For many crypto enthusiasts, mid-2018 feels like a lifetime ago.
In those heady days, crypto’s market capitalization stood at $300 billion; rumors swirled that bulge bracket investment banks such as Goldman Sachs were entering the market; and Intercontinental Exchange excitedly announced plans for Bakkt, lauded to be the New York Stock Exchange of crypto.
Since then, the market has effectively halved, Goldman’s exact plans for crypto remain unclear, and Bakkt’s launch date is up in the air.
Things at Coinbase, once a retail exchange powerhouse, also look different. In 2018, the exchange had big ambitions to lure Wall Street’s savviest investors and fastest traders to its marketplace.
But times have changed, and now the firm, which recently scored a $8 billion valuation, is returning to its roots, focusing on San Fran’s Market Street over Wall Street. That is to say, the firm is shifting its client focus away from the likes of Goldman Sachs and BlackRock to crypto-native funds like Pantera and Polychain.
As a result, the firm is readjusting its 2018 goal to build out a full-scale Wall Street-grade prime broker, according to people familiar with the situation. And there’s one striking casualty. Jonathan Kellner, the Wall Street veteran who led brokerage giant Instinet, is no longer joining the firm, a Coinbase spokesperson confirmed.
As first reported by The Block, Kellner was set to join Coinbase this year to lead institutional sales and support, becoming one of the most notable Wall Street hires in crypto. He was expected to leverage his experience on Wall Street to integrate Keystone, the brokerage Coinbase announced it was acquiring in June 2018, into the broader business. This would include building out the aforementioned prime broker unit, dubbed Coinbase Prime, and over-the-counter trading.
Kellner did not respond to a request for comment. Dan Romero, who effectively took his spot in December to front Coinbase’s institutional business, said “Jonathan is an exceptional leader, but it was the right decision for us to focus on this area of the market,” referring to the firm’s pivot away from Wall Street.
“Crypto is an incredibly fast-moving industry and market conditions can change pretty quickly. We are refocusing on the crypto fund area of the ecosystem,” he added.
A spokesperson for Coinbase declined to comment on the specific terms of Kellner’s withdrawal. Previously, Romero was VP of Coinbase’s international business.
How did we get here?
To some market observers, Coinbase’s retreat from Kellner and Wall Street might come as a surprise.
In May 2018, Adam White — who led Coinbase’s institutional business for the majority of 2018 — told Bloomberg how Coinbase was looking to capitalize on a “wave of institutional capital waiting on the sidelines.” But, White said, “before it moves into the space, we have to have the fundamental components, the infrastructure, institutions are used to.”
Then, in September, White told CoinDesk the firm was actively hiring from Wall Street to “bridge the gap between financial services and technology.”
“We need to pull from some of the best and brightest minds that have worked their whole careers in other kinds of traditional financial firms,” he said.
As part of those efforts, the firm hired Christine Sandler from Barclays to serve as co-head of institutional sales, as well as Eric Scro from the New York Stock Exchange. He now serves as head of investor relations. Coinbase also brought on Oputa Ezediaro, an 11-year veteran of JPMorgan, to cover institutional sales.
In recent months, however, White’s “doctrine” was met with opposition from senior management at Coinbase, according to a person familiar with the situation. According to someone with direct knowledge of Coinbase’s institutional business, at least some at the exchange thought it was futile to focus on Wall Street first given the bear market backdrop.
That’s because white-shoe investing firms require more out of a prime broker than a crypto fund, including expensive handholding and a broader range of services, such as derivatives, hedging tools, and margin.
Consider a hedge fund like Point72, as an example. Such a firm would likely have numerous points of contact, including the person responsible for moving funds, executing trades, etc., with which Coinbase would have to engage, whereas a firm like Polychain would have one point of access, or one person, working across those verticals.
Crypto hedge funds know how to navigate this market without the same complex requirements as Wall Street, said Richard Johnson, an analyst at capital markets consultancy Greenwich Associates.
“For a person like Jonathan Kellner, it would be a lot of work to look for that needle in the haystack firm which is willing to start investing in crypto at this stage,” Johnson, who was not surprised by the news, said. “The activity of the last six-months has seen a bit of a setback. People are continuing to invest but I think focusing on the crypto side for them makes sense.”
“Nearly 20% of the all hedge funds launched in 2018 were crypto-first,” Romero said. “When we think about where crypto is today, these funds are critical and will be making the investments that will set the stage for the next bull cycle.”
Still, it is worth noting that crypto funds have been under pressure. A number of bitcoin-native firms have seen their holdings tank amid the bear market or have been issued lawsuits by their limited partners, while U.S. regulators subpoenaed those who invested in initial coin offering markets.
“The current bear market is going to go from bad to worse very quickly for both crypto funds and ICO projects,” Anthony Pompliano, head of crypto investor Morgan Creek Digital, penned in a November letter to fans and clients. “The pain ahead is something that many of these entrepreneurs and fund managers have never had to deal with.”
White declined to comment for this piece. He left the firm in 2018 to join cryptocurrency exchange Bakkt, which is preparing to roll-out bitcoin-tied futures sometime in 2019, the firm has said.
But what about the institutional money?
Coinbase doesn’t doubt the institutional money is out there. Nor do other market participants, including Edward Woodford, CEO of crypto exchange SeedCX, who said in a note to The Block that institutional interest is 100% and growing.
“There have been a number of high profile announcements but the institutions really entering the space in a material fashion are more under the radar,” Woodford said. “The demands of institutions have also shifted as the prices and returns have normalized.”
Indeed, Coinbase still has a long-term interest in working with Wall Street, Romero said, even if “the focus on mainstream financial brands has cooled off slightly” for now, speaking specifically about the firm’s hunt for talent. He insisted the shift would have “no material difference” in Coinbase’s services. For instance, Coinbase is not curtailing its initiatives in Chicago to build out a brand new, Wall Street-grade matching engine. It is also not deemphasizing its custody business. It will also keep growing its institutional business, although the firm wants to hire a more diverse team to match its new ambitions, according to Romero.
The plan makes some sense to Josh Olszewicz, a trader at Techemy Capital, who said he thinks the move aligns more with Coinbase’s roots.
“Most of the company isn’t really finance focused,” he said. “They have a fintech-ish background but they’re starting to dilute quality and brand going in five hundred different directions.”
As for Kellner’s exit, it was met with skepticism by some market observers.
“This is a big loss for Coinbase,” said David Weisberger, CEO of crypto data provider CoinRoutes. “Jonathan would have intuitively understood the conflicts of interests that arise from running a business that spans clearing services, custody, a matching business, and trading,” he said referring to Coinbase’s wide-ranging business model.
Still, Weisberger didn’t discount the new strategy entirely either, saying “it’s a perfectly fine thing to do.” But he warned if they abandon certain Wall Street ethos then institutional-aimed rivals — including Bakkt, ErisX, or Woodford’s SeedCX, could eat their lunch.
“The problem they have, and it is the single biggest difference between Silicon Valley and Wall Street, is that Wall Street has learned in financial markets that there is a need for a cooperative environment,” Weisberger said. “Competing at all cost and giving no quarter to your competition to become the Facebook or Uber of this space is not a winning strategy.”
“Even crypto hedge funds want to trade on markets they trust to be fair, with a reasonable opportunity to achieve best execution,” Weisberger added. “That is never going to mean trading exclusively on one exchange.”
Still, it might not be the likes of Bakkt concerning Coinbase, but rather crypto giant Binance, which dominates peer-to-peer crypto trading, said Olszewicz.
“Binance is light years ahead of Coinbase on many fronts,” he said. Binance is known for listing 150 tokens and dominating trading in Asia with turnover over the last month standing at $19 billion, versus Coinbase’s $3.2 billion.
Romero said crypto-native funds are looking at different assets than traditional Wall Street firms. “Assets that are more cutting edge, they are looking at staking, whereas traditional financial firms are focused primarily on bitcoin …”
In addition to looking at a broader range of coins, Coinbase is looking to expand its reach, Romero said. “You need deep liquidity, easy access in and out, and I think again that doesn’t change too much for crypto funds. There is a lot of trading volume happening outside of the U.S. so we want to expand our services to the international market and take marketshare in the EU and Asia quite a bit.”
The real question for 2019, then, is whether these once high-flying crypto firms can beat the bear before it’s too late.