Original author: Yilan, LD Capital

1. Investment Logic

1. Asset Category - Exposure to US Stock Compliant Cryptocurrency Market

This year, Coinbase's stock has risen by over 173%, attributed to a 122% increase in Bitcoin since the beginning of the year and a 40% increase in tech stocks. Following both the US stock market and the cryptocurrency market, this dual-market correlation can bring returns that surpass both markets when the trend is upward.

The image shows the correlation of COIN and ETH, as well as other related assets (MARA, HUT, GLXYCOIN, MSTR, etc.), all of which closely follow the trend of ETH.

Source: LD Capital

2. Potential for Main Business Growth Yet to Be Unleashed

Coinbase's main business is trading revenue, which has recently been positively affected by macroeconomic interest rate stoppage and industry cyclical-halving events, as well as events such as spot ETFs, leading to speculation in the market and more positive market expectations. However, the continuation of the macro contradiction over the next 8-12 months, suitable for the high inflation and high interest rate environment for crypto growth, will still have a negative impact on Coinbase's main business.

For Coinbase, which went public in May 2021 during a bear market, growth is the core driver of stock price appreciation. Coinbase's global platform and derivative trading were officially launched only in May of this year, and the global platform will bring more spot trading volume, while the derivative business will be a huge driver of trading revenue growth. On August 14, Coinbase announced its official entry into Canada, launching with Interac payment rails, other partner relationships, fund transfers, and Coinbase One, indicating Coinbase's emphasis on growth (regional and business expansion). Therefore, despite the business growth being constrained by external conditions over the next 12 months, combined with many unreleased positives, there is tremendous revenue growth potential within 24 months.

3. Total trading volume has not met expectations, but adjusted EBITDA continues to greatly exceed expectations

In the third quarter of 2023, Coinbase achieved an adjusted EBITDA of 180 million, although lower than the 194 million in the second quarter, it still greatly exceeded expectations. Compared to the same period last year, the decrease in trading volume was mainly due to a 60% decrease in cryptocurrency volatility. Therefore, the market has given Coinbase relatively poor profit expectations, but in reality, Coinbase's Q3 performance was impressive, achieving a net profit of 81.6 million through discounted repurchase notes. And due to the positive expectations of the macro environment due to the cessation of interest rate hikes, combined with strategic bond repurchases, Coinbase has achieved greatly exceeding expectations in adjusted EBITDA, and is expected to achieve positive EBITDA in the fourth quarter.

4. Coinbase's vigorous development of subsidiary businesses brings new growth points

- International platform and derivative trading business - Coinbase's derivative exchange is still in its early stages. In Q2-Q3, only the API test version was launched, and it only had a few customers. Therefore, some of the next steps Coinbase will take include integrating it into the retail application. In August, its wholly-owned subsidiary CFM successfully obtained regulatory approval from the National Futures Association (NFA) designated by the Commodity Futures Trading Commission (CFTC) and became a futures commission merchant (FCM), allowing it to provide federally regulated cryptocurrency futures trading to eligible U.S. customers. The official launch of the international platform and derivative products will bring substantial revenue growth.

- USDC business - Coinbase acquired a minority stake in Circle without disclosing specific investment figures. The nature of this investment implies that Coinbase and Circle will have greater strategic and economic consistency in the future development of the financial system. This indicates that USDC will have broader development prospects, possibly expanding from cryptocurrency trading to areas such as foreign exchange and cross-border transfers. Coinbase's senior executives downplayed competition with PayPal's entry into the stablecoin field (PYUSD 44mln Supply market share is still small). Q3 stablecoin revenue increased, mainly due to higher average interest rates on USDC reserves, rising by 375 basis points or 420%. Coinbase and Circle will continue to generate income from interest on USDC reserves.

- On-chain business - After the launch of Base, the additional MEV income brought by it is direct profit that Coinbase can obtain. In addition to direct profit opportunities, Coinbase CFO Alesia stated in a conference call that Base's usage will provide opportunities for all other products and services provided by Coinbase, such as users using Coinbase's payment channels and wallet products, which will also bring additional income. In addition, the ETH Staking business brings Coinbase at least $100 million in revenue.

5. Coinbase may continue to gain more market share than Binance and become the largest exchange

The SEC's charges against Binance are more serious, in addition to being accused of operating an unregistered securities exchange, broker, and clearing agency like CB, the SEC has accused it of more activities similar to FTX: deception, cross-entity mixed assets, and trading against clients, without similar charges against Coinbase.

Competitor Binance's global suppression is favorable for Coinbase, indicating that Coinbase is likely to replace Binance as the most influential exchange. 6. Having the necessary compliance qualifications makes Coinbase one of the biggest beneficiaries of Spot ETFs Traditional asset management institutions' approval of spot ETF applications is a huge boon for Coinbase as a potential custodian. Coinbase will receive significant revenue from the upcoming spot ETF through AUCC (average annual custodial asset cost). In the future, it is believed that there will be additional revenue from clearing and other services. However, there are still many issues to be resolved, with a long time window. 7. Regulatory pressure leads to increased compliance costs Despite Coinbase's strong performance during the ongoing crypto winter, continued regulatory uncertainty remains the basis for the company's negative outlook. Regarding the SEC's lawsuit against Coinbase, the company is seeking to dismiss the lawsuit filed by the SEC in June (accusing the company of operating an unregistered exchange, broker, and clearing agency). The SEC may not necessarily win the lawsuit, and it is likely to end in a settlement, with the settlement fine having a significant impact on the company's profits (Kraken's $30 million). This will affect the company's fundamentals, but the market may interpret it as a positive. In summary, it is currently believed that Coinbase's profit expectations are better than the first half of 2023, but profits will continue to be suppressed due to the crypto market not truly entering a bull market. However, with the correct on-chain and derivative development strategies, its revenue and profit growth potential will be unleashed. Income growth that has not been fully priced in includes: 1) substantial revenue growth after the official launch of the international platform and derivative products. 2) Continued growth of staking business, including MEV income from Base chain (and other chains); staking business income; incremental usage of Coinbase's other products and services (wallets, etc.) by on-chain users; 3) Potential volume recovery of USDC bringing in reserve interest income and fee generation from distribution. However, due to the strong correlation with the crypto market trend, it is expected that the main business's trading revenue will not have a significant increase in the background of an 8-12 month period of macro pessimism continuing to contradict the high inflation and high interest rate environment suitable for crypto growth. But in the subsequent bull market, the growth rate will exceed the 515% growth in 2021. Valuation indicates that in the benchmark scenario, Coinbase's fair value is $89, currently priced at $74, undervalued by 16%; but combined with the DCF valuation model for forecast business growth and the sensitivity of the terminal EV/EBITDA multiple, it should be considered in conjunction with the internal cycle of crypto market trading and market sentiment. In the short term, with the recent dual situation of the US stock market and the crypto market showing signs of a small bull market, the rebound is significant. A more practical operational recommendation is to buy when short-term macro positives are being priced in, and to consider the risk of overvaluation when the P/B exceeds the high point in July of this year. At EV/EBITDA 7x, the fair value is $89, and at 14x, the fair value is $170. Company Background and Business Introduction Established in 2012, Coinbase operates a diversified cryptocurrency business and is the largest cryptocurrency asset trading platform in the United States, serving over 108 million customers. Users can buy, sell, and trade crypto assets through the platform. On April 14, 2021, Coinbase successfully went public on Nasdaq, becoming the "first stock of cryptocurrency." Specific business lines include: 1) Coinbase App - For ordinary traders Users can trade tokens on the platform. The first choice for fee income is to pay transaction fees based on a transparent pricing plan, including transaction fees and spreads added to transactions in fiat-to-crypto or crypto-to-crypto trades. These transaction fees are fixed as a percentage of the user's trading volume on the company's platform, simplifying trading (excluding small trades, which have fixed fees), with tiered pricing for advanced trading volumes. The second choice is through the company's subscription product Coinbase One, where consumers pay a monthly fee instead of transaction fees until they reach a certain trading volume threshold. However, for simple trades, spreads are still charged. The Coinbase application has expanded proprietary product experiences, providing its customers with peer-to-peer payments, remittances, direct deposits, and through its Coinbase card (Coinbase-branded debit card). Additionally, users can earn returns on crypto assets through various means, including staking rewards, DeFi earnings, and other unique methods for specific crypto assets. For most consumers, staking crypto assets is a technical challenge. Independent staking requires participants to run their own hardware, software, and maintain close to 100% uptime. The company offers true on-chain proof of stake services, reducing the complexity of staking, allowing its consumers to earn staking rewards while fully owning their crypto assets. In return, the company charges a commission on all staking rewards. Recently, its Cloud product has integrated the on-chain staking protocol Kiln, which can provide Ethereum staking below the 32 ETH limit.

2) Two Wallet Products

• Web3 Wallet

Consumers can access third-party products by adding a "web3 wallet" in the Coinbase application. The web3 wallet allows the company's customers to interact with certain Dapps, including trading on decentralized exchanges or accessing art and entertainment services. This product provides consumers with convenience, easy access, and interaction with Dapps, and shares the responsibility of knowing and storing customer security keys between consumers and Coinbase, making wallet recovery possible. The company profits by charging fees for certain transactions on decentralized exchanges.

• Coinbase Wallet

Coinbase also provides a software product called Coinbase Wallet to consumers in over 100 markets, allowing them to participate in and interact with Dapps and crypto use cases without a central intermediary. The Coinbase Wallet product experience is similar to the Web3 Wallet but with key differences, including consumers having full control of their private keys and seed phrases, and having a broader range of assets and use cases in web3. The company profits by charging fees for certain transactions on Dapps, such as fees for fiat-to-crypto transactions and/or fees for transactions on decentralized exchanges.

3) Institutional Business

Coinbase offers products to serve institutional clients (including market makers, asset management firms and owners, hedge funds, banks, wealth platforms, registered investment advisors, payment platforms, and public and private companies).

Coinbase Prime is a comprehensive platform that meets all institutional spot crypto needs in an agency capacity. It provides trading, storage, transfers, staking, and financing services to institutions. Through Coinbase Prime, institutions can access deep liquidity pools in the crypto market and achieve best price execution due to the company's ability to access a range of connected trading venues, including the Coinbase Spot Market. The company offers volume-based pricing and charges transaction fees for each matched trade.

It also provides market infrastructure for trading venues through Coinbase Spot Market and Coinbase Derivatives Exchange.

The first regulated derivative products, Nano Bitcoin Futures and Nano Ethereum Futures contracts, were launched on the Coinbase Derivatives Exchange. Coinbase is the first native crypto platform to be approved in a regulated derivatives market, providing opportunities for other derivatives intermediaries to trade on its derivatives exchange. Once approved by regulatory authorities, the company will directly offer these derivative products to its clients (currently only available to institutions).

4) Developer Kit

The developer kit includes some of the latest products, including Coinbase Cloud and Coinbase Pay.

Coinbase Cloud provides crypto payment or trading APIs, data access, and staking infrastructure. These tools allow companies to build crypto products faster and simplify interactions with the blockchain. Coinbase Pay and Coinbase Commerce allow developers and merchants to more easily integrate crypto transactions into their products and businesses.

Financial Analysis

1. Business Model and Revenue Growth

Source: Capital IQ

Coinbase achieved $674 million in revenue in Q3 2023. Breaking down the revenue, trading revenue and subscription/service revenue are still the main sources of income. Ancillary businesses have grown alongside trading revenue, but it can be seen that in Q3 2022 and Q4 2022, trading revenue accounted for 61% and 52% of total revenue, respectively, in Q1 2023, the proportion decreased to 48%, and in Q3 2023, it decreased to 43%. The development of other businesses such as subscription and services has also brought substantial revenue to Coinbase and is on a growing trend.

Trading revenue shows explosive growth in bull markets and a downward trend in bear markets, while subscription services and other businesses show stable growth in bear markets and growth alongside trading revenue in bull markets.

Business Revenue Breakdown

• Trading Revenue

Trading revenue was once Coinbase's main source of income, generating $288 million in revenue in the third quarter, but is now surpassed by subscription and service revenue ($334 million): Coinbase makes money by buying and selling cryptocurrencies. It typically depends on trading volume or may depend on fixed income. Spreads: This is the difference between the buying and selling prices of cryptocurrencies. Conversion fees: These fees convert one cryptocurrency to another and come from the company's revenue stream. Over-the-counter trading: This service is aimed at institutional buyers and high-volume traders. Leveraged trading: It also allows users to borrow from the platform. It involves interest payments and borrowing fees. Payment processing fees: It also allows users to make payments using cryptocurrencies from their platform.

• Subscription and Service Revenue

Coinbase offers custody subscription services including Coinbase Pro, Coinbase Prime, and Coinbase Custody.

Coinbase Pro is an advanced trading platform for professional and institutional investors. It offers certain free features and advanced features with premium subscriptions. Coinbase Prime is designed for institutional investors, providing enhanced trading capabilities, dedicated account management, and access to liquidity solutions. Coinbase Securities typically provides secure custody solutions for institutional clients for storing cryptocurrencies. It also offers insurance coverage for digital assets. In addition, subscription and service revenue also includes stablecoin revenue, block rewards, interest income, and more.

Coinbase's subscription and service revenue in Q3 2023 was $334 million, accounting for 49.55% of total revenue in Q3 2023.

• Other Revenue

Coinbase's other revenue comes from the following channels: Coinbase Commerce; Coinbase Cards; Interest income; Institutional services; Other products and services. In Q3 2023, it accounted for 7.5% of total revenue and is gradually increasing.

In terms of regional revenue, although Coinbase's clients are spread across over 100 countries, the largest concentration is in the United States, accounting for approximately 40%, followed by the UK/Europe, accounting for about 25%. However, the revenue share of the United States region in FY2019-2022 accounted for 78%, 76%, 81%, and 84% of total revenue, far exceeding other regions. In August of this year, Coinbase announced its entry into the Canadian market, but growth in other regions will be limited by local regulatory environments and competition from local exchanges.

2. Profit Breakdown

Coinbase's overall gross profit margin is very high, a major characteristic of SaaS companies, with a gross profit margin of 85% in Q3 2023. The main profits are still distributed in the aforementioned trading revenue and subscription services. MEV income from staking business and income from USDC are reflected in this; the net profit increased by $81.6 million from bond repurchases, increasing the net profit margin, which was the biggest change in the third quarter.

• Staking Business and Base MEV Income

Coinbase is the only Base Sequencer, and as such, Coinbase is able to capture all priority gas profits due to sequencing from the Base chain.

According to L2 revenue = L2 fees - L1 data storage costs - L1 verification costs. Based on the current cumulative cost of Base, the estimated sorting fee is 5.46 million, subtracting half of 3.54 million, which could give Coinbase around 1 million USD (but in reality, Coinbase relies on charging 25%-35% staked ETH commission as income). The revenue brought to Coinbase by the Base chain reaches 1 million (if calculated to the actual value received by Coinbase, it would be even smaller). Looking at Coinbase's staked ETH quantity, it ranks first among all CEX, with a market share of 8.6%, ranking below Lido. The realized ETH income is approximately 300 million USD, of which Coinbase receives 25%-35% commission, resulting in around 100 million USD in income from the staking business. Coinbase's EBITDA remains at around 40% of revenue. This ratio will increase with the arrival of the bull market. USDC Business: Currently, the Coinbase platform holds 132 million USDC. Due to the Q1 banking crisis, which led to the failure of Silicon Valley Bank, USDC was significantly recast, and Binance's exchange of USDC for another stablecoin led to a decrease in USDC market value. However, Coinbase CEO Brian believes that the US regulatory risks may intensify, and people believe that compared to other stablecoins like Tether, USDC has more US relevance, which may pose short-term challenges for USDC. The overall market value of USDC has declined, with stablecoin market share currently at only 21%. Perhaps this is also a strategic consideration for introducing Coinbase as an investor and planning to launch USDC on six new blockchains between September and October to prevent further decline in market share. It is clear that Coinbase values the stablecoin business and needs to generate as much income as possible from the stablecoin business. Costs: In January 2023, the company announced and completed a restructuring that affected approximately 21% of the total number of company employees as of December 31, 2022 (referred to as the "2023 restructuring"). The 2023 restructuring was aimed at addressing market conditions that continue to impact the crypto economy and ongoing business priority work, to manage the company's operating expenses. As a result, about 950 employees from different departments and locations were laid off. As part of the layoffs, they received severance pay and other personnel benefits. Cash payments related to this restructuring were essentially completed in the second quarter of 2023, with the remainder expected to be paid by December 31, 2023. The significant reduction in labor costs resulting from the layoffs also contributed to a 50% reduction in operating expenses, which was one of the important reasons for Coinbase's three consecutive quarters of significantly exceeding expectations in Q1, Q2, and Q3 of this year. In terms of operating cost expenditures, on March 3, 2023, the company completed the acquisition of One River Digital Asset Management, LLC. ("ORDAM"), by acquiring all issued and outstanding membership interests of ORDAM. ORDAM is an institutional digital asset management company registered with the U.S. Securities and Exchange Commission (SEC) as an investment adviser. The company believes that this acquisition is consistent with its long-term strategy and can provide more opportunities for institutional participation in the crypto economy. The total consideration paid in the acquisition was 96.8 million USD. Lending Costs: In August and September 2023, Coinbase's CFO Alesia Haas led the repurchase of Coinbase's 2031 debt, amounting to 263 million USD, but only spent 177 million USD. That is, most of the profit was used to repurchase convertible senior notes (issued in September 2021 for 1 billion, due in October 2031), resulting in a net gain of 81.6 million USD from the disappearance of corresponding long-term debt.On August 7, 2023, Coinbase announced a cash tender offer to purchase up to $150 million of its senior unsecured notes due in 2031 at a price of 64.5 cents (prior to August 18) or 61.5 cents (after August 18 but before September 1). Coinbase will fund this transaction through its operating cash flow. This tender offer follows the repurchase of $645 million of 0.5% convertible senior notes due in 2026 at a 29% discount in June 2023, for approximately $455 million in cash. Given Coinbase's ample liquidity and no recent refinancing risks, this transaction is considered profitable and will not lead to a cash crisis. The transaction will further increase excess cash reserves for debt and reduce annual interest expenses by approximately $5.4 million. In theory, Coinbase's proactive use of cash tender offers to purchase some of its future maturing debt to reduce debt burden helps lower future debt interest expenses and improve financial stability. It may also boost market confidence, stock prices, credit ratings, and reduce borrowing costs. Valuation: In the base case scenario, the fair value of Coinbase is $89, which is 16% undervalued compared to the current price of $74. However, the sensitivity of the DCF valuation model to forecast business growth and terminal EV/EBITDA multiples is high. Considering the inherent cyclical nature and market sentiment of the crypto market, the short-term stock price is under downward pressure due to the bearish situation in the US stock and crypto markets. It is recommended to sell in the next 12 months and buy in the following 24 months. At an EV/EBITDA of 7x, the fair value is $89, and at 14x, the fair value is $170. Risk - Regulatory Uncertainty: Coinbase is seeking to dismiss a lawsuit filed by the SEC in June in the New York federal court, accusing the company of operating an unregistered exchange, broker, and clearing agency. The lawsuit focuses on the fact that Coinbase has combined the functions of a broker, exchange, and clearing agency, which are traditionally separate in the securities market, and has not registered with the SEC or obtained any applicable exemptions. Coinbase has also provided two additional services to investors, which involve its operation as an unregistered broker. The first is Coinbase Prime, which forwards cryptocurrency asset orders to the Coinbase platform or third-party platforms. The second is Coinbase Wallet, which routes orders to third-party cryptocurrency trading platforms to obtain liquidity outside of the Coinbase platform. Coinbase has primarily generated revenue from cryptocurrency trading services but has overlooked the fact that these assets may have securities attributes. Since 2016, Coinbase has explicitly stated that cryptocurrency assets should be regulated by securities laws and positioned itself as a compliant platform in its marketing. However, Coinbase has allowed trading of cryptocurrency assets that meet the Howey test standard without registering with the SEC, violating the registration requirements of the Securities Act of 1933. Since 2019, Coinbase has offered staking services, allowing investors to earn returns by staking cryptocurrency assets, from which Coinbase receives a 25-35% commission. However, Coinbase has never registered with the SEC for the issuance and sale of staking projects, depriving investors of important information about the program and violating the registration requirements of the Securities Act of 1933. The income received by Coinbase ultimately flows into its parent company, CGI, which is actually the real controller of Coinbase. Therefore, CGI has also violated the same trading regulations as Coinbase.SEC seeks final judgment: (a) permanently prohibit the defendants from violating securities laws; (b) order the defendants to surrender illegal gains and pay pre-judgment interest; (c) impose civil penalties on Coinbase and require it to provide appropriate or necessary equitable relief for investors. (Note: In the judgment sought by the SEC against Binance, it also permanently prohibits it from engaging in financial business activities.) Summary: Currently, it is believed that Coinbase's profit expectations are better than the first half of 2023, but profits will continue to be suppressed due to the crypto market not truly entering a bull market. However, its income and profit growth potential will be released due to the correct on-chain and derivative development strategies. Income growth that has not been fully priced in includes: 1) substantial income growth after the official launch of international stations and derivative products. 2) Continued growth of staking business, including sorting income from the base chain (and other chains); staking business income; incremental use of Coinbase's other products and services (wallet, etc.) brought by on-chain users; 3) Potential volume recovery of USDC bringing growth in reserve interest income and fees generated from distribution, but due to the strong correlation with the crypto market, it is expected that the main business trading income will not have significant growth in the macro pessimistic 8-12 months, contrary to the high inflation and high interest rate environment suitable for crypto growth. However, the growth rate will exceed the 515% growth in 2021 in the subsequent bull market. Valuation indicates that in the base case scenario, Coinbase's fair value is $89, which is 16% undervalued compared to the current price of $74. However, given the high sensitivity of the DCF valuation model to forecast business growth and terminal EV/EBITDA multiples, it should be considered in conjunction with the inherent cyclical nature of the crypto market and market sentiment. In the short term, the stock price is expected to rebound significantly in the recent dual situation of a small bull market in the US stock and crypto markets, and it is a practical recommendation to buy when macroeconomic benefits are being priced in. When the P/B exceeds the high point in July of this year, the risk of overvaluation should be considered. At an EV/EBITDA of 7x, the fair value is $89, and at 14x, the fair value is $170. Appendix Compliance Status: Coinbase's CEO believes that the MiCA bill passed in Europe, but the UK, Singapore, and Brazil are actively working to pass legislation, with each financial center leading the way in this regard. Other countries are ahead of the United States in this respect. At the same time, Coinbase is also working to provide regulatory clarity for the entire industry. One of the biggest obstacles to the adoption of this technology is the lack of clear rules and the enforcement regulation that has been carried out in the United States so far. While significant progress has been made in accepting crypto and web3 technology and enacting clear legislation in other parts of the world, the United States has always had difficulties in catching up. Coinbase has an important role to play here. When the SEC refuses to make rules and chooses to use enforcement regulation, Coinbase uses the courts to help bring regulatory clarity to the United States and helps create case law. Coinbase is also actively involved in congressional activities, where bipartisan support for crypto legislation can be seen. In the past two months, the House Financial Services Committee and the House Agriculture Committee have passed landmark crypto market structure bills (FIT21) and stablecoin bills with bipartisan support. These bills will be submitted to the full House for a vote later this year and then to the Senate. Coinbase has committed to ensuring that the United States passes crypto legislation and does not fall behind. It is also mobilizing crypto users across the United States to ensure that their voices in Coinbase's democratic body are heard. So far, one-fifth of Americans have used cryptocurrency—higher than the proportion of union cardholders. The "Support Crypto" movement has attracted about 60,000 crypto advocates, covering 435 congressional districts. Coinbase's political influence is also expanding, with a live meeting held in August with representatives from Senator Gillibrand's office, Mayor Adams's office, Governor Hochul's office, and hundreds of crypto enthusiasts. Coinbase is subject to various anti-money laundering and counter-terrorism financing laws and regulations, including the Bank Secrecy Act (BSA) in the United States and similar laws and regulations abroad. As a money services business registered with the Financial Crimes Enforcement Network (FinCEN) in the United States, the BSA requires the company to develop, implement, and maintain a risk-based anti-money laundering program, provide anti-money laundering training programs, report suspicious activities and transactions to FinCEN, comply with certain reporting and recordkeeping requirements, and collect and maintain information about its customers. In addition, the BSA requires it to comply with certain customer due diligence requirements as part of fulfilling its anti-money laundering obligations, including developing risk-based policies, procedures, and internal controls, and reasonably designing to verify customer identities. In the United States, Coinbase has obtained licenses to operate as a money transmitter or equivalent money transmitter in the states necessary for its operations, including the District of Columbia and Puerto Rico. In addition, it has obtained a BitLicense from the New York State Department of Financial Services (NYDFS). Outside the United States, Coinbase has obtained a license from the German Federal Financial Supervisory Authority to provide custody and trading of crypto assets. The company is also registered as a crypto asset exchange service provider in Japan and provides crypto asset and first-party payment services, covering crypto asset and first-party payment services, according to the registration of the Kanto Local Finance Bureau of the Japanese Ministry of Finance. In Singapore, the company operates under the Payment Services Act and is supervised by the Monetary Authority of Singapore (MAS). The company is currently in a preliminary approval state and requires final approval from MAS to become a major payment institution. Under these licenses and registrations, it is subject to extensive rules and regulations, including anti-money laundering, customer asset and fund protection, regulatory capital requirements, eligibility and proper management, operational controls, corporate governance, customer disclosures, reporting, and recordkeeping. Coinbase's subsidiary, Coinbase Custody Trust Company, LLC, is a limited purpose trust company approved by the New York State and is subject to supervision, review, and oversight by NYDFS. NYDFS regulations impose many compliance requirements, including but not limited to operational restrictions on the nature of crypto assets that can be held under custody, capital requirements, BSA and anti-money laundering program requirements, related party transaction restrictions, and notification and reporting requirements.

Coinbase provides services to customers through an electronic money institution authorized by the Financial Conduct Authority in the UK and the Central Bank of Ireland. The company complies with rules and regulations applicable to the European electronic money industry, including rules related to fund custody, corporate governance, anti-money laundering, disclosure, reporting, and inspections.

Coinbase has established a set of policies and practices for evaluating every cryptocurrency asset it considers for listing or custody and is a founding member of the Crypto Ratings Council. Coinbase's brokerage business is operated by Coinbase Capital Markets and Coinbase Securities, both of which are registered as brokers with the SEC under the amended Securities Exchange Act of 1934.

Coinbase Q3 Financial Report Update

Overall, Coinbase's profit and revenue in the third quarter exceeded expectations, but total trading volume did not meet expectations. The financial data is similar to the second quarter (adjusted loss per share for the third quarter was $0.01, better than the expected loss per share of $0.55 according to FactSet, marking the third consecutive quarter that Coinbase has exceeded profit expectations). Total revenue for the quarter was $674.1 million, exceeding the expected $650.9 million.

Despite shrinking market trading volumes, Coinbase had a strong performance in the third quarter, as follows:

1) Discounted bond repurchases, achieving a net profit of $81.6 million, with ample cash flow

Coinbase CFO Alesia Haas led a repurchase of Coinbase's 2031 debt, amounting to $263 million, but only spent $177 million. That is, most of the profit was used to repurchase convertible senior notes (issued in September 2021 for $1 billion, maturing in October 2031), resulting in a net gain of $81.6 million from the disappearance of long-term debt. This has strategic considerations and shows that Coinbase is not troubled by cash flow.

2) Continued strong development of on-chain business, international stations, and derivative business

Coinbase's derivative exchange is still in the early stages, with the actual launch of the API test version only in Q2-Q3 and only a few customers. Therefore, some of the next steps Coinbase will take include integrating it into the retail application. In August, its wholly-owned subsidiary CFM successfully obtained regulatory approval from the National Futures Association (NFA), a self-regulatory organization designated by the Commodity Futures Trading Commission (CFTC), to become a futures commission merchant (FCM), allowing it to provide federally regulated cryptocurrency futures trading to eligible U.S. customers. The official launch of international stations and derivative products will bring substantial revenue growth.

Looking ahead to the fourth quarter, trading revenue in October is approximately $105 million, and Coinbase expects to achieve a "meaningful" positive adjusted EBITDA in 2023, with a slight adjustment to the previous goal of "raising" full-year EBITDA for 2023.

Note: This article represents the author's personal views and is not investment advice.

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