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Coinbase launches in Europe - but who's its mystery bank partner?

All a bit murky - but firm claims userbase is growing

By Simon Rockman, 3 Nov 2014

Comment Brian Armstrong of Bitcoin wallet and exchange company Coinbase claims banks are not mustering to kill Bitcoin, despite multiple claims from various sources.

He says that Coinbase, the largest exchange company of the lot, has 1.7 million accounts – and says he knows of just two instances where customers have had their bank accounts closed for doing business with his firm.

Indeed, Armstrong argues that in both those cases, the Coinbase conformance team contacted the customers’ banks and were told that the accounts had been closed because the customers were doing other unsavoury things such as unlicensed money broking.

This contrasts starkly with rumours (here, here and here) on BitcoinTalk. Indeed, when I wrote that Silicon Valley Bank “welcomes Bitcoin opportunities” after it told me it did exactly that in our meeting, the company later called to ask me to remove the line in the article. Yeah, right…

Amstrong argues hard that Bitcoin is welcomed by banks and that Coinbase has a relationship with an EU bank. Although he would not say which, it seems to be Estonia’s LHV. This is part of Coinbase’s entry into Europe which sees it launch into 18 countries, albeit with no permanent staff here.

Barclays told us that it has no official policy on customers who trade in Bitcoin, or on companies which are in the Bitcoin business, saying “We have no issue with customers trading Bitcoin”, and that it was only when there was a regulatory issue such as Know Your Customer laws or the financial regulator asking them to look into the affairs of a customer which might lead them to taking action.

Lloyds gave us a similar statement: “We do not have a policy of closing accounts where customers deal in Bitcoin. Whenever we look to close an account, we always decide on a case by case basis and as a last resort. We are not always able to disclose reasons for closure in our letters to customers, but it would be wrong to make assumptions about our decisions, as a number of factors could be at play.”

Coinbase says that growth has been strong. While the value of Bitcoin itself has floundered from a high of $1,000 a year ago to under $400 today, Coinbase has added nine of the ten billion-dollar merchants which have signed up in the last year. That’s ten more than there were at the start of the year and Coinbase’s clients include Dell, Expedia, Square, PayPal and accounting software giant Intuit whose software now allows companies to invoice in Bitcoin. The number of transactions and active customers is growing well. Coinbase is looking to emulate this growth in Europe and wants to add another ten billion-dollar-revenue companies here.

Coinbase sees one of the things which makes it special as the access it gives developers to APIs, notably in the form of a way to query the blockchain using SQL called Toshi. There are 7,000 developers on the Coinbase programme and Armstrong claims that its APIs are the most used on GitHub – although a quick check seems to show that Bluetooth Low Energy APIs outstrip them. Armstrong cites the advantage of using the Coinbase APIs as being the only “full stack APIs” and said that they were created as an integral part of the two year, $2m investment it needed to build the company infrastructure.

Shooting the breeze

The business model is that Coinbase takes one per cent on conversions of Bitcoin to fiat currency either though the exchange or through the API. One area where there is a lot of opportunity growth is international remittance, and the company's aim is for Coinbase to be “disruptive” in this space. The maverick nature of that disruption is tempered with the need for cyber crime insurance and being audited every quarter by Silicon Valley Bank and the new mysterious banking partner.

Beyond Filipinos sending money home, Armstrong looks to the way Bitcoin might help a new kind of transaction evolve; tiny fraction-of-a-cent micro-transactions which are not feasible using the credit card model. He sees Coinbase as becoming “Amazon Web Services for Bitcoin”.

Armstrong argues that adding merchants is good for Bitcoin, which might seem obvious but, perversely, it could be seen the other way around. When there is a shortage of coins the price goes up; Armstrong says that this is the “gateway drug which gets people into Bitcoin”.

He agrees that merchants convert the Bitcoin they receive into fiat currency straightaway, and that this could be seen to put a downward pressure on the price – but he argues that because Coinbase sees the details of the transactions, he’s of the opinion that the amount of trade this accounts for is small enough, at ten to 15 per cent, to be significantly outweighed by investment purchases.

That might be three times the merchant volumes at the start of the year but it’s small enough to not be a factor in the recent price tumble. Armstrong attributes that to huge mining farms which have borrowed money to build their infrastructure and which need to pay back their investors, and on the bubble nature of Bitcoin which he says has been through three bubbles, each ending with a plateau higher than the previous one.

If merchant volumes became big enough to be a factor, says Armstrong, they would be accompanied by such a level of acceptance of Bitcoin the value would be robust against the downward pressure.

Coinbase looks after a lot of money. Again, details were thin, but Armstrong was prepared to say “hundreds of millions of dollars' worth” of Bitcoin. This makes it a little odd that while the company has ambitions to have its own banking licence, they are very long term ambitions. Perhaps it doesn't really need a banking licence of its own, what with all the existing banks being friendly to Coinbase and its customers. ®

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