0:10

Hello, and welcome to another episode

0:12

of the Odd Lots Podcast. I'm Joe

0:14

Wisenthal and I'm Tracy Alloway. So,

0:17

Tracy, obviously a lot going

0:19

on in crypto, but I would say the

0:21

two big things are, like, I guess

0:23

the crypto winter, there's been some recovery,

0:26

but obviously all the coin prices

0:28

are way lower than they used to be. And

0:31

then there's just everything going on on the regulatory

0:33

side. Yeah, it's sort of a double whammy

0:35

for the industry. And I guess it's hard.

0:37

It's hard to determine causality

0:40

when it comes to price and extra regulation

0:43

coming in. But yeah, it is not a great time

0:45

for crypto. Well, I would say

0:47

that the historical

0:50

patterns would suggest the regulators

0:52

like to come in after people have lost

0:54

money. After people have lost money and scams, their

0:56

investments go down. So it kind

0:58

of makes sense that you see the uptick in

1:01

regulation right after, just like

1:03

the lines have been going down for a while, right, But

1:05

it does prompt these big questions about

1:07

should the regulators have been more proactive,

1:09

should they have been doing things before people

1:12

lost money? And then what should they do now?

1:14

Anyway, we have the

1:17

perfect guest to talk about this because

1:19

we are going to be speaking with Brian Armstrong,

1:22

CEO and co founder of coin Base

1:25

right in the middle of all this, the pre eminent

1:28

American crypto exchange. So, Brian,

1:30

thank you so much for coming on odd Lots. Yeah,

1:32

thanks for having me. I want to ask you a question.

1:34

We've actually asked other executives

1:37

in the crypto space this question before,

1:39

but I'd love to get your take on it. What

1:42

is yield farming and where does the return

1:44

of it come from? Well,

1:47

I mean, yield farming has a little bit of a bad name,

1:49

I think in this environment. There

1:52

was obviously with the collapse of Tera,

1:54

Luna and block Fi and some other

1:56

firms like that. I think that's

1:58

a very valid question to be asking,

2:00

and I'm not sure I couldn't even answer it on their

2:02

behalf. But you know,

2:05

I think there's a lot of other pieces of crypto that people

2:07

are still excited about, and you

2:10

know, there's lots of things we can build beyond that. So

2:12

one of the things we've talked about on the show quite

2:14

a bit is this idea of crypto as kind of

2:16

the ultimate momentum asset

2:19

and when money is flowing in prices

2:21

go up and everything is great. When money

2:23

flows out, prices collapse quite quickly,

2:26

which would seem to make the business

2:28

of being a crypto exchange extremely

2:31

cyclical. But one of the things that stood

2:33

out from your most recent results

2:36

you just reported relatively recently, you talked

2:38

about how you want to be profitable through

2:41

the cycle, through the upturns and the

2:43

downturns. Can you talk a little bit more about

2:45

how you plan on doing that. Yeah,

2:47

Well, historically most of our revenue has been from trading

2:50

fees, which you're absolutely right, it is cyclical,

2:52

and crypto has been a fairly volatile

2:54

asset class goes up and down.

2:57

Now, what we've done is we've started shifting more and more

2:59

of our revenue to what we call subscription and services

3:02

in our financials and our earnings calls.

3:04

And basically what that means is things like

3:07

usd coin, a stable coin that's

3:09

been a nice growth mechanism for us, even

3:11

in a down crypto market. Things

3:13

like custody fees, fees

3:16

that we earn on coin base card. People are

3:18

you know, using it for spending in merchant

3:20

commerce activity, So these things are

3:23

I wouldn't say there's zero percent correlated with

3:25

overall market in crypto, but there are certainly

3:27

a lot less than trading fees, and that's allowing us

3:29

to build a more predictable business. So

3:31

we started in the industry also talk about

3:34

the regulatory side, and that one whom

3:36

you know will definitely talk a lot about

3:38

that. But in particular, I think yesterday I

3:40

saw that coin base you had

3:42

some new program I think it was called the

3:44

four thirty five program about

3:47

you know, call your congressman, like let

3:49

people know that you care about crypto

3:51

policy. And of course like Uber sort

3:53

of famously started the strategy like

3:55

telling people on the app, like tell your

3:57

local regulators you want to drive an Uber.

4:00

And I'm going to try to ask this in the most

4:02

like diplomatic way possible. And I have many

4:04

friends who are into crypto, and

4:07

I like many of them. But when

4:09

it comes to crypto, do you want the

4:11

type the type of person who would

4:13

call their congressmen to tell

4:15

them to do better crypto

4:17

policy? Is that really the type

4:19

of person that you want sort of

4:21

being the voice of cryptoregulation. Well,

4:25

I think the average person in crypto, and by the way,

4:27

there's a lot of them, you know, one true one in five

4:29

households now have used crypto, about fifty

4:31

million Americans. This is a this is becoming a

4:33

major constituent of you know, lobbying

4:35

group and everything that's gonna have shape

4:38

future elections. They want to you know, these

4:40

average people. They may not have the exact solution

4:42

for what the legislation should say around regulation

4:45

of crypto, but they do know that they want

4:47

elected representatives who are going to ensure

4:49

that this industry comes within the regulatory

4:52

perimeter, offers consumer protection, but also

4:54

you know, allows this innovation to flourish so

4:56

that it can we can update the financial system.

4:58

You know, eighty percent of a Americans now

5:01

believe that the financial system doesn't

5:03

work for them. It's either too slow, it

5:05

has too higher fees, it doesn't

5:08

you know, nobody has equal access or not. Everyone

5:10

has equal access to it. And it's not surprising

5:12

that's the case. I mean, the technology behind the financial

5:14

system is sometimes forty years old. It's written

5:17

in cobalt, and these mainframe computers

5:19

and the laws for it are sometimes one hundred

5:21

years old. They were created before the Internet even existed,

5:24

right, so it's time to update the financial

5:26

system. We I think the average voter in America

5:28

is now realizing that crypto is one of the great

5:30

technologies that can help me update that

5:33

and they want their elected representatives

5:35

to bring that legislation

5:37

and clarity to the US. Just on the political

5:39

side. I mean, Joe and I kind of alluded to this in

5:41

the intro, this idea that now that we have

5:44

losses and we have big scandals in the

5:46

industry, regulators seem to be

5:48

becoming more active in the space.

5:50

Can you talk to us a little bit about from

5:53

your perspective, what is it like dealing

5:55

with Washington now versus say,

5:57

in twenty twenty or twenty twenty one. Yeah,

6:01

well, I would say compared to twenty twenty,

6:04

many more people that I meet with in Washington are

6:06

actually pretty knowledgeable about crypto now. It's

6:10

no longer a niche thing. Some of the conversations

6:12

I had five years ago, you know, they were very basic. But

6:15

most people that I speak with now actually have a

6:17

reasonable understanding of crypto. They

6:21

there. I think there's two camps. One camp

6:23

is saying, hey, in the wake of FTX, I'm

6:26

afraid of being associated with crypto, and

6:28

I'm just going to kind of wait and see what happens because

6:30

it's too dicey to even go near it.

6:32

The other half of the folks I speak

6:35

with are saying, you know what, this is an opportunity.

6:37

I'm actually I want to be one of the people

6:39

who helps bring this within the regulatory

6:41

perimeter. And and we can see how important that is now

6:43

with the collapse of FTX, and so

6:45

they're actually drafting legislation, they're

6:48

trying to gather bipartisan support

6:50

to get some clarity going. And you

6:52

know, I'm personally much more in favor of that ladder

6:54

group. So actually I want to ask you,

6:57

you know you talk about this impulse is like

6:59

okay, in the wake of bring it inside

7:01

the regulatory perimeter, And part

7:03

of my question is like why because I

7:05

look at FTX collapse and one of the biggest

7:08

like sort of like crucial exchanges

7:10

in the industry, and nothing bad

7:12

happened after that. There was no fallout

7:14

or no bailouts, It didn't have any

7:16

spillover. So part of my thing is

7:19

like, I don't want this in any perimeter because that seems

7:21

to work pretty well in terms of the lessons

7:23

of two thousand and eight avoiding too big

7:25

to fail. What about the argument

7:28

that it's like from a sort of like structural

7:31

like yeah, like financial contagion

7:33

standpoint, regulators have done a pretty

7:35

good, pretty good job not letting

7:38

this volatile product, this volatile

7:40

industry create problems for the financial

7:43

system. Let it burns strategy. Yeah,

7:46

well, you know, I would disagree

7:48

with the idea that nothing bad happened. I mean, a lot of people

7:51

lost money, that's absolutely

7:53

And I'm glad you say that because I did not. You're

7:55

right, people lost their like, yes, yeah,

7:58

so there was certainly some activity

8:01

there, and I think that's the kind of consumer

8:03

protection we're talking about. I don't I don't think there should have been

8:05

bailouts or anything like that. Nothing in

8:08

crypto is too big to fail. And it's kind of antithetical

8:10

to crypto frankly, to you know, have a bailout

8:12

or something like that. If you the first bitcoin block

8:15

that was mind right had a message in it about

8:18

that, you know, Chancellor on the braink of bailout. So

8:20

crypto was kind of founded almost a bitcoin was

8:22

founded as a result of reaction to

8:24

the two thousand and eight financial crisis. But I

8:27

think those two ideas can come into unity. I

8:29

mean, we can have and again I'm talking about

8:31

for the centralized actors in crypto, you

8:33

know, the custodian's exchanges, companies like coin

8:35

base. It's pretty clear everybody generally,

8:37

there's broad consensus those should be regulated. It

8:39

applies some of the best practices and standards, so

8:41

we don't have fraud and corruption and things, you

8:43

know, wash trading or email issues. But

8:46

the decentralized pieces of crypto that's different.

8:48

I mean, we need to have decentralized protocols

8:51

so that we can have a global, more global and

8:53

fair and free financial system, and that piece.

8:56

You know, I don't think those are going to be regulated because there

8:58

is no central authority for bitcoin or them. For instance,

9:01

what should consumer protections look like

9:03

in crypto? In your opinion, and especially

9:05

you know, when I think of something like doge

9:07

coin, you know, it's hard for me

9:10

to come up with an economical use

9:12

case for it, and so it's like, well,

9:14

you can put all the disclosures that you want on there,

9:17

but it seems highly likely that people will

9:19

be losing money on that product at

9:21

some point in time. Yeah,

9:23

So again I would say, you know, the regulation and the

9:25

customer protection probably should happen with the centralized

9:27

actors, the custodian, the exchange,

9:29

not necessarily dodge coin, which would be another decentralized

9:32

coin, right, But yeah,

9:34

I mean I think the exchanges

9:36

and the firms that are being built around you

9:38

know, custody or trading of things

9:40

like that, they are going to have to have, um,

9:42

some of these best practices from the traditional financial

9:44

services world. So you know, let's have

9:47

audited financials, let's make make sure customer

9:49

funds are segregated from corporate

9:51

funds, um, let's make sure that there's

9:54

MLKYC programs and avoid avoiding

9:56

wash trading, and yeah, appropriate disclosures

9:59

are important as well. So those are all

10:01

just kind of good general best best practices. But again it's

10:03

focused on the centralized players as opposed

10:05

to the decentralized pieces. It's

10:07

interesting you make this distinction obviously

10:10

between you know, there's sort of centralized

10:12

players and then decentralized DeFi

10:14

stuff. You're kind of becoming a hybrid, and

10:16

you recently launched a layer

10:18

to roll up to help scale

10:20

ethereum. And I'm curious, as

10:23

a regulated entity

10:25

and one that has to abide by like finsend

10:27

and anti money laundering laws,

10:30

can you explain if the tension

10:32

or is there any tension between

10:34

I believe these sort of like a you know, roll

10:37

up layer twos have some sort of centralized

10:39

sequencer so that the transactions

10:41

made out of them then get back to the main ethereum

10:44

chain. Are you responsible for that

10:47

and do you hate? How do you deal with that as

10:49

an regulated entity? What

10:51

if someone wanted to or try

10:53

to launder money through this layer

10:55

two are you facilitating

10:58

that by putting those transactions onto the

11:00

main ethereum chain. Yeah, so

11:03

earlier, you know, I mentioned that the centralized players

11:05

like coin base should be regulated and I and I was

11:07

really referring to like, you know, our primary revenue stream

11:09

today csodia in exchange. But you're absolutely right. We

11:11

are embracing decentralization. At coin Base. We have

11:13

a number of different products and legal entities

11:16

and different ones working in various areas. So

11:18

we did launch this really exciting thing, a layer two solution

11:20

called Base and our goal with that is

11:22

really to help provide more scalability

11:25

and better usability for

11:27

layer two solutions. So we want to get transactions

11:29

and ethereum down to you a penny or less

11:32

and help that scale to hopefully

11:34

a billion or more people someday. I

11:36

think I guess the core of your question was really around

11:39

the responsibility from a centralized decentralized

11:41

pease and I think, you know, so

11:43

base is it has some centralized

11:46

components today, but it's it's going to be more and more decentralized

11:48

over time as as it grows, and so you

11:51

know, I think we have responsibility in terms

11:53

of you know, transaction monitoring things like that that

11:55

we have to look at in the early days, but as

11:58

it decentralizes, I think that again,

12:00

the centralized actors are the ones that are probably

12:02

going to have the most responsibility there to avoid

12:04

money laundering issues and having

12:07

transaction monitoring programs things like that.

12:26

So speaking of responsibility,

12:28

Um, you know, there are thousands I

12:31

think of coins and tokens listed

12:33

on coin base now, dred

12:36

Okay, I didn't

12:38

flip through all the pages, but there's a lot

12:41

um And you guys

12:43

say that you never actually list securities,

12:46

but it feels like nowadays there's so

12:48

much uncertainty over

12:51

you know, you could wake up tomorrow and the SEC says

12:53

this is a security or that's a security. I

12:55

mean just a little while ago, for

12:58

instance, they were um, I think there was an inforcement

13:00

action on Kim Kardashian for

13:03

unlawfully touting a crypto security.

13:05

So how can you say

13:08

with confidence that you don't list any

13:10

securities when it feels like that's

13:13

a very fluid thing at the moment.

13:15

Yeah, So I think, look,

13:17

the best thing for us and for the whole industry

13:19

would be, here's a clear rule

13:21

book. Everybody has to follow it, you know, and

13:23

if the rules change, give us a new rulebook, we'll

13:25

follow that one. Right. We've actually

13:28

been requesting that, and we've we've filed

13:30

a petition with the SEC on this. People can read

13:32

it on their website, and we sort of enumerated,

13:34

Look, these are the ways that the current securities

13:37

laws don't really address some of these underlying questions

13:39

in crypto, like if

13:41

there is no common enterprise or centralized entity

13:43

behind this thing, who who publishes the disclosures?

13:46

You know, So there's there's questions

13:48

like that. Now, what we've

13:50

done in the absence of that clarity, which again would

13:52

be the best case scenario, is

13:54

that we have created our own internal

13:56

process to review assets, and

14:00

we developed something I think it has like seventy

14:02

seventy two points in the legal analysis and kind

14:04

of one area it looks at is securities law.

14:07

It also looks at compliance risk, you know, cybersecurity

14:09

risk, things like that. And we've evaluated probably

14:12

roughly a thousand assets through this process,

14:15

about eight hundred of them we have rejected and

14:17

for various reasons, whether securities or

14:19

compliance or cyber about you

14:21

know, two hundred two and fifty or something like that, we've decided

14:23

to list. So, you know,

14:25

I guess the heart of your question is what happens

14:28

if the sec comes out and says okay.

14:30

So if they come out and they and they again

14:32

we're asking, we're asking for more clear rules. Right,

14:35

So if they come out and say, you

14:37

know, we think this asset is a security, that's

14:39

great. Okay, now we have clarity and assuming

14:42

you know, it's not, if it meets the legal

14:44

definition, it's not going too far. We

14:46

would be happy to sort of update our process in

14:48

our system based on that that new information.

14:51

Now, ultimately, if they publish

14:53

something and they say, well, we think all these assets are securities,

14:56

well that's not really our understanding

14:59

of the law. And the third party is an external council

15:01

we've worked with, and so there is a line here

15:03

where I think as an industry, and it's not just us,

15:05

it's these asset issuers which are even more primarily

15:08

affected. You know, they would have to say, okay,

15:10

well, let's let a court decide that, because

15:12

you know, we have to follow a rule of law. So does

15:14

the sec right. And so if they put

15:16

out, you know, their opinion about

15:18

something, that doesn't necessarily mean it's true. It just means

15:21

the court ultimately has to be the decider

15:23

on that. Can you give an example

15:25

not necessarily of a specific coin,

15:27

but of something that you have seen

15:30

in tokens that you've rejected that

15:33

to your mind said no,

15:35

we cannot list this because this is a characteristic

15:37

of a security.

15:39

Yeah, I mean, there's

15:43

so there's a variety of I mean, there's many

15:45

prongs of the Howie test, right, I mean, and

15:47

I don't want to get into like an in depth legal analysis

15:49

here, but you know we've never done a Howie

15:51

Test episode, and so this

15:53

could be it, but no, go ahead. Yeah,

15:57

So you know there's multiple prongs there, right.

15:59

I think you know, if if people are buying it primarily

16:01

with this expectation of profit, and it's

16:04

there's you know, there's a common enterprise and

16:06

and and right. So, but if there's something

16:09

in the like speaking in terms

16:11

of patterns that you see within

16:13

crypto projects that when

16:15

you look at it's like, no, this team, like the

16:17

type of things the teams do

16:20

that would say, you know what, this token is not going to be

16:22

kosher from coin base. Are there things

16:24

that you see in the industry where you

16:26

think teams are crossing that line into

16:28

I don't know whether it's the common enterprise aspect

16:31

that preclude

16:33

them from at least your judgment being

16:35

safe to list. Yeah, I mean so I'll give you

16:37

a security example, but there's others in

16:40

cyber security and others. Um. So

16:43

you know, look, if you're if you're legitimately just trying to raise

16:45

money for your company or for some project like

16:47

an apartment comment X or something like that, that is

16:49

a security. That's the point of security's law. There

16:51

has to be an investment of money

16:54

into this thing, and for you know, in

16:56

a common enterprise with an expectation of profit you

16:58

know, based on the others. So that

17:01

should exist, by the way, and we want that to exist

17:04

in the world. Um, we've acquired a

17:06

broker deal license. We were a stormant

17:08

right now. We we'd like to activate it. We're working

17:10

with the sec to hopefully make that happen. Crypto

17:13

is a technology that could make you know, crypto

17:15

securities could offer benefits and update

17:17

the financial system and improve all kinds of things to

17:20

you know, time to settlement and various things

17:22

like that. So that's an example. Um,

17:25

you know, if people are out there kind of really hyping

17:27

these things like on YouTube and um and the

17:29

tokenomicxer look sketchy and

17:32

um, you know there's really

17:34

low float and the insiders are selling it. These are

17:36

all bad fact patterns and those are the things we try to

17:38

avoid for consumer protection. UM.

17:41

You know, there's other ways. There's other reasons we may reject

17:43

assets too, I mean an initiation. Another example would

17:45

be cybersecurity risk. So we often will

17:47

um evaluate the smart contracts for

17:50

you know, is there some exploit in this or there's

17:52

an ability you know, if if the the

17:54

acid issue is not even like a malicious thing but

17:56

an accidental thing. If they lose the

17:58

key, everyone's

18:01

phones could be swept or something like that, that that's not secure

18:03

enough right to meet our standards. So that those are examples.

18:06

Is crypto shooting itself

18:08

in the foot in some respects by like resisting

18:11

the security designation, Like is that a

18:13

tacit admission that maybe

18:15

there isn't a reasonable expectation

18:18

of profits here? Question?

18:23

Yeah? Yeah, I

18:25

mean we want actually crypto securities to exist.

18:27

So we're not saying none of these things are securities.

18:30

But on the flip side, is not true either. It's not that all of

18:32

these are securities. Both of those are inaccurate statements.

18:35

And I guess the thing I would say too, is that just

18:39

an expectation of profit alone does not make

18:41

something a security. It has to be meet every prong

18:43

of the how he test is my understanding. So an example,

18:45

you know, people might buy a Picasso painting hoping

18:47

it goes up in value, or buy gold

18:50

or something like that. So those

18:52

aren't securities. So

18:54

yeah, I mean basically, Bitcoin ethereum and

18:57

the assets that we trade on our platform day, we believe

18:59

our crypto commodity, and it's you

19:01

know, people trade those. Some of them they want

19:03

to go up in value, just like they buy gold. Other

19:06

other times they're using it for various utility

19:08

aspects. You know, this is sort of

19:10

I want to get back to the regulatory question. But

19:12

before I forget, can you talk for

19:15

a second about how you view

19:17

bitcoin specifically, because it feels like the

19:19

crypto industry in many respects

19:21

has moved on from Bitcoin. And

19:24

I'm sure your mentions on Twitter are

19:26

filled every day with angry, laser eyed

19:28

people that think you hate bitcoin. But

19:31

it is also true that you know you launched you

19:33

launched an ethereum layer two.

19:35

I don't know if do you have a light do you is

19:37

there a coin based lightning note or we'd

19:41

like to do more with lightning pleasure havin pro

19:43

lightning so but haven't yet. Yeah, and

19:46

you know there's all these issues with like funding

19:48

for core bitcoin devs, like frustration

19:51

that they don't get enough and can't maintain it. What

19:53

is your view towards bitcoin?

19:56

I mean, I love bitcoin. I honestly, I don't

19:58

really understand why, Um, anybody might

20:01

think the opposite. I'd kind of like dedicated people

20:03

do, right, I mean, I'm not wrong that you, um,

20:05

there is kind of all abused by

20:07

bitcoin maxis at one time or another. I

20:09

think that's unfortunate.

20:11

Um, I don't know how seriously to take

20:14

that. I mean I do see people say this on Twitter

20:16

sometimes but I don't know if it's like a widely believed

20:18

thing. I mean, it would sort of defy credulity,

20:21

right. I mean I've kind of almost dedicated my life too

20:23

like bitcoin and helping it grow. I mean literally

20:25

I read the Bitcoin white paper and then decided to

20:27

quit my job and found this company. Um. Now,

20:30

of course the industry has evolved into many things,

20:32

right, I mean, there's lots of new innovations coming out

20:34

in crypto. But yeah, I'm very

20:36

pro bitcoin, and I think, look,

20:38

I think there's a very simple

20:41

base case for for bitcoin, which is that it's

20:43

the gold standard in the crypto economy.

20:45

And I think that I'll probably always be

20:47

true and it'll keep growing. Now if things

20:50

like lightning continue to get traction, I think

20:52

it could also become like a settlement layer.

20:54

There's um, there's people now creating

20:56

NFTs in bitcoin, and so it's

20:58

evolving. I'm

21:01

as as an operator of an exchange in custodian

21:04

I try to just be agnostic. I don't. My

21:06

job is to say, is not to tell our

21:09

customers which coin they should use. It is to list

21:11

and make available every coin that meets

21:13

our standards, the legal

21:15

tests. I discussed and then we

21:18

need to be agnostics. I think some people, because

21:21

I'm not pro one coin or another,

21:23

they sort of take that as like you must hate

21:25

this thing, But those are two different things. Just

21:28

going back to the SEC for a second, you know, we

21:30

talked about how it does seem

21:32

like SEC is sort of an enforcement mode

21:34

and there's a chance that you wake up tomorrow and

21:37

there's a bunch of new announcements. Wouldn't

21:39

you think the ultimate goal

21:42

is for the SEC when it comes to crypto.

21:44

Do they just want it to go away entirely?

21:47

Or are they aiming for, you know,

21:49

the industry to still exist but maybe in a

21:52

different in a different

21:54

way, or a JP Morgan in City

21:57

instead of coin base. And yes,

22:00

Unice law Well,

22:02

I mean I always want to be hesitant to kind of

22:04

speculate on the motives of people within the

22:06

SEC. I mean, I think we have a pretty

22:08

good relationship with different people on staff and commissioners,

22:11

and I guess

22:14

the real answers I don't know. I suspect

22:16

that there are different people with different views inside

22:18

the SEC. I think it wouldn't surprise

22:20

me if some people their view

22:23

they actually just wanted to go away they wish this whole thing

22:25

would go away. I think I don't think I would

22:27

hope that that's not a majority of view. I know it's not the majority

22:29

of view of Americans, and I don't see how

22:31

would be in the interests of America or are you know,

22:34

protecting consumers to wish

22:36

it would go away, because clearly it's not. One

22:38

in five households in the US are using

22:40

this stuff and they're just going to use unregulated

22:42

things off shore if if we don't get our act together

22:44

in the US. So I think the majority view is more

22:47

like, we know that this is going

22:49

to exist, we just need to bring it

22:51

within the regulatory perimeter. I wish

22:53

that they were doing that by just again publishing a

22:55

clear rule book and going through a rulemaking

22:57

process with industry, but it

23:00

hasn't happened as much to date. And so you know, if

23:02

it needs to be more enforcement based and then some

23:05

of this stuff gets figured out via case

23:07

law, I mean that's okay too, it'll just take a little

23:09

longer. Why do you think that regulatory

23:12

response has so far been kind of

23:15

disjointed. I think it's fair to say, like maybe

23:17

disjointed or unclear. Was it a lack

23:19

of resources or regulators

23:21

just didn't understand the space. What

23:24

was it? Maybe can clarify what do

23:26

you mean disjointed? Well, I guess um,

23:28

slow maybe and unclear? You

23:30

know, to your point this idea

23:32

that we go in and ask them questions and they don't

23:35

give you answer, right, Oh

23:37

man? I frankly

23:39

I I you know, I'm spending a lot more time in DC. I'm

23:41

trying to figure this out too. Perhaps

23:43

I was a little naive coming in. I kind of assumed

23:45

that, you know, when

23:47

you're running a business, that the

23:50

regulators just give you the rules and then you just

23:52

follow them, and that would have been like how

23:54

I assumed it would work. But it

23:58

seems to be more complicated

24:00

than that. Maybe it's like there's various political

24:02

motivations. There's different factions within the government

24:04

who have different goals. You

24:08

know, people who've gotten legislation past, they've

24:10

told me it's kind of like a small miracle. Whenever it happens,

24:12

you have to kind of get the House and the Senate

24:14

and the President all aligned and the you

24:17

know, there has to be a real impetus for it to happen.

24:20

I kind of believe this thing with FDx is

24:22

maybe that impetus. Maybe this is our moment to finally

24:24

get some clarity in the next year, at least

24:26

give another regulatory question, though not about

24:29

not SEC related. It

24:32

seems like some banks are de

24:34

banking crypto companies, but it does

24:36

I do not get the impression that

24:38

that is a risk for coin base.

24:41

Do you perceive that to be a regulatory

24:44

advantage for you, that smaller

24:46

exchanges may have a harder time getting a banking

24:48

partner in this environment? Well,

24:50

look, I mean I'd hate to consider that to be an advantage.

24:54

You know, we haven't had any issue with any of our bank partners.

24:56

I do think that there's a there's a general

25:00

moment in the wake of FTX where, you

25:02

know, reasonably so bank

25:05

regulators are asking

25:07

tough questions and they're and they're basically coming in and saying,

25:09

what are the liquidity risks if you're gonna

25:12

take crypto deposits? Um?

25:14

You know, is it is it okay to be

25:16

making loans against those deposits?

25:18

Or are they too risky? And um?

25:21

I think those are totally fair questions to ask. So, yeah,

25:24

I don't think that we would have any kind of major

25:26

crackdown and say, well, you can't bank crypto companies. I

25:28

haven't. I haven't heard that from any anybody.

25:31

And by the way, that that would be probably exceeding

25:33

their authority because Congress has to make those kinds of decisions

25:35

about what is allowed in the economy. Um.

25:38

But if they're coming in and asking questions about liquidity,

25:40

I think that's probably reasonable quick

25:42

to follow up on that. Um, would you or

25:45

have you put any lobbying

25:48

or any of your DC effort towards

25:51

guaranteeing or making sure that anyone provided

25:54

you know, provided other basic checks that like

25:56

that crypto can't be I guess discriminated

25:59

again within the banking system. Is that an effort

26:01

you've made it? Well, I'm

26:03

certainly in our messaging and in our conversations

26:05

with members of Congress and the Senate,

26:08

we have made that point to them, which

26:10

is, we want to just be treated on a level

26:12

playing field. Right, don't unfairly penalize

26:14

crypto versus traditional financial services.

26:17

But um, you know you shouldn't

26:19

like allow us to have a lighter weight system

26:21

or anything like that either. So it's

26:24

it's a balance. Um. You know,

26:26

we've mentioned this a couple of times, But I'd be curious

26:28

to get your take on what happened

26:30

to FTX, Like when when

26:33

you know that one week in November I

26:35

think was shocking for a lot of people for

26:38

very different reasons depending on who you are. But

26:40

what was it like for you when when you saw,

26:43

you know, it happens so quickly you had

26:45

the Twitter exchanges and then you had a bankruptcy

26:47

file I think filing within like seven

26:50

or ten days. Yeah, I mean that that was a wild

26:52

week. Um. I was actually in Japan at that time,

26:54

meeting with our team there and talking with regulators

26:58

and government folks in Japan, and I got

27:00

a call from somebody who said it's

27:03

bad, like we think FTX is going to go down in the

27:05

next forty hours and Sam might go to jail.

27:07

And I was like, okay, tell me more what happened. And I

27:09

kind of started to piece it all together. You

27:12

know. I had a chance to chat just briefly with Sam

27:14

actually and cz during that whole thing,

27:17

and I was just doom

27:19

scrolling Twitter, I suppose like a lot of people,

27:22

and I mean, really that's

27:24

not true. I Mean the first thing that I really thought about was,

27:27

Okay, what is our exposure any

27:29

of this. So we immediately went and you know,

27:31

underwrote any of our counterparties, including

27:33

FTX itself, but any that might have secondary

27:36

effects. And

27:38

then we started to think about, Okay, well,

27:41

this is actually quite validating of our strategy

27:43

over the last ten years of being built in US,

27:45

trying to embrace compliance, not trying to cut any

27:47

corners. How

27:50

can we make sure that people understand that coin base

27:52

is it's not like FTX. And

27:55

I basically thought about it as there's

27:57

gonna be a it's gonna be a black eye for the industry,

28:00

but this is ultimately coin stands

28:02

to be a huge net beneficiary of this because

28:05

it's going to bring an increased focus on compliance

28:08

and trust, which is what we've been doing for the last ten years. I

28:27

want to ask a little bit about you know,

28:30

start the price crypto winter, and

28:32

obviously there's been a bit of a bounce, but

28:34

the bounce has basically just been like because

28:36

the Nasdaq has bounced two and it looks

28:39

many of these coins sort of looked

28:41

pretty highly correlated to other risk

28:43

assets, and for years I

28:45

feel like there was this case to investors

28:47

that they should buy crypto for two reasons.

28:50

One it was this new uncorrelated asset

28:52

class, and two, in the case of bitcoins

28:54

specifically, it was really good as

28:56

an inflation protection thing, and

28:59

that league it just got, you

29:01

know, the highest inflation in forty

29:03

years, and bitcoin really hasn't gone

29:05

anywhere. It's flat over the last several years,

29:08

and the coins all seemed to buy and

29:10

large at this point seemed to more or less

29:12

be correlated with like the NASDAC

29:14

or QQQ or whatever. What

29:16

is the case and what do you feel about, like, so,

29:19

what's the new case to

29:21

be made? After people have seen narratives,

29:23

these old narratives that the industry was

29:25

pretty loud about making. I'm not saying

29:27

you I don't know, but many in the industry definitely

29:30

were have not held up in terms

29:32

of like the case for investing in it. Yeah,

29:35

well, I guess I'm just sort of laughing a little bit,

29:37

because, you know, crypto being

29:39

has been roughly as volatile as the stock market recently.

29:41

And I can tell you there's many years coin

29:44

base where people would constantly ask me, it's so volatile,

29:46

no one'll ever use it. And so now that it's just on part

29:48

with volatility of the stock market. I'll

29:51

take that as a slight win at least a step in the way testa

29:53

shares to buy coffee either. Yeah. Yeah,

29:55

but anyway, well, okay, so obviously

29:58

we have stable coins for commerce now, which

30:00

which is a good piece of the puzzle.

30:03

But let's go back to your question about in

30:06

an inflation hedge. So you

30:08

know, I think there certainly was this belief

30:11

and I, frankly I shared this belief too, which

30:13

was that crypto bitcoin

30:16

specifically. Actually, this is where people hopefully

30:18

the bitquin Maxie's kind of aligned

30:20

with my thinking is that that that is sort of the new

30:22

gold standard in the crypto economy,

30:25

and it would be something that people flee

30:27

to in times of uncertainty, with guaranteed scarcity

30:29

and things like that. Just you know, similar

30:31

to like real estate has a you can't make more

30:33

of it, so at least the land

30:36

part of it. So there is sort of a guaranteed scarcity

30:38

component. It's a nice insulation hedge. Now.

30:41

I think what happened is I was frankly surprised

30:43

to see how quickly crypto came down in an

30:46

environment of high inflation, where I thought, maybe

30:48

the world is shifted, maybe we're ready now where this would

30:50

be considered an inflation hedge. It

30:53

turns out we were way too early for that. Now,

30:55

I think, I guess my current updated thinking

30:57

on that is that we still need Probably

31:00

crypto is still too smaller percentage of the global

31:02

economy to it's being treated more like

31:04

a growth you know, asset

31:06

or something as opposed to like a true like

31:09

a gold standard or something. And so I

31:11

mean we probably rely need the cryptoconomy to grow

31:14

ten x, twenty x or something from here to start

31:16

to have that sort of a role in the broader

31:18

macro environment. You

31:20

know, you mentioned stable coins there, and I

31:22

just remembered once upon a time, I

31:25

guess a few years ago we had Sam Bankman

31:27

freed on and we asked him to explain to us

31:29

what would happen if tether just

31:32

suddenly collapsed? And

31:34

I'd be curious to get your I guess in retrospect

31:37

respect, we should have asked SPF what

31:39

would happen if FTX actually collapsed? But

31:42

in retrospect, can

31:45

you talk to us about your impression of

31:47

Tether's role in the crypto ecosystem?

31:51

Um, well, look, I'm not here to sort of criticize

31:53

anybody in the ecosystem. I don't. I don't really.

31:57

You know, we've utilized Tether in various

31:59

ways, is on our platform in different times. I know, they've

32:01

been investigated by various parties and they reached settlements

32:04

and they sort of had they got comfortable with various ways.

32:08

You know. Look, our focus at this point has been

32:10

on USD coin. We have a partnership

32:12

with Circle on that, and I think that's been

32:14

a that I feel very comfortable

32:16

saying. I you know, I understand more about it, and it

32:18

feels it's well backed, it's

32:20

one to one backed, and it's audited and all these things.

32:23

I just don't have as much information on Tether, but I don't

32:25

have anything negative to say. Certainly they don't have no

32:27

no beef with them, let me ask

32:30

you. You know, look, obviously, after

32:32

all this time and even well before

32:34

the FTX, as you know, there's been

32:36

there's there's just a lot of skepticism still

32:38

to this day about crypto, and I think many

32:41

people say, yeah, it's not it's not going to go away,

32:43

but like it's still it's just

32:45

speculations. People are just in it for the money

32:48

and there's no real use case

32:50

outside of maybe some niches, but

32:52

like Web three isn't really a

32:54

thing yet, and I'm curious, like a

32:57

lot of people in crypto have done

32:59

faint stastically well and you

33:01

know, like you know, made an

33:04

extraordinary amount of money despite

33:06

the fact that buy and large, these

33:08

coins aren't really used for much outside

33:11

of making money. And there's not

33:13

a you know, decentralized Facebook

33:16

that exists. You know, there's a

33:18

there's a good reason why it would be nice to have

33:20

one, because it's sort of scary

33:22

to think about, like how much power is in

33:24

the hands of Elon Musk or Mark Zuckerberg

33:27

and all these people, but by and large, like nothing

33:29

exists. Like when does that happen?

33:31

Because there's like tons of money has been made, but

33:33

when do we get like this sort of like okay,

33:36

now there's a thing that's been delivered

33:38

that people will use for non speculative purposes.

33:42

Yeah, so I guess, you know, I'll disagree a

33:44

little bit with this idea that, um, it's

33:46

it's all speculation, right. I think that

33:48

was probably a fair thing to say five years ago

33:51

or so. But and there's not going to be some moment

33:53

where it all flips. It's it's a gradual thing.

33:55

And so we've actually tracked this

33:57

inside coin base. You know, what percent of our active customers

34:00

are doing something other than trading with

34:02

crypto and it's now over fifty

34:05

percent. What's an example of that,

34:07

like buying an NFT something other than

34:09

trading. Yeah, that's an example,

34:12

and there's lots of other examples. I'll kind of give

34:14

you a framework for how I think about how it's evolved

34:17

over time. But you

34:19

know, obviously those people doing commerce, they're

34:21

doing borrowing and lending, they're you

34:23

know, earning money, they are doing

34:26

things like staking. And

34:29

here's how to think about it over time.

34:31

Right, So, the first use case of crypto was really

34:34

a new form of money or this new asset

34:36

class that got created, and a lot of the activity

34:38

early on was speculative. Although

34:41

just I don't want to undersell that first point, because

34:43

by having a new form of money that is

34:46

global and decentralized and guaranteed to be scarce,

34:48

that that is no small thing, right. I Mean, we sort of take

34:50

it for granted in the US that our currency is relatively

34:52

stable, even though it inflates more recently.

34:56

Most people in the world, that is a luxury. They do not have

34:58

and it would be an incredib will benefit

35:00

to humanity if only the only thing crypto

35:02

ever did was have a form of sound

35:04

money for the world that anybody could have as long as they have

35:07

a smartphone. That that's a that is a game

35:09

changer. Okay, so let's not undersell that. But

35:11

beyond crypto being just a new form of money, it

35:14

also became a new type of financial

35:16

services, right defy. And we saw different

35:18

ways for people to do borrowing and lending and you

35:20

know, commerce payments and staking

35:23

and various things like this, and so that

35:25

that was all very good. Now the third realm

35:27

is kind of what you touched on, is being you know about decentralized

35:30

social and everything. We call it Web three. It's it's

35:32

not only new type of money and new type of financial

35:34

services, but a new application platform

35:36

even things that have nothing to do with financial services.

35:38

And you know, I'm pretty excited about,

35:41

for instance, decentralized identity with

35:43

EANs. That's a foundational component,

35:45

so people's identity doesn't have to be sort

35:48

of owned by a big tech company. Once

35:50

you have decentralized identities, you can connect them

35:52

in a social graph. You can make decentralized social networks.

35:56

You can have public profile pages with badges

35:58

and accreditation and know your badge,

36:00

you know, accessing to buildings like proof

36:03

of attendance, concert tickets, like all these kind

36:05

of things, um new business

36:07

models for you know, the music industry and

36:09

like like YouTube, Spotify. You can imagine

36:11

all these things being built in a new way. We

36:13

can imagine them to. I guess the

36:15

question is why why hasn't it happened

36:18

yet? You know, we're talking It's been like a decade,

36:20

more than a decade since the White Paper, So

36:22

why why if this is such

36:24

revolutionary technology and it's so

36:27

much better than the way we've been doing things, why hasn't

36:29

the adoption been quicker? Yeah?

36:31

Well, I think one reason is, um, the scalability

36:34

of the blockchains has been one thing that

36:36

we could unlock that would help it move even faster.

36:38

I think the usability needs to get a lot simpler,

36:41

right. The average person doesn't really know what a private key

36:43

is. They don't want to, you know, install Chrome

36:45

extension to understand some thing

36:48

like they It needs to be just simpler

36:50

for the average person. And

36:53

I guess, you know, look at the Internet as an example,

36:55

right, I think like the very foundational pieces

36:58

of the Internet might even go back to like the sixties or

37:00

something. But you know, you started

37:02

to see um tell net and

37:04

like these very early you know types

37:06

of things come together, like in the eighties, I think

37:08

it was um so we think

37:10

of the Internet as really

37:13

happening from like the year two thousand or

37:15

something like that. And that again that's by the way,

37:17

you know, twenty three years now, but it

37:19

took a lot of foundational work to happen before

37:21

that. You know, broad scalability, broadband had

37:24

to happen, right. Another thing another Internet at

37:26

now, crypto as well. I mean people are working

37:28

on hashcash and

37:30

all those for decades in some case.

37:32

I mean the prehistory of bigcoin just pretty long

37:34

as well. Well those were like research papers, I

37:37

mean they you know, tell net was like a real thing

37:39

that had I don't know how many people, maybe a million people

37:41

using it or something. But um or

37:43

like that first you know, fiber

37:45

that had to get laid in the ground and everything. But

37:48

um yeah, look, I would love it to happen

37:50

faster. I mean, let's be honest, Like the regulatory

37:52

environment has not helped either. It's like there's

37:55

a there's a fear in this in

37:57

the United States that if you start a company

37:59

in this space, like you're just going to be have

38:02

a bunch of legal bills and you know, subpoenas

38:04

in your inbox or whatever. So that's

38:06

not helping either. But we can't blame it

38:09

entirely on that. It's the technology needs

38:11

to be more scalable, more usable, and

38:15

it's all happening, it's just taking a while. And I want

38:17

to ask I have one last question, and it's a

38:19

coin Base specific question

38:21

and is inspired by another guest that we've

38:23

had on in the past, Jim Chanos,

38:26

who has been critical. I don't know if he's

38:28

ever short coin Base, but he's certainly been critical

38:31

the company. And he says two things.

38:33

He's like, Hey, how is it that in

38:35

like these most incredible some of the most incredible

38:37

bull markets ever for crypto company

38:40

hasn't been profitable. But also

38:43

that so much of the revenue you do make

38:45

is because of the huge gap between

38:48

what institutional traders on coin

38:50

base pro pay versus

38:52

the commissions on regular coinbase.

38:55

And it's pretty easy, or at least was, to switch

38:57

back and forth. But maybe people didn't realize

38:59

how much cheaper one could trade just

39:01

by like a few clicks on the website

39:04

to get over to the pro side, Like

39:06

how much compression is there going to

39:08

be? And have you know what do you say that

39:11

to the argument that retail investors have

39:13

sort of gotten a raw deal compared to

39:15

the more more professional ones. Yeah,

39:18

um, so I'm not sorry I caught

39:20

the first part exactly, but I think I mean, is

39:23

profitable during this csane

39:25

bull market? Right, That's what I thought I heard you said.

39:27

But in twenty twenty one we were actually okay,

39:30

very profitable. UM did about

39:32

four billion dollars of EBNA in groups revenue

39:34

SWY twenty two

39:36

we were not okay because the market came down

39:38

quite a lot, and we've made some really some cuts

39:40

and adjustments to try to get to an environment

39:42

where we can generate even a hopefully in any market

39:45

environment. But I guess the core your question is

39:47

really around feed compression. Yeah, yeah,

39:49

um, okay. So there's

39:52

a there's a number of pieces to this. So the first

39:54

is that it's true there are difference in pricing amongst

39:56

our customers UM if they want to trade

39:59

through more of a pro interfew base or a simple interface

40:01

there's also a difference in pricing, of course, based

40:03

on how much trading volume they do. There's tiers, there's

40:05

tiers of that, and so I think what we've seen is there's a willingness

40:08

for customers to pay basically

40:10

for ease of use and simplicity and trust.

40:12

And so I don't think,

40:14

by the way, our fees are not really out of line with the

40:16

rest of the market. I mean, there's sometimes there's

40:18

firms that kind of advertise like zero fees or

40:20

whatever, and you know they're

40:23

payment order flow or there's like different

40:25

things that you're paying a fee one way or another.

40:27

It's sometimes not

40:29

always obvious, right. One of the thing I'll mention

40:31

is that we actually we actually launched

40:34

something called coin Base one, which is like an Amazon

40:36

Prime type subscription, and for customers

40:38

who pay for that, I mean, they get a number of things

40:40

like a million dollar acount protection and all these kind of things,

40:42

but one of the things they get is you

40:45

know, reduced fee trading basically, and that's

40:48

something we're sensitive to as well for our power

40:50

users. Basically, all right, Armstrong,

40:53

CEO coin Basis, thank you so much for

40:55

coming on avelots. We've wanted to have you for a long

40:57

time. I'm thrilled we finally made it happen. Yeah,

41:00

this is great. One of the best set of questions

41:02

I've had in well, Tracy.

41:17

That was a lot of fun. I really enjoyed that. Yeah,

41:19

I'm glad we were finally able to do it. And I

41:21

guess kudos Bryan for coming on and answering

41:23

our questions in the midst of a deep crypto

41:25

winter. Yeah, it is interesting.

41:28

There's just the myriad regulatory

41:31

things right now, and I have to say I

41:34

do have sympathy and I've

41:36

heard it from other people in the industry,

41:38

particularly with this idea,

41:41

because it's one thing to like go to the SEC

41:43

and laut and clear five rules around

41:45

security is not getting any answers. But then

41:47

you also hear entities in the industry

41:50

and they're like, no, we didn't even want to launch

41:52

until we were sure we'd be on the right side

41:54

of the law. And then like they're

41:56

still in like pre launch phase three years later,

41:59

while other people have made you get punished

42:01

for engage an whereas if you don't ask questions

42:03

and just launch, sometimes that's better. Yeah, And

42:05

then the only thing that you know they do go after

42:08

things like the Kim Kardashian token, which

42:11

was not that big, and so

42:13

it's like, you know, I have

42:15

some sympathy I feel like for entrepreneurs

42:19

on this particular point within the industry. I mean,

42:21

I do think the lack of regulatory clarity

42:23

is worth discussing. But the argument

42:26

for why a regulator might want

42:28

to do that is because well, if you start

42:30

imposing all these rules or unveiling all

42:33

these new rules, then you de facto legitimize

42:36

it, And maybe maybe they don't

42:38

want to do that, but you know, if they don't want to do that,

42:40

then they should also maybe come out

42:42

and say that because it isn't

42:45

But like I said, and it is definitely true that a

42:47

lot of people lost money, Like I do

42:49

think there is perhaps

42:52

in this view that we should take it more as

42:54

a win that the collapse of FTX

42:56

didn't have like a broader macro

42:58

contagion, especially you know, given

43:01

what we saw in two thousand and eight when the collapse of

43:03

what Shadow Banks then had this huge

43:05

impact. And so like this idea of bringing

43:08

it in the perimeter, like maybe there are some perimeters

43:10

we want to keep it out of. I don't know, people are lost

43:12

money, but at least the financial system to collapse.

43:14

That's like the best we can hope for nowadays. It's not

43:17

terrible, all right? Shall we leave it there? Let's leave

43:19

it there. This has been another episode of

43:21

the Old Thoughts podcast. I'm Tracy Alloway.

43:23

You can follow me on Twitter at Tracy Alloway

43:25

and I'm Joe wi Isn't All. You can follow me

43:27

on Twitter at the Stalwart. Follow

43:29

our guest Brian Armstrong. He's at Brian

43:32

Underscore Armstrong. Follow our producers

43:34

Kerman Rodriguez at Kerman Arman

43:37

and Dash Bennett at Dashbot. And

43:39

check out all of our podcasts at Bloomberg

43:42

under the handle at podcasts, and

43:44

for more odd Lots content, go to Bloomberg dot

43:46

com slash odd Lots, where we post

43:48

transcripts. Tracy my blog, and we have a

43:50

newsletter comes out every Friday.

43:53

Thanks for listening.