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DeFi is the new kid on the block, but is it a bully or does it play well with others? If blockchain has the promise to be disruptive, could DeFi be disruptive squared? That question was pointedly raised in Coinbase’s filing with the SEC in connection with Coinbase’s registration of shares.

Coinbase has ridden the wave of disruption brought by cryptocurrencies to fame and fortune. Based on current auction prices for its stock, Coinbase is valued at roughly $100 billion in connection with it going public, a valuation that is thought to be based both on its position in the market and the hefty trading fees it earns. For frame of reference, the total market capitalization of Intercontinental Exchange, Inc., which is the parent company of the New York Stock Exchange and owns exchanges and clearing systems throughout the world, is $65 billion.

One would think that this would make Coinbase fat and happy. But hidden in its registration statement is a risk factor titled: “We compete against a growing number of decentralized and noncustodial platforms and our business may be adversely affected if we fail to compete effectively against them.” The filing includes the following warning with respect to decentralized platforms: “We have seen increased interest in certain decentralized platforms with transaction volumes rivaling our own platform on multiple occasions, and expect interest in decentralized and noncustodial platforms to grow further as the industry develops.” In other words, even at this early stage, decentralized platforms have threatened to reach volumes close to those of Coinbase, the largest U.S. cryptocurrency exchange.

LEGAL TOKENS

If Coinbase is looking over its shoulder concerned about what decentralized finance can do to its business model, where does that leave traditional financial institutions? For now, traditional financial institutions are probably more interested in what happens with the Coinbases of the world (there are, after all, hundreds of cryptocurrency exchanges worldwide). DeFi faces significant challenges, not least of which is how decentralized apps need to operate within the umbrella of financial regulations (and make no mistake, financial regulations do apply, even if transactions are driven by autonomous algorithms). Also, decentralization and the autonomous nature of smart contracts are alien to a system built entirely on centralized trusted actors exercising conscious control over transactions, and regulated as such. But if DeFi can overcome these challenges to reach mainstream adoption, it could perhaps transform the financial services industry, very much like the internet has transformed the industry from $80 live broker trades to zero dollar online commissions. GameStop, anyone?

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Anthony Tu-Sekine | Partner

As the head of Seward & Kissel’s Blockchain and Cryptocurrency Group and a frequent commentator on all things crypto, Anthony advises clients on a wide range of evolving topics, including how to structure and issue security and utility tokens, registered and unregistered offerings of security tokenstoken custody, transfer and liquidity issues, non-security opinions, and investments in crypto assets by funds and other investors. A recognized leader on physical precious metals funds, Anthony represented APMEX Inc. and alternative asset manager Sprott Inc. in connection with the launch of OneGold.com, which allows investors to own gold documented on blockchain.

You can work with regulators or you can really try to piss them off… If you really want to do the latter, then you should expect that they will bring every tool they have against you.

Anthony’s thoughts on BitMEX indictment, as published in Law360 article “BitMEX Case Seen as Blessing in Disguise for Crypto Sector”