Brian Armstrong, CEO of Coinbase, is a hard man to track down. It took CoinDesk months to get him on the phone. “Things have been busy!” he said.
No wonder. Armstrong is leading the charge to make bitcoin a mainstream currency. His firm specializes in services that make it easy to use.
Customers in the US can buy bitcoins from Coinbase using credit cards. They can keep them easily in a web-based wallet, an iPhone app, and they can send them to each other via email addresses, without having to worry about QR codes or random alphanumeric gibberish. They can even use SMS if they want. How is it able to do this?
Core developer Jeff Garzik once said that although the underlying protocol for the bitcoin currency had been developed, a second layer of services designed to exploit the coin was still needed.
These services, such as more intuitive payment systems, credit services, stock exchanges, and smart property, are what will give bitcoin more traction among mainstream users who would run a mile from a public bitcoin key.
Coinbase isn’t building most of them – but it is focusing on making a superset of services as simple as possible.
“We want to make bitcoin easier, and if we can do it with underlying bitcoin technology we will always do it that way first,” he says.
“But if customers ask for something like recurring billing, or subscription payments, or free micro-transactions and we can’t think of a way to do it with the underlying protocol, then we are going to provide it on top of the protocol.”
This creates something of a bubble for Coinbase and its customers. When Coinbase users send each other bitcoins between Coinbase wallets, they send money to email addresses, rather than bitcoin addresses. This is one of the ease-of-use features offered by the company.
What exactly does Coinbase do?
Armstrong breaks its services down into three main categories: user wallets, bitcoin buying and selling, and merchant tools.
It has competitors in all three areas (BitPay in the merchant space, for example), but capitalizes on being one of the only companies – if not the only one – to offer an end-to-end ecosystem.
Armstrong describes the company’s advances in each of these areas. The off-chain transactions in its user wallet offering nestled alongside paper wallet, and bitcoin rewards for referring other customers.
On the merchant side, it enabled merchants to collect shipping addresses and emails through its merchant tools earlier this month, and has been offering recurring payments since May. Merchants can also accept microtransactions with zero fees.
Isn’t it dangerous to take large amounts of bitcoin trades off-chain and offer them non-standard services such as the ability to send to email addresses? By creating a bubble of customers who can transact in a non-standard way, doesn’t Coinbase risk Balkanising the bitcoin community?
The “Gmail” of the bitcoin world
Armstrong likens his service to Gmail, and bitcoin to SMTP.
SMTP is an open email standard that provides basic functionality, but people using Gmail can do extra, non-standard things, such as having calendar invites automatically dropping to Google calendar, or taking advantage of automatic message prioritization or conversational threading directly in the client.
“We love open protocols,” he says. “And in the same vein we never want to have anyone locked into anything on Coinbase, so if you were to lose faith in us, you didn’t like our services, or we did something evil in the future, you will always be able to send bitcoins outside Coinbase.”
Between 75-80% of transactions that Coinbase conducts are handled internally, says Armstrong, but if it needs overflow capacity, it has partners.
Where it needs to reach out to our exchanges, he has agreements with Tradehill, Bitstamp, and Mt. Gox.
But with Tradehill benched because of regulatory issues, and with Mt. Gox taking a long time to process US withdrawals, Armstrong admits that Bitstamp is his ‘go-to’ exchange at present.
However, the company also conducts over-the-counter trades with two or three institutional players, at least one of which is a miner, he says.
Regulatory uncertainty
The company still faces challenges, however. There is still some regulatory uncertainty, he suggests. The company is exchanging bitcoins for fiat currency on US territory, and it has indeed taken the step of securing an MSB license at the federal level.
However, the individual US states are a different story. Each state has its own regulatory approach (and some appear to have none at all). Some states are considerably more aggressive than others. “We’re in uncharted territory, so hard to say if this stuff falls under a particular state’s MTL [money transmitting license] statutes,” says co-founder Fred Ehrsam. “We’re still talking to states to figure out how each responds, but Coinbase is prepared to get licensed where a regulator deems it’s necessary.”
In the meantime, he is continuing to do business, relying on the fact that Coinbase has its AML and KYC processes established.
In short, it seems to be a process of acting first and asking forgiveness later, while doing the utmost to ensure that, should regulators come calling, it will be in a position to show them some documented processes.
“Our approach so far has been that we assume the industry is going to get there eventually, where it will be pretty clear that you need to do it. That said, there is nothing clear yet today saying that that is the case.”
This approach stands in stark contract to partners like Tradehill, for example, which focuses more on the high-net worth market. It refuses to do business without all of its US state licenses intact, and has backed out of the market while it resolves the issue.
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It is a bold move on Coinbase’s part. Grabbing a market first brings the benefit of time; an early adopter can get a solid grip on a market and establish a healthy cashflow before regulators weigh in.
Square, for example, was fined $507,000 by state regulators in Florida and Illinois for failing to obtain a license before opening up for operations.
However, by that time the firm had raised $341m, and the Florida fine (which enabled it to then obtain its license) was presumably at that point just a cost of doing business.
Coinbase has a long way to go down that road. It successfully completed its A-round last May with a $5m investment led by Union Square Ventures.
It was the largest investment in a bitcoin-related company at the time, and it sets the scene for bigger funding deals in the future. It is constantly growing, having just signed a deal with Cashie Commerce, enabling the latter to use its merchant API for BitDazzle, an online Etsy-style marketplace for bitcoin-friendly merchants.
Deals like this will propel the company forward – and bitcoin with it.
If the regulatory challenges do come, the firm must be secretly hoping that it will have raised enough funds to handle them.
In the meantime, it will be concentrating on volume growth, by gaining mindshare in a still-nascent market.
This must be one reason why it waived merchant processing fees for its first $1m in sales. It will also strive to stay focused on what users want, which is likely to keep it one step ahead of the core development team on merchant and wallet features.
Bitcoin startups today must make a landgrab for users. In a market with everything to play for, owning your own ecosystem in a decentralized world like bitcoin is a valuable asset.