From BitGo to MakerDAO: Crypto firms are eyeing broker dealers, and it points to a big shift in the market

The cryptocurrency market, born out of an anti-establishment, anti-government movement, is bending its knee to U.S. regulators. 

Across the market for digital assets, firms and foundations are eyeing so-called broker dealer licenses to operate compliantly. The regulatory designation, granted by FINRA and the Securities and Exchange Commission, is tailored uniquely for every recipient firm, experts say, but generally, they grant permission for companies to provide services relating to the securities industry.

As CoinDesk reported, earlier this year there was a backlog of crypto companies awaiting broker dealer approval. That pipeline saw some relief with the agency recently approving the likes of Harbor and Watchdog Capital. 

Still, even more firms have their sights set on a broker dealer, showing how much the industry has evolved from its humble origins in the anarchist cypherpunk ethos. BitGo, MakerDAO, and Abra have been quietly working on landing their own broker dealer in recent months, according to sources. These developments have not been previously reported on. 

Various paths

The path to a broker dealer varies for firms depending on the purpose of the BD and the method by which a firm acquires one. Some firms, such as Coinbase and MakerDAO, have purchased their own broker dealers via acquisitions.

That does not necessarily mean that companies can use them to do as they please. In Coinbase's case, for example, the cryptocurrency exchange acquired a broker dealer through its acquisition of Keystone.

Sources say that Keystone's license did not explicitly give the firm permission to issue securities on a blockchain, which was something Coinbase said it was exploring as part of the acquisition. At the time of the acquisition, a Coinbase source said it was a possibility that the firm could opt for a security token offering via the broker dealer, rather than an initial public offering. 

"Whenever any broker changes their business model (including through acquisition) they need to get approval," a source said. 

Another source said that Coinbase was in the process of "repurposing" their broker dealer. 

Coinbase declined to comment. As for rival BitGo, the firm, at one point, was looking at building out a broker dealer unit and acquiring a complimentary license. It was previously led by former BitGo Vice President Josh Schwartz. BitGo declined to comment. 

Harbor, a platform for firms to conduct tokenized fundraises, waited roughly 15 months for their broker dealer to be approved. Unlike Coinbase, Harbor is not looking to facilitate the trading of blockchain-based securities. Rather, CEO Josh Stein says that the license offers the firm more flexibility in how it engages with investor clients — the folks who invest in token fundraises via its platform. 

"It allows us to explore new business lines and implement different pricing structures," Stein said in a phone interview. 

A broker dealer allows firms to charge investors on a transactional basis, which allows them to take a small percentage fee off of every transaction, experts say.

There is also Abra, the crypto app, which recently revamped its offering to exclude U.S. investors from purchasing "synthetic" stocks. 

The service, once offered to Americans, allows people to buy into contracts that essentially track the price of a given stock and settle in bitcoin. Abra's view was that since those contracts were tied to bitcoin, a commodity in the U.S., they would not be considered securities. Regulators disagreed. 

CEO Bill Barhydt said the firm is looking to get a broker dealer to relaunched stock trading in the U.S., but in a way that more closely resembles traditional brokerage platforms — with crypto onramps. 

"We are moving more and more into the direction of native assets," Barhydt said. " It was fantastic to help us out of the gate to see what people were interested in."

Making peace with regulators

Insiders say there are effectively two reasons to get a broker dealer in the crypto market. 

For some, like Abra and Coinbase, it is to roll out specific products or business lines. For others, however, they might be looking to protect themselves from dealing with assets that regulators could consider securities. 

The MakerDAO Foundation provides one example. The firm acquired a broker dealer license from LaVecchia Capital, a Connecticut-based firm. The Foundation supports the development of the MakerDAO, which serves as an issuance platform for its synthetic stablecoin, Dai.

MakerDAO can be best thought of as a "credit facility and synthetic issuance platform serving as the de facto central bank for the Ethereum-based Open Finance ecosystem," as The Block analyst Matteo Leibowitz eloquently noted. 

If the Securities and Exchange Commission were to deem Maker, the protocol's governance token, a security, that could shield it, possibly, from certain regulatory reprisal. 

It could also allow the Maker Foundation to buy and sell securities on its own account "as a principal before selling or collateralizing the securities in order to mint synthetic version or mint Dai that is backed by those securities."