Three years ago, Coinbase faced a professional and philosophical dilemma. As Forbes reminds us, the U.S. Financial Crimes Enforcement Network had ruled that their cloud-based “wallet” service for Bitcoins qualified them as “money transmitters,” and therefore made them subject to state licensing requirements and other regulations.
Since most Bitcoin users are anti-regulation, this ruling (or rather, “interpretive guidance”) put them at odds with a vocal share of their customers. Coinbase’s lawyer also pointed out that compliance would be expensive and laborious for what was then a small operation, and encouraged them to fight it.
On the other hand, Bitcoin’s reputation had suffered from various well-publicized hacks, swindles, and a dark-net marketplace of illicit drug sales. Coinbase saw an opportunity to open up cryptocurrency use to a wider range of people who, at that time, saw the whole thing as a complicated, sleazy risk. So, Coinbase CEO Brian Armstrong decided to go legit.
Three years later, the company has 117 employees and 4.8 million customers, and they store roughly $700 million worth of the world’s Bitcoins. Much of their growth since 2013 can be credited to its legitimization, since that decision caused a boost in their funding from investors like the New York Stock Exchange, USAA, and Bank of Tokyo-Mitsubishi UFJ. That kind of investment wasn’t available to them before; pre-compliance, they were mostly relying on funds from angel investors and risk-chasing venture capitalists to keep them afloat.
Granted, Coinbase’s decision has met with some criticism. Some Bitcoin users have accused the company of using “Gestapo” tactics like inquiring after suspicious transactions and suspending or closing the accounts involved. “If I wanted to be questioned about where every transaction happens, I’d ask the IRS for an audit,” said one unimpressed user.
Coinbase also runs GDAX, a platform for digital asset trading that accepts both Bitcoin and Ether, and continues to champion public blockchains and open networks as the future of financial industry disruption. And despite the compliance that legitimized them, they’re not pushovers; the company is currently resisting an Internal Revenue Service “John Doe” summons asking for the identities and transactions of all U.S. customers from 2013 through 2015.
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