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Coinbase’s Institutional Flip Side

Hurt by exposure to retail crypto trading, the exchange has a growing prime brokerage and alliances with BlackRock’s Aladdin and other platforms

Friday, October 28, 2022

By David Weldon

Shareholders of Coinbase Global are paying a steep price. The stock has been down over 70% this year as the cryptocurrency exchange – the biggest in the U.S. – contends not only with uncertainties related to bitcoin and other speculative assets, but also managerial and reputational challenges.

There is, however, a side of Coinbase that is on a positive trajectory: an institutional strategy promising to expand and diversify the company’s customer and revenue bases. A marquee partnership with BlackRock was announced in August to provide users of the investment management giant’s Aladdin platform “with direct access to crypto, starting with bitcoin, through connectivity with Coinbase Prime.”

Coinbase Prime, which calls itself the leading institutional prime brokerage for crypto assets, “will provide crypto trading, custody, prime brokerage, and reporting capabilities” to Aladdin users that are also Coinbase clients, the announcement said.

Brett Tejpaul, Head of Coinbase Institutional

Other partnership deals followed, notably with hedge fund firm Two Sigma’s Venn performance analytics platform, Broadridge Financial Solutions and SS&C Technologies’ Eze Investment Suite. These put a favorable spin on Coinbase, as did a recent agreement with Google enabling payments for cloud services, in contrast to litigation and arbitration developments.

Risk Posture

“Our goal is to be the safest, easiest and most trusted bridge to the crypto economy,” Brett Tejpaul, head of Coinbase Institutional, and two colleagues wrote in a July 20 blog, when solvency crises at Celsius Network, Three Arrows Capital and Voyager Digital were roiling the market. Noting that Coinbase steered clear of such exposure, the post went on, “We offer the most secure, comprehensive and scalable products and services – including financing – and our multifaceted risk management programs are designed to protect our clients, our shareholders and the broader crypto economy.”

The institutional business has grown to serve well over 14,000 clients through Coinbase Prime, and its qualified custodian is New York State-regulated Coinbase Custody Trust Co. In addition to Tejpaul, previously of Barclays and JPMorgan, the leadership includes Matt Boyd, head of prime finance; Caroline Tarnok, head of credit and market risk; Kevin Johnson, head of trading; and Greg Tusar, formerly of Goldman Sachs and KCG Holdings, who joined Coinbase as vice president of institutional products in 2020 when it acquired Tagomi, which Tusar co-founded.

Another Goldman alumnus, Usman Naeem, recently joined the team as global head of derivative sales and agency trading.

Underscoring the strategic importance of institutional, vice president of international and business development Nana Murugesan indicated in a Cointelegraph interview that the business will be integral in Coinbase’s plans for expansion in Australia.

Across Asset Classes

With the institutional partnerships have come endorsements like a statement by BlackRock global head of strategic ecosystem partnerships Joseph Chalom: “Our institutional clients are increasingly interested in gaining exposure to digital asset markets and are focused on how to efficiently manage the operation life cycle of these assets. This connectivity with Aladdin will allow clients to manage their bitcoin exposures directly in their existing portfolio management and trading workflows for a whole portfolio view of risk across asset classes.” 

(Separately, CoinDesk and other outlets reported in September that BlackRock turned to CF Benchmarks, an affiliate of the Kraken crypto exchange, for bitcoin index pricing.)

“We’re teaming up with Coinbase to help capital allocators and portfolio managers bring crypto into context and to support their need for insights around multi-asset-class analytics,” said Marco Della Torre, CEO of Venn by Two Sigma. “We believe Venn can help these investors integrate digital assets into their existing capital allocation frameworks, seamlessly and with the rigor their role demands.”

Ray Tierney, Broadridge

“Institutions are increasingly interested in the crypto space, but trading assets has remained a challenge because messaging is only available through proprietary API interfaces,” said Ray Tierney, president of Broadridge Trading and Connectivity Solutions. “Now, through Coinbase’s deep access to liquidity and NYFIX’s extensive market reach, we can integrate more than 2,000 clients to bring crypto trading to the institutional market.”

SS&C Eze is “excited to significantly expand our digital asset trading capabilities with this partnership with Coinbase, the largest U.S. cryptocurrency exchange and a leading crypto platform,” said general manager Michael Hutner. “As more institutions diversify with digital assets, SS&C Eze is dedicated to providing the tools and access to ensure they can manage these investments seamlessly.”

The SS&C Eze institutional digital asset trading platform “provides seamless broker-agnostic access to institutional liquidity across the market,” the company said. The platform also includes market data for more than 100 tokens and 500-plus pairs from more than 35 sources. Trades can be created, processed and viewed within the Eze OEMs (order and execution management systems) alongside other asset classes.

Jury Still Out

Is Coinbase Institutional capable of clearing away the clouds?

“Coinbase needs to focus on performance,” asserts Mark Jamison, a University of Florida professor who is also an American Enterprise Institute senior fellow. “So the question for Coinbase is, Does BlackRock have critical capabilities that Coinbase lacks, and if so, can this partnership make up for Coinbase’s deficiency?”

“A negative image is damaging, but the only way to meaningfully improve it is to actually cure the deficiencies,” Jamison added. “Focus first on fixing the realities, then market the improvement,” rather than “image first, quality later” [which] has always failed in my experience.”

Each partnership is unique and will have to work on its own merits.

“Often, these sorts of announcements never make it past a press release, and it’s not clear to me that a software integration has been made at this stage,” says Suzannah Balluffi, an analyst with Opimas. She allowed that adding linkages between BlackRock’s Aladdin and Coinbase Prime “could provide a major boost to Coinbase’s institutional business. Aladdin is one of the most widely used portfolio management systems, and trillions of dollars pass through it each year.

“What concerns me about the Aladdin announcement,” Balluffi continues, was the timing “only a few days before Coinbase’s Q2 earnings, which included a pretty significant net loss of over $1 billion that quarter. This strikes me as an odd coincidence, given the impact on stock price.” [Editor's note: On November 3, Coinbase reported a net loss for the third quarter of $545 million, half that of the previous quarter. It cited as a bright spot, within its $576 million of net revenue, a 43% quarter-over-quarter rise in subscription and services revenue, as well as "continued momentum in our product development and partnerships."]

Balluffi says that if the main impact of the BlackRock partnership is on existing or mutual clients of Coinbase, then it is not clear that it will be a meaningful, incremental sales channel.

“At this stage, Coinbase needs to do everything it can to reorient itself toward long-term profitability and growth,” Balluffi concludes. “They’ll eventually have to reduce trading fees and cut expenses,” as well as “grow other business lines so they don’t depend so much on retail trading.”

Phased Integration

Meanwhile, Coinbase says progress is being made on platform integrations, and functionality will be rolled out in phases.

Greg Tusar, VP, Institutional Products

“BlackRock’s deep expertise in investment management technology, combined with Coinbase’s integrated and secure trading, custody and prime brokerage product suite, will facilitate greater institutional access and transparency to digital asset investing,” said Coinbase president and chief operating officer Emilie Choi.

Greg Tusar spoke of mutual benefits in the hookup with Broadridge: “Despite short-term cycles, momentum in institutional adoption is trending one way – toward more exploration and more interest. Utilizing the NYFIX order-routing network, this partnership puts deep, multi-venue crypto liquidity on more buy-side traders’ desks, lowering barriers for participation in this growing asset class.”

As Brett Tejpaul put it in the SS&C announcement, “We’re excited to support the ongoing expansion of cryptocurrency trading with the best tools available, ensuring traders of all types can benefit from access to this growing asset class.”




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