Coinbase's Decentralized Exchange Acquisition Is a Shortcut to List ERC20 Tokens

May 27, 2018

As reported here on May 24, the world’s biggest cryptocurrency brokerage and trading platform, Coinbase, acquired decentralized cryptocurrency exchange Paradex.

Intent to Add Tokens

In an official announcement, Coinbase CEO Brian Armstrong stated that the acquisition of Paradex was part of a larger Coinbase initiative to expand globally and serve customers outside of the US. “The move not only reinforces Coinbase’s commitment to investing in decentralized infrastructure and participating in the nascent world of wallet-to-wallet trading, but also our focus on the international crypto trader. After making some product enhancements, we’ll initially offer this experience to customers outside the U.S., and eventually to U.S. customers,” said Armstrong. Moreover, Armstrong emphasized that GDAX, short for Global Digital Asset Exchange, which has been Coinbase’s leading flagship cryptocurrency exchange, will rebrand to Coinbase Pro to offer professional trading tools and services for advanced traders. Armstrong added: “Switching to the name Coinbase Pro is a recognition that the individual active trader requires a product completely dedicated to their specific needs.” The announcements from Armstrong and President Asiff Hirji described Paradex as a relay platform, rather than a decentralized cryptocurrency exchange. Even the Paradex development team presented itself as a decentralized relayer in its official announcement, stating, “One year ago this month, we set out to build the best decentralized relayer that empowers users with self-custodianship.” The decision of Coinbase and Paradex to categorize the Paradex platform as a relayer was likely done to avoid scrutiny from the U.S. Securities and Exchange Commission (SEC), which previously emphasized that in order to list ERC20 tokens or initial coin offering (ICO) projects, US-based exchanges must first receive a license and approval from the SEC. According to Armstrong, the Paradex decentralized digital asset relayer will only be available to customers outside of the US in the short-term until local exchanges can reach consensus with the SEC on handling tokens. The acquisition and integration of Paradex into the main infrastructure of GDAX and rebranding the exchange to Coinbase Pro can be considered a shortcut which Coinbase took to list ERC20 tokens ahead of other trading platforms in the US. Legally, local exchanges are not allowed to list tokens that have conducted ICOs, because if the tokens turn out to be categorized as securities, the exchanges face conflict with the SEC and other financial authorities. On May 23, the Paradex development team stated that its relayer would not be available until the integration of the Paradex relayer into the Coinbase infrastructure is completed. If Paradex merges with Coinbase Pro, it is likely that existing Coinbase users outside of the US will be able to seamlessly trade tokens in a peer-to-peer manner.

US Customers Will Have to Wait

In an interview with CNBC, the Coinbase team stated that it will have to implement changes for compliance purposes before opening Paradex and decentralized token trading to US-based users. The acquisition of Paradex by Coinbase demonstrates the company's confidence in its ability to circumvent legal barriers to eventually enable decentralized token trading in the US. Depending on the stance of the SEC, cryptocurrency exchanges in the US may not be able to support tokens in the conventional way of directly listing them as trading pairs on their centralized platforms. Coinbase's decision to essentially acquire the development team behind Paradex and merge it with its professional cryptocurrency trading platform could be an unorthodox method of allowing users in the US to trade additional tokens.