Coinbase is aiming high and expanding aggressively as the popularity of blockchain and crypto assets soars.

The San Francisco-based cryptocurrency exchange said last week it is buying broker-dealer Keystone Capital Corp., signalling its intent to move beyond its current offerings of bitcoin (BTC), bitcoin cash (BCH), ether (ETH) and litecoin (LTC). By using the purchase to become a broker-dealer registered with the Securities and Exchange Commission, Coinbase wants to offer other digital tokens -– many of which the SEC regards as securities — without running afoul of regulators. The purchase could also allow Coinbase to sell traditional assets such as equities.

Coinbase simultaneously announced it bought Venovate Marketplace, an SEC-registered broker-dealer, and Digital Wealth, which is a Registered Investment Advisor. Coinbase did not reveal the respective purchase prices. In April, it purchased Earn.com and has also been bolstering its professional trading platform.

Coinbase now has a unique advantage and responsibility to work closely with regulators and pave the way for other players in the crypto ecosystem,” Kulkarni says.

In blog post published Wednesday, Asiff Hirji, the company’s president and COO, said that if approved as a regulated broker-dealer, “Coinbase will soon be capable of offering blockchain-based securities, under the oversight of the U.S. Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).

The company has a longer-term goal of fusing blockchain with traditional securities. “Ultimately, we can envision a world where we may even work with regulators to tokenize existing types of securities, bringing to this space the benefits of cryptocurrency-based markets, like 24/7 trading, real-time settlement, and chain-of-title, Hirji said in the post.

Awaiting Regulatory Approval 

There are potential obstacles to SEC and Finra approval of the Keystone deal, but many say the acquisition will ultimately pass muster.

Coinbase has an outstanding record of compliance, so there is a high likelihood that this deal will go through,” says Taylor Monnig, the COO of Texas-based crypto-mining facility TMGcore.

He tells ThirtyK this will not be the first time an exchange has operated as a broker-dealer. Genesis Global Trading, which SecondMarket spun out and sold to Barry Silbert’s Digital Currency Group, is one example.

“The move to acquire Keystone Capital will have a major impact on Coinbase,” Monnig says. “It will allow them to sell any future token that is registered as a security and offer [over the counter] trading, and give their customers access to traditional investment opportunities outside of the cryptocurrency space in the future.”

Wall Street Could Dive In

If Coinbase is approved as a registered broker-dealer and can sell so-called “security tokens,” which are essentially investment contracts and considered securities by the SEC, it could benefit from a coming wave of investor demand.

Rohit Kulkarni, managing director of private investment research of SharesPost Digital Assets Group, tells ThirtyK that while security tokens represent a much smaller share of the initial coin offering market than utility tokens, which give holders access to a product or service, the paradigm is going to change as 2018 progresses.

“A significant amount of smart money is waiting on the sidelines,” Kulkarni says. “We expect new capital to flow into the crypto-assets ecosystem from Wall Street, not to utility coins but to security tokens.

Kulkarni says the regulatory environment for digital currencies and tokens is likely to stabilize in the next 12 to 18 months.

“As a market leader and an early mover in regulated and securitized tokens, Coinbase now has a unique advantage and responsibility to work closely with regulators and pave the way for other players in the crypto ecosystem,” Kulkarni says.

Dan Butcher
Dan Butcher is a New York-based financial writer and editor who has worked at the FT's Ignites and FundFire, SourceMedia's Financial Planning, Crain's InvestmentNews and eFinancialCareers. He got his B.A. at the University of Colorado at Boulder and his M.A. at New York University.