On January 11, Brian Armstrong, Co-Founder and CEO of Coinbase, appeared on CNBC’s “Squawk Box” to discuss the U.S. Securities and Exchange Commission’s (SEC) recent approval of several spot Bitcoin Exchange-Traded Funds (ETFs). Armstrong highlighted the significance of this development for the cryptocurrency industry and Coinbase.

Historic Milestone for Crypto

Armstrong emphasized that the SEC’s approval is a monumental step for the crypto industry, signaling government recognition of cryptocurrencies as a legitimate asset class.

Coinbase’s Role as Custodian

Coinbase has been named the custodian for 10 out of 13 approved Bitcoin ETF applications, a development Armstrong views as beneficial for introducing new capital pools into Bitcoin.

Impact on Coinbase’s Business

While specific revenue projections were not shared, Armstrong noted that being the custodian for these ETFs is advantageous for Coinbase. He said that it not only generates revenue but also caters to customers seeking diverse crypto asset uses beyond Bitcoin.

Broader Investment Access

Armstrong believes that the approval of spot Bitcoin ETFs opens the door for investors who previously lacked a straightforward way to gain exposure to crypto:

This ETF is really about unlocking new pools of capital that weren’t previously available. They didn’t have a way to get exposure to crypto and so now they can come and get exposure to Bitcoin. That’s great. New pools of capital come in. But that’s kind of the first step in people’s journey around crypto … I think many of them will graduate from ETFs to actually holding it directly and then starting to use it directly.

Future of Other Spot ETFs for Other Cryptocurrencies

Armstrong anticipates that the approval of spot Bitcoin ETFs will pave the way for other cryptocurrencies to have US-listed spot ETFs. He also foresees the development of crypto asset index funds, akin to the S&P 500:

I do think that this will, hopefully, pave the way for other crypto assets to have their own ETFs. And then, frankly, we should have index funds for crypto assets too, just like the S&P 500. Hopefully, maybe one day it’ll be the Coinbase 500 or something like that

And you can even imagine different index funds that focus on DeFi (decentralized finance) or staking or NFTs (non-fungible tokens) or different subsets of the crypto market. This is a really important new area of the financial markets and I think that it will have all kinds of new products come to market after this.”

The SEC’s Reluctant Approval

Armstrong observed that the SEC’s approval seemed reluctant, possibly influenced by legal pressures.

He expressed a desire for clearer regulatory guidelines and the need for new laws to address outstanding issues in the crypto market.

Coinbase’s Relationship with the SEC

Despite challenges, Armstrong remains committed to engaging with the SEC to foster a regulated and trusted crypto industry in the U.S.

Long-term Outlook

Armstrong avoids focusing on short-term market movements, instead emphasizing a long-term perspective. He is optimistic about the influx of new capital into the crypto market following these approvals.

Historical Context

Armstrong compared this milestone to other significant moments in crypto history, speculating on future developments like central banks holding Bitcoin.

On the same date, Mizuho Securities’ senior analyst Dan Dolev appeared on CNBC’s “The Exchange” to analyze the consequences of the introduction of spot Bitcoin ETFs, with a particular focus on Coinbase and the overall crypto market.

Dolev shared a somewhat skeptical perspective on the effect of these ETFs on Coinbase. He pointed out that, contrary to what might be assumed, the ETFs present a substantial challenge for Coinbase. He elaborated that by serving as a custodian for these ETFs, Coinbase is essentially eating into its most lucrative segment – direct Bitcoin trading.

He underscored that as a custodian, Coinbase’s fee earnings would be markedly lower (about five basis points) compared to the substantially higher fees (around 250 basis points) it charges for direct Bitcoin trading. This represents a shift from a highly profitable model to one that is considerably less so.

Dolev then explored the wider impact on the cryptocurrency market. He proposed that the introduction of spot Bitcoin ETFs signifies a major shift in Bitcoin trading’s pricing dynamics. He foresaw a notable reduction in trading prices, a trend he believes began with the ETFs’ introduction. This reduction, he argued, stems from heightened competition and more market alternatives, diminishing Coinbase’s capacity to levy higher fees.

In discussing Bitcoin trading costs, Dolev noted that Coinbase had been able to impose high fees as it was among the few trusted trading platforms in the U.S. However, with the advent of spot Bitcoin ETFs and other trading venues, he expects Coinbase’s ability to sustain such high fees will diminish.

Regarding the behavior of Bitcoin enthusiasts or long-term investors, Dolev remarked that Coinbase profits primarily from active trading. If users opt to hold their Bitcoin without engaging in trading, Coinbase doesn’t earn from these holdings. He suggested that this trend of holding without trading might become more prevalent, further affecting Coinbase’s revenue.