A couple of times a year an IPO takes centre stage. Uber,
Slack, Snap, AirBnB, Tesla – they’ve all been the one to watch on Wall Street
in previous years. Right now, it’s Coinbase – the cryptocurrency equivalent of big
tech.
Like others
before it, Coinbase has forgone the option of a regular IPO and taken the
ever popular direct listing route. This process involves investors and employees
converting their ownership stakes into stock that is then listed on an exchange
and no new shares are offered.
Among other benefits, a direct listing is a cheaper way for
the company to go public. By this point a direct listing is nothing new, and is
not what will be discussed here.
See also: Slack direct listing to usher in new era for equities
In its much anticipated S-1, Coinbase omitted some key
numbers that would have allowed it to be fully valued before the listing is
complete. However, an Axios report
valued the company at over $100 billion in February based on its most recent
sale of shares on the secondary market. Some suggest that the company will end
up with a $200 billion valuation.
The company itself is definitely making money, with very
positive financial reports. Founder Brian Armstrong is set to join the ranks of
the world’s richest once the listing is complete.
The Coinbase IPO is going to be a turning point for
cryptocurrency, and for finance more generally. The IPO is a vindication of a
company’s success – what better way to legitimise the most prominent member of a
once rogue and subculture industry than by listing it on Nasdaq’s exchange with
a huge valuation?
Firstly, the listing is going to authenticate the business
of bitcoin and the array of alternative cryptocurrencies, or altcoins, that
Coinbase buys, sells and trades on its platform. This is an important step in
the evolution of the sector. Despite early stories of two pizzas being sold for
10,000 bitcoin, the currency really found its feet on the dark web as a means
of payment for drug dealers and other illicit merchants on the Silk Road
website.
This start was far from ideal for the cryptocurrency sector,
and has marred its development at almost every turn over the last decade. As
bitcoin gets backing from institutional investors, banks, governments et al, ridding itself of the shackles of
these negative connotations will be a huge step.
See also: Coinbase CEO says crypto specific regulation is necessary
More than anything else, Coinbase listing on Nasdaq this
month will be the turning point that some in the cryptocurrency space have been
looking for. The move will not be welcomed by those that prefer the sector to
remain unregulated and decentralised, as per the original modus operandi.
Once a company lists on an exchange, especially one as
prominent as Nasdaq, the value of its stock tends to be viewed as higher
quality and often rises as well. The listing requirements for Nasdaq are
stringent: companies must have aggregate pre-tax earnings of $11 million in the
last three years, must have a minimum aggregate cash flow of at least $27.5
million for the past three fiscal years and, crucially, must go through
rigorous disclosure processes.
Liquidity risk, for listed companies, also tends to be
lower. Prospectuses outline risk factors (in this instance a fall in the price
of Bitcoin), use of proceeds, financial health and dividend policies. These are
not taken into as much consideration for non-listed companies.
Coinbase quickly acted on the securities complaint filed
against Ripple Labs in late 2020 by delisting its XRP token, a step that shows
the company’s willingness to cooperate with regulators. While Coinbase requested
a longer comment period to respond to Financial Crimes Enforcement Network’s
(FinCEN) request for comment on proposals for certain transactions involving convertible
virtual currency or digital assets, which would impose new and onerous
reporting and recordkeeping requirements for cryptocurrency transactions, the
company has largely adhered to regulations in the US and further afield.
See also: SEC’s Peirce says it is time to reconsider our crypto approach
If FinCEN’s proposals become legislation it will mean that
Coinbase will be required to disclose far more about the digital transactions
of its customers than it currently does, from wallet addresses to names and
everything else that comes with that. Once Coinbase becomes a regulated, listed
entity, it will have to comply with this in a much more uniform manner than
other, unlisted, crypto exchanges. There will be no hiding for Coinbase or its
45 million customers.
Once Coinbase completes its IPO, bitcoin will have a new-found
sense of legitimacy. Most people see that as a positive, others of course will
not.
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