Coinbase is building $ 4 billion cash stack to deal with tighter regulation and crypto risks

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Coinbase Global Inc. in its first months as a state-owned company built up $ 4 billion in cash stock as it enjoys a trading frenzy and prepares for further regulatory scrutiny.

Coinbase saved money in part to deal with a host of business risks in the crypto industry, according to CFO Alesia Haas. The company is testing its balance sheet to make sure it has sufficient funds to prepare for a stricter regulatory regime, possible cyber attacks or potential trade declines, according to Ms Haas. It also maintains additional cash as insurance against risks it has yet to identify, she said.

We want to make sure that we maintain those cash reserves so that we can continue to invest and develop our products and services in case we enter a crypto winter, Ms. Haas said.

A recent surge in trading, including among individual investors, has boosted Coinbases’ profits. The company earned $ 1.61 billion in the second quarter, up from $ 32 million a year earlier. Users of monthly retail transactions increased about six-fold over the same period, to reach 8.8 million. The company has approximately 9,000 institutional clients.

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The good results also bolstered Coinbases’ cash balance, which stood at $ 4.36 billion as of June 30, about four times more than at the end of 2020. The company went public in April via a direct listing, a type of public offering where investors can sell shares but companies do not raise capital. The following month, Coinbase raised $ 1.4 billion by selling debt.

Securities and Exchange Commission Chairman Gary Gensler said this month that he intends to regulate cryptocurrency trading and lending platforms as much as possible. Coinbase pays close attention to public statements by Mr Gensler, Ms Haas said. We believe regulation can be a catalyst, not a burden, she said.

Coinbase could also face new tax reporting requirements under the roughly $ 1,000 billion infrastructure bill to Congress. The bill would require crypto exchanges to report clients ‘trading earnings to the Internal Revenue Service, in the same way that stock brokers report their clients’ trades. Coinbase has many systems in place to comply with the measure, according to Ms Haas, who said she expects the costs of compliance to be intangible.

WSJ explains how Coinbase is trying to distance itself from bitcoin risks to be successful on Wall Street. Photographic illustration: George Downs

Coinbase generated $ 2.23 billion in revenue in the quarter ended June 30, up from $ 186 million in the previous year period. About 95% of Coinbases’ revenue comes from trading fees, with the remainder coming from subscriptions and services, including custodial fees for storing institutional client assets, according to Ms Haas.

Price volatility during the quarter was a boon to the company’s business operations, according to Ms. Haas. The price of bitcoin plunged to around $ 30,000 in late June, from about double that amount in April, according to CoinDesk, a digital currency information company. Bitcoin was trading at around $ 45,000 on Tuesday night, according to CoinDesk.

The addition of new crypto assets to the Coinbases trading platform, like the addition of Dogecoin in June, also boosted revenue, Ms. Haas said.

As Coinbase adds new users, the company will primarily focus on investing in new products and services in areas such as consumer financial services, said Moshe Katri, analyst at Wedbush Securities Inc. The company’s recent results show that it can generate cash from its operations, Mr. Katri said. It is literally an ATM, he said.

Acquisitions are also on the table, according to Ms. Haas. Coinbase acquired Bison Trails Co., a blockchain infrastructure company in February. Coinbase said it does not plan to return capital to shareholders by repurchasing shares or paying dividends.

Having cash on hand allows Coinbase to take advantage of investment opportunities while preparing for the risks to come, said Chris Brendler, analyst at investment bank DA Davidson & Co. It’s nice to have this ability during rainy days, he said.

Write to Kristin Broughton at [email protected]

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