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Transcript: Brian Armstrong on the Challenges Facing Crypto

Surviving crypto winter and a regulatory onslaught.

Brian Armstrong, chairman and chief executive officer of COINBASE Global Inc., during an interview in New York, US, on Wednesday, March 1, 2023. Armstrong said crypto can help improve the American financial system and discussed working with lawmakers to come up with a "clear rule book."Photographer: Victor J. Blue/Bloomberg

Crypto is currently two distinct, but related challenges. The first is the bear market. The crypto winter. Coin prices are way down from where they were a year ago. The other challenge is regulatory. When people lose a lot of money, law enforcement enters the scene. And we've definitely seen a pickup on this front, with more civil and criminal actions having been taken against perceived bad actors. So how does the CEO of the pre-eminent US crypto exchange Coinbase handle this environment. This transcript has been lightly edited for clarity.

Key insights from the pod

How can Coinbase weather future downturns? — 2:47

Will crypto owners become a voting block? — 4:24

Has crypto regulation already succeeded? — 7:57

How does Coinbase know it doesn't list any securities? — 13:15

How does Brian feel about Bitcoin? — 20:10

Brian’s reaction to the FTX implosion — 26:50

Why didn’t Bitcoin hold up as an inflation hedge? — 29:15

What is the future of actual crypto usage? — 34:10

Joe Weisenthal: (00:10)

Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal.

Tracy Alloway: (00:15)

And I'm Tracy Alloway.

Joe: (00:16)

So, Tracy, obviously a lot going on in crypto, but I would say the two big things are, first, the crypto winter. There's been some recovery, but obviously all the coin prices are way lower than they used to be. And then there's just everything going on on the regulatory side.

Tracy: (00:33)

Yeah. It's sort of a double whammy for the industry, and I guess it's hard to determine causality when it comes to price and extra regulation. But yeah, it is not a great time for crypto.

Joe: (00:46)

Well, I would say that the historical patterns would suggest the regulators like to come in after people have lost money. After people have lost money in scams, their investments go down. So it kind of makes sense that you see the uptick in regulation right after the lines have been going down for awhile.

Tracy: (01:05)

Right. But it does prompt these big questions about should the regulators have been more proactive? Should they have been doing things before people lost money?

Joe: (01:12)

And then what should they do now? Anyway, we have the perfect guest to talk about this. We are going to be speaking with Brian Armstrong, CEO and co-founder of Coinbase, right in the middle of all this, the preeminent American crypto exchange. So Brian, thank you so much for coming on Odd Lots

Brian Armstrong: (01:32)

Yeah, thanks for having me.

Joe: (01:33)

 I want to ask you a question, we've actually asked other executives in the crypto space this question before, but I'd love to get your take on it. What is yield farming and where does the return of it come from?

Brian: (01:46)

Well, I mean, yield farming has a little bit of a bad name I think in this environment. There was obviously with the collapse of, you know, Terra Luna and BlockFi and some other firms like that. I think that's a very valid question to be asking. And I'm not sure I couldn't even answer it on their behalf. But, you know, I think there's a lot of other pieces of crypto that people are still excited about and you know, there's lots of things we can build beyond that.

Tracy: (02:12)

So one of the things we've talked about on the show quite a bit is this idea of crypto as kind of the ultimate momentum asset. And when money is flowing in, prices go up and everything is great. When money flows out, prices collapse quite quickly, which would seem to make the business of being a crypto exchange extremely cyclical. But one of the things that stood out from your most recent results you just reported relatively recently, you talked about how you want to be profitable through the cycle, through the upturns and the downturns. Can you talk a little bit more about how you plan on doing that?

Brian: (02:47)

Yeah. Well, historically, most of our revenue has been from trading fees, which, you're absolutely right. It is cyclical and crypto has been a fairly volatile asset class. It goes up and down. Now what we've done is we've started started shifting more and more of our revenue to what we call subscription and services in our financials, in our earnings calls.

And basically what that means is things like USDC, a stablecoin, that's been a nice growth mechanism for us, even in a down crypto market. Things like custody fees, fees that we earn on the Coinbase Card. People are, you know, using it for spending in merchant commerce activity. So these things are, I wouldn't say they're 0% correlated with overall market and crypto, but they're certainly a lot less than trading fees. And that's allowing us to build a more predictable business. 

Joe: (03:31)

So I want to talk about regulatory side. And we'll talk a lot about it. But in particular, I think yesterday I saw that Coinbase you had some new program, I think it was called the 435 program basically telling people to call your congressman, let people know that you care about crypto policy.

And of course, Uber sort of famously started this strategy of telling people on the app to tell your local regulators you want to drive an Uber. And I'm going to try to ask this in the most diplomatic way possible. And I have many friends who are into crypto and I like many of them. But when it comes to crypto, do you want the type of person who would call their congressmen to tell them to do better crypto policy? Is that really the type of person that you want sort of being the voice of crypto regulation?

Brian: (04:24)

Well, I think the average person in crypto, and by the way, there's a lot of them, you know, one in five households now have used crypto. About 50 million Americans. This is becoming a major constituent, lobbying group and everything that's going to shape future elections.

These average people, they may not have the exact solution for what the legislation should say around regulation of crypto, but they do know that they want elected representatives who are going to ensure that this industry comes within the regulatory perimeter, offers consumer protection, but also, you know, allows this innovation to flourish so that we can update the financial system. You know, 80% of Americans now believe that the financial system doesn't work for them. It's either too slow, it has too high fees. You know, nobody has equal access or not everyone has equal access to it.

And it's not surprising that's the case. I mean, the technology behind the financial system is sometimes 40 years old. It's written in [COBOL] and these mainframe computers and the laws for it are sometimes a hundred years old. They were created before the internet even existed.

So it's time to update the financial system. I think the average voter in America is now realizing that crypto is one of the great technologies that can help them. And they want their elected representatives to bring that legislation and clarity to the US.

Tracy: (05:38)

Just on the political side, I mean, Joe and I kind of alluded to this in the intro, this idea that now that we have losses and we have big scandals and the industry regulators seem to be becoming more active in the space. Can you talk to us a little bit about, from your perspective, what is it like dealing with Washington now versus say in 2020 or 2021?

Brian: (06:00)

Yeah. Well, I would say compared to 2020, many more people that I meet with in Washington are actually pretty knowledgeable about crypto now. It's no longer a niche thing. Some of the conversations I had five years ago, you know, they were very basic. But most people that I speak with now actually have a reasonable understanding of crypto. 

I think there's two camps. One camp is saying, ‘Hey, in the wake of FTX, I'm afraid of being associated with crypto and I'm just going to kind of wait and see what happens because it's too dicey to even go near it.’

The other half of the folks I speak with are saying, ‘You know what? This is an opportunity. I'm actually, I want to be the one of the people who helps bring this within the regulatory perimeter. And we can see how important that is now with the collapse of FTX.’ And so they're actually drafting legislation. They're trying to gather bipartisan support to get some clarity going. And, you know, I'm personally much more in favor of that latter group.

Joe: (06:55)

So actually I want to ask you, you know, you talk about this impulse, it's like, ‘Okay, in the wake of FTX, bring it inside the regulatory perimeter.’ And part of my question is why? Because I look at FTX collapsing, one of the most crucial exchanges in the industry. And nothing bad happened after that. There was no fallout or no bailouts. It didn't have any spillover.

So part of my thinking is, I don't want this in any perimeter because that seems to work pretty well in terms of the lessons of 2008 avoiding too big to fail. What about the argument that from a sort of like structural financial contagion standpoint, regulators have done a pretty good job not letting this volatile product, this volatile industry, create problems for the financial system?

Tracy: (07:43)

The ‘let it burn’ strategy.

Brian: (07:46)

Well, and I would disagree with the idea that nothing bad happened. I mean, a lot of people lost money.

Joe: (07:51)

Absolutely. And I'm glad you say that because I did not. You're right. People lost their money, yes.

Brian: (07:57)

So there was certainly some bad activity there and I think that's the kind of consumer protection we're talking about. I don't think there should have been bailouts or anything like that. Nothing in crypto is too big to fail. And it's kind of antithetical to crypto frankly, to, you know, have a bailout or something like that. The first Bitcoin block that was mined had a message in it about you know, chancellor on the brink of bailout. So Bitcoin was founded as a result of a reaction to the 2008 financial crisis.

But I think those two ideas can come into unity. And again, I'm talking about for the centralized actors in crypto, the custodians, exchanges, companies like Coinbase, it's pretty clear everybody, generally, there's broad consensus. Those should be regulated. It applies some of the best practices and standards. So we don't have fraud and corruption and things, you know, wash trading or AML issues. But the decentralized pieces of crypto, that's different. I mean, we need to have decentralized protocols so that we can have a global, more global and fair and free financial system. And that piece, you know, I don't think those are going to be regulated because there is no central authority for Bitcoin or Ethereum, for instance.

Tracy: (09:01)

What should consumer protections look like in crypto in your opinion? And especially, you know, when I think of something like Dogecoin, you know, it's hard for me to come up with an economical use case for it. And so it's like, well, you can put all the disclosures that you want on there, but it seems highly likely that people will be losing money on that product at some point in time.

Brian: (09:22)

Yeah. So again, I would say, you know, the regulation and the consumer protection probably should happen with the centralized actors, the custodian, the exchange, not necessarily Dogecoin, which would be another decentralized coin.

But yeah, I mean I think the exchanges and the firms that are being built around custody or trading of things like that, they're going to have to have some of these best practices from the traditional financial services world. Let's have audited financials. Let's make sure customer funds are segregated from corporate funds. Let's make sure that there's  AML/KYC programs and avoid avoiding wash trading. Appropriate disclosures are important as well. So those are all just kind of good general best practices, but again, it's focused on the centralized players as opposed to the decentralized pieces.

Joe: (10:07)

It's interesting, you make this distinction obviously between the centralized players and then decentralized DeFi stuff. You're kind of becoming a hybrid. And you recently launched a layer-2 roll up to help scale Ethereum. And I'm curious as a regulated entity and one that has to abide by FINCEN and anti-money laundering laws, can you explain the tension, or if there is any tension between having these roll up Layer-2s that have a centralized sequencer so that the transactions made on them then get batched to the main Ethereum chain. Are you responsible for that? How do you deal with that as an regulated entity? What if someone wanted to or try to launder money through this layer 2 are you facilitating that by putting those transactions onto the main Ethereum chain?

Brian: (11:02)

Yeah, so earlier, you know, I mentioned that the centralized players like Coinbase should be regulated. And I was really referring to, you know, our primary revenue stream today. Custodian, exchanges etc. But you're absolutely right. We are embracing decentralization at Coinbase. We have a number of different products and legal entities and different ones working in various areas.

So we did launch this really exciting thing, a layer two solution called Base. And our goal with that is really to help provide more scalability and, and better usability for layer-2 solutions. So we want to get transactions in Ethereum down to a penny or less and help that scale to hopefully a billion or more people someday.

I guess the core of your question was really around the responsibility from a centralized, decentralized piece. And I think, you know, so Base has some centralized components today, but it's going to be more and more decentralized over time as as it grows. And so I think we have responsibility in terms of, you know, transaction monitoring, things like that, that we have to look at in the early days. But as it decentralizes, I think that again, the centralized actors are the ones that are probably going to have the most responsibility there to avoid money laundering issues, and having transaction monitoring programs, things like that.

Tracy: (12:26)

So speaking of responsibility, you know, there are thousands I think of, of coins and tokens listed on Coinbase now.

Brian: (12:35)

More like hundreds.

Tracy: (12:36)

Hundreds. Okay.

Brian: (12:36)

About 250.

Tracy: (12:38)

I didn't flip through all the pages, but there's a lot. And you guys say that you never actually list securities, but it feels like nowadays there's so much uncertainty over, you know, you could wake up tomorrow and the SEC says this is a security, or that's a security. I mean a little while ago, for instance, I think there was an enforcement action on Kim Kardashian for unlawfully touting a crypto security. So how can you say with confidence that you don't list any securities when it feels like that's a very fluid thing at the moment?

Brian: (13:15)

Yeah. So I think, look, the best thing for us and for the whole industry would be ‘Here's a clear rule book. Everybody has to follow it,’ you know, and if the rules change, give us a new rule book, we'll follow that one. We've actually been requesting that and we've filed a petition with the SEC on this. People can read it on their website. And we've sort of enumerated, look, these are the ways that the current securities laws don't really address some of these underlying questions in crypto. Like if there is no common enterprise or centralized entity behind this thing, who publishes the disclosures? So there's questions like that. Now, what we've done in the absence of that clarity, which again, would be the best case scenario, is that we have created our own internal process to review assets.

And we developed something, I think it has like 72 points in the legal analysis. And then kind of one area it looks at is securities law. It also looks at compliance risk, you know, cybersecurity risk, things like that. And we've evaluated probably roughly a thousand assets through this process. About 800 of them we have rejected and for various reasons, whether securities or compliance or cyber. About 200, 250 or something like that, we've decided to list. So, you know, I guess the heart of your question is what happens if the SEC comes out and says, okay. So if they come out and again, we're asking for more clear rules, so if they come out and say, ‘You know, we think this asset is a security,’ that's great. Okay, now we have clarity.

And assuming, you know, it's not, if it meets the legal definition it's not going too far, we would be happy to sort of update our process and our system based on that new information. Now, ultimately if they publish something and they say, ‘well, we think all these assets are securities’ then well, that's not really our understanding of the law and of the third parties and external council we've worked with. And so there is a line here where I think as an industry, and it's not just us, it's these asset issuers, which are even more primarily affected. You know, they would have to say, ‘okay, well let's let a court decide that’ because, you know, we have to follow a rule of law, so does the SEC, right? And so if they put out their opinion about something that doesn't necessarily mean it's true, the court ultimately has to be the decider on that.

Joe: (15:23)

Can you give an example, not necessarily of a specific coin, but of something that you have seen in tokens that you've rejected that to your mind, you said ‘nope, we cannot list this,’ because this is a characteristic of a security.

Brian: (15:39)

Yeah. I mean so there's a variety of things. There's many prongs of the Howey Test, right? And I don't want to get into like an in-depth legal analysis here….

Tracy: (15:50)

We've never done a Howey Test episode, so this could be it, but no — go ahead.

Brian: (15:55)

Yeah. So there's multiple prongs there, right? I think, you know, if if people are buying it primarily with this expectation of profit and there's a common enterprise…

Joe: (16:07)

But is there something in the, speaking in terms of patterns that you see within crypto projects that when you look at, the type of things that teams do that, you know, this token is not gonna be kosher for Coinbase. Are there things that you see in the industry where you think teams are crossing that line into, I don't know whether it's the common enterprise aspect, that preclude them from, at least in your judgment, from being safe to list?

Brian: (16:36)

Yeah. I mean, so I'll give you an a security example, but there's others in cyber security and others. So if you're legitimately just trying to raise money for your company or for some project like an apartment complex or something like that, that is a security, that's the point of securities law. There has to be an investment of money in into this thing. And for a a common enterprise with an expectation of profit based on the effort of others. So that should exist, by the way. And we want that to exist in the world.

We've acquired a broker deal license. It's dormant right now. We'd like to activate it. We're working with the SEC to hopefully make that happen. Crypto is a technology that could make  crypto securities that could offer benefits, and update the financial system and improve all kinds of things like time to settlement and various things like that.

So that's an example. You know, if people are out there kind of really hyping these things like on YouTube and and the tokenomics look sketchy, and there's really low float and the insiders are selling, these are all bad fact patterns. And those are the things we try to avoid for consumer protection.

There's other other reasons we may reject assets too. I mean, another example would be cyber security risk. So we often will evaluate the smart contracts for, you know, is there some exploit in this or there's an ability, you know, if the asset issuer, not even like a malicious thing, but an accidental thing, if they lose the key, everyone's funds could be swept or something like that. That's not secure enough to meet our standards. So those are examples.

Tracy: (18:06)

Is crypto shooting itself in the foot in some respects by like resisting the security designation? Like, is that a tacit admission that maybe there isn't a reasonable expectation of profits here?

Brian: (18:21)

Tracy: (18:22)

Sorry, loaded question.

Brian: (18:24)

Yeah. I mean, we want actually crypto securities to exist. So we're not saying none of these things are securities, but on the flip side is not true either. It's not that all of these are securities. Both of those are inaccurate statements. And I guess the thing I would say too is that just an expectation of profit alone does not make something a security. It has to meet every prong of the Howey test, is my understanding.

So an example, you know, people might buy a Picasso painting hoping it goes up in value or buy gold or something like that. So those aren't securities. So, yeah, I mean, basically Bitcoin, Ethereum and the assets that we trade on our platform today, we believe are crypto commodities. And people trade those, and some of them they want to go up in value just like they buy gold. Other times they're using it for various utility aspects.

Joe: (19:08)

So I want to get back to the regulatory question, but before I forget, can you talk for a second about how you view Bitcoin specifically? Because it feels like the crypto industry in many respects has moved on from Bitcoin, and I'm sure your mentions on Twitter are filled every day with angry laser eyes people that think you hate Bitcoin. But it is also true that you launched an Ethereum layer 2. I don’t know, is there a Coinbase Lighting node, or?

Brian: (19:40)

We’d like to do more with Lightning...

Joe: (19:42)

But haven’t yet. And there's all these issues with like the funding for core Bitcoin devs, frustration that they don't get enough and can't maintain it. What is your view towards Bitcoin?

Brian: (19:56)

I mean, I love Bitcoin. I honestly, I don't really understand why anybody might think the opposite. I've kind of like dedicated...

Joe: (20:02)

But people do, right? I mean, I'm not wrong...

Brian: (20:04)

There is kind of a meme...

Tracy: (20:06)

We've all been abused by Bitcoin maxis at one time or another, I think.

Brian: (20:10)

That's unfortunate. I don't know how seriously to take that. I do see people say this on Twitter sometimes, but I don't know if it's like a widely believed thing. I mean, it would sort of defy credulity, right? I mean, I've kind of almost dedicated my life to Bitcoin and helping it grow. I mean, literally, I read the Bitcoin White paper and then decided to quit my job and found this company.

Now of course, the industry has evolved into many things, right? I mean, there's lots of new innovations coming out in crypto, but yeah, I'm very pro-Bitcoin and I think there's a very simple base case for Bitcoin, which is that it's the gold standard in the crypto economy. And I think that that'll probably always be true and it'll keep growing.

Now if things like Lightning continue to get traction, I think it could also become like a settlement layer. There's people now creating NFTs in Bitcoin, and so yeah it's evolving. As an operator of an exchange and custodian I try to just be agnostic.

My job is not to tell our customers which coin they should use. It is to list and make available every coin that meets our standards, the legal tests I discussed. And then we need to be agnostic. So I think some people, because I'm not pro one coin or another, they sort of take that as like, you must hate this thing. But those are two different things.

Tracy: (21:27)

Just going back to the SEC for a second, you know, we talked about how it does seem like the SEC is sort of in enforcement mode, and there's a chance that you wake up tomorrow and there's a bunch of new announcements. What do you think the ultimate goal is for the SEC when it comes to crypto? Do they just want it to go away entirely? Or are they aiming for, you know, the industry to still exist, but maybe in a different way?

Joe: (21:55)

Maybe at JPMorgan or Citi instead of Coinbase or Uniswap?

Brian: (22:01)

Well, I always want to be hesitant to kind of speculate on the motives of people within the SEC. I think we have a pretty good relationship with different people on the staff and commissioners. And I guess the real answer is, I don't know. I suspect that there are different people with different views inside the SEC.

I think it wouldn't surprise me if some people just want it to go away. They wish this whole thing would go away. I would hope that that's not a majority view. I know it's not the majority view of Americans and I don't see how it'd be in the interest of America or, you know, protecting consumers to wish it would go away, because clearly it's not. One in five households in the US are using this stuff, and they're just going to use unregulated things offshore if we don't get our act together in the US.

So I think the majority view is more like, we know that this is going to exist, we just need to bring it within the regulatory perimeter. I wish that they were doing that by just, again, publishing a clear rule book and going through a rulemaking process with the industry. But that hasn't happened as much to date. And so, you know, if it needs to be more enforcement based, and then some of this stuff gets figured out via case law, I mean, that's okay too. It'll just take a little longer.

Tracy: (23:10)

Why do you think that regulatory response has so far been kind of disjointed, I think it's fair to say, maybe disjointed or unclear. Was it a lack of resources or regulators just didn't understand the space? What was it?

Brian: (23:24)

Maybe you can clarify, what do you mean disjointed?

Tracy: (23:26)

Well, I guess slow, maybe. And unclear, you know, to your point. 

Joe: (23:32)

This idea that you go in and ask them questions and they don't give you answers, right?

Brian: (23:36)

Oh man. Frankly, you know, I'm spending a lot more time in DC. I'm trying to figure this out too. Perhaps I was a little naive coming in. I kind of assumed that you know, when you're running a business that the regulators just give you the rules and then you just follow them. You know, that would've been like how I assumed it would work. But it seems to be more complicated than that.

Maybe there's various political motivations. There's different factions within the government who have different goals. You know, people who've gotten legislation passed, they've told me it's kind of like a small miracle whenever it happens, you have to kind of get the House and the Senate and the president all aligned and there has to be impetus for it to happen. I kind of believe this thing with FTX, maybe that impetus, maybe this is our moment to finally get some clarity in the next year. 

Joe: (24:26)

Let me ask you another regulatory question, though not SEC-related. It seems like some banks are de-banking crypto companies, but it does, I do not get the impression that that is a risk for Coinbase. Do you perceive that to be a regulatory advantage for you, that smaller exchanges may have a harder time getting a banking partner in this environment?

Brian: (24:50)

Well, look, I'd hate to consider that to be an advantage. We haven't had any issue with any of our bank partners. I do think that there's a moment in the wake of FTX where, you know, reasonably so, bank regulators are asking tough questions and they're basically coming in and saying, what are the liquidity risks if you're going to take crypto deposits?

Is it okay to be making loans against those deposits or are they too risky? And I think those are totally fair questions to ask. So, yeah, I don't think that we would have any kind of major crackdown and say, well, you can't bank crypto companies.

I haven't heard that from anybody. And by the way, that that would be probably exceeding their authority, because Congress has to make those kinds of decisions about what is allowed in the economy. But if they're coming in and asking questions about liquidity, I think that's probably reasonable.

Joe: (25:42)

Quick follow up on that. Would you put any lobbying or any of your DC efforts towards guaranteeing or making sure that anyone provided, you know, provided other basic checks that crypto can't be discriminated against within the banking system? Is that an effort you've made?

Brian: (26:03)

Well, certainly in our messaging and in our conversations with members of Congress and the Senate we have made that point to them, which is, we want to just be treated on a level playing field, right? Don't unfairly penalize crypto versus traditional financial services. But you know, you shouldn't like allow us to have a lighter weight system or anything like that either. So it's a balance.

Tracy: (26:25)

You know, we've mentioned this a couple of times, but I'd be curious to get your take on what happened to FTX. You know, that one week in November I think was shocking for a lot of people for very different reasons depending on who you are. But what was it like for you, it happened so quickly, you had the Twitter exchanges and then you had a bankruptcy filing within like seven or ten days.

Brian: (26:50)

Yeah, I mean, that was a wild week. I was actually in Japan at that time meeting with our team there and talking with regulators and government folks in Japan. And I got a call from somebody who said, ‘Um, it's bad. Like, we think FTX is gonna go down in the next 48 hours and Sam might go to jail.’

And I was like, ‘okay, tell me more what happened?’ And I kind of started to piece it all together. I had a chance to chat just briefly with Sam actually and CZ during that whole thing. And I was just doomscrolling Twitter, I suppose, like a lot of people and, I mean that's not true. I mean, the first thing that I really thought about was, okay, ‘what is our exposure to any of this?’

So we immediately went and wrote any of our counterparties, including FTX itself, but any that might have secondary effects. And then we started to think about, okay, well this is actually quite validating of our strategy over the last 10 years of being built in the US, trying to embrace compliance, not trying to cut any corners. How can we make sure that people understand that Coinbase is not like FTX? And I basically thought about it as there's going to be a black eye for the industry, but this is ultimately, Coinbase stands to be a huge net beneficiary of this because it's gonna bring an increased focus on compliance and trust, which is what we've been doing for the last 10 years.

Joe: (28:27)

I want to ask a little bit about price in this crypto winter. And obviously there's been a bit of a bounce, but the bounce has basically just been like, because the NASDAQ has bounced too. And it look, many of these coins sort of look pretty highly correlated to other risk assets. And for years I feel like there was this case to investors that they should buy crypto for two reasons. One, it was this new uncorrelated asset class, and two, in the case of Bitcoin specifically, it was really good as an inflation protection thing

And we just saw the highest inflation in 40 years and Bitcoin really hasn't gone anywhere. It's flat over the last several years. And the coins all seem to, by and large at this point, seem to more or less be correlated with like the NASDAQ or QQQ or whatever.

Tracy: (29:23)

The new narrative.

Joe: (29:24)

So what’s the new case to be made after people had seen these old narratives that the industry was pretty loud about making, I'm not saying you, I don't know, but many in the industry definitely were, have not held up, in terms of like, the case for investing in it.

Brian: (29:33)

Sure. Well, I guess I'm just sort of laughing a little bit because you know, crypto roughly as volatile as the stock stock market recently. I can tell you there was many years for Coinbase where people would constantly ask me, ‘it's so volatile, no one will ever use it.’ And so now that it's just on par with volatility of the stock market, I'll take that as a slight win, at least a step in the right direction.

Joe: (29:53)

Well, we don't use Tesla shares to buy coffee either, but anyway.

Brian: (29:55)

Well, okay, so obviously we have stablecoins for commerce now, which is a good piece of the puzzle. But let's go back to your question about the inflation hedge. So I think there certainly was this belief, and frankly I shared this belief too, which was that crypto and Bitcoin specifically, actually, this is where people, hopefully the Bitcoin maxis are kind of aligned with my thinking, is that, that that is sort of the new gold standard in the crypto economy, and it would be something that people flee to in times of uncertainty with guaranteed scarcity and things like that. Just, you know, similar to like real estate — you can't make more of it, at least the land part of it. So there is sort of a guaranteed scarcity component. It's a nice insulation hedge.

Now I think what happened is — and I was frankly surprised to see how quickly crypto came down in an environment of high inflation — where I thought maybe the world has shifted, maybe we're ready now where this would be considered the an inflation hedge. It turns out we were way too early for that.

I guess my current updated thinking on that is that probably crypto is still too small a percentage of the global economy, it’s being treated more like a growth asset or something as opposed to like a true gold standard or something. And so, I mean, we probably need the crypto economy to grow 10x 20x or something from here to start to have that role in the broader macro environment. 

Tracy: (31:19)

You know, you mentioned stablecoins there, and I just remembere once upon a time I guess a few years ago we had Sam Bankman-Fried on, and we asked him to explain to us what would happen if Tether just suddenly collapsed. I guess in retrospect we should’ve asked SBF what would happen if FTX just collapsed, but can you talk to us about your impression of Tether’s role in the crypto ecosystem?

Brian: (31:50)

Well, look I'm not here to sort of criticize anybody in the ecosystem. I don't really know. We've utilized  Tether in various ways on our platform at different times. I know they've been investigated by various parties and they reached settlements and they sort of had, they got comfortable with various ways.

Our focus at this point has been on USDC. We have a partnership with Circle on that, and I think that's, I feel very comfortable saying, you know, I understand more about it and it feels, it's well backed, one-to-one backed and it's audited and all these things. I just don't have as much information on Tether, but I don't have anything negative to say certainly at all. I have no beef with them.

Joe: (32:29)

Let me ask you. You know, look, obviously even after all this time and even well before FTX, as you know, there's been just a lot of skepticism still to this day about crypto, and I think many people say it's not going to go away, but still it's basically just speculation. People are just in it for the money. And there's no real use case outside of maybe some niches. But Web3 isn't really a thing yet.

And I'm curious, a lot of people in crypto have done fantastically well and made an extraordinary amount of money despite the fact that by and large, these coins aren't really used for much outside of making money. And there’s not a decentralized Facebook that exists. There’s a good reason why it would be nice to have one, because it's sort of scary to think about like how much power is in the hands of Elon Musk or Mark Zuckerberg and all these people, but by and large, nothing exists.

When does that happen? Because tons of money has been made, but when do we get to ‘okay, now there's a thing that's been delivered that people will use for non-speculative purposes.’

Brian: (33:41)

Yeah. So I guess, you know, I'll disagree a little bit with this idea that it's all speculation, right? I think that was probably a fair thing to say five years ago or so, and there's not gonna be some moment where it all flips. It's a gradual thing. And so we've actually tracked this inside Coinbase, you know, what percent of our active customers are doing something other than trading with crypto? And it's now over 50%. 

Joe: (34:05)

And what's an example of that? Is buying an NFT something other than trading?

Brian: (34:10)

Yeah, that's an example. And there's lots other examples. I'll kind of give you a framework for how I think about how it, how it's evolved over time. But, obviously there's people doing commerce, they're doing borrowing and lending. They're earning money. They are doing things like staking, here's how to think about it over time, right?

Okay. So the first use case of crypto was really a new form of money or this new asset class that got created. And a lot of the activity early on was, speculative, although I don't want to undersell that first point, because by having a new form of money that is global and decentralized and guaranteed to be scarce, that is no small thing, right? I mean, we sort of take it for granted in the US that our currency’s relatively stable even though it inflates more recently, but most people in the world, that is a luxury they do not have. And it would be an incredible benefit to humanity if  the only thing crypto ever did was have a form of sound money for the world that anybody could have as long as they have a smartphone that, that is a game changer. Okay? So let's not undersell that. 

But beyond crypto being just a new form of money, it also became a new type of financial services, right? DeFi. And we saw different ways for people to do borrowing and lending and, you know, commerce payments and staking and various things like this. And so that was all very good. Now, the third realm is kind of what you touched on as being, you know, about decentralized social and everything. We call it Web 3.0.

It's not only a new type of money, a new type of financial services, but a new application platform. Even things that have nothing to do with financial services. And, you know, I'm pretty excited about, for instance, decentralized identity with ENS, that's a foundational component. So people's identity doesn't have to be sort of owned by a big tech company.

Once you have decentralized identities, you can connect them in a social graph, you can make decentralized social networks. You can have public profile pages with badges and accreditation and, you know, your badge, you know, accessing buildings like proof of attendance, concert tickets, like all these kind of things. New business models for, you know, the music industry and like YouTube, Spotify, you can imagine all these things being built in a new way.

Tracy: (36:15)

I guess the question is why hasn't it happened yet? You know, it's been like a decade, more than a decade since the white paper. So why, if this is such revolutionary technology and it's so much better than the way we've been doing things, why hasn't the adoption been quicker?

Brian: (36:30)

Yeah. Well I think one reason is the scalability of the blockchains has been one thing that we could unlock that would help it move even faster. I think the usability needs to get a lot simpler, right? The average person doesn't really know what a private key is. They don't want to, you know, install a Chrome extension to understand something like they, it needs to be just simpler for the average person. And I guess, you know, look at the internet as an example, right? I think the very foundational pieces of the internet might even go back to like the sixties or something. But you know, you started to see, Telnet and these very early, you know, types of things come together like in the eighties, I think it was. So we think of the internet as really happening from like the year 2000 or something like that. And that again, that's by the way, you know, 23 years now. But it took a lot of foundational work to happen before that, you know, broad scalability, broadband had to happen, right? Another thing, another internet analogy.

Joe: (37:26)

Sure. Crypto as well. I mean, people were working on hashcash and all those for decades in some cases. I mean, the pre-history of Bitcoin is pretty long as well. 

Brian: (37:35)

Well those were like research papers. I mean, you know, Telnet was like a real thing that had, I don't know how many people, maybe a million people using it or something. But you know, or that first fiber that had to get laid in the ground and everything. But yeah, look I would love it to happen faster.

Let's be honest, the regulatory environment has not helped either. It's like there's a fear in this in the United States that  if you start a company in this space, you're just going to have a bunch of legal bills and, you know, subpoenas in your inbox or whatever. So that's not helping either. But we can't blame it entirely on that. The technology needs to be more scalable, more usable, and it's all happening, it's just taking a while. 

Joe: (38:16)

I want to ask, I have one last question, and it's a Coinbase specific question and is inspired by another guest that we've had on in the past, Jim Chanos who has been critical, I don't know if he's ever been short Coinbase, but he's certainly been critical ofthe company. And he says two things, how is it it that in like  some of the most incredible bull markets ever for crypto, the company hasn't been profitable, but also that so much of the revenue you do make is because of the huge gap between what institutional traders on Coinbase Pro pay versus the commissions on regular Coinbase.

And it's pretty easy, or at least was, to switch back and forth, but maybe people didn't realize how much cheaper one could trade just by a few clicks on the website to get over to the pro side. How much compression is there going to be and what do you say to the the argument that retail investors have sort of gotten a raw deal compared to the more more professional ones?

Brian: (39:18)

Yeah. So  I'm not sure about the first part exactly, but I think you, I mean, why in 2021...

Joe: (39:23)

Why weren’t you profitable during this insane bull market?

Brian: (39:26)

That's what I thought I heard you say. But in 2021, we were actually very profitable. Did about $4 billion of EBITDA, grew revenue 600% in 2021. 2022, we were not because the market came down quite a lot and we've made some cuts and adjustments to try to get to an environment where we can generate EBITDA, hopefully in any market environment. But I guess the core of your question is really around fee compression.

So there's a number of pieces to this. So the first is that it's true there are differences in pricing amongst our customers. If they wanna trade through more of a pro interface or a simple interface. There's also a difference in pricing, of course, based on how much trading volume they do, there's tiers of that. And so I think what we've seen is there's a willingness for customers to pay basically for ease of use and simplicity and trust.

And so, I don't think, by the way, our fees are not really out of line with the rest of the market. I mean, there's sometimes there's firms that kind of advertise like zero fees or whatever, and you know they're payment for order flow or there's different things that you're paying a fee one way or another. It's sometimes not always obvious, right?

One other thing I'll mention is that we actually launched something called Coinbase One, which is like an Amazon Prime type subscription. And for customers who pay for that, I mean, they get a number of things like a million dollar account protection and all these kind of things, but one of the things they get is reduced fee trading basically. And that's something we're sensitive to as well for our power users.

Joe: (40:51)

Brian Armstrong, CEO of Coinbase, thank you so much for coming on Odd Lots. We've wanted to have you for a long time. I'm thrilled we finally made it happen. 

Brian: (41:00)

This was great. One of the best set of questions I’ve had.

Joe: (41:16)

Tracy, that was a lot of fun. I really enjoyed that.

Tracy: (41:18)

Yeah, I'm glad we were finally able to do it. And I guess kudos Brian, for coming on and answering our questions in the midst of a deep crypto winter.

Joe: (41:26)

Yeah, but it is interesting. There's, just, the myriad regulatory things right now. And I have to say I do have sympathy and I've heard it from other people in the industry, particularly with this idea because it's one thing to like go to the SEC and wanting to clarify rules around security and not getting any answers. But then you also hear entities in the industry and they're like, ‘no, we didn't even want a launch until we were sure we'd be on the right side of the law.’ And then they're still in pre-launch phase three years later while other people have made billions.

Tracy: (42:00)

Right, you get punished for engaging, whereas if you don't ask questions and just launch, sometimes that's better.

Joe: (42:05)

Yeah. And then the only thing that, you know, they do go after things like the Kim Kardashian token, which was not that big. And so it's like, I do have some sympathy I feel, for entrepreneurs on this particular point within the industry.

Tracy: (42:20)

I mean, I do think the lack of regulatory clarity is worth discussing, but the argument for why a regulator might want to do that is because, well if you start imposing all these rules or unveiling all these new rules, then you de facto legitimize it. And they don't want to do that, but you know, if they don't want to do that, then they should also maybe come out and say that.

Joe: (42:45)

And it is definitely true that a lot of people lost money. I do think there's perhaps this view that we should take it more as a win that the collapse of FTX didn't have like a broader macro contagion, especially, given what we saw in 2008 when the collapse of shadow banks then had this huge impact. And so this idea of bringing it in the perimeter, maybe there are some perimeters we want to keep it out of. I don't know.

Tracy: (43:11)

People lost money, but at least the financial system didn't collapse? That's like the best we can hope for nowadays.

Joe: (43:16)

It's not terrible.

Tracy: (43:17)

All right. Shall we leave it there?

Joe: (43:25)

Let's leave it there. 

Follow Brian Armstrong on Twitter @brian_armstrong


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