Cryptocurrency exchange Coinbase, which listed on Wednesday, might have heralded a new era. Its valuation on Nasdaq briefly surpassed USD 100 billion, almost matching Facebook’s USD 104 billion debut in 2012, as social media became mainstream business. Due to the growing interest in digital currencies, Coinbase made a profit of close to USD 800 million on USD 1.8 billion revenue in the first three months of the year. But this pales in comparison to crypto companies in Asia that conventionally dominate the space.
Crypto analytics firm Messari found in a recent report that the region is the clear global leader and home to six of the ten biggest crypto unicorns. A total of 94% of bitcoin futures volume originates from Asia, with Binance as the predominant exchange. When crypto coins rallied in February, the company traded USD 761 billion worth of crypto, leaving behind Huobi and OKEx with USD 214 billion and USD 188 billion, respectively, according to CryptoCompare.
Both Binance and Hong Kong-listed Huobi were founded in China, then forced to leave when the country banned crypto trading in 2017. “Binance is now very regulated, even in more jurisdictions than Coinbase,” CEO and founder Changpeng Zhao, or CZ, told Bloomberg. His firm has a hard time keeping up with the boom. “We are by no means perfect, still struggling heavily with customer support,” he shared on Twitter over the weekend. “Adding 5x more helpdesk staff.”
Zhao keeps indicating that his company won’t need to turn to the capital markets. He built his firm from the bottom up and didn’t have to raise any money since its ICO in July 2017, which brought in USD 15 million. Last year, Binance earned nearly USD 1 billion.
The main profit drivers for the exchanges are generous transaction fees for the crypto “on-ramp,” when its customers exchange fiat money for digital currencies. For Coinbase, such transactions accounted for 96% of its revenues, a number that is expected to drop as the space gets more crowded and competition intensifies. The players are already mulling other financial products to diversify into, such as custody services and crypto lending, which many already offer. But they are also making inroads into traditional finance, or TradFi, as they call it, planning to change it for the better.
A different finance industry
Binance recently announced that it is rolling out tokenized share trading, which will be backed by the actual shares that are held in escrow. It also has a debit card, allowing its customers to spend their crypto.
Yusho Liu, co-founder of Singapore-based exchange Coinhako, is also pondering doing the same. His firm recently added a new service for wealthy individuals that includes custody, block trading, and personalized services. “For traditional financial institutions, the crypto market is a ‘whole new beast’ in the world of finance, operating 24/7, 365 days a year,” Liu said. “Traditional firms trying to enter crypto will have to work with or acquire local players, as compliance issues, security regulations, and technology requirements create high barriers of entry.” The recently launched crypto exchange of local bank DBS, however, said that it only operates from 9:00 a.m. to 5:00 p.m., Monday to Friday.
In Singapore, crypto and financial services will continue to gain traction and prosper due to upcoming regulations and licenses, Liu added. That attracts new businesses that use the city as a gateway to Asia. The Winklevoss twins and their Gemini exchange opened shop last year, embracing the city-state’s favorable regulatory environment. “They have become an FX capital of the world, and they are going to become a crypto capital,” Cameron Winklevoss told the podcast What Bitcoin Did. “The MAS (Monetary Authority of Singapore) is leading the way there with a thoughtful licensing regime.”
An actual threat for crypto exchanges might be coming from within the ecosystem—from decentralized exchanges (DEX) running autonomously on software protocol to facilitate purely peer-to-peer transactions. That means users don’t need to place their trust in an exchange to secure their holdings, minimizing the likelihood of a Mt.Gox scenario, where the Tokyo-based exchange suspended trading in 2014, closed its website, and filed for bankruptcy protection, withholding bitcoins from its users. “DEXs fulfill one of the main benefits of cryptocurrencies; to be able to control your own wealth without a trusted intermediary,” said Ivan Poon, CEO of the Switcheo network, which allows peer-to-peer trading between participants.
For the moment, most of the action is still happening on centralized exchanges. On Monday, spot trading volume on DEXs added up to USD 8 billion, while its centralized counterparts processed roughly USD 180 billion, explains Rabeel Jawaid, co-founder of dTrade. Ultimately, decentralized exchanges are the better value proposition, as they distribute their revenue to traders and liquidity providers, he said. “This allows participants to directly profit from the long-term adoption of the exchange.”