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US crypto exchange Coinbase Global Inc launched its NFT marketplace on Wednesday, in a sign of confidence in the niche digital asset even as the market shows signs of cooling.

The marketplace could be key to reviving the crypto exchange’s growth prospects a year after its fizzling public debut.

A trial version of its long-awaited platform -- designed to sell ownership of digital art and possibly other items -- was unveiled Wednesday in the company’s latest attempt to diversify its revenue and bring more predictability to the business.

The platform, first announced in October, will initially be available for a "small number" of people in the United States, a Coinbase spokesperson said. More users will be added from a waiting list over the next three to five weeks as the platform is tested.

Non-fungible tokens (NFTs) are a type of crypto asset which uses blockchain to record the ownership of digital files such as an image, video or piece of text.

They exploded in popularity in 2021, echoing the ballooning embrace of crypto such as bitcoin by mainstream investors and companies. Some NFTs have fetched millions of dollars worth of cryptocurrency, but growth has slowed in 2022.

On the popular marketplace OpenSea, NFT sales on the ethereum blockchain halved to around $2.5 billion in March, from $5 billion in January.

When Coinbase went public a year ago, investors had high hopes for a growth story. But with sales growth expected to go from triple digits in 2021 to negative this year, shares have tanked to a record low recently.

The social NFT marketplace -- which will allow users to trade, “like" and comment on images, similar to Instagram -- will be entering a crowded field six months after it was originally announced. A slew of other crypto exchanges and platforms, such as Binance and FTX, have already launched similar marketplaces. Plus, the NFT hype itself is cooling down. Sales on OpenSea, the world’s biggest NFT marketplace, are down 67% over the past 30 days, per tracker DappRadar.

Coinbase will need the platform to be a hit as it seeks to reduce its reliance on trading fees, which are subject to the whims of retail traders who more recently have been on the sidelines after crypto prices fell from last year’s highs. At the end of last year, about 86% of Coinbase’s revenue came from trading fees. It has about 89 million registered users to whom it could promote the service.

Many believe Coinbase will be able to expand into NFTs -- but perhaps not as quickly as they expected last fall. The platform may be “too little, too late," according to Dan Dolev, managing director at Mizuho Securities. “I don’t think this is the big, promising thing," he said.

"We believe NFTs are here to stay," a Coinbase spokesperson said. "Beyond buying and selling NFTs, our marketplace offers better ways to find the right communities and better spaces in which they can feel connected with each other."

NFTs are largely unregulated, and reports of scams, fakes and market manipulation are common.

One marketplace, LooksRare, has generated billions of dollars worth of volume from a small number of wallets trading NFTs repeatedly back and forth between themselves at inflated prices.

Another marketplace, Cent, halted transactions in February because people were selling NFTs of content which did not belong to them.

Coinbase said it will allow copyrighted or fraudulent content to be reported. The ability to create (or "mint") NFTs will be added to the Coinbase NFT platform in future, the spokesperson said.

Looking Ahead

Despite the challenges, Coinbase is investing heavily in search for growth. Its previous efforts to diversify revenue have included its so-called staking products, which allow users to earn yield on their coins. But in a recent investor letter, the company said it may slow its investments if there’s a material decline in sales so that losses won’t exceed $500 million this year. Its venture arm is one of the most prolific in the industry, making nearly 150 deals last year.

“We’re not always going to be the first to market with a product," said Alesia Haas, chief financial officer, during its earnings call in February. “But once we see customer demand, we’re going to fast follow and make sure that we can leverage the strength of our platform."

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