Terry Founded in June 2012, Coinbase’s business consists primarily of a bitcoin wallet and trading platform that allows merchants and consumers to transact with the new digital currency, bitcoin. Headquartered in San Francisco, California, the company is dedicated to making bitcoin more accessible to consumers, with the goal of becoming the Gmail of the bitcoin world.
The company’s CEO, Brian Armstrong, is leading the team responsible for making bitcoin a mainstream currency. Users in the U.S. can use their credit cards to buy bitcoin at Coinbase. They can easily store their bitcoins in any online wallet app and send them to each other via email without the hassle of QR codes or strings of seemingly garbled bitcoin addresses. They can even control their bitcoins via SMS.
How does it do it? Jeff Garzik, the core developer, has said that while the underlying protocol for the Bitcoin currency has been developed, a second layer of services to take full advantage of the currency is still needed. These services, such as more intuitive payment systems, credit services, stock exchanges, and smart assets, will allow Bitcoin to gain more traction among mainstream users who are not interested in concepts such as Bitcoin’s public keys.
Coinbase is not building most of these services, but it is focused on making them as easy to use as possible. Coinbase wants to make bitcoin easier, and if it can do so by using the underlying bitcoin technology, then Coinbase will do so with the underlying technology first, but if customers ask for something like recurring settlement, or subscription payments, or free ultra-small payments or free ultra-small payments, and cannot figure out a way to implement the functionality using the underlying protocol, then Coinbase will offer it at the top of the protocol.
When Coinbase users send bitcoins to each other between Coinbase wallets, they are sending bitcoins to an email address, not a bitcoin address. This is one of the many easy-to-use features that this company offers.
Coinbase’s services can be broken down into three main pieces: user wallets, bitcoin buying as well as selling, and merchant tools. It has competitors in all three areas (BitPay, for example, is its rival in the merchant tools space), but it also has different strengths in each. For example, it is one of the few (if not the only) company that offers a decentralized Bitcoin ecosystem. For another example, it offers off-chain transactions for wallets, as well as bitcoin rewards for referring other customers.
On the merchant side, it enables merchants to collect shipping addresses and email addresses via an earlier released merchant tool, and has started offering recurring payments, with merchants also accepting micropayments at zero rates. Armstrong always likens Coinbase’s service to Gmail and Bitcoin to SMTP, an open email standard that provides basic functionality, but people can do more non-standard things with Gmail, such as automatically putting invitations to calendar events into Google Calendar, or taking advantage of automatic message prioritization or view emails as a session directly inside the client.
Coinbase processes 75%-80% of transactions internally, but has agreements with partners Tradehill and Bitstamp when more processing power is needed.
From a world where nothing is set in stone to a decentralized world like Bitcoin, having your own ecosystem equals a valuable asset, but the company still faces some challenges with some regulatory uncertainty.
The company is converting bitcoin to fiat currency within the US, and it has indeed taken steps to get a license to have an MSB at the federal level. However, this will vary from state to state in the US. Each state has its own method of regulation (some states seem to have none at all).
The firm has also set up its own “AML” (anti-money laundering) and “KYC” (know your customer) processes and is doing its best to make sure that when regulators come to ask questions, the firm can show them some documented processes. This approach is markedly different from partners such as Tradehill, which will focus more on the high net worth market. It refuses to do business without getting all the US state licenses and has pulled out of the market while it addresses this issue.
This shows that Coinbase is making a pretty bold move. Taking the market first is good for getting a head start. Early players can take a large chunk of market share and build a healthy cash flow before regulators enter the picture. In Square’s case, they were fined $507,000 by regulators in Florida and Illinois for starting business without a license. But by that point, the company had amassed $331 million in capital, and the Florida fine (which led to it subsequently getting a license in Florida) was simply treated as a cost of doing business at that point.
Coinbase still has a long way to go. It managed to pick up a $5 million Series A investment led by Union Square Ventures in May 2013. At the time, that was the largest investment ever made by a Bitcoin-related company, and it set the stage for more in the future. Meanwhile, despite Bitcoin’s poor performance in 2014, Coinbase had a solid year, not only securing up to $75 million in investments led by DFJ, NYSE and United Services Bank of America (USAA) and other investors, but also convincing some prominent retailers to become Bitcoin trading partners for the first time, including Dell, Overstock, Mozilla and Wikipedia, among others.
The support from investors, merchants and users demonstrates the confidence that all parties have in Bitcoin. The company has previously raised $30 million in funding, including a $25 million Series B round led by leading venture capital firm Andreessen Horowitz. Venture capital firms Union Square Ventures, Ribbit Capital and SV Angel have also invested in Coinbase.
It continues to grow, and has signed a deal with Cashie Commerce that allows the latter to use its merchant API on BitDazzle, an online Esty-style marketplace for bitcoin-friendly merchants.
If regulators do come looking for trouble, the company hopes it has raised enough money to deal with them. In the meantime, Coinbase will focus on the growth side of trading volume by gaining traction in what is still an emerging market. That’s one reason the company waived the first $1 million in sales processing fees for merchants. It will also seek to focus on what users want, which may allow the core development team to be a step ahead when it comes to developing user and wallet features.
