The reason why Coinbase will list any ERC20 token but not your favorite niche project.

A semi-common sentiment I see on subreddits for some small-cap coins I follow is that people want to see the project listed on major CEXs, we'll say Coinbase for example, or why their favorite token doesn't get listed, but the hottest new ERC20 shitcoin is, or why projects only trade as ERC20 tokens on coinbase.

I'm a law student and I recently learned something in blockchain class that might help explain this behavior from the central exchanges, beyond them just getting big bags of shitcoins for cheap, so I thought I would farm some moons share with you all.

If you live in America, as a crypto enthusiast you might have heard of the BitLicense, a license CEXs are required to get to offer services in New York State. Coinbase has two of these, but so do a few other popular CEXs like Gemini, and more are supposedly working on acquiring one, including Crypto.com and Kraken. It's the first and only state in the US to require this level of regulatory compliance so far, because New York loves to swing its big finance industry dick around.

In order for a CEXs with a Bitlicense to list a token or asset, they have to go through a process with the NYS Department of Financial Services, which you can see in this flowchart.

NYDFS requires new coin listings to be certified in various ways to make sure that they are not financial securities, that the network is not vulnerable to known exploits, that there isn't a centralization problem, etc. NYDFS is also extremely understaffed, so this is not exactly a simple process if CEXs choose to go through the NYDFS channels. CEXs do however, have an option to self certify a token if it meets certain requirements, which you can read here.

I believe that Coinbase is so willing to list ERC-20 tokens because they are standardized assets on the Ethereum network, and Coinbase can skip all the cybersecurity analysis and just self certify them with minimal paperwork on their end, whereas any new network would require significantly more work on their end, and their certification policy probably doesn't reach beyond ERC-20 tokens.

TL;DR The reason your favorite smallcap project isn't on Coinbase is because the government, of New York specifically, makes it a pain for them to list it.