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.


05/11/15 Update: FinTech Market Map v2.0

FinTech_MarketMap_02091505/11/15 UPDATEAs a result of all the great feedback — over 50 comments and suggestions — the map is now 575+ names. This version includes a node for “Capital Markets” software, which I would define as companies that provide technology to institutions (asset managers, pension funds, banks, broker-dealers and other institutional investors) to analyze, access and participate in institutional financial markets. You’ll also find some Capital Markets firms in broader categories such as “Data and Analytics”, “Wealth Management”, and “API / Connectivity” because in many cases these companies serve both institutional and retail / consumer markets.  As always, feedback is very welcome!

Click here for full live mapI’ve been collecting lists of interesting financial technology startups for a while, but mostly they are lost in emails, bookmarks, Evernote and yellow stickies. So a few weeks ago I decided to get organized and start putting together a sector map of “fintech”.

It’s a good time to be doing this

  • Last year fintech firms raised $5.3Bn from VCs, 2x the amount in 2013. Commentators love to debate which city — New York, London or San Francisco — will be the “capital” for fintech. Bottom line is that the funds are flowing.
  • We’ve now had two of the first big fintech IPOs — Lending Club and OnDeck.
  • Fintech innovation is fast, smart and has the potential to disrupt established business models: online marketplaces disintermediate banks; low cost, consumer-friendly investment platforms are attracting assets dramatically faster than traditional asset managers; branchless banks deliver better service at a lower cost to more people; new payment technology provides better security, convenience and customer loyalty.
  • Traditional financial institutions are taking notice and starting to react. Many have (re)started venture funds or labs to make strategic investments. Others have chosen to partner (RBS referring clients to Funding Circle, Jefferies securitizing loans CircleBack, etc). Many more will acquire.
  • This technology makes our lives better.  In the future it will cost less and take less time to make a payment, transfer funds, buy foreign currency or obtain a loan.

So what is FinTech Continue reading “05/11/15 Update: FinTech Market Map v2.0”