Two titans of U.S. cryptocurrency trading are in a race to build the nation’s first regulated venues for tokens deemed to be securities, potentially appeasing watchdogs threatening to rein in the multibillion-dollar market.
Coinbase Inc., one of the largest cryptocurrency exchanges, said Wednesday that it’s buying a trio of firms including a broker-dealer registered with the Financial Industry Regulatory Authority. If U.S. regulators approve, Coinbase will use licenses its obtains to offer customers blockchain-based securities. It will also be subject to more federal oversight.
The announcement came hours after Bloomberg reported that Circle Internet Financial Ltd., one of the world’s most valuable cryptocurrency platforms, intends to pursue registration as a brokerage and trading venue with the U.S. Securities and Exchange Commission so it can help investors buy and sell tokens deemed to be securities. Circle also plans to seek a federal banking license to provide more services to customers.
Regulated trading platforms could eventually handle billions of dollars in tokens sold by companies in initial coin offerings. Despite a crackdown by the U.S., China and other countries, companies have already raised more than $9 billion through ICOs in 2018, more than double what they did all of last year, according to market tracker CoinSchedule. The SEC has said most of the coins are securities, which means issuers must register and comply with federal laws — as do platforms that handle trading.
Coinbase agreed to buy a firm that owns Cardiff, California-based broker-dealer Keystone Capital Corp., Venovate Marketplace, Inc., and Digital Wealth LLC. Acquiring that trio would give the exchange licenses to operate as a broker dealer, an alternative trading system and a registered investment adviser. Alternative trading systems operate outside traditional public stock exchanges.
“This is an important moment for the crypto ecosystem, and yet another indication of the maturation of the crypto economy,” Coinbase said in a statement that didn’t include terms. The moves “will set Coinbase on a path to offer future services that include crypto securities trading, margin and over-the-counter trading.”
Coinbase currently lets users buy and sell Bitcoin, Bitcoin Cash, Ether and Litecoin. Customers have urged the company to add assets, but it has held off amid concerns that U.S. regulators could deem more digital tokens to be securities. If approved, the deal could alleviate those worries and allow Coinbase to significantly expand the number of coins it lets customers trade.
The transaction would put Coinbase under the oversight of the SEC and Finra. Until now, it has mostly been regulated by a patchwork of state authorities. The SEC has said platforms handling digital assets deemed to be securities must register or qualify for an exemption.
Institutional investors prefer working with firms that are regulated, Adam White, general manager of Coinbase’s institutional arm, said in an interview. He said it’s hard to predict how soon authorities might approve the move.
“This is not only a good thing for our company but a good thing for our industry,” he said. “We’re going to move at pace at which regulators are comfortable.”
Ultimately, Coinbase said, it envisions a future in which regulators may let crypto platforms turn existing securities into tokens. That would enable around-the-clock trading all week.