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Coinbase’s primary revenue source has been undergoing a transformation since its IPO. The forthcoming report on Coinbase’s second-quarter earnings could highlight a notable shift in its revenue streams, with transaction fees possibly losing their top spot to the earnings from its close affiliation with USDC stablecoin issuer, Circle.

Upon its Nasdaq introduction in April 2021, transaction fees from traders on its platform primarily drove Coinbase’s revenue. The Securities and Exchange Commission (SEC) disclosed that during Q1 2021, Coinbase amassed a significant $1.5 billion from these transactions. This figure constituted 86% of its total $1.8 billion revenue. However, with a decline in digital asset values, Coinbase saw its transaction revenues decrease to $375 million in Q1 of the present year, making up only 46% of its overall revenue of $773 million.

With the trading activity showing a slowdown due to the crypto market‘s downturn, Coinbase has shifted its focus to subscriptions and services, emphasizing offerings like staking. As of the first quarter, revenue from subscriptions and services was at $362 million, narrowly trailing transaction revenues by $13 million. This marks a significant increase from the previous year’s $152 million during the same timeframe.

While staking products have garnered significant attention and faced regulatory scrutiny, the lion’s share of the first-quarter revenue from subscriptions and services came from interest income, standing at $241 million. This overshadowed the $74 million garnered from blockchain rewards.

The surge in interest income is largely credited to Coinbase’s collaboration with Circle and Centre, the consortium responsible for USD Coin, as per John Todaro from Needham & Company. Being an original member of this consortium, Coinbase inked a deal with Circle in 2018, ensuring a shared revenue from reserves supporting the token.

Stablecoins like USDC are digital assets anchored to the value of traditional currencies such as the U.S. dollar. Their backing typically comes from cash and government securities, such as Treasury Bills. The latter have seen increased yields as the Federal Reserve elevates interest rates to tackle inflation. As Todaro highlighted in a discussion with publication Decrypt, the rise in interest rates saw Coinbase recognizing potential income gains. However, the trading volumes experienced a decline post the bull market, marking a shift in revenue sources.

USDC: 6th Largest Cap Coin

CoinGecko’s data indicates that USDC has the 6th largest market cap in the crypto world at $26 billion. However, this value has experienced a 19% dip from its initial $32.5 billion at the beginning of Q2, especially after an incident with Silicon Valley Bank in March. Although the Federal Reserve has since elevated interest rates to the highest in 22 years, potentially benefiting Coinbase’s USDC reserves-based earnings, Todaro believes the shrinking USDC market cap may nullify these advantages.

Despite potential fluctuations in USDC-based interest income, Todaro predicts subscriptions and services might emerge as the dominant revenue source. His projection for Coinbase’s next quarter is a revenue of $320 million from subscriptions and services, which surpasses the anticipated $242 million from transactions.

This is likely the quarter that Coinbase becomes a bank vs. exchange.

Ryan Selkis, co-founder of the crypto analytics firm Messari, shares similar sentiments. He believes Coinbase is transitioning more towards a banking model rather than just an exchange. He opined in an interview that subscriptions and services are offering a balanced revenue stream for Coinbase, especially with the Federal Reserve’s rate increases. However, Selkis also mentioned that specifics regarding the revenue split between Coinbase and Circle remain undisclosed.

This is likely the quarter that Coinbase becomes a bank vs. exchange.
With trading volumes down ~40% Q2 v Q1, and interest rates up, I’d expect to see >$300mm of interest income vs. <$300mm of transaction revenue.
Earnings on Thurs… pic.twitter.com/KLz0mbw6EP
— Ryan Selkis 🪳 (@twobitidiot) August 1, 2023

Todaro and Selkis both envision a possible resurgence in transaction-based revenues for Coinbase. Selkis states that if there’s a renewed vigor and demand in the market, with Coinbase maintaining its key role in introducing new clients and institutions to the crypto world, the platform might witness a comeback of revenues driven primarily by transactions.