Why did NYSE invest in Coinbase?

Coinbase’s $75M capital raise led by DFJ has attracted a lot of attention. It was large, and it includes some interesting strategic investors, notably the NYSE.

Historically, the NYSE has not made many strategic investments in startups, except in areas of trading technology and low latency data (eg Fixnetics). So why Coinbase?

There’s incredible growth in the adoption of bitcoin and consumer mobile wallets, as well as the growing acceptance of bitcoin among merchants.

And then there’s Coinbase’s ambition to become a regulated exchange, which it claims to have done in about half the US states. As an exchange, Coinbase can provide (and presumably monetize) not just matching services for buyers and sellers, but also real-time pricing information on bitcoin trades. Exchange status would mitigate some of the uncertainty of the legality of bitcoin and presumably opening up the exchange ecosystem to the myriad of investment firms that trade FX and other asset classes.

So no suprise that NYSE president Tom Farley commented that the NYSE’s investment was intended in part to “keep an eye on bitcoin as it matures as a legitimate currency.”

More broadly, there’s the disruptive threat that bitcoin technology presents to exchanges and clearing firms generally. If bitcoins threaten to disrupt payment systems, then blockchain technology has the potential to disrupt providers of “trust transactions” more broadly — including those supporting the systems for the registration, trading, settlement and clearing of securities.

There is a lot of “infrastructure” that goes in to enabling the transfer of ownership of a share. The pure exchange execution fee is small, and measured in “mils” (100ths of a penny) per lot of shares, but when you consider the systems involved in matching, allocating and confirming the trade, then the pot becomes quite a bit larger.

Overstock is already building Medici, a blockchain-based securities exchange.  The venture claims that it would incur just 20% of the costs carried by the current, centralized system run by the Depository Trust & Clearing Corporation, the entity that manages clearing for most securities in U.S. capital markets, and offer complete traceability of trades.

While Coinbase is clearly not targeting the Medici opportunity, it certainly will provide NYSE and its shareholders with greater insight into the future.

Disclaimer: The views expressed on this blog are mine alone.