Over the past month, Coinbase has made several announcements that show how the U.S. fiat-to-crypto giant’s strategy for future growth is shaping up. On February 19, Coinbase announced via a Tweet and an official blog post that it had purchase crypto analytics firm Neutrino. On February 28, Ripple’s XRP token became the latest cryptocurrency to be available for purchase through Coinbase. And Coinbase has been adding some big names to its team, with former Senior Managing Director of the Citadel hedge fund LJ Brock becoming Coinbase’s Chief People Officer, and former Amazon Web Solution’s principal solutions architect Luke Youngblood being hired to develop staking and governance solutions. Coinbase’s director of engineering and product Varun Srinivasan told CoinDesk that these developments are all part of its strategy to become “the Google of
Today we're announcing Coinbase has acquired Neutrino, a blockchain intelligence platform. Neutrino's technology is the best we've encountered, and will play an important role in legitimizing crypto, making it safer and more accessible for everyone. https://t.co/6gXcRvpEBM
— Coinbase (@coinbase) February 19, 2019
They can also be seen as steps to shore up Coinbase’s status as its services and those of Binance increasingly overlap. Coinbase and Binance experienced exponential growth as interest in cryptocurrency exploded in 2017 by focusing on two very different approaches to the crypto space. Coinbase announced it has received $300 million in a Series E fundraising round through a blog post in October, which valued the firm at over $8 billion. Irish Tech News called Binance the only tech company in history to achieve an above-$1 billion valuation within six months whilst turning a profit. Analysis from The Block Crypto puts Binance’s profits for 2018 at $446 million.
As we explained in an in-depth article on Binance’s ascent, Binance side-stepped China’s regulatory crackdown on crypto exchanges by completely avoiding fiat-to-crypto trading. In contrast, Coinbase’s growth was fuelled by it being the primary fiat-to-crypto gateway for Western crypto investors. But in December, Coinbase added feeless crypto-to-crypto trading to its platform. And one month later, Binance announced the launch of its Jersey-based platform to allow users to buy cryptocurrencies with Euros and British Pounds. Coinbase is now looking to leverage its position as the premier fiat-to-crypto gateway into offering trading on potentially thousands of cryptocurrencies. Binance is moving in the opposite direction, using its position as the top crypto-to-crypto exchange to overtake Coinbase as the one-stop site for all crypto-related transfers. In essence, both are now battling to become “the Google of Crypto.”
But Coinbase’s latest moves have prompted a lot of controversy. The acquisition of Neutrino has attracted a lot of criticism, both due to concerns over Neutrino itself, and revelations that firms Coinbase has worked with in the past may have sold user data gathered through the platform. And the addition of XRP to the platform was marred by an issue that caused many users to lose funds. Both issues have led to the #DeleteCoinbase hashtag to gain traction of Twitter.
So let’s take a look at the controversy, and see how Coinbase’s strategy is shaping up as it does battles Binance to become the Google of crypto.
Neutrino: Coinbase’s Controversial New Analytics Acquisition
Announcing its acquisition of Neutrino, Coinbase’s official blog described the firm as “a blockchain analytics firm” with “the best [technology] we’ve encountered in this space.” The blog post goes on to describe the rationale behind its acquisition:
“Blockchain intelligence is increasingly important in the crypto ecosystem, and is necessary to achieve our mission of bringing the open financial system to the world. By analyzing data on public blockchains, Neutrino will help us prevent theft of funds from peoples’ accounts, investigate ransomware attacks, and identify bad actors. It will also help us bring more cryptocurrencies and features to more people while helping ensure compliance with local laws and regulations.”
However, in an interview with Cheddar, Coinbase’s Head of Sales Christine Sandler explained there were additional reasons that Coinbase’s purchase of Neutrino was important:
”It was important for us to migrate away from our current providers… They were selling client data to outside sources and it was compelling for us to get control over that and have proprietary technology that we could leverage to keep the data safe and protect our clients.”
Bitcoin Magazine’s analysis of the Neutrino acquisition points out that Sandler’s statement may have been an admission that Coinbase inadvertently violated its own terms of service:
A post on Messari explains that most cryptocurrency exchanges use the same few providers of blockchain analytics, with some of the biggest names including Elliptic and Chainalysis. These firms have increasingly adopted what Messari calls a “give-get” data model: data obtained from exchanges is used to improve the analytics these firms provide, so that the more they’re used, the more effective their offering becomes. Coinbase’s purchase of Neutrino brings analytics in-house, and should therefore be seen as a positive move toward providing Coinbase’s users with increased privacy protection.
Both Chainalysis and Elliptical have issued statements categorically denying that they were ever using personally-identifiable user data from Coinbase. And a CoinDesk article quotes a Coinbase representative as corroborating these claims, insisting that Coinbase never passed such data no to third-party analytics firms. The primary use of these analytics firms is to identify “bad actors” in the form of cryptocurrency wallets that have been used for activities such as money laundering, financial crime, and funding terrorism. But the CoinDesk article notes that most blockchain analytics firms do collect and sell anonymized transaction data as a proprietary service, and that this is something that Coinbase’s new acquisition Neutrino is likely to continue to do even after the Coinbase purchase. But by bringing Neutrino’s blockchain analytics in-house, Coinbase is at least retaining more control over the way in which user data is used by analytics platforms.
However, it has quickly become apparent that Neutrino was far from an uncontroversial choice to solve the controversial issue of protecting customers’ data privacy. Bitcoin Magazine and others have reported that three Neutrino executives previously ran a controversial software firm called Hacking Team. Bitcoin Magazine published a separate article detailing Hacking Team’s past, which includes infecting a leading protest movement news site with malware in Morocco, helping the Turkish government spy on an American citizen, and being used by the Saudi government as part of its efforts to ensnare murdered journalist Jamal Khashoggi. These activities led Reporters without Borders to list Hacking Team among its five “Enemies of the Internet” in 2013. AMB Crypto has reported that Coinbase paid $13.5 million for Neutrino, with Hacking Team founders Marco Valleri and Alberto Ornaghi each personally receiving $2.951 million.
The Italian government stripped Hacking Team of its export license after an Italian PhD student was murdered in Egypt in March, 2016. Neutrino was formed soon after this. The Bitcoin Magazine article also voices the concerns of Janine of The Block Digest podcast, who was one of the first to draw attention to Neutrino’s team’s questionable past. Janine says that, ethical concerns aside, the aspect of the acquisition that most worries her is Neutrino’s Money Module software. This software was specifically designed to give Hacking Team access to targets’ devices and private keys.
The article concludes with a generic response from Coinbase, stating that Coinbase was “aware” of Hacking Team’s past activities, and did not “condone” nor “defend” them, but that “and Neutrino’s technology was the best we encountered in the space to achieve” the goal of fully controlling and protecting customer data while running necessary blockchain analytics.
But even the superior technology aspect of the acquisition has raised some questions. Kraken CEO Jesse Powell tweeted that Neutrino was ranked last place of five analytics firms on tech, and was disqualified from being used by Kraken anyway because of its executives’ past activities.
I asked our Compliance team what they thought of Neutrino. Fortunately, they'd just completed an evaluation. Neutrino came in last place on product (out of the 5) but was disqualified anyway due to the risks. However, other factors are important in M&A: cost, culture fit. pic.twitter.com/kiYh11GEBc
— Jesse Powell (@jespow) March 3, 2019
Neutrino’s eight team members have now moved into Coinbase’s recently-opened London offices. Blockonomi’s article on the acquisition sees this as part of a wider strategy for Coinbase to expand its presence in Europe:
“Moreover, the Neutrino acquisition also indicates Coinbase’s pivoting focus to Europe and its crypto centers. As the exchange has built out its London operations, it’s also looked elsewhere in Europe, having announced the opening of an office in Dublin, Ireland, last fall. The company first received a Barclays bank account and an e-money license to operate in the U.K. last spring.”
With the launch of its Jersey-based fiat on-ramp, Europe is also a key area for Binance. It is likely to be a key battleground as both firms stake their claim to become “the Google of Crypto.”
XRP: Troubled Addition of Ripple’s Cryptocurrency to Coinbase
When Coinbase’s intention to massively expand the cryptocurrencies added to its platform, many expected a big short-term price boost for the cryptocurrencies in question. This has been true in the past, with Bitcoin Cash’s addition to Coinbase in December 2017 being precipitated by a sudden surge in its value. The price movement was significant enough to spark allegations of insider trading from Coinbase staff who knew the listing was about to happen. These allegations have never been proved, and Coinbase’s own investigation into the matter concluded that no insider trading took place. But if nothing else, it’s proof that a Coinbase listing was seen as a big boost to a cryptocurrency’s price.
XRP’s price performance following February’s Coinbase listing was much less spectacular. A Forbes article notes a 10% rise in XRP’s price following its addition to Coinbase Pro, then quotes a variety of cryptocurrency analysts as giving reasons for the relatively subdued performance. These range from controversies surrounding XRP itself to the overall slow price movement within cryptocurrency’s protracted current bear market. But there are other reasons for this listing not exactly setting the world on fire.
As explained on AMB Crypto, many users transferred XRP funds to Coinbase within inserting the correct destination tag. The destination tag is a feature used by only a few cryptocurrencies, and it is a separate piece of uniquely identifying information to a wallet’s public or private keys. The destination tag for transfers has caused confusion for XRP users in the past, but it typically causes delays in crediting funds, rather than an outright loss of funds. However, Coinbase initially responded to those who had experienced destination tag issues with messages saying that the funds were lost.
Coinbase’s stance on this appears to have changed, as the AMB Crypto article shows Coinbase responding to Twitter users talking about the issue with a request to send a direct message. But added to the mounting controversy around Neutrino, its added up to a bumpy period for Coinbase.
It looks like you may have encountered an issue with the Destination Tag on an XRP transaction. Please DM us so that we can review your case.
— Coinbase Support (@CoinbaseSupport) March 8, 2019
Coinbase’s Expanding Team
Along with expanding its acquisitions and cryptocurrency offerings, Coinbase has been making some big-name additions to its team in recent months. Citadel Senior Manager LJ Brock’s mid-February hiring was described by Bitcoin Exchange Guide as part of a continuing “migration of top executives from established financial firms to crypto companies.” The article goes on to describe Citadel as “one of the world’s largest alternative asset managers with more than US$29 billion in assets under management” and “one of only three percent of hedge funds that have been in existence for more than 20 years.” And the addition of former Amazon Web Services principal solutions architect Luke Youngblood earlier this month was described by The Block as being part of a strategy to offer a greater range of cryptocurrency custody services to high-level Coinbase clients:
“So-called “Mining 2.0” strategies have increased in popularity among crypto hedge funds as such firms look for new ways to make money in the bear market. These strategies aim to squeeze alpha through active participation in crypto-networks with wide-ranging opportunities, including staking, providing validation services, or provisioning resources (e.g. compute power) directly to decentralized networks.”
Both Brock and Youngblood bring wide-ranging experience and expertise to Coinbase’s staff. Bitcoin Exchange Guide’s article focuses on Brock’s 20 years of H.R. experience, while The Block’s piece mentions that Youngblood founded early blockchain tech pioneer Blockstream and helped create the staking infrastructure for the Tezos network.
Other notable recent additions to the team include the January hirings of former Thomson Reuters Global Head of Trading Operations Quito Zuba and regulatory reporting firm Abide Financial Director Mark Kelly. Kelly’s role in particular is tied to Coinbase’s expansion of operations in Europe, as Bitcoin Exchange Guide explains he played a key role in advising Abide on EU regulatory compliance.
But an older hire has added to the recent controversies surrounding Coinbase. Bitcoin Cash figurehead Roger Ver has drawn attention to the June 2017 hiring of Kathryn Haun in a series of tweets that use the hashtag #DeleteKatieHaunFromCoinbase.
Kathryn Haun is a former federal prosecutor responsible for sending countless people to prison for victimless crimes. To my knowledge, she has never apologized. https://t.co/7sVD622Roe
— Roger Ver (@rogerkver) March 6, 2019
Haun has long been a controversial figure in the crypto space. As Coinbase mentions in the blog post announcing her hiring, Haun was a Federal Prosecutor who played a key role in the investigation into the crypto-using Silk Road dark web marketplace. But Ver’s recent tweets may have been prompted by a more personal issue, as Huan apparently instigated the fining of Ripple for not making Ver complete Know Your Customer (KYC) compliance when acting as an angel investor in the firm.
— Roger Ver (@rogerkver) March 8, 2019
#DeleteCoinbase: How Worried Should Coinbase Be?
Interspersed with his anti-Huan tweets, Ver was careful to limit his criticism and point out he was still a supporter of Coinbase as a whole.
Coinbase has done more to drive crypto currency adoption than just about any other company. We should be grateful despite a few poor decisions along the way.
— Roger Ver (@rogerkver) March 7, 2019
But the hashtag #DeleteCoinbase has received widespread attention. Some Twitter users have even claimed that Coinbase is temporarily halting account closures.
— Liam ₿ Epp (@LiamEpp) March 6, 2019
And Kraken CEO Jesse Powell has appeared in a YouTube video with the unambiguous title “Killing a Brand in 2 Weeks: #DeleteCoinbase.”
Of course, as one of Coinbase’s main competitors for fiat-to-crypto conversion, Kraken have a vested interest in seeing #DeleteCoinbase take off. And it should be noted that other similar #Delete movements have had limited impact, such as the trending of #DeleteFacebook after the social media giant was rocked by similar privacy concerns.
There is no firm data available on how many accounts have been deleted following the hashtag’s creation and it is likely more restricted to hardcore cryptocurrency enthusiasts than the mainstream audience to which Coinbase is primarily appealing. But as Binance begins competing with Coinbase on many of the same core offerings, Coinbase should be at least a little worried about the mounting recent negativity. It is unlikely that Coinbase will collapse overnight because of recent headlines, but there is little doubt they should be taking special care to repair their image in the fallout from the recent controversies.