Coinbase and Binance diverge in outlook for 2023

Hello, and welcome to this week’s edition of the FT’s Cryptofinance newsletter complete with a fresh new design. Today we’re looking at the plans for 2023 from two of the industry’s bellwether exchanges.

January is a period for looking forward and setting targets for the next 12 months.

Few predicted the extent of last year’s carnage in crypto markets so a little caution is understandable. Still, it’s striking how differently two of the industry’s biggest exchanges, Coinbase and Binance, are planning for the coming year.

Coinbase has had a rocky start. After settling a fine with the New York attorney-general’s office last week over poor compliance standards, its rough January continued when it announced on Tuesday that it would cut a fifth of its workforce — amounting to almost 1,000 employees.

If that sounds familiar to you, it’s because it is. The exchange also cut a fifth of its workforce last summer. If you combine both sets of cuts, Coinbase has cut a whopping 35 per cent of its workforce since June.

In a blog post, chief executive Brian Armstrong took a cautious tone and spoke about the need to “make sure we have the appropriate operational efficiency to weather downturns in the crypto market”.

Still, he assured the world that Coinbase was well capitalised “and crypto isn’t going anywhere” — judging by the crypto market’s sideways performance in recent months, he’s right.

Fines and job cuts aside, Armstrong is also facing a Grand Canyon-scale gap that has emerged between his exchange and Binance, which has left the US-listed trading shop in the dust.

Binance, by far the world’s largest exchange, seems to be impervious to the crypto pressures plaguing its competitor.

Not only has its market share increased over the past 12 months but chief executive Changpeng Zhao said on Wednesday that he planned to increase the exchange’s workforce by up to 30 per cent this year. This would inflate Binance’s total headcount to roughly 10,000 if we take the chief executive at his word.

Most traditional exchanges employ far less than that (and still have to cut costs, as Crypto.com proved earlier this morning). I’d love to know what most of Binance’s army would be doing all day.

Make no mistake: failing on compliance standards and growing too quickly are two examples of Coinbase scoring some serious own goals. But Binance’s soaring ambition is particularly eye-catching because of the environment both are operating in.

Exchanges are, ultimately, operating in an environment that isn’t kind to crypto writ large. High inflation, rising interest rates and war in Europe have whipped up the perfect storm for downward pressure on the digital assets market.

Bank of America and S&P Global downgraded their ratings on Coinbase this week over concerns that the customers just weren’t coming back any time soon.

“With heightened regulatory uncertainty and consumer confidence shaken due to FTX, we think retail crypto market participation will remain tepid in 2023,” said BofA’s research analyst Jason Kupferberg, bumping the exchange’s equity from “neutral” to “underperform”.

At S&P Global, Coinbase’s credit rating downgrade from double B to double B minus reflects “our view that weakened trading volumes in the aftermath of FTX’s collapse will continue to pressure Coinbase’s profitability”, said Prateek Nanda and Thierry Grunspan.

Whose view of the crypto market will prevail, or could both be right? In financial markets, the consensus is often wrong. Bitcoin is up 14 per cent this year even though the flow of news has been unremittingly bad.

Still, Coinbase is a listed company and therefore subject to transparency that Binance does not need to concern itself with. Plus, Binance is an especially private private company. Zhao’s predictions thus ought to be taken with several grains of salt.

“I don’t know how much reliable information we have on the financial success of Binance. Is it profitable growth?” said S&P’s Alexandre Birry, adding that it was only possible to rely on data from companies “putting themselves to the public scrutiny test”.

Do you have thoughts on Coinbase’s and Binance’s competing starts to the new year? Or maybe thoughts on our new design? Send me your comments at [email protected]

Weekly highlights

• The government in El Salvador has passed the country’s digital assets law, paving the way for President/bitcoin bro Nayib Bukele’s volcano-backed bitcoin bonds. Investors, form an orderly queue, please. Dr Ricardo Valencia, assistant professor of public relations at California State University, Fullerton, told me: “Salvador’s economy is in dire conditions with a huge debt and the only answer is acquiring debt or desperate solutions like this.”

• Drama continues at Genesis. The crypto lender owned by Digital Currency Group, the conglomerate led by Barry Silbert (who we explored in this edition of the newsletter), owes creditors more than $3bn. Take a look at my colleague Nikou Asgari’s story here. Then late on Thursday, the SEC sued Genesis and Gemini, the crypto exchange founded by the Winklevoss twins, saying a crypto asset-lending programme was not properly registered as a securities offering.

• Nexo — one of the last crypto lenders still standing — became the latest in a rapidly growing list of crypto companies to kick off the new year on the wrong foot. The lender’s Bulgarian office was raided by local law enforcement on Thursday and it is under investigation for money laundering and other suspected offences. Check out my coverage here.

• The Bank for International Settlements has again raised alarm bells on crypto. In a report, BIS said crypto enabled “shadow financial functions” and called on central banks and public authorities to “work to make traditional finance more attractive”.

• European lawmakers are also fretting anew about crypto following FTX’s collapse. The enthusiasm around Mica, the continent’s standard-setting rules for crypto, has cooled since Sam Bankman-Fried’s exchange went bankrupt. One lawmaker said he had “serious doubts” Mica could have prevented an FTX collapse on European soil. Read my story with Laura Noonan here.

Soundbite of the week: Sam starts a Substack

Sam Bankman-Fried’s compulsion to talk in public about FTX has extended to starting a Substack.

His overview is full of candidates for this edition’s soundbite of the week, including claims that he hasn’t run Alameda Research “for the past few years” and more denials that he stole funds or stashed away billions of dollars.

But my pick below may just qualify as understatement of the year:

“Over the course of November seventh and eighth, things went from stressful but mostly under control to clearly insolvent.”

Data mining: Crypto crime reaches all-time high

If you’ve subscribed to this newsletter for some time, you will know I enjoy sharing many of the wacky, embarrassing and often amusing stories that come to life in cryptoland.

However, the chart below is no laughing matter. It’s worth emphasising time and again that the many failures in the crypto world can have severe real-world consequences.

Data by blockchain analytics company Chainalysis has found the amount of crypto sent to wallet addresses associated with illicit behaviour hit an all-time high last year.

Just over $20bn worth of crypto was sent to addresses linked to some awful crimes, including human trafficking and terrorism financing.