Coinbase grew rapidly by working with US regulators. Will it expand even further by bypassing the SEC?

Coinbase has launched a new derivatives exchange in Bermuda, a totemic act that shows the largest US crypto exchange means business when it says US crypto regulations are increasingly unviable. The exchange, which has publicly clashed with the US Securities and Exchange Commission (SEC) over a number of issues, was granted its license to operate in the island nation last month as it looks to test the international waters.

Founded by CEO Brian Armstrong in 2012, Coinbase has grown to become the second largest crypto exchange – only behind HQ-less Binance – by trading volume, largely by working closely with US regulators. The 2021 IPO came at the end of a lengthy due diligence process with the SEC, leading many to believe the agency had endorsed the business model. But over the past couple of years, under Gary Gensler’s regime as SEC chairman, the company has hit an impasse with the regulator.

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The watchdog agency has blocked a number of new services Coinbase wanted to bring to market, including a crypto-lending program called Earn and a “staking-as-a-service” platform that would offer US users dividend-like yield payments. Despite being asked multiple times to “register” with the SEC as an official securities exchange, Coinbase has instead fought a definitional battle over which crypto tokens do and do not count as securities (the exchange claims it does not list “investment contracts” ).

The new Bermuda-based Coinbase International Exchange is starting small – an attempt to get a piece of the share of professional investors and traders outside the U.S. At the time of writing, the “exchange” is basically just an API, without a dedicated app or website, Axios reported. Only bitcoin (BTC) and ether (ETH) derivative contracts will be offered at launch, with leverage option limited to 5%.

But the new vertical is also a sign of the stock exchange’s increasingly global perspective. Although Coinbase has operated across Europe and parts of Asia, Africa and Latin America for years, it has recently become more vocal about building internationally. In a blog post in April, the exchange said it has started talking to financial regulators in Abu Dhabi (which is building a crypto/fintech technology sandbox), while Armstrong, after a conversation with the UK’s finance secretary and city minister, Andrew Griffith, said the country is “moving quickly about sensible crypto regulation.”

Other exchanges have pulled out of the US, such as Bittrex, which recently shut down its stateside operations shortly before being sued by the SEC. Eric Voorhees’ Shapeshift didn’t exactly leave the country, but moved further into the ether when it shut down its corporate entity to become a Decentralized Autonomous Organization (DAO).

But by most accounts, many have viewed Coinbase’s messages as an empty threat.

Despite attempts to diversify its revenue streams, the exchange essentially only makes money by charging US crypto users above-average trading fees (which people seem to pay for Coinbase’s trusted brand reputation and user-friendly interface). In its latest SEC filing, the exchange said the US represents about 40% of its customer base, with another 25% in the EU and UK

“As more and more markets move forward with regulatory frameworks to become crypto hubs, we believe the moment is right to launch this international exchange,” Coinbase said in its latest announcement. “We would like to see the US take a similar approach rather than regulation by enforcement, which has led to a disappointing trend for crypto development in the US.”

It is worth saying that Coinbase spelled out in plain text that it has no immediate attempts to flee the US “Rest assured that Coinbase is committed to the US,” the blog post said. it comes to the increasingly fraught relationship with the SEC. The agency recently sent Coinbase a “Wells Notice,” advising it that the agency is building a case against the exchange.

Coinbase said it would fight the SEC in the courts if it is sued. But at this point, the exchange’s lawyers may just be trying to wait out Gensler’s tenure. While there is no guarantee that the next SEC chief will be less lenient, the exchange has allies in the securities agency.

SEC Commissioner Hester Pierce, for example, broke ranks and recently published her dissenting opinion that the commission’s attempt to redefine what an “exchange” legally means to apply it to crypto firms was an attempt “to solve problems that don’t exist.” Furthermore, she said the SEC’s antagonistic stance toward crypto would drive the industry overseas or toward harder-to-police decentralized finance (DeFi) areas.

Coinbase may prefer to continue operating in the United States while building operations elsewhere. But the SEC must soon get the message that at some point the US market may not be worth it. This is especially so as other jurisdictions take a more cooperative approach to regulating crypto. In particular, Hong Kong will revamp its “virtual asset exchanges” framework as early as June 1, which could allow operators to open up to retail investors currently kept out of markets by China’s vast crypto firewall.