TL; DR– Coinbase is setting up to Trojan Horse traditional brokerages to become a top-tier finserv company
The last few months and weeks in the crypto world have been intense to say the least. Words like “bubble” and “mania” are used all the time. Over the US Thanksgiving holiday, Coinbase-the leading ‘on-ramp’ to the crypto-world, reportedly opened over 100,000 accounts. Recent reports suggest that Coinbase now has more accounts than traditional brokerage Schwab.
The company is, however, going through some growth challenges. Most notably, the governance issues around the supposed insider trading of Bitcoin Cash, but also the frequent outages making the site unavailable for long periods of time and frustrating customers. It’s the “fail whale’ period of Coinbase.
What’s lost amid all of this excitement, however, is that Coinbase is quietly and rapidly executing a classic “Trojan Horse” strategy that could ultimately end up with it putting traditional brokerages out of business.
It’s a bold statement, I realize and, at the risk of hyperbole, let me explain why.
Step 1: Coinbase becomes the de-facto location for natively crypto-assets
Honestly, they are pretty much there already for mainstream US consumers, at least. Coinbase announced Bitcoin Cash support a few weeks ago and they are clearly headed down the path of supporting ever more and more crypto-assets. No one should be surprised in 2018 when more coins get listed on Coinbase. They are riding the wave, basically printing money, by charging high fees (there aren’t really any competitors) for every transaction to new crypto-customers.
As the excitement continues around crypto (by now, I think we can all agree that it is here to stay), more and more people will start using Coinbase to experiment and “put their toe in the water” with crypto-assets.
In marketing terms, we would say they have “awareness” among their target customers.
Step 2: Coinbase becomes a trusted brand in the mind of the consumer
As mainstream usage grows and cryptoassets continues to come out of the shadows, Coinbase (assuming they get their reliability and governance issues addressed) becomes synonymous with crypto. It’s like PayPal for digital money.
In marketing terms, we would call this “perception.” They aren’t there yet. As mentioned, the Coinbase site goes down regularly enough (the equivalent of Twitter’s ‘fail whale’), the sign up and KYC/AML process is still time-consuming and cumbersome, and the whole tax reporting issue is still up in the air, which makes them vulnerable to regulators.
But, none of this is insurmountable.
Step 3: Leverage crypto custody expertise to push into traditional assets
Once they get to a solid point of reliability Coinbase will be trusted by millions of customers who rely on them for their crypto-asset custody expertise. This is where things will get interesting because they will intersect perfectly with another macro-trend: the “blockchain-ification” of traditional assets.
All the while that Coinbase is building up its customer base, the world of traditional assets (stocks, bonds, etc.) will be going through their own ‘blockchain revolution.” The centralized clearing houses that currently manage all of the information about shares in AAPL, GOOG, AMZN, FB, etc. are going to be replaced by distributed ledgers. Most people in financial services can see this. It’s precisely why stock exchanges, DTCC and everyone else is going so hard, so fast into blockchain.
In this blockchain world of the future, every asset is represented by a digital token on a blockchain. That token has a corresponding private key which signifies ownership. The brokerages of the future are the ones that will have expertise in private key custodianship and all of the technological and security infrastructure that goes along with it.
So, take a wild guess now…which company now has a 5 year head start on the learning, know-how, and practice in managing private keys?
When the stocks of AAPL and FB become tokens, the brokerage of the future will need to prove they can effectively manage the private keys on behalf of their clients.
This is when Coinbase will begin to eat away at the business of traditional brokerages. Their back-end and security will be more blockchain-ready and battle tested, so they will be able to provide all of the services that traditional brokerages do, but do it cheaper and with greater reliability.
Essentially, Coinbase will say “you already trust us to hold your Bitcoin, Ether, Litecoin, Zcash, Steem, etc. with us. Now you can also use some of those gains to move seamlessly in and out of traditional companies and other investment vehicles right within Coinbase. After all, it’s all about managing cryptoassets on your behalf and we’ve been doing that better and longer than anyone else on the planet. So, do a BTC-AAPL trade right within our platform.”
As if that’s not enough, Coinbase will also push down into mobile payments, using their Toshi wallet app (or some future version of it) to integrate with the brokerage account. So, customers will eventually have a replacement for TD Ameritrade, Fidelity, E*Trade on one side and a replacement for PayPal, Venmo on the other side.
Brokerages Inviting the Coinbase Fox Into the Henhouse
Ironically enough, we may even see traditional brokerages hasten their own demise by partnering with the company that is going to compete with them, in the well-intentioned name of customer service.
Much like Borders and others allowed Amazon to run their back-end infrastructure at the beginning of the Internet era, Fidelity, for example, now allows customers to see their Coinbase holdings via a Fidelity dashboard. It feels customer-centric (and it is), but it actually raises the profile of Coinbase among Fidelity customers, increasing the likelihood that they will start moving more assets into Coinbase, building the brand perception and hastening the arrival of the day when Coinbase can effectively compete with traditional brokerages.
The Challenge for Traditional Brokerages Before the Ultimate Disruption
The brokerages are in a race against time. For them, they need to acquire the innovation and knowledge associated with managing crypto-assets before Coinbase becomes a top-tier financial services brand.
There are a few cards they could play including partnering with some high-potential coins that are not yet listed on Coinbase like Zcash (disclosure: I’m an advisor), which Fortune recently identified as a potentially “better Bitcoin” and/or being the outlet for direct investment into regulated Initial Coin Offerings. The investment bankers who did IPOs get cut out by the retail brokers doing ICOs.
There’s a saying that “6 months in crypto is like 5 years in the ‘normal’ world.” Some brokerages are faster and more innovative than others, but we all know that even the most agile enterprises often can’t move as quickly as fast-moving start-ups.
The comparative advantages that a traditional brokerages has over Coinbase (security experience, scale, regulatory relationships, customers, brand recognition, and balance sheet) are not going to be there forever and the size of the advantage will shrink at crypto-speed.