Coinbase’s New Customer Incentive: Interest Payments, With a Crypto Twist

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The newest enticement in the crypto world is something traditional investors know very well: interest payments.

Coinbase, a platform where users can buy and sell bitcoin and other cryptocurrencies, is launching a program for institutional investors that will pay them a set interest rate, likely between 5% and 8%, when they park money in its custody service. The program, called “staking,” comes with a crypto twist. The interest is earned only if customers are holding certain cryptocurrencies, and the interest will be paid in those cryptocurrencies.

Cryptocurrencies are in the dumps, with prices falling and trading volume shrinking, so Coinbase and other companies are looking for ways to expand their revenue base. Coinbase, which announced the new service Friday, plans to pitch the program as a way for investors to get a set return on notoriously volatile assets. For the crypto projects themselves, it is a way to attract new backers.

Staking is based on a concept called proof of stake. Cryptocurrencies like bitcoin and Ethereum are run by interconnected but independent computers. To become part of that network, users have to buy their way in. In exchange for that capital and computer power, however, they are promised a payout in newly created tokens proportionate to their investment. Coinbase’s service will take those payouts and turn them into regular, recurring payments.

Proof of stake is less energy-intensive than bitcoin’s version of this concept, called proof of work. In that version, users are required to solve a complex math riddle, which becomes harder as more users participate. The computing power required to solve the puzzle creates the underlying value, which is why bitcoin is so energy-intensive.

The goal of both proof of stake and proof of work is to give people an incentive to participate in the network, thus ensuring it is sustained indefinitely. The strategies are also meant to protect networks from malicious actors.

Because of the difference between proof of stake and proof of work, bitcoin isn’t an option for staking. Coinbase’s staking service will start with only one cryptocurrency, called Tezos, which launched last year. Other cryptos will be added later.

Coinbase is the largest company in the sector to start offering this service. A startup called Staked offers a similar service, and another one was just launched by a company called Battlestar Capital. These services are essentially cooperatives using pooled capital for the staking service. Another startup, BlockFi, accepts cryptocurrencies as deposits for interest-bearing accounts and as collateral for loans.

“The industry has to evolve from just holding these things to doing interesting stuff with them,” said Sam McIngvale, head of product at Coinbase’s custody division.

Coinbase says its custody service, which launched last summer, has about $600 million in assets. Coinbase will split the staking revenue with customers, taking 20% of the newly minted cryptocurrency. The company is also exploring other ways to monetize assets in the custody service, such as collateralized lending.

Staking is the next step in Coinbase’s goal of expanding crypto-based financial services, and clients had been asking about it, Chief Executive Brian Armstrong said in an interview.

“Our mission is to build a new financial system,” Mr. Armstrong said. “To do that, we need more and more people.”

In an original WSJ documentary, markets reporter Steven Russolillo ventures to Japan and Hong Kong to explore the universe of cryptocurrencies. His mission: create WSJCoin, a virtual token for the newspaper industry. Image: Crystal Tai. Video: Clément Bürge

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