Behind Coinbase's quiet roll-out of OTC crypto trading this month 

Key Points
  • Coinbase launched its over-the-counter trading desk for institutions to get cryptocurrency exposure in the past month. But they aimed to keep it under wraps at first.
  • Over-the-counter, or OTC, trading is a familiar option for institutions used to buying and selling equities, and adds diversity to a mostly retail-driven crypto market, Coinbase executives say.
  • "We wanted to make sure we had all the boxes checked before we went public," Tim Plakas, head OTC trader for Coinbase, told CNBC at the company's New York headquarters this week.
Employees work at the Coinbase Inc. office in San Francisco, California.
Michael Short | Bloomberg | Getty Images

Coinbase rolled out an over-the-counter cryptocurrency trading desk earlier this month, but until now has been hesitant to openly discuss its ambitions.

The widely followed startup, recently valued at $8 billion, wanted to test interest in the product from professional traders first, and work out the kinks quietly.

"We wanted to make sure we had all the boxes checked before we went public," Tim Plakas, head OTC trader for Coinbase, told CNBC at the company's New York headquarters this week. "We needed to have some of our trusted institutional clients on board and were in a beta mode to make sure that all the pipes were working."

Over-the-counter, or OTC, trading is done directly between two parties instead of on an exchange. Coinbase acts as what's known as an "agency" and earns commission by executing client trades.

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Coinbase is best-known for the popular U.S. cryptocurrency exchange that was on-boarding as many as 50,000 retail accounts per day during the crypto boom last year. But although it took off with ordinary investors, many institutions weren't as eager to use it, according to Christine Sandler, the head of institutional sales.

The OTC "soft launch" began with a small network of clients like asset management firms. Sandler announced it in an interview with Cheddar this week. But she said it was important to debut it slowly with a ring of trusted institutions before they "blanketed the Earth" with a new product.

Sandler, who was head of electronic equity sales at Merrill Lynch and later Barclays during her 30-year career on Wall Street, described OTC as giving "an extra pair of hands" to facilitate a trade.

Clients can call Coinbase and say "I'd like to buy $1 million in bitcoin right now — what's the spread?" Coinbase, in this case, finds willing buyers and sellers without tipping off the market that a big order is coming. Coinbase will then get a bid and an offer, and reflect that in multiple price quotes for the client.

Wall Street professional investors are slowly warming to crypto. Goldman Sachs-backed Circle has a "principal" OTC desk called Circle Trade with a minimum entry-point of $250,000. Principal trading desks use their own inventory complete customer orders and also provide liquidity for clients. Genesis Trading is another OTC option for crypto in addition to Gemini, a firm founded by Cameron and Tyler Winklevoss.

The Coinbase executives anecdotally started to notice an increase in OTC volumes and decided it was time to jump in.

"This is a really opportunistic way for us to counterbalance and offer something that's different than our exchange trading but offers value to clients in a way that's really safe," Sandler said.

Crypto risks

One of cryptocurrency's major benefits or risks — depending on who you ask — is its anonymity.

Digital currencies' secretive nature has led to criticism from economist Nouriel Roubini and others, who peg it as the currency of choice for money-launderers or criminals. Bitcoin itself has fallen more than 70 percent from its high, marked by volatility on its way down.

In addition to price and headline risk, counterparty risk that a party might not live up to its contract obligations is already top of mind for asset managers.

"All of the participants in this program and on our exchange have gone through full [know your customer] and [anti-money laundering]," Sandler said. "They're known entities to us."

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SEC Chairman Jay Clayton on regulating cryptocurrencies

Eventually, Coinbase said, it will also link the OTC offering to its custody business. Custody in cryptocurrency means storing these assets offline, in what's known as "cold storage." That makes it hard to make a trade quickly, since it takes multiple days in most cases to move the cryptocurrency back online. But at some point, Coinbase expects clients to be able to make those trades immediately in the OTC product before the funds are physically available, then settle the trade when the funds come out of cold storage days later.

For now, Coinbase's OTC desk is only available to accredited investors on Coinbase Prime. Eventually though, executives said it will available for Coinbase Pro, which is designed for more sophisticated individual traders.

Still, Sandler said the new product could have implications for the average bitcoin trader, in the sense that it brings more activity to the sector.

"It's bringing diverse flows to the marketplace, and that of diversity creates healthy markets," Sandler said. "The worst thing a marketplace could be is homogeneous. Bringing more diversity to the marketplace is absolutely paramount."