The internal story of Coinbase's coinblog and Wall Street guards' power struggle

For many passionate crypts, half of 2018 looks like a lifetime ago.

In those heady days, the crypto market capitalization was $ 300 billion; the rumors swirled over those projecting arm banks like Goldman Sachs who were entering the market; and Intercontinental Exchange eagerly announced plans for Bakkt, lauded as the New York Stock Exchange of the crypt.

Since then, the market has been effectively halved, Goldman's exact plans for cryptography remain unclear and Bakkt's launch date is in the air.

Even things at Coinbase, once a retail exchange, are different. In 2018, the exchange had great ambitions to attract the wisest investors and the fastest Wall Street traders on its market.

But times have changed, and now the company, which recently got an $ 8 billion valuation, is returning to its roots, focusing on San Fran's Market Street on Wall Street. That is to say, the company is shifting customers' attention from Goldman Sachs and BlackRock to crypto-native funds such as Pantera and Polychain.

As a result, the company is re-adjusting the 2018 goal of building a first full-scale broker, according to people who know the situation. And there is a striking victim. Jonathan Kellner, the Wall Street veteran who led brokerage broker Instinet, is no longer joining the company, confirmed a Coinbase spokesperson.

As previously reported by The blockKellner was destined to participate in Coinbase this year to drive sales and institutional support, becoming one of the most important assemblies of Wall Street in the crypt. He had to take advantage of his experience on Wall Street to integrate Keystone, the brokerage that Coinbase had announced it was acquiring in June 2018, in the broader business. This would include the creation of the aforementioned prime broker unit, called Coinbase Prime, and counter trading.

Kellner has not responded to a request for comment. Dan Romero, who actually took his place in December to deal with Coinbase's institutional business, said: "Jonathan is an outstanding leader, but it was the right decision for us to focus on this area of ​​the market", referring to Business far away from Wall Road.

"Crypto is a rapidly evolving sector and market conditions can change quite rapidly, and we are focusing on the area of ​​the cryptographic fund of the ecosystem," he added.

A spokesman for Coinbase declined to comment on the specific terms of Kellner's withdrawal. Previously, Romero was vice president of the international business of Coinbase.

How did we get here?

For some market observers, Coinbase's withdrawal from Kellner and Wall Street could be a surprise.

In May 2018, Adam White – who led Coinbase's institutional business for most of 2018 – said Bloomberg how Coinbase was trying to take advantage of a "wave of institutional capital waiting at the margins". But, White said, "before it moves into space, we must have the fundamental components, the infrastructure, the institutions are used to it."

Then, in September, White told CoinDesk the company was actively hiring from Wall Street to "bridge the gap between financial services and technology".

"We need to pull off some of the best and brightest minds that have worked throughout their careers in other types of traditional finance companies," he said.

As part of these efforts, the company hired Christine Sandler from Barclays to serve as co-director of institutional sales, as well as Eric Scro of the New York Stock Exchange. Now he is in charge of investor relations. Coinbase also presented Oputa Ezediaro, an 11-year-old veteran of JPMorgan, to cover institutional sales.

In recent months, however, White's "doctrine" has been met with opposition from the executives of Coinbase, according to a person familiar with the situation. According to someone who has a direct knowledge of the institutional business of Coinbase, at least some of the exchange thought it was futile to focus on Wall Street before given the background of the bear market.

This is due to the fact that white shoe investment companies require more from a prime broker than a cryptographic fund, including expensive handles and a wider range of services, such as derivatives, hedging instruments and margin. .

Consider a hedge fund like Point72, for example. This company would probably have numerous points of contact, including the person responsible for the transfer of funds, the execution of commercial operations, etc., with whom Coinbase should have committed itself, while a company like Polychain would have a point access, or a person, who worked through those verticals.

Crypto hedge funds know how to navigate this market without the same complex requirements as Wall Street, said Richard Johnson, an analyst at Greenwich Associates' financial market consulting firm.

"For a person like Jonathan Kellner, it would be a lot of work to look for that needle in the haystack company that is willing to start investing in crypts at this stage," said Johnson, who was not surprised by the news. "The activity of the last six months has seen a little bit of an arrest: people keep on investing but I think that focusing on the cryptographic side makes sense for them."

"Almost 20% of the hedge funds launched in 2018 were crypto-first," said Romero. "When we think about where cryptography is today, these funds are fundamental and they will make the investments that will lay the groundwork for the next bullish cycle".

However, it is worth noting that the encrypted funds have been under pressure. A number of bitcoin-native firms have seen their holdings tank in the bear market or legal actions have been initiated by their limited partners, while US regulators have sued those who invested in the initial coin markets.

"The current bear market will hurt in no time at all for both encrypted funds and ICO projects", Anthony Pompliano, head of the encryption investor Morgan Creek Digital, wrote in a November letter to fans and customers. "Pain is something that many of these entrepreneurs and fund managers have never had to face."

White declined to comment for this piece. He left the company in 2018 to join the cryptocurrency exchange Bakkt, which is preparing to launch bitcoin futures in 2019, the company said.

But what about institutional money?

Coinbase does not doubt that institutional money is out there. Nor other market participants, including Edward Woodford, CEO of Crypto Exchange SeedCX, who said in a statement to The block that institutional interest is 100% and growing.

"There have been a series of high profile ads, but institutions really enter the space so material is more under the radar," said Woodford. "Even the demands of the institutions have changed when prices and returns have normalized".

In fact, Coinbase still has a long-term interest in working with Wall Street, Romero said, although "the focus on major financial brands has cooled slightly" for now, specifically talking about the hunt for talent. ;company. He insisted that the shift would not have "any substantial difference" in the services of Coinbase. For example, Coinbase is not reducing its initiatives in Chicago to build a brand new Wall Street level matching engine. Furthermore, he is not underestimating his custody activity. It will also continue to grow its institutional business, even if the company wants to hire a more diverse team to meet its new ambitions, according to Romero.

The plan makes sense for Josh Olszewicz, a trader at Techemy Capital, who said he believes the move is more in line with the roots of Coinbase.

"Most of the company is not focused on finance," he said. "They have a fintech-ish background but they are starting to dilute the quality and the brand going in five hundred different directions".

As for Kellner's exit, she was greeted with skepticism by some market observers.

"This is a big loss for Coinbase," said David Weisberger, CEO of the cryptographic data provider CoinRoutes. "Jonathan would intuitively understand the conflicts of interest arising from the execution of an activity that covers clearing, custody, matching and trading services," he said referring to Coinbase's wide-ranging business model.

However, Weisberger has not in the least ignored the new strategy, saying "it's a perfectly nice thing to do". But he warned that if they abandon certain principles of Wall Street, then rivals aimed at the institution, including Bakkt, ErisX or Woodford & # 39; s SeedCX, could eat their lunch

"The problem they have, and it's the only big difference between Silicon Valley and Wall Street, is that Wall Street has learned in the financial markets that there's a need for a cooperative environment," Weisberger said. "Competing at all costs and not giving a quarter to the competition to become Facebook or Uber of this space is not a winning strategy."

"Even the crypts hedge funds want to trade in markets that they believe are right, with a reasonable opportunity to get the best execution," added Weisberger. "This never means trading exclusively on an exchange".

Binance

However, it may not be similar to Bakkt about Coinbase, but rather to the cryptic giant Binance, which dominates the peer-to-peer encryption, said Olszewicz.

"Binance is light years ahead of Coinbase on many fronts," he said. Binance is known for listing 150 tokens and dominated trading in Asia with a turnover in the last month of $ 19 billion, compared to $ 3.2 billion in Coinbase.

Romero said crypto-native funds are looking at different assets compared to traditional Wall Street businesses. "The most avant-garde activities are evaluating stakeout, while traditional financial companies focus mainly on bitcoin …"

In addition to considering a wider range of coins, Coinbase is looking to expand its reach, Romero said. "You need deep liquidity, easy access inside and out, and I think again that it does not change too much for the encrypted funds.There is a lot of trading volume outside the United States, so we want to expand our services to the international market and take a share of the market in the EU and Asia a little ".

The real question for 2019, then, is if these cryptographic companies, once high, can beat the bear before it's too late.