to $60.50. That’s an improvement from where it closed out 2022, but still less than one-fifth of its peak shortly after Coinbase’s 2021 direct listing on the Nasdaq. Meanwhile, Armstrong and other senior managers continue to dump millions’ worth of their personal holdings, with Armstrong alone having sold nearly $22 million since the year began.

But if you’re among the poor sods who have lost over $50,000 investing in Coinbase stock or options based on Armstrong & Co’s antics, the securities law firm of Faruqi & Faruqi LLP would like to hear from you regarding a potential class action against the exchange.

Coinbase had faced the threat of similar suits before, including another from Faruqi after Coinbase abruptly announced plans to raise $1.25 billion in additional capital just one month following its Nasdaq debut. It remains to be seen how many investors with losses over $50,000 will respond to Faruqi’s current appeal.

Coinbase tends to downplay legal issues it would prefer investors don’t focus on, such as the ‘material risks’ section of its prospectus, which included “the identification of Satoshi Nakamoto … or the transfer of Satoshi’s Bitcoins.” Small wonder, then, that Coinbase is a member of the Crypto Open Patent Alliance (COPA), a group set up to undermine Dr. Craig Wright’s efforts to be acknowledged as Satoshi.

Coinbase is also keen to downplay Wright’s suit against it and rival exchange Kraken for ‘passing off’ the corrupted BTC token as the original Bitcoin. Guess once you’ve started down the road of passing off your operations as legally compliant and regulatory-friendly, it must be hard to stop.

Follow CoinGeek’s Crypto Crime Cartel series, which delves into the stream of groups—from BitMEX to Binance,, Blockstream, ShapeShift, Coinbase, Ripple,
Ethereum, FTX and Tether—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.

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