Hello, everyone. Welcome to our next session here. I'm Ben Budish, Barclays analyst, covering the U.S. brokers, asset managers, and exchanges. With us, for our next session, we've got Alesia Haas, CFO of Coinbase. Alesia, thanks so much for joining us.
Thank you.
Just to start, I'm gonna read the safe harbor statement.
I always appreciate that.
During today's discussion, Coinbase may make forward-looking statements. Actual results may differ materially from today's statements. Information concerning risks, uncertainties, and other factors that could cause these results to differ, including Coinbase SEC filings. The discussion today will also include references to certain non-GAAP financial measures, reconciliations, and the most directly comparable GAAP financial measures are provided in the shareholder letter on the company's investor relations website. Non-GAAP financial measures should be considered in addition to, but not as a substitute for GAAP measures. So with that said, Alesia, great to have you here. It feels like every week that goes by in crypto is like a year in our regular lives. Like, so much has happened since we last spoke. So maybe starting with, you know, we're a month after Q2 earnings call.
Yeah.
Some of the major themes in that call, financial discipline, product excellence, driving regulatory clarity. But before we dive into those buckets, what's top of mind for you? Like I said, a lot's kind of gone on. What, what are you most focused on?
Those are our three strategic priorities right now, so we continue to make progress against each of those, and I know we'll talk about those later. What I think is the exciting. Sorry.
We okay?
Talk more loudly, otherwise-
Yeah.
Okay. Actually, it dovetails with the regulatory goals that we have, and we think there's a foundation where clear regulations, our most trusted brand, and the product innovation will really drive growth for us as a company. So that's an exciting initiative to announce in Canada since we last spoke. We've been working on the global expansion. We also are just continuing to accelerate our product momentum, and I'm really proud of our efforts to continue to innovate, to diversify the revenue streams. We've launched Base, we can talk about Onchain Summer and, and kind of the growth of that protocol. And then on the discipline, you saw that we've done a debt repurchase. We are looking to be more financially strong, build an efficient and financially prudent company, so making good progress there as well.
I would just say our morale is strong, and I am so proud of our employees and their ability to focus, execute what we see in the headlines, despite what we see as the dramas that we all get kind of comfortable with in crypto, the ups and the downs.
Par for the course.
A little bit, for better or for worse, here we are.
Well, so on the product side, maybe let's talk some, a little bit about derivatives and your futures business. So Coinbase recently received approval for its FCM license, but let's start with the DCM portion. So you've been running a futures exchange in the U.S. for some time now, mostly through other retail brokers and clearing firms, and more recently, you've kind of expanded to institutions with some larger, notional-based products. So maybe start with an overview of the product set here. What's the behavior like on the platform? Who are the typical users so far? Are they hedging? Are they speculating, and what sort of growth have you seen?
All right. Let me zoom out broadly. So Coinbase has been a spot trading platform up until just recently, which means that we were participating in roughly 25% of the global trading market for crypto. Derivatives represent 75% of the global trading market, so bringing forth a derivatives platform and offering has been one of our core strategic priorities, and we've been working towards this goal for many years. Working towards this goal, because these are in the U.S., highly regulated products, and so it required requisite licensure to be able to offer. So the DCM was the very first product that we offered, and that is the crypto derivatives exchange. We couldn't offer that directly to our end users. You had to then bring in derivatives brokers to that product platform, and so the goal there has to start to be building liquidity.
We offer a few different contracts of different sizes. We are building smaller, what we call nano contracts, that are designed for retail users and larger contracts for institutions. And onboarding more and more brokers to enable that development on our platform. But the key, and I think we're going to talk about this next, is being able to then broaden this product suite to enable more and more of our end users and our customers to access derivative products. The goal here is for them to express a variety of trading views, whether it's speculative trading, hedging positions. Even for ourselves, we earn a lot of revenue now in crypto, so like our staking revenue is crypto native revenue.
Being able to hedge that effectively if we can't sell it right away is an important thing to manage our company, and we think as others need that, we'll have both speculative and non-speculative use cases in our derivatives products.
Well, you led me to my next question. So what changes now that you're approved to be an FCM? What can you share in terms of what the product might look like, the target user? You know, if you can share any details around, like, the fee structure, what that might look like and, you know, considerations that we should modify.
This is the next step on our journey. So we got the exchange, and now we've just recently were approved for Coinbase Financial Markets to be a derivative broker. So that means now we can build products direct to our end customers, direct to our retail customers, direct to our institutional customers. So now the broker will trade on our exchange, in addition to other brokers that can trade on our exchange, but our direct to retail is one of the key parts of our journey. We're really proud to be the first crypto native platform to receive this license, and we can now have a platform where we can do derivatives, spot all within the same family of products and services. This is a highly regulated product by the CFTC and the NFA. This is a license that we received. We have not yet launched this product.
We are in, I think we're technically now in beta testing of it, and so this is coming soon that we'll be able to start rolling this out. Our goal is to offer retail products that are small contracts, that are commensurate with how retail investors can trade crypto on the global market, but in a highly regulated way. We also think that this, securing this application or this license, demonstrates our commitment to compliance, demonstrates that we are willing to do the hard things and obtain the licenses when there is clear regulatory infrastructure to do so. So we're excited about this. We haven't launched, but it is coming soon, and we think this will be an important part of our story going forward.
We're all looking forward to it.
Us, too. Thank you.
Maybe lastly, on the topic of derivatives, can you give us an update on the International Exchange? What's the behavior like from early adopters, which as we understand, is more institution-focused? Maybe what does that kind of profile look like? Is it, you know, market makers, crypto, hedge funds, trading firms? And what are your thoughts on rolling this out to retail, around the world?
Absolutely. So what we just talked about was the derivatives offering in the U.S., which, as I mentioned, SEC-regulated products. For non-U.S. customers, we have started to offer derivatives products through what we call the International Exchange. These are perpetual futures, which means they look different than U.S. derivatives. They don't have an expiry date. They roll, essentially. And what we're doing there is we've just launched this product to eligible users in global markets. This should come as no surprise, but other countries like the U.K., Europe, they have other licenses that we would need to obtain to offer derivatives within certain markets. And so we are obtaining licenses to be able to grow these products, and we will kind of have rolling announcements within the derivatives product offering as we obtain new licenses.
But for select customers in global markets, the Coinbase International Exchange will serve that platform. Today, we are still in the process of building liquidity. We've opened up order books. We are just getting started with onboarding customers. So initially, it's market makers to develop the liquidity. That is the key foundation of any markets platform, and we will go from there to onboard customers. So it will serve retail and institutions abroad.
If I could ask maybe one more sort of ancillary question. I think sort of as we think about or as we understand the crypto landscape outside the U.S., we tend to see more of a concentration in retail traders, more of a concentration in the institutional side in the U.S. Why do you think that is, and why sort of start your international exchange with an institution-focused approach rather than retail?
So I think the answer is it's both. Importantly, when we looked at the market and we obviously talked to our customers, as the competitive landscape changed with certain implosions in 2022 and the certain changes in banking rails that we've seen in 2023, the market has changed materially. Market makers, though, are the foundation of these platforms, regardless if there's a lot of volume from retail or not, and so we need to start with the liquidity the market makers have.
I think our most trusted brand and what we bring to the market in terms of just simply the transparency of our financial statements, our commitment to doing the right thing, and compliance is going to lend us well to be able to onboard institutions that we provide the foundation that we can then offer it to more institutional, more retail users, et cetera. But it's really step one to get the hedge funds and market makers there.
Got it. Makes sense. Maybe changing gears a little bit, let's talk about USDC and Circle.
Okay, yeah.
So you recently announced a revision to the relationship with Circle. You know, can you talk about what drove that new agreement? What do investors sort of need to know to understand, you know, the background, any context you can provide?
So USDC is our stablecoin. We think stablecoins are a really important part of the overall crypto ecosystem as they offer the benefits of crypto, which we hope think is a promising, faster, cheaper, more accessible product, without the volatility that you see in so many crypto assets. And so these are US dollar-backed cryptocurrencies that have instant 24-hour settlement. We've been in Circle since 2018, when we jointly launched USDC, and at that time, we did it through a consortium, which we referred to as Centre. We've learned a lot over the last five years of this relationship, and so we thought there was efficiencies to be gained. We think there's accountability for Circle to be the sole issuer, and Coinbase plays an important reseller opportunity in this ecosystem. This transaction unlocked the ability to put USDC on six new protocols.
Importantly, it put it on Base. Base is the Coinbase new Layer 2 solution, and we think that it starts to open up the opportunity for us to build this future of our goal of like, very fast, very cheap transactions on a global payment rail. And the commercial relationship that we have with Circle was slightly amended as well. So we've always had a commercial relationship with Circle, by which we earn a portion of the revenue from the underlying reserves on USDC. We continue to earn revenue on that, but what we simplified is now for the off platform, i.e., USDC, that's held not on Coinbase, on our platform, not on Circle, but just in DeFi wallets, in other platforms, we now split that equally.
That was the key economic change within the relationship, and then we took an equity stake in Circle with that as a result of widening our partnership.
Got it. So maybe let's talk about USDC itself a little bit. So what are your thoughts on the decline in market cap over the last, you know, six months? What, what is the company doing, or what can you do to try to remedy this?
Yes. So going back to Q1, we had a really unfortunate event in Q1 with the banking collapse, that Circle had just over $3 billion of reserves, of USDC reserves at Silicon Valley Bank. And over the course of the weekend, before it became clear what would happen with uninsured deposits, USDC depegged, i.e., in secondary trading in various crypto platforms, people were selling their USDC for less than a dollar. Nobody ever burns their USDC. So with USDC, you mint it, which means you give the issuer a dollar, you receive a USDC. When you burn it, you give the issuer USDC, you receive a dollar back.
So the minting and burning continued at 1 to 1, but secondary trading, where you said, "I will just trade you on a secondary platform, USDC, for something else," started to depeg. As a result of that depeg, market makers needed to restore the peg back to par, and the trade that they did to restore the peg resulted in a significant decline in the market cap of USDC. What we've seen then is that event in 2021, compounded by then some other platforms choosing to not offer USDC and moving to non-US dollar-backed stable coins or non-US domicile issuers because there was fear of the overall, what was gonna happen to banks in the US. We saw money move to Tether. No comments, no judgment, but interesting to observe. But now it's really stabilized.
Over the last few months, we've now seen what it looks like: a new USDC at the right, roughly the $26 billion level. So what are we doing now at Coinbase? I think it's really important now with this new deal. The other thing that I didn't mention is previously, Circle and Coinbase would compete for mint share to drive their share in the economics. The new deal removes competition because it's split equally, which means we are jointly motivated and equally goaled to just grow the market cap again. So Circle's doing things, Coinbase is doing things. To focus on what Coinbase is doing, we're really working on integrating USDC in our products. I mentioned that we are putting USDC now on Base. USDC on Base, we believe, will get us to a future where pennies will be spent for international payments.
That really changes what people can spend right now on, like, compared to Western Union, compared to a wire, compared to so many expensive payment rails. So these are 24-hour, few pennies, few seconds of confirmation time, money can move anywhere in the world. We also have added a reward rate on USDC. So just today, we are now up to 5% rewards. If you hold USDC on our platform, you can earn 5% on your USDC. We find that when customers hold more assets on our platform, they're more likely to trade, more likely to integrate in other products and services that we offer, and so this is net additive to the behavior we see in our platform. We've also made USDC the primary trading pair on our international exchange that we talked about.
So encouraging then market makers and others to use USDC as that primary currency, and especially in crypto, with this 24/7 market, that you have to move money so quickly. You can't move fiat 24/7 through the banks, through moving it through the exchange system. And so stable coins are key to that. And so integrating that deeply in our exchanges is one of the other things we've done. So we're working through all of our products to see how we can more drive behavior, drive adoption towards USDC, which will in turn, we believe, help drive the market cap up.
Got it. So maybe from now thinking about Coinbase's P&L, so you're now generating a pretty meaningful portion of revenues from interest income. You know, there is presumably a future risk that if you were to see rates fall, you could see a disproportionate bottom-line impact. So how are you thinking about, you know, hedging this risk and thinking longer term? I mean, I know Brian's a dreamer, right? He's thinking about the next 30 years of what the financial ecosystem looks like. But how do you anticipate interest income will evolve? Will it remain a meaningful portion of Coinbase's revenues, or as we look farther and farther out, does it, you know, get diversified away? How do you think that kind of shakes out?
I'm really cautious to say that I have a crystal ball about how anything shakes out in crypto. And so one of the things that we do is we just run scenario after scenario after scenario, and we continue to invest in diversification. So with USDC specifically, obviously, if interest rates fall, that will impact USDC revenue. We're hopeful now that we can grow market cap, that volume will offset price, and we could see a change in that revenue trajectory. But it is a scenario that interest rates, well, it is a scenario that we then see degradation in that revenue, no different than we saw interest rates rise, and we saw growth in that revenue in this year. What's important, though, is we're building multiple uncorrelated revenue streams.
I think that's kind of an important part of our story, and we have multiple new products that monetize in very different ways, and our goal is to build diversified revenues. So just like as we saw when interest rates rose, that investors went to a more risk-off behavior, and so we saw less trading in crypto because volatility has come down, because risk behavior is transformed. We think that lower interest rate environment changes risk on behaviors, and so you could see more speculative behavior. So those naturally offset each other. But now we also have a custody business that grows with assets on platform. We have a staking business that's growing with assets on platform, that is offering validation of transactions.
Ethereum has been an important protocol that is underpinning multiple new utility use cases with decentralized applications, and so the behavior there is shifting from just speculations towards utility. Base is going to monetize this protocol that I mentioned, that Coinbase has through sequencer fees. So every single transaction on Base, that is monetizing through just like a payment for sequencing the transaction, uncorrelated with price, uncorrelated with interest rates. So the key for us is continued diversification, continuing to ensure that we get good product adoption, and then our revenues will have correlations with broader, broader macro factors, but we can hedge them out through different things. No different than a big bank has trading revenues go up one year, maybe asset management changes another year, maybe investment banking fees. We're looking for that type of diversification and to lower the beta of our revenue streams.
Yeah, makes sense. Moving on to another topic, Bitcoin ETFs. So a number of applications have been filed with the SEC, and Coinbase has been listed as a partner, either as a custodian, Prime broker, surveillance sharing partner, or all of these. So I guess first, what are your thoughts on the potential fund approvals? I think there seems to be a market view that BlackRock is coming at this. They probably kind of cracked the code, and that seems to be kind of a view that's developing. But what are your thoughts there? And second, how should we think about, you know, the P&L impact to Coinbase as, you know, the partner in those various ways?
We were absolutely honored to be selected in so many ETF applications, and we think it just speaks to the trust and the value of our platform because you can imagine the level of due diligence that we went through to have been awarded these mandates to be selected as these participants. The primary revenue stream for us is custody revenue, so we will be custodying the underlying spot asset that supports the ETF for these various funds.... We believe that over time, that could go to trading as they buy additional Bitcoin to put into the products or sell, as the case may be. So we think these bring ancillary revenues. As it relates to the timing, as it relates to the certainty of the SEC approving or not approving these, I honestly can't speculate as to when that will be.
We are heartened to see the quality of the names that have submitted these applications, and I think it speaks to that they're seeing their end customers seek out these products and services. They're not doing this for the fun of going through an application process. But I also think they have the credibility and the reputation of bringing high-quality financial services products to market, and so I hope that they are taken very seriously. We are heartened to see the recent court case with Grayscale, where the judge ruled that the SEC can't act in an arbitrary and capricious manner, and that we have to have a level playing field for these ETFs. These are good signs, but it is still subject to approval, and timelines are uncertain. They've been recently extended, so we're doing all we can to support the applicants.
Fair enough. So how do we think, or how do you think about sort of the pros and cons of these products? So on the one hand, you know, we could see Bitcoin volumes, maybe on the negative side, you know, move away from Coinbase. You could see that sort of incremental users say, "Well, I could buy the ETF in my Fidelity account." On the other hand, it brings in, you know, a whole group of new investors into the asset class that maybe weren't able to or, more hesitant because of the sort of on-chain nature of Bitcoin, which could be quite beneficial. So how do you think about those sort of pros and cons? Good for the ecosystem, but could you see volumes actively migrate off Coinbase?
We're definitely in a camp of good for the ecosystem, and I think it's so important. If one in five Americans owns crypto today, and predominantly that's Bitcoin, that is 50 million Americans. That is 5x the number of people that own an electric vehicle. So we already have lots of spot Bitcoin holders. But importantly, you can't have a spot crypto asset with registered investment advisors. They can't advise crypto to go into portfolios, and so they can advise for an ETF. And so we think that this opens up new pools of capital, many new market participants now that can now invest assets into crypto in a regulatory compliant product that meets their then requirements. So for us, we think this is additive. We think this is going to continue to grow adoption of crypto assets. We think this legitimizes the asset class.
It just brings it more and more into traditional mainstream products and services, and it will benefit in other ways, like providing custody services, we can provide support. That's broadly our goal then, because while we do want to be direct to consumer in many of our products and services, we also want to build important tools that enable other financial services providers to offer credit products to their end users, and this is an important way we can grow that ecosystem.
Makes sense. Maybe move over to sort of trading, thinking about the competitive environment. Starting off on the, on the trading side, you know, you surprised again on the last earnings call on a fee rate side, but as you kind of explained, that was largely due to mix shift in the customer base. At the same time, you've always maintained that over time, you expect your fees to contract.
Mm-hmm.
So given that that's not really played out over the last, you know, three quarters, nine months, what does that trajectory look like? What does the timeline look like, and what are the factors that you weigh internally when you think about balancing, you know, revenue versus volume growth?
Absolutely. We fundamentally believe that at some point in time, crypto trading will be commoditized. No different than many asset services have become commoditized. I mean, equities took 20 years to get to the level of fees that we see today, no fees, and to be truly commoditized. So crypto will go on a same journey. I don't know that it will be 20 years, I don't know that it'll be 5 years, but we do believe that when we get to the level of commoditization, with multiple participants being able to offer these services, fees will go down. Not commoditize. What we're seeing is instead, companies blowing up for poor controls. Like, it's the opposite of commoditization. We're seeing Ethereum move from proof of work to proof of stake, like changing the underlying technology about how you hold and validate those assets.
And so we are not at the point of maturity where we're seeing consolidation of activity on certain protocols, where then people know these protocols, they've been stable and mature for many years. So we do believe that we're not yet at the point of fee compression. And so today, what we think about is that we are a premium product. We are offering safety, trust, like access to the breadth of products and services that Coinbase offers, and that commands the fees that we charge today. We also look at the competitive environment and say: How do our fees stack up broadly against alternative platforms, and what is the value proposition there? We're happy to see that we have not lost market share as a result of fee changes that we made in Q1.
Q2, as we said, was just mix shift, so nothing changed, and that's an indicator that we don't believe that these fees are then causing us to lose business or gain business. We also changed fees on the institutional side, and we saw growth in our trading quarter-over-quarter. So we look at ourselves, as I said, the premium provider. We definitely do experiments to see what is the right price equilibrium. Our goal is to grow revenue, our goal is to grow trading volume, and we will hold this fee at the right level in order to facilitate that growth.
You kind of touched on competition as it relates to trading, which I wanted to ask about next, but maybe, you know, sort of a topic that always comes up because there are fewer than there were before, but there are other sort of providers of, you know, crypto trading services. So in terms of, you know, beyond the volumes that we can sort of track, just on a daily or monthly basis, what else are you sort of seeing out there in terms of, you know, do you see or, or customers moving funds from platform to platform? Or, you know, given the nature of, you know, crypto asset transfers, this is all a bit more obfuscated. You can see it going into a wallet, but you don't know where it is.
Any kind of insight into that kind of behavior, or what switching looks like in general in crypto?
Yeah. So retail doesn't have a lot of switching, and the reason being is that the other platforms that are now offering crypto trading tend to be retail financial service providers. So we've seen the growth of Robinhood, and we've seen the growth of PayPal. We see Block offering Bitcoin. We see Fidelity offering Bitcoin. This is great. What's different about most of those platforms is you have to buy it on the platform and then hold it on the platform. You can't actually send it back and forth. So that's an observation. The other observation I have, and we shared in our shareholder letters, we've seen an increasing amount of our customers just holding their Bitcoin. So yes, they're not trading, but they're not selling it, moving to fiat, and exiting the platform.
They're just moving into a HODL mentality, which is no different than the behavior we saw in the last few crypto winters. That when volatility is low, like we see today, people just sit and hold. They're sitting and holding. They're not exiting our platform. That's not to say that people don't have multiple accounts on multiple platforms and are buying it in multiple places. But what we think is our unique value proposition of where we sit in the overall spectrum is, yes, we're an easy place to buy and sell crypto. But increasingly, we're now a place you can buy, sell, you can stake, you can explore DeFi. We've had an Onchain Summer where we saw many people then buying Coca-Cola NFTs, engaging with friend.tech , engaging with these new, early, early stage—I mean, I need to underscore, like, early stage, decentralized app, apps.
This is the future of crypto, the utility, the using crypto as a consumable in the way that it was designed. So that is how our platform grows and evolves and what provides the unique attributes. And to do that, you have to be incredibly crypto-native. You have to be able to handle bridging of assets, movement on chain. We hope to really obfuscate that complexity and continue. We're not doing it well today. This is sort of like we're so early in the tech. This is like, think about early dial-up modems when you, like, heard the sound of your modem connecting to the internet, and then you, like, logged on to AOL. Like, we're in that day in crypto where it's like, that we're showing the tech. It's, like, messy, like, not easy to use.
Our goal is to use that technical strength that we have to push that technology below the surface and just create, like, "Hey, I want to buy an NFT." Great. Push buy, it shows in my wallet. Today, you're bridging your asset to the protocol you want and then getting your Ethereum on Base and finding an NFT and then waiting for it. It's just, it's two steps. So that's the future that we can really differentiate for crypto. I bought crypto, I'm sitting and watching the price move in my account.
Interesting. Definitely want to come back to that sort of topic, but a few other maybe kind of financial questions. So maybe on the capital market side, you know, you've been in the market repurchasing debt the past few months, albeit in relatively small amounts. So are you being opportunistic, or is this sort of an important part of your capital allocation strategy?
We're being opportunistic. So we generated cash flow in Q2, as we shared, about $150 million, and we looked at that and said, "This is a good opportunity for us to reduce leverage, given where the bonds were trading vis-à-vis other similarly rated companies." And so this is an opportunistic way that we could deleverage, move us forward one more step towards stronger financial health, continued financial prudence and operating efficiency.
Then otherwise, what are your top capital priorities? You know, what areas of the business make sense to accelerate, and how are you thinking about M&A in that context?
We're always thinking about M&A. We're always thinking about product growth. I think Brian did a call to founders that you might see on Twitter, where he has 10 more ideas that he built in crypto that we don't have the ability to do. So there's no shortage of ideas of what could be built here. Our capital priorities are, though, to continue organic growth. We always look at M&A in service of our organic road map to say: Could we accelerate this by buying, we partner? Is it the most efficient for us to build directly? A lot of companies raised a lot of capital in 2021 and are sitting on a fair amount of cash in crypto and not excited about the change in valuations that we may be interested in exploring with them today. So that's...
We will be opportunistic in M&A, but it is a little bit slower today than it was in the past.
How do you think about the right cash balance for Coinbase?
Mm.
I feel like it's a, it's sort of an ongoing topic. I think investors view maybe there's some— you want to be conservative because you don't know what's going to happen in the environment, you don't know what's going to happen with your regulator. But how do you, how do you think about that? How much is, you know, available on hand, for M&A or to kind of move way back in the business?
Yeah.
How much is services, how much do you need to kind of sleep soundly at night?
We were opportunistic in raising the $3.5 billion, $3.4 billion of debt in 2021, as we looked at that overall interest rate environment and thought these were good liabilities to put on the balance sheet with no covenants, with low interest rates, that we could then use that opportunistically. And when we think about using it opportunistically, we could use it in M&A. We also are using it to bootstrap our institutional financing business, where we're using some of it to lend out to customers to enable them to take leverage positions, specifically on the institutional side. We had some of that on the retail side, and we've deprecated that product, at this point in time.
We also use this as self-insurance against the potential what if, what could come in the overall market to ensure we can invest through a cycle. We did burn cash in 2022. Having that balance sheet gave us the confidence we could do that and continue to invest through that trough. Because importantly, crypto has gone through price cycles, and what we've seen is that in price cycles, you get big run-ups, and then it comes back down, but that trough is higher than the last trough, and then that next peak is higher than the last peak. And so having that ability to invest through that time period was important to us. And so this felt like the right strategic decision to run a large cash balance, to just have the ability to be incredibly opportunistic at that time.
Now we're in a positive carry situation where we're earning more on those deposits than we do pay on the debt. We are being opportunistic and selectively repurchasing assets to deleverage a little bit, but it still provides all of that same optionality around opportunistic investment in products, whether they're organic or inorganic, continuing to work on the financing business, and continue to prepare for the unknown unknowns that may occur in this space.
Maybe switching gears again to the regulatory side. I think as we've discussed before, your sort of views on the SEC, the ongoing lawsuit, that's all pretty well understood. So maybe a question about something new. So the Treasury and the IRS recently proposed some new rules around crypto tax reporting rules. So can you maybe talk about these rules a little bit, and what's your reaction here? What sort of impact could this have, if any?
Yep. So IRS came out with broker reporting rules. These are the types of rules that you have for any of your current brokerage accounts. You get a 1099 in the mail every year in tax season that said, "Here are your gains and losses." That same form goes to the IRS. You get interest from it. We've long been advocating for broker reporting rules for crypto because our customers crave us to provide this so they can file their taxes. It's long been required to be able to pay for your taxes when you have a gain on a crypto sale. Great. That's all very good news. Like, we've advocated, we have rules, yay, we're moving forward with, like, parity. But unfortunately, the proposed rules go beyond just parity with analogous assets.
That's where we're gonna have some comments in the comment letters, and we'll be asking participants. I encourage all of you to be active, too, quite candidly, because where the IRS has gone in the proposed rules now is they're asking for all transaction reporting for anything you do in crypto. If you spend $1 in USDC on a cup of coffee, that has to be reported to the government. A stablecoin, in this instance, is just $1 that you just spent on a cup of coffee. That goes far beyond. We don't show dollars that you spend on coffee for any other bank reporting. If you buy an NFT that is the symbol of collectible, now that has to be reported. There's no financial reporting, tax reporting in art today. There's none in collectible lands that has to be reported by brokers.
That has all been scoped in for reporting. So we believe that there should be parity with analogous asset classes. We believe that the IRS has the ability to audit any at any point in time and on their own, they don't need financial reporting, centralized providers for all data, and we think this amount of data will overwhelm them. So there's privacy issues that we would like to flag. There's just overwhelming data that we don't believe that the government can volume of transactions, given the amount of small denominations. And then the timelines apply for non-centralized database for protocol compliance. Don't even have the data. How on earth will they do it? So there's we'll see some pushback. But the core of it, we think driving parity is a good thing and getting progress for that is a good thing.
Well, we talked about it a little bit earlier, so maybe let's return to Base and some of your sort of on-chain initiatives. I think it's always helpful to get kind of a refresher. Can you sort of remind the audience, you know, what is Base and what is sort of how what is Coinbase, you know, help grow it and develop the crypto ecosystem at large?
Yep. So this is where I learn deep in the technology. So there's Layer 1 solutions. These are protocols. This is Bitcoin, this is Ethereum. These are the blockchains about how we move value on chain. The challenge with that is Bitcoin has a consensus mechanism called Proof of Work. That is taking so much computing power, and so it's, like, quite expensive. It is quite slow to be able to, like, confirm a transaction on the blockchain. Maybe it's... Ethereum improved on that by going to Proof of Stake, so it's less energy efficient. I'm sorry, it's more energy efficient, it costs less energy. It was getting to a faster speed, but it's still not as fast as a Visa payment, as fast as, like, when you put Apple Pay. It's not as fast yet.
So what Layer twos do is they sit on top of these Layer one solutions, and they package transactions. It's like they're batching them. And so they can increase the speed of a transaction. They can then lower the cost of a transaction. And so what we see with Base now, and when we've done early experiments, it's now a few seconds, it's a few pennies. And so that starts to be really competitive against other payment rails. And then when thinking about Base, and we're thinking about all crypto, this is a common thing, is these are going to be centralized protocols where anybody can plug into them and build applications on top of them. They are global payment rails, meaning they are not unique to a certain country or unique to a certain group of companies.
It's like, this works for the bank, or this works for Brazil, or these are now these global protocols that can be built on top of by applications that can have fast, cheap transactions. That's what we're really excited about with Base. So again, transactions will incur little sequencer fees. They get paid. We are going to make sure other people can sequence transactions, so this will be a decentralized protocol for the community of which we will commit developer hours because it is near and dear to our heart, and continue to build out an ecosystem around Base.
So what does that look like as the platform becomes more decentralized? Is Coinbase currently-- are you validating pretty much all the transactions on Base and-
We're the only sequencer, now we are building more sequencers on top of it.
And then in terms of just kind of overall activity, I think for anybody that's unfamiliar, there are a bunch of places you can kind of easily track the amount of activity. We've already seen quite quickly that, you know, the average transactions on Base are quite comparable to some of the other, like, leading, you know, L2 rollups.
Yeah.
So what are you sort of seeing? Where is the most sort of excitement? What are developers kind of coming to the platform to do?
You know, this is first of all, these are early days, and so Base has been launched for just over a month. We're like at 35 days, but we were the fastest L2 layer solution to get to over 100,000 users. We're like the third in terms of total value locked on the contract, and so we've really seen rapid adoption in it. It's notoriously hard to build two-sided marketplaces then. I mean, in this case, we're building the developer community to build development applications on Base and then bringing users to those developers. So it's really building a two-sided marketplace on Base. What we're pleased to see with the developers is just the breadth and the, like, creativity of these applications, and that goes back to Onchain Summer.
So Onchain Summer, as we launched Base, we wanted to share with our customers and with the overall ecosystem, just the creativity of these new apps. And so every day we had a new onchain event that people could do. And this you could connect any wallet. I use the Coinbase Wallet, I'm a loyalist, but you could use Mask, you could use all these wallets. And people bought onchain, an NFT that represented a real-life object, and so they could connect goods and services back to an online representation and an offline representation. There was a thing called friend.tech around social networks that are built on Base. There's gaming. There's big brands, Coca-Cola, Atari, others, that want loyalty programs. We need artwork that was tied to their brands that people bought.
So we're seeing all sorts of different people experiment with different things, like I was missing on, like, the early dot-com era in the internet, where people were like, "Okay, I'm gonna bring on something online and see how that goes." That's the development community happening on Base. But what we're most excited about is these are very core utilities. These are gaming, social, messaging, collectibles. Not speculative trading in nature, but a whole new behavior in crypto, which we're excited to see develop.
So that's the developer side. We've talked about the retail. Maybe let's return to the institutional side. I feel like I remember an investor letter pre-FTX, kind of before the fall of last year, where you kind of outlined a number of your institutional initiatives. So you have a partnership with BlackRock, Aladdin, and, and several others. So can you kind of, you know, I think that's sort of taken a backseat in the narrative as we've had collapses, as the regulatory environment has kind of changed. But where are you kind of in terms of the, the pipeline or the rollout of institutional partnerships? What kind of traction are you seeing on Aladdin? What can you share with us there?
So I can't share anything specifically on Aladdin, although I continue to share that BlackRock is very active in the crypto space with its applications. This is a core part of their service offering that they're continuing to build out, and we're happy to be a partner in many, other than through the ETF application, et cetera. But what we've shared in our shareholder letters and what we continue to see, and we refer to it as like the coiling spring of institutions, and it's appropriate to end on this because you are all institutions and represent institutions. Like, we have seen growth in onboarding quarter-over-quarter. We've seen growth in our Prime trading quarter-over-quarter. People are geared up. They are testing the pipes. There's definitely some that are sitting there and waiting for regulatory headlines to clear.
There's definitely some that are sitting there to say, well, I mean, I'm not—this is not me, I'm speaking about broadly, but like, NFTs, you had to buy Ethereum. They, Coca-Cola, initially burned some Ethereum. How are they going to support their own treasury? Corporates are like, thinking about how do I then build crypto into my pipes and services? So we are getting continued momentum in driving those conversations, providing our tools and services to buy, sell, store, receive in commerce, liquidity, the audits, and the heads that we need to do that for our business, and that we see nice on it. But I don't think we've seen this, like, open the gates of huge institutional capital, but it just feels like every quarter we're making momentum towards that future.
Great. We've got just over 30 seconds left. Maybe the last quick one, but on the institutional theme, you mentioned the institutional finance business. That's sort of something that the ecosystem saw come and go, again, with the collapse of a lot of these platforms last fall. But where are you with that, that rollout and development?
Just getting started. We launched that in Q2 with just the first few customers, and we're going to be slowly building that right now. People are onboarding.
Well, we're just out of time there. But, Alesia, thanks again.
Thanks so much.
Yeah, thanks so much for having me. What a pleasure.
Thank you.