Coinbase Builds a $4 Billion Cash Pile To Weather Tighter Regulation, Crypto Risks
The cryptocurrency exchange plans to use its cash to expand and prepare for higher compliance costs, CFO says
Coinbase Global Inc. in its first months as a public company has built a $4 billion cash stockpile as it benefits from a trading frenzy and prepares for closer regulatory scrutiny.
Coinbase has socked away cash in part to weather a host of business risks in the crypto industry, according to chief financial officer Alesia Haas.
The company stress-tests its balance sheet to ensure it has adequate funds on hand to prepare for a stricter regulatory regime, possible cyberattacks or potential trading declines, according to Ms. Haas.
It also maintains additional cash as insurance against risks it hasn't yet identified, she said.
"We want to ensure that we maintain those cash reserves so that we can continue to invest and continue to grow our products and services in the event that we go into a crypto winter," Ms. Haas said.
A recent surge in trading, including among individual investors, has buoyed Coinbase's profits.
The company earned $1.61 billion during the second quarter, compared with $32 million a year earlier. Retail monthly transacting users increased roughly sixfold over the same period, to 8.8 million. It has about 9,000 institutional customers.
The strong results also have bolstered Coinbase's cash balance, which stood at $4.36 billion as of June 30, or about four-times higher than at the end of 2020.
The company went public in April through a direct listing, a type of public offering where investors can sell shares but companies don't raise capital.
The following month, Coinbase raised $1.4 billion by selling debt.
Securities and Exchange Commission Chairman Gary Gensler said this month that he intends to regulate cryptocurrency trading and lending platforms to the maximum extent possible.
"Coinbase is paying close attention to Mr. Gensler's public statements,'' Ms. Haas said.
"We do believe that regulation can be an enabler and not a burden," she said.
Coinbase also could face new tax-reporting requirements under the roughly $1 trillion infrastructure bill in Congress.
The bill would require crypto exchanges to report customers' trading gains to the Internal Revenue Service, similar to how securities brokers report on their clients' transactions.
Coinbase has many systems in place to comply with the measure, according to Ms. Haas, who said she expects the compliance costs to be immaterial.
Coinbase generated $2.23 billion in revenue during the quarter ended June 30, compared with $186 million during the prior-year period.
About 95% of Coinbase's revenue comes from trading fees, with the rest coming from subscriptions and services, including custody fees for storing assets for institutional clients, according to Ms. Haas.
Price volatility during the quarter was a boon to the company's trading business, according to Ms. Haas.
The price of bitcoin plunged to around $30,000 in late June from around double that amount in April, according to CoinDesk, a digital currency information firm. Bitcoin traded at around $45,000 late Tuesday, according to CoinDesk.
The addition of new crypto assets on Coinbase's trading platform, such as the addition of Dogecoin in June, also boosted revenue, Ms. Haas said.
As Coinbase adds new users, a key focus for the company will be on investing in new products and services in areas such as consumer financial services, said Moshe Katri, an analyst with Wedbush Securities Inc.
"The company's recent results show it can generate cash from its operations,'' he said. "This is literally a cash machine."
Acquisitions are also on the table, according to Ms. Haas.
Coinbase in February acquired Bison Trails Co., a blockchain infrastructure company. Coinbase has said it doesn't have plans to return capital to shareholders by buying back shares or paying dividends.
Having cash on hand allows Coinbase to take advantage of opportunities to invest while also preparing for risks down the road, said Chris Brendler, an analyst with investment banking firm D.A. Davidson & Co.
"It's nice to have that ability for rainy days," he said.