Coinbase’s evolution: From IPO to thriving crypto ecosystem

• The recent episode of the “Bankless” podcast highlighted the steps Coinbase took towards the diversification of revenue.
• The fate of its case against the SEC would have significant ramifications for the crypto industry and beyond.

In a new episode of YouTube’s “Bankless” podcast, Jay, a software developer and independent researcher, and Michael Rinko, a research analyst at Deli Digital, discussed Coinbase’s [COIN] business evolution since its 2021 IPO.

They highlighted Coinbase’s journey from being an early entrant into the crypto space to being a titan in the sector.

A deep dive into Coinbase’s journey

The SEC initiated legal action against Coinbase in June 2023, accusing it of operating as an unregistered securities exchange and breaching U.S. securities laws. The lawsuit also raised concerns about Coinbase’s staking services.

Coinbase pushed back against the SEC’s accusations in its latest filing

Coinbase’s arguments remained unchanged: it asserted that the tokens listed on its platform are not securities and questioned the SEC’s jurisdiction in the enforcement action.

The SEC contended that certain cryptocurrencies listed on Coinbase qualified as securities under the Howey Test. However, Coinbase argued that there was no contractual commitment between token sellers and buyers.

This is a crucial element for an investment contract under the Howey Test.

Coinbase also invoked the Major Questions Doctrine, stating that crypto regulation should be a matter for Congress, not the SEC.

The early days

In 2021, Coinbase made headlines with its IPO, boasting an impressive valuation of nearly $100 billion. The crypto exchange has come a long way from its humble beginnings as an early entrant into the crypto world.

At the time of its IPO, Coinbase relied heavily on trading fees, which accounted for roughly 96-97% of its total revenue. This dependence on a single income source raised questions about the depth of its competitive moat.

By 2023, the company had shifted its revenue model, resulting in a healthier and more balanced business structure.

Circle collab and a shift in revenue streams

The evolution of Coinbase’s income sources included a pivotal partnership with Circle, the mastermind behind the USD Coin [USDC]. This collaboration evolved further as Coinbase transitioned from a consortium-based approach to a more direct partnership with Circle.

Coinbase acquired a more substantial equity stake in Circle, while the revenue-sharing model shifted to a simpler and more equitable 50/50 arrangement.

This strategic change in ownership structure allowed Coinbase to retain a vested interest in the performance and growth of USDC’s interest income.

Foray into Ethereum staking

Another crucial element of Coinbase’s journey was its foray into Ethereum [ETH] staking, marked by the creation of CBETH, a liability redeemable for Ether on the Coinbase platform. This move allowed Coinbase to tap into Ethereum’s burgeoning staking market.

Those who stake their Ether through Coinbase enjoy a 3.5% annual percentage yield (APY), with Coinbase claiming a 25% share of the yield. Looking ahead, Coinbase’s staking business has the potential for substantial growth, particularly among institutional investors.

Enter Base, the Layer 2 solution

One of the standout features of Coinbase’s recent journey is the introduction of Base, a Layer 2 solution with significant growth potential. Despite not having its native token, Base managed to attract users and developers organically.

This success can be attributed to its association with Coinbase, a user-friendly interface, and robust security measures.

Base offers more than just a technological solution. It has become a conduit to increase the usage of USDC, a stablecoin that contributes positively to Coinbase’s bottom line.

The connection to the Optimism stack adds another layer of appeal. This allows developers to deploy their applications on both Ethereum and Base seamlessly.

By diversifying its revenue streams, forming strategic partnerships, and delving into new ventures like Base, Coinbase has solidified its position as a major player in the ever-evolving world of digital assets.

The ball is in the SEC’s court to respond to Coinbase’s argument that the court should dismiss the lawsuit.