Major players Coinbase and Gemini launch new services offshore amidst regulatory uncertainty in the US mainland.

Centralised crypto players Coinbase and Gemini have joined the ongoing trend where US-based crypto firms are taking business overseas in response to regulatory uncertainty stateside.

Both Coinbase and Gemini respectively have announced Coinbase International Exchange and the Gemini Foundation, which will expand their digital asset services to institutional clients overseas. 

“We would like to see the U.S. take a similar approach instead of regulation by enforcement, which has led to a disappointing trend for crypto development in the U.S.,” wrote Coinbase. “The Coinbase International Exchange is an expansion, bringing the safest, most trusted name in crypto to the global market.”

Coinbase International Exchange

While Coinbase said it is still committed to maintaining its status in the US, it has observed that countries outside of the US are moving forward with responsible regulatory frameworks for crypto, instead of hostility.

“As more and more markets are moving forward with regulatory frameworks to become crypto hubs, we believe the moment is right to launch this international exchange,” Coinbase said.

Coinbase International Exchange will initially offer Bitcoin and Ethereum perpetual futures. Currently, the new venture has regulatory approval from the Bermuda Monetary Authority (BMA).

“The Coinbase International Exchange is another step on our plans to scale globally—going broad and deep, lighting up the map—first announced in May of 2022,” wrote Emmanuel Goh, Head of Coinbase International Exchange.

Trades on Coinbase International Exchange will be in USD Coin (USDC), with security features like real-time 24/7 risk management, dynamic margin requirements, including rigorous compliance standards.

Institutional clients based in eligible non-US jurisdictions can access the platform through an API, said Coinbase. Retail customers would not be able to have initial access to the platform.

Gemini Foundation

The prominent crypto firm founded by twins Tyler and Cameron Winklevoss had been teasing the Gemini Foundation since late April, a non-US derivatives platform  which will service 30 countries and territories, including Hong Kong, Singapore, Brazil, and the Philippines.

1/ Introducing Gemini Foundation – a non-US crypto derivatives platform.

Coming soon…https://t.co/HtFHHfAP8d

— Gemini (@Gemini) April 21, 2023

Based in Singapore, the Gemini Foundation, was launched in response to the harsh regulatory landscape in the US. 

According to the Winklevoss brothers, Gemini had applied to the Commodity Futures Trading Commission (CFTC) in early 2020 in hopes to open up a US derivatives trading platform, but decided to pull out of the plan, as the current situation “made clear that it was not going to happen anytime soon.”

“If we can’t do it in the U.S. right now—dramatically grow our business and bring crypto to folks here—that’s not going to stop us from bringing it globally,” said Tyler Winklevoss.

Crypto Derivatives 

Derivatives trading is a form of trading which involves speculating the potential price of more complex forms of financial instruments – without having to own the asset itself.

In the context of crypto, crypto derivatives are financial instruments that derive value from an underlying crypto asset, and are contracts between two parties that allow traders to speculate on the price movements of any crypto asset without actually having to own it. The trader makes a profit (or loss) depending whether an asset’s price goes up or down.

Crypto derivatives have been proven popular on exchanges operating in non-US jurisdictions, including Binance, Deribit, and the now-fallen FTX. Outside of the US, retail users can participate in derivatives trading, including a popular form of derivatives trading native to cryptocurrency called perpetual future contracts.

Perpetual future contracts allows customers to speculate on price movements without not only having to own them, but also not having to lock in a settlement date.

To crypto traders, derivatives are seen as an important offering as users can hedge and manage risk. But in the US, crypto derivatives trading is highly restricted. As such, exchanges tend to focus on spot markets – the practice of trading on the current price of assets. Binance’s US arm excludes derivatives trading from their offerings.

Compliance difficulties

Both Coinbase and Gemini have been known to be on the better side of US regulators as centralised exchanges, but have been met with much difficulties recently.

While Gemini had received a trust charter from the New York Department of Financial Services in 2015 amongst its track record of compliance efforts, it faced a number of operational challenges from other regulators. 

In June 2022, the CFTC sued Gemini, alleging the crypto firm made “false and misleading statements” in its efforts to launch the first US-regulated Bitcoin futures contract in 2017 – a separate process from its prior attempt to launch derivatives exchange in the US.

“We have an eight-year track record of asking for permission, not forgiveness, and always doing the right thing. We look forward to definitively proving this in court,” the firm said in a statement at the time. 

The situation worsened for Gemini as the Securities and Exchange Commission charged Gemini for offering and selling unregistered securities through its Gemini Earn lending service in January, as they got boiled down in trouble through their business partner – the now-bankrupt Genesis, run by the Digital Currency Croup.

Meanwhile, Coinbase is under fire from the US Securities and Exchange Commission and its chair Gary Gensler, as the regulator charged ex-Coinbase product manager Ishan Wahi and his brother Nikhil with insider trading in July 2022, including allegations that nine digital assets offered on Coinbase were unregistered securities.