Why the crypto meltdown could be “good for Coinbase”: strategist
MoffettNathanson partner Lisa Ellis joins Yahoo Finance Live to discuss Binance’s rescue of FTX, what it means for cryptocurrencies and stocks, and consolidation in the space.
Video transcription
SAM BANKMAN-FRIED: We believe the most important thing is that we backstop the industry, and that is the most important thing. And we will do what it takes to do that. But yes. Ideally, others would be in it with us.
– It was FTX CEO and co-founder Sam Bankman-Fried earlier this year about the importance of crypto rescue. But now the cryptocurrency exchange is looking at being acquired by rival Binance after FTX saw a spike in withdrawals, causing a significant liquidity crunch. Let’s get straight to our own David Hollerith here. David. Lisa. Lisa. Sorry. Lisa. At MoffettNathanson, Lisa Ellis. Good to see you. I’m sorry about that. So I know you cover Coinbase extensively. What does this mean for Coinbase?
LISA ELLIS: Well, it’s just– I mean, look. The whole industry is going through a pretty big shakeout right now. And that kind of thing is causing tremors across the industry. No doubt about it. But ultimately, what this situation reveals is that there is a pretty meaningful difference between the kind of security and trust you can count on with regulated exchanges and the crypto companies that operate heavily within the regulated ecosystem versus those that are operating in the unregulated or semi-regulated the space, something FTX, and for that matter Binance, also do.
So as much as this is painful, will cause a shakeout and causes some kind of tremors and concern for the stability of the overall industry, ultimately, it will probably mean a flight to quality, which should be good for Coinbase and its more regulated colleagues.
– Is there a flight to quality and platform as well? And what platform would that be? Because I’m thinking about a Coinbase, I’m thinking about a Robinhood watching this megadeal happen and trying to figure out what it means for them.
LISA ELLIS: Yes. Well, I mean, one notable difference, of course, is that with somebody like Coinbase and Robinhood, I mean, they’re publicly traded companies. They are regulated by the FCC. They have to have very clear, transparent disclosures that investors look through every quarter to see what’s happening with the balance sheet, how they’re reserved, for example. And then also because they are regulated, they do not, for example, participate in the derivatives market, the option markets in crypto. They do not lend. They do not lend.
So they are completely reserved. Big difference here because you can’t really have a run on the bank, so to speak, on someone like Coinbase because they are 100% reserved. They could, if they needed to, withdraw every single deposit. So there may be technological aspects of the platform. But it’s really more about, I would say, the policies and procedures that they follow that provide stability and a sort of security to the underlying consumer assets
– Lisa, in light of this development, there was some speculation a couple of months ago that there might be a Coinbase or a Robinhood tie-up. Now does that have to happen given that you have a FTX and Binance merging?
LISA ELLIS: That’s a good question. I think we’re still in TBD mode in terms of — I mean, it certainly seems natural that when we’re in a crypto winter and trading volumes have dropped dramatically, and these are scale-based businesses that benefit significantly from their economies of scale — liquidity breeds more liquidity, et cetera — that we will see consolidation. There are still something like 300 exchanges globally operating in crypto. And we should definitely see significant consolidation at some point. But whether that comes in the form of actual mergers or acquisitions like we’re seeing with Binance bailing out FTX versus just volume migration to a few or smaller number of platforms and then others basically just shutting down, I’d say is TBD.
– With the midterm elections here in the US, you can get some transition to the Financial Services Committee with the House. And that might have some impact on the crypto landscape as well, or at least the review, the acceptance of blockchain and crypto related technology as well. Do you foresee any kind of fallout from the midterm elections to what the next few years for crypto look like?
LISA ELLIS: Yes. Well, I mean, we, like I think many in the US crypto ecosystem, are hopeful. There is a bipartisan bill in the Senate that should at least start the process of establishing a regulatory framework for the industry, specifically assigning some of the big highly decentralized cryptos, meaning like Bitcoin, Ethereum, et cetera, specifically under the CFTC and go further from there. And I think that now that we’re through the election and they can sort of get back to an agenda, this is arguably an area that’s an easy win for both parties to demonstrate some bipartisan cooperation.
And so I think we and many in the industry are crossing our fingers that they will go ahead with this first step legislation to in a way pave the way for further, you know, changes and additions over time. The US, frankly, has fallen a bit behind. And we have, as a result, seen significant amounts of trading volume move offshore to other jurisdictions where the regulatory framework is clearer for the exchanges and the ecosystem in general.
– Lisa, if I learned anything from covering Lehman Brothers and the Bear Stearns crisis, it’s that when you have liquidity concerns in large financial institutions, it takes a while to shake out. In the shorter term, the selloff we’re seeing in various crypto tokens across the board, how long can that continue based on the issues at FTX? No pressure.
LISA ELLIS: I wish we knew. I wish everyone knew that. See, the immediate sale, right, as we see yesterday today, which tends to happen. People make decisions very quickly. Either they dump or they don’t or they move or they don’t. Which I think is very… so it should stabilize here pretty quickly. However, I think what’s uncertain, as always, as we saw this spring with the Luna-Celsius situation and Three Arrows Capital, is that we don’t really know at this point what the potential consequences are. , if there are other exchanges or other entities that had exposure right here.
This is part of the problem with these unregulated offshore exchanges. You don’t actually know where the risk lies, how exactly who has whose assets. And so it will probably take at least a few weeks, as we saw this spring, to see what potential ramifications there might be elsewhere in the industry.
– MoffettNathanson partner Lisa Ellis, thanks so much for joining us on all things crypto this morning. Appreciate it.
LISA ELLIS: Thank you.
