Close-up of the Coinbase

Coinbase slams FTX/Apple/FUD, Circle scraps public listing

Coinbase (NASDAQ: COIN) is slamming bankrupt rival digital asset exchange FTX’s accounting practices, Apple’s NFT policies and any other bad news, while Circle has mothballed its plan to go public.

This past weekend, Coinbase CEO Brian Armstrong offered his response to recent claims by Sam Bankman-Fried, the disgraced founder of the bankrupt FTX exchange and its affiliated market-maker Alameda Research, that the loss of roughly $8 billion in customer funds was largely down to accidental double-counting of deposits sent to Alameda that were meant for FTX.

SBF previously confirmed that FTX had difficulty establishing banking relationships so it relied on customers transferring funds to Alameda—whose ‘Research’ appendage was specifically intended to fend off bankers’ crypto concerns—then Alameda would forward these funds to FTX. SBF told Bloomberg that $8b of these funds were “misaccounted” because he’d been “real lazy about this mental math.”

In response, Armstrong tweeted that “I don’t care how messy your accounting is (or how rich you are) – you’re definitely going to notice if you find an extra $8B to spend. Even the most gullible person should not believe Sam’s claim that this was an accounting error. It’s stolen customer money used in his hedge fund, plain and simple.”

Coinbase has been leveraging FTX’s downfall to paint itself as the only exchange that Americans can trust, taking out a full-page ad in the New York Times trumpeting its U.S. headquarters and its “transparent accounting and audits that are required of a public company.”

Armstrong also retweeted a Twitter user asking OpenAI’s new ChatGPT chatbot to explain why Coinbase is “the most trusted crypto exchange.” ChatGPT’s response cited Coinbase’s “combination of regulation, security measures and user-friendly interface,” although it should be noted that ChatGPT also recently generated a convincing history of an utterly fictional war that allegedly took place in the 1950s between Ohio and Indiana that included Ohio nuking Indianapolis, so…

Coinbase investors appear less impressed with the company’s assertions, as its stock price has fallen nearly one-fifth since FTX filed for bankruptcy protection last month. The shares recently sank as low as $40 and, while they’ve since regained some of those losses, remain mired well below the $250+ range they enjoyed at this time last year (and fell another 3.5% on Monday).

It’s not just investors displaying a lack of enthusiasm. Since September, only one Coinbase insider—director Tobias Lütke—has seen the wisdom of buying additional shares in the company. Meanwhile, Armstrong has unloaded $2.25 million worth of his stock and CFO Alesia Haas has dumped nearly $5 million, all of this during the second half of November. 

A week ago, Bloomberg credit analyst David Havens called this year’s dramatic plunge in the value of Coinbase’s junk bonds the “canary in the coal mine” that should have alerted investors to the unfolding digital currency carnage. Havens also cited Coinbase’s surprise announcement this spring that its customers could be relegated to the status of unsecured creditors should the exchange file for bankruptcy.

Armstrong did some major damage control following that revelation, explaining the ‘unsecured creditor’ disclosure was added to conform to new accounting requirements required by the U.S. Securities and Exchange Commission (SEC). This explanation only partially allayed customers’ unease, a sentiment that has grown in the wake of FTX’s demise and the resulting contagion that threatens the solvency of more than one digital asset giant

Don’t mention the war

In late-November, Armstrong warned his followers not to believe any ‘FUD’ (fear, uncertainty and doubt) regarding his company, citing the fact that Coinbase publicly releases its financial accounts every three months. But Reggie Middleton, the self-styled ‘founder of DeFi’ (aka the so-called decentralized finance), isn’t buying it, claiming that Coinbase doesn’t necessarily “disclose all that stakeholders need to know.”

Middleton went on to cite the $350 million patent infringement lawsuit filed against Coinbase in September by Veritaseum Capital LLC on Middleton’s behalf. The gist of the suit is that Coinbase is making bank off a patent awarded to Middleton and Matthew Bogosian in December 2021 that covers nearly every activity on the Coinbase platform.

Middleton’s assertion is based on the fact that, as a public company, Coinbase has a legal obligation to alert investors to litigation that could ultimately cost investors dearly. But this isn’t the first time Coinbase has adopted a ‘head in the sand’ approach to litigation that threatens its ability to remain a going concern.

Apes, Apple and outflow

Middleton also suggested that Coinbase’s Q3 financial report shows an already creaky situation that has almost certainly become more acute in recent weeks. The sum of customer cash held on Coinbase fell by nearly one-half from the end of 2021 to September 30, 2022 and the exchange saw an additional $1.5 billion worth of BTC tokens withdrawn in just two days last month. All centralized exchanges are currently facing a palpable lack of market confidence, leading to the largest outflows from exchanges in years as consumers increasingly opt for self-custody.

The liquidity crunch may have contributed to Coinbase’s recent decision to ‘pause’ the release of the second and third parts of its inane Bored Ape Yacht Club NFT-themed animated series. The first episode of ‘The Degen Trilogy’ was released in July and was greeted with confusion, derision and concerns over how much of Coinbase’s dwindling cash reserves were wasted on this boondoggle, particularly at a time when the exchange was drastically trimming its workforce.

In yet more bad news, the exchange disabled NFT transfers via its Coinbase Wallet for iOS last week, claiming that Apple “blocked our last app release until we disabled the feature.” Coinbase accused Apple of seeking a 30% cut of the gas fees required to send an NFT on the Ethereum chain, insisting that the transaction be conducted via Apple’s In-App Purchase system.

Coinbase claimed “this is clearly not possible” and accused Apple of introducing “new policies to protect their profits at the expense of consumer investment in NFTs and developer innovation across the crypto ecosystem.” Apple claims that Coinbase has known of these new rules for over a month and failed to take any corrective action.

Whether Apple’s stance is ‘fair’ largely depends on whether you’re a bigger Apple fanboy than ‘crypto bro.’ However, as others quickly pointed out, blockchain transactions “can have multiple output values, one can be an Apple wallet.” As such, Coinbase’s ‘clearly not possible’ claim was based more on “not wanting to pay, not that it is impossible.”

Circle the wagons

The year seems determined to keep kicking Coinbase while it’s down. Its Q3 report detailed Coinbase’s growing dependence on the interest it generates from its reserves of the USDC stablecoin. USDC is issued by the Centre consortium, which comprises Coinbase and Circle. But Monday brought word that all is not well in Circle world.

In July 2021, Circle announced plans to go public on the New York Stock Exchange via a merger with Concord Acquisition Corp, a ‘special purpose acquisition company’ (SPAC). The deal originally valued Circle at $4.5 billion but this was later doubled to $9 billion after the overall digital asset market reached all-time highs later that year.

Well, call off the dogs, because Monday saw Circle and Concord announce the “mutual termination of their proposed business combination.” Concord was facing a December 10 deadline to proceed with the deal, and while an extension to January 31, 2023, was a possibility, Circle CEO Jeremy Allaire tweeted that “we did not complete SEC qualification in time.”

Another possibility is that neither firm was all that eager to subject itself to the new levels of scrutiny that the SEC vowed in March to begin applying to proposed public listings. This isn’t the digital asset market’s first SPAC-linked listing to abandon their public plans since that announcement.

Allaire used Monday’s announcement to fend off rumors that Concord might have been deterred by Circle’s financial outlook, saying Circle generated revenue of $274 million and $43 million in profits in Q3, with around $400 million remaining on its balance sheet. Allaire insisted that Circle was still “investing, building, growing and working with a large and thriving ecosystem of companies and projects.”

However, Circle took a hit in September when Binance, the largest exchange by trading volume, announced that it would henceforth forcibly convert customers’ USDC balances to its own BUSD stablecoin. Circle subsequently acknowledged that this decision accounted for $3 billion of the $8.3 billion in USDC redemptions it was required to process in Q3.

In fact, Circle cited Binance’s BUSD decision in last month’s filing with the SEC regarding its proposed Concord deal, saying “we do not expect that the financial forecasts we presented to Concord’s board of directors in February 2022 … will prove accurate.”

Allaire is reportedly determined to take Circle public, although he has no new timeline to offer. Given the relentlessly downward trajectory of Coinbase’s shares since its Nasdaq listing in spring of last year, Circle investors—at least, those who weren’t poised to cash out big time via this aborted NYSE listing—may feel like they dodged a bullet. This time.

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