In response to increasing pressure from regulators, cryptocurrency exchange Coinbase Global (COIN 5.68%) has been dropping a lot of hints about moving its U.S. operations overseas. The U.S. already lags behind other nations in terms of its regulatory framework for crypto, and the recent emphasis on "regulation by enforcement" by the SEC has made the crypto industry increasingly susceptible to regulatory risk.
But would Coinbase really leave the U.S.? That's the question on many people's minds. And if so, how would it impact the company's valuation?
Coinbase's new expansion strategy
The important point to keep in mind here is that Coinbase does not appear to be bluffing. Back in March, Coinbase updated its "Go Broad, Go Deep" strategy, which focuses on international expansion. Over a period of eight weeks, Coinbase planned to build up its operations across six different continents, with an emphasis on cities that wanted to become "crypto hubs" and countries that wanted to be "crypto nations." Coinbase specifically pointed out the potential opportunity set in places like London, Dubai, and Bermuda.
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You can think of that as the "Go Broad" part of the strategy. The "Go Deep" part of the strategy involves a push into different types of tradable crypto assets. The one crypto asset that most people are familiar with is the non-fungible token (NFT), which is one area where Coinbase has already explored with the launch of an NFT marketplace in 2022.
But I think Coinbase is thinking even bigger in terms of new crypto derivatives -- such as Bitcoin perpetual futures -- that are not yet approved for trading in the United States. Crypto derivatives are a huge, booming business worldwide, and it makes sense that Coinbase would want to get involved. In March, for example, crypto derivatives trading volumes on major exchanges hit $2.8 trillion. In comparison, crypto spot trading volume was just over $1 trillion.
Remember: Coinbase makes money when people are trading cryptos and crypto assets. The company has a real incentive to expand its cryptocurrency platform to as many nations as possible, across as many assets as possible. For that reason, investors should be optimistic about Coinbase's future growth prospects.
After updating its "Go Broad, Go Deep" strategy in March, Coinbase followed that up a month later with another update on how things are going. The company singled out Brazil, Singapore, and Canada as top markets to focus on for now. And it suggested that the licensing process for a crypto derivatives exchange in Bermuda was progressing according to plan.
Coinbase is not giving up on the U.S. market
At the same time, Coinbase is not giving up on the U.S. market, even amid ongoing pressure from the SEC. Coinbase CEO Brian Armstrong has been one of the highest-profile defenders of the crypto industry in the U.S., even going so far as to launch a new Crypto435 lobbying initiative to educate U.S. lawmakers. In mid-April, he appeared in front of Washington lawmakers to make the case for crypto.
As Armstrong sees it, U.S. regulators are doing "untold harm to America" by making it close to impossible for crypto businesses such as Coinbase to function. For one, there is still absolutely no regulatory clarity on crypto assets.
For example, when SEC head Gary Gensler recently appeared in Washington in front of the same lawmakers, he could not (or would not) clarify whether Ethereum was a security or a commodity. This is one of the most basic questions in all of crypto.
It's easy to see why Coinbase is so frustrated. Time and time again, the company has attempted to work with regulators. The message from Coinbase seems to be, "Just tell us what you want, and we'll do it." But regulators won't meet the company halfway, and now it looks like Coinbase is starting to hedge its bets by expanding into places like Bermuda, where regulation is more favorable.
Should you buy Coinbase?
In its latest 10-K filing, Coinbase included an entire section ("Regulation is Coming and We Believe We Are Positioned to Benefit") on the impact of regulation worldwide. Coinbase specifically gave props to the European Union, Brazil, the U.K., and India for leading the charge on crypto. And it applauded efforts by overseas destinations such as Australia, Switzerland, and Hong Kong in cleaning up their regulatory frameworks to support crypto. So Coinbase has been thinking of making the move overseas for some time now, and knows exactly where it should go.
We will likely get more clarity from Coinbase when it releases quarterly earnings in May, but for now, it's safe to say that Coinbase is already starting to make the transition into a U.S.-based company that derives an ever-larger share of its revenue from overseas markets. If you are bullish on Coinbase being able to follow through on its "Go Broad, Go Deep" strategy, the company could be remarkably undervalued right now.
