Coinbase Braves Regulatory Headwinds and Proceeds with L2 Offering

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The largest centralised cryptocurrency exchange in the U.S. will continue to push ahead with its Ethereum scaling solution, despite growing regulatory headwinds.

Coinbase has announced the launch of Base - an Ethereum layer-two solution - which will join other layer-two peers in attempting to overcome Ethereum's scalability issues.

"L2s primarily work by bundling transactions, sparing users time and money. More specifically, these blockchains take data off a blockchain, compress it, and then post it back in the original blockchain. Since the beginning of the year, L2s have been picking up considerably in terms of transactions," says Manuel Villegas, Next Generation Research, at Julius Baer.

Villegas however warns that U.S.-based projects and companies, such as Coinbase, continue to face increased regulatory headwinds

"It is still essential to understand that the changing regulatory environments and macroeconomic conditions will largely shape crypto’s direction for the year to come," says Villegas.

The U.S. Securities and Exchange Commission (SEC), and most recently, the New York Department of Financial Services (NYDFS) have indicated a greater interest in regulating crypto in 2023.

The NYDFS said in February it has ordered stablecoin issuer, Paxos, to stop issuing BUSD, the world's third largest stablecoin.

The move follows the SEC's settlement with Kraken over allegations that the exchange's staking service was an illegal sale of securities.

"The move from the SEC has weighed on the crypto markets," says Dalvir Mandara, a Quantitative Researcher at Macro Hive. "Notably, it paints a potentially bleak outlook for proof-of-stake (PoS) based blockchain tokens, including Ethereum."

Julius Baer's Next Generation research team warns the grip the U.S. Securities and Exchange Commission (SEC) has over the crypto industry is vastly tightening, with threats to multiple areas of the industry.

But Villegas says Coinbase could yet prove a winner if the SEC's grip doesn't tighten too much.

"The future looks promising, and we are optimistic that Coinbase, one of the largest CEX, is investing heavily on development," he says.