How Coinbase's U.K. license could rescue its reputation

Despite its popularity — or perhaps because of it — the cryptocurrency exchange Coinbase has been at the front lines of many of the issues plaguing the cryptocurrency market. Its new e-money license in the U.K. could go a long way to easing some of those pains.

In some ways, the nature of operating as a cryptocurrency company also limits the options Coinbase has to address customer issues. By comparison, banks may be heavily regulated, but with that comes consumer protections and other benefits that engender trust.

Without such protections, everyday problems can quickly balloon.

Michael Short/Bloomberg

As recently as February, the exchange caused an uproar by inadvertently double-charging users for cryptocurrency purchases. It attributed this issue to the credit cards people used to fund those purchases, meaning the cause of the issue was beyond the exchange's control, according to The Verge. The problem crossed borders, having been reported by customers of Canada's Scotiabank and the U.S.'s USAA. And as of this writing, just over a thousand TrustPilot U.K. reviewers give Coinbase an average rating of 1 out of 5 stars.

Coinbase could placate its EU customer base in part through licensing. Its recently obtained e-money license in the U.K. will extend across all 23 EU member states as well.

Coinbase’s e-money license allows it to issue cryptocurrencies and support the U.K.'s Faster Payments Scheme (FPS). It should also provide assurances to Coinbase users, says blockchain developer Peter Ullrich.

“It will certainly give European Coinbase users more security since their fiat-funds will not be lost if Coinbase goes bankrupt, a fate that is not uncommon for crypto exchanges,” said Ullrich, adding that customers "should be aware that the guaranteed reimbursement only applies to fiat-currencies and not their crypto-currencies. Those will still be lost if Coinbase or they themselves get hacked."

Coinbase says it is the first crypto exchange to replace SEPA with FPS. Access to FPS promises U.K. customers “faster, safer and seamless bank transfers,” Coinbase CEO Zeeshan Feroz said in a blog post.

Not only is FPS supported by all major U.K. banks, but it allows customers to trade cryptocurrencies as conventional fiat moneys, similar to pounds, euros or dollars.

The currency exchange provider recently claimed that the U.K. is its largest market in Europe and pledged significant investment into its London team.

Coinbase also announced that it had been granted the right to open a British bank account by Barclays, meaning that U.K.-based customers now could use a local service to make crypto transfers and exchanges. Up to this point, Coinbase customers in the U.K. have had first to purchase euros to buy e-money, as Coinbase’s only other EU-based partner is an Estonian bank.

Interestingly, the Estonian bank in question, LHV, has come out with announcement of its own, saying it was opening a U.K. branch in London.

Though bitcoin and other cryptocurrencies originated as an alternative to the traditional, regulated banking system, this is a case where regulation and licensing may do more to help the crypto market than to hurt it.

"Coinbase has been a vocal supporter for regulation of the crypto sector and worked together tightly with regulatory bodies all around the globe. Thus, I am not surprised that they are the first to acquire an e-money license as well," Ullrich said. "Being the first crypto exchange to acquire this license gives them a huge first-mover advantage, but other exchange will certainly follow suit, given the growing importance of the European market."

If Ullrich is right, Coinbase would be wise to use its first-mover advantage aggressively. The market is ripe and the precedents have been set for an influx of crypto competition in the U.K.