Important disclosures. Please see the Morgan Stanley Research Disclosure website at morganstanley.com/researchdisclosures. The taking of photographs and the use of recording devices is also not allowed. If you have any questions, please reach out to your Morgan Stanley sales representative. Good afternoon, everyone, and thanks for joining us here at the Morgan Stanley Financials Conference. I'm Mike Cyprys, equity analyst covering brokers, asset managers, and exchanges for Morgan Stanley Research. For our next session, it's my pleasure to welcome Greg Tusar, Vice President of Institutional Products at Coinbase. With over $330 billion of assets on the platform as of the first quarter, Coinbase is a crypto platform that facilitates trading, staking, and custody of crypto tokens, as well as provides broader services to the crypto ecosystem. Greg, thanks so much for joining us.
Thanks for having me. Appreciate it.
Great. So I've been asked to read the safe harbor statement before we start. I'd like to remind you that during today's chat, Greg may make forward-looking statements. Actual results may vary materially from today's statements due to risks, uncertainties, and other factors that are described in SEC filings. Our discussion today may include references to non-GAAP financial measures, and a reconciliation of non-GAAP financial measures is available in the company's latest shareholder letter. That's a mouthful. All right, with that out of the way, why don't we dig in here? You have a really interesting background, Greg, in market structure spanning a number of decades, including your time at Goldman Sachs. I believe you were leading a company that sold itself, that then sold itself to Goldman. You were at KCG for some time as well.
You founded a crypto Prime broker, Tagomi, which you sold to Coinbase in 2020. You now run the institutional product business at Coinbase. So what attracted you to the crypto industry after spending so many years in more traditional finance, more on the equity side?
Yeah.
Maybe talk about your role and responsibilities today and how you're spending your time.
Sure, happy to. That was a good summary. So this is 32 years for me, somewhere at the intersection of technology and finance. I started, as you said at the beginning, of what by sheer luck turned out to be the start of electronic trading and equities, and spent the bulk of it at Goldman Sachs, and then entered the world of crypto and digital assets in 2017. Something about it seemed inevitable to me then, and it does now. And the idea was to bring the learnings from helping institutions learn to trade electronically in equities and foreign exchange and fixed income into the world of crypto and digital assets. So we co-founded a company in 2017 called Tagomi, and we were then acquired by Coinbase in 2020.
The idea in 2020 was to marry what we built, which was advanced trading, together with what Coinbase had at the time, which was really centered around custody first and foremost. Marrying those two things together, like chocolate and peanut butter, begat what we call Coinbase Prime. So we've been on this great journey since then, building an institutional business. There's some learnings from prior market structures like we were talking about before, but it is in many ways sort of its own asset class with its own idiosyncrasies.
Great. And when most people think about Coinbase, they often think about the direct-to-consumer business, but there's also a fast-growing and important institutional business under their hood as well. So maybe you can help contextualize this institutional business. How meaningful is this today?
Yeah. Well, of the assets that you said, about half of it are actually held by institutions. So as of the end of the first quarter, it was about $170 billion of assets. And the word institutional in crypto is a funny thing. It means a lot of different things to a lot of different people. And so for us, it covers a lot of surface area. There are market makers and professional traders, and that's generally in crypto what people mean by institution. But we also cover ETF issuers, asset managers, pensions, endowments, corporate clients. So institutional at Coinbase means a lot of different things. And again, it started right around 2018 with the birth of the custody business. And we've been building concentrically around that. Custody is, for us, the first and most important thing that our institutional customers come to us for.
The safekeeping of private key material might be the single most important thing we do as a company. But we've been building other services around that over time. So, zooming out for a minute, the way we think about the institutional business, there's three main pillars. There's what we call Coinbase Prime. So that's custody, that's trading, that's financing, staking. We now have a Web3 wallet product. And from there, you can do things on-chain like governance and other things. And the idea is to have a product portfolio and a platform that makes it easy for customers to go from one thing to the next. And that's our Prime product. And that began, again, with the acquisition of Tagomi in 2020, and before that, the acquisition of Xapo. So this has been both an organic story and an inorganic story over time.
The second pillar we call markets, and that's what has our underlying spot market, that has our U.S. CFTC-regulated futures market, and that has our new international market for non-U.S. customers. And then the third pillar, which is the most nascent and came through the acquisition of a company called One River Digital Asset Management, is our asset management business. Coinbase Asset Management is an attempt to have something on the shelf that will appeal to asset owners and others that want all of these services, but in a fiduciary wrapper. And so the idea is to have each of these offerings for different client types.
Great. And over the last couple of years, the markets have digested some bad actors. We've seen some regulatory developments. We've been through a crypto winter. Now we're in, I guess, the bull market, it seems. Introduction of ETFs, and the list goes on. So maybe we could talk a little bit about what's different this time around, particularly with the run-up that we've seen versus the last run-up. And to that end, what are you observing just in terms of institutional client behavior?
Yeah, it's really interesting. So I would say in 2021 and 2022, that cycle begat a lot of interest from institutions. And when I say institutions here, I mean sort of capital-i institutions. So asset managers and others who maybe like me saw the inevitability of this and began down this road of investing in infrastructure and those sorts of things. Along came 2023. Various firms blew up, all of those things. But the investment from a lot of those institutions carried through. And same with Coinbase. I mean, we built through a difficult year. The culture of the company is really a builder's culture at heart, and that's sort of encoded in the DNA. It starts with our CEO, who's very much a product builder.
We all emerged on the other side of that cycle, ready to launch ETFs and ready to do a lot of those things. But that doesn't happen overnight. That was a long-term build. What's different this time around, I would say, is the quality and nature of the institutions that are now in the space, that have participated in the Bitcoin ETF launch, for example, or who are building tokenized funds and other things on top of blockchain technology.
Through the arc of your career, Greg, you've seen equities and other asset classes go through transformations, transitions, to electronify. I guess with that perspective, how do you see crypto market structure evolving as you look out? What lessons do we take away from these other asset classes? How different might the market structure look in crypto sphere in, say, 10 years' time? And then to that end, what are some of the implications of the FIT 21 bill, which recently passed through the House on market structure if it does become law?
Yeah. So crypto, as we were talking about before, has a lot in common both with FX underlying structure in terms of how orders are routed from place A to place B, has some in common with equities. But there are some things that are really, really unique about both. The lack of credit intermediation, from my point of view, actually makes the space safer. The lack of central clearing, it brings the challenge of having to pre-fund your transactions. But it also means there's no moment at which, were this or that intermediary to fail, that you'd have a massive systemic issue.
I think in that sense, rethinking market structure through a lens that makes it safer, that sort of eliminates unnecessary intermediation just because that's how trade settled long ago, for example, are the unique things about crypto that we want to take advantage of rather than try to squeeze it into an old market structure, which I think would be a mistake. I think the things we're excited about with FIT 21 are the assignment of spot market authority to the CFTC, which we think is the right home. We've said and we believe for some time that the assets that we're trading are commodities, and therefore this is the right regulator. We now have, through our regulated futures market, a lot of experience navigating both the CFTC and the NFA.
I feel like we've got a good template when this becomes legislation to move into that regime quite easily.
Great. Why don't we dig into the Coinbase Prime offering? It wasn't that long ago that Coinbase primarily offered custody capabilities for institutions, but with the Prime platform, you've broadened out the offering. So maybe you could talk a little bit about the capabilities that the platform offers today, the journey that you have been on, and the challenges that you've faced along the way, how you overcame them.
Sure. Sure, sure. So again, back to that first pillar, Prime is starting with custody. We're a regulated qualified custodian regulated by the New York Department of Financial Services, the same licensure that the DTCC has or the Bank of New York when it comes to the safekeeping of assets. And with the addition of Tagomi, what we added was the ability to trade a much larger size. So some of the learnings from equities, for example, how you take a big order and you split it using algorithms and find the best price and do all of those things, made this asset class look and feel like other things that they're trading.
That made it possible, I think, to begin to see things like the ETF launch, where now orders are not $1,000, but are $1 million or $10 million or $100 million, as we've seen in inflows into the Bitcoin ETF. Those two things together being in the same platform, we think, is a real differentiator. So we see in custody that we have custody competitors or we might have trading competitors, but we think we're alone in having a platform that actually connects all of these things together so that an issuer can go from one to the other quite easily. The other thing that we've done is try as best we can to make this look and feel like any other asset class. So for example, integrating with BlackRock's Aladdin platform.
When you log into Aladdin, what you see as an investor is your fixed income, your equities, and your crypto, all side by side with common reporting, with the same order routing that you would have. And so we feel like part of our job in bringing institutions into the space is to make this look and feel as much as possible like any other asset class, even though under the hood, as we said, there's quite a few differences in terms of market structure. But that's been a key to things like the Bitcoin ETF launch, for example.
Where would you say we are along that journey in terms of building out these capabilities, many of the capabilities that the traditional financial world offers? What would you think the roadmap is as you look out?
So I think in terms of custody and trading, they are becoming more mature. I would never want to say they're solved problems. And custody is something that we can never stand still, and we continue to evolve our key management and those kinds of things. But I was really pleasantly surprised when we launched the Bitcoin ETF together with our issuer partners. You might recall there was a last-minute pivot to the cash model rather than the in-kind model. And I won't go into sort of the arcana of what that means. But practically, what it meant was between 3:00 P.M. and 4:00 P.M. on the day of a creation, somebody needs to go buy that quantum of Bitcoin.
What we actually saw now that the tools exist, which maybe didn't exist a year or two before, is when we went to buy, call it $500 million over that window, that the price didn't move very much. And that to me tells me, number one, the tools exist. But number two, the market is quite liquid and deep and maybe more than that was the biggest fear when it was launched is, "Oh my goodness, when we have a huge inflow, it's going to move the price 5%-10%." In actual fact, what we see is it looks sort of like a large-cap equity. We've had sort of single-digit basis points of impact relative to that 3:00 P.M. strike.
So that tells me the tools are there and the market for crypto is deep and liquid and ready for things like more ETFs, for example, the ETH ETF.
Maybe you can give us a flavor of the types of institutions that are customers today. How penetrated are you and where are you having the most traction versus the least traction as you think about building out more institutional customers?
Yeah. So that taxonomy I said before, market makers, professional trading groups, they're key to building underlying markets and providing liquidity. And it's a lot of the same market makers that are in other asset classes as well have sort of moved into crypto. And what's interesting to me, by the way, is when I started in equities to when I left in 2017, it took two decades for that to become electronic and liquid. And it took a couple of years in crypto. And I think that tells me people moving in already have models built, have the infrastructure, have the tools. And so I feel like we're living on this sort of exponential curve where it's evolving quite quickly. So market makers and professional traders provide the underlying liquidity. Asset managers, ETF issuers, and others who are pensions, endowments, asset owners have been customers for some time.
But I would say the advent of the ETF has really taken that category up several notches. Hedge funds have been quite active, actually dating back to the last cycle when Bitcoin as macro begat investment from the CTA and macro investing crowd, and that begat the long-short equity crowd. And that's what actually led up to asset managers and others coming in. So that is a big category that includes a lot of different kinds of hedge funds. I forget the exact stat, but something like 30%-33% of the largest 100 hedge funds in the world are onboarded and active on our platform, which gives you a sense of where they are. And then the last category of corporate clients who are interested in crypto as a product feature or that's sort of a nascent category still for us, I would say.
Okay. Now, as part of the Prime offering, you also provide lending and margin to institutions as well. Can you just talk about this sort of Prime financing product set? What does that look like? And how are you using the balance sheet of Coinbase today to support these offerings? And how do you see demand evolving?
Yeah. So there's three main activities inside of financing. The first one we'll call bilateral lending. So that's somebody wanting to borrow dollars or borrow assets against fully collateralized and in every case over-collateralized crypto. And that's a business that is still relatively new for us in terms of use of balance sheet. The second, which really grew quite a bit, is trade financing. And that grew largely in the advent of the ETF, where we're financing the float between trade date and settlement date for equity activity or something else. And the third, which we're really excited about, which feels new and nascent still, is a true portfolio margin product. So like true Prime brokerage that you would experience if you came to an investment bank and receive margin on your portfolio with appropriate risk-based haircuts and those kinds of things.
Those first two today make use of balance sheet. Our hope over time is that the third bucket, as it grows, will self-fund and self-finance in the same way that Prime brokerage does. That's not something that we're rushing into. It's something that we're taking a measured approach and sort of making sure we measure twice once from a risk point of view. That's something I expect to grow over time as more hedge funds come into the space, for example.
Great. Why don't we talk about the custody offering that you have and the traction that you're seeing? The new Bitcoin ETF has been a tailwind there, I believe. Can you just talk about the opportunities that you see for custody, how that's evolving, particularly given the passage and then subsequent veto of the SAB 121 repeal?
Yeah. So we were fortunate to win the vast majority of the Bitcoin ETF opportunities. And I think part of that was the positioning of this Prime platform to be able to integrate trading and custody. And on our team, we have quite a bit of experience from the TradFi world understanding ETF flows. And that put us in position to really, we think, help the issuers launch. And that's gone incredibly well. In terms of the path forward, I think that sets us up well for the ETH ETF launch, which we're quite excited about. And I'm sorry, what was the second part of your question?
Just the SAB 121.
Oh, right. So, SAB 121, I think we've been quite vocal as a company that that should have been repealed, that what crypto really needs as a space is, in coming mainstream, for banks to be able to participate. And we were quite disappointed to see that repeal be vetoed. As a practical matter, what that means in the short term is it will be harder for banks to come in and participate either in custody or in Prime brokerage and sort of these other areas. We welcome that competition. We think in the long run that it's better if there are more banks and competitors and others coming into the space that will grow the overall pie. In the near term, that means fewer competitors from a custody point of view.
Again, of those that we compete with in custody, those are mostly pure-play custodians and not Prime sort of platform providers.
Just on the ETFs, any sense on timing around the ETH ETFs as well as options on the Bitcoin?
I don't. I wish I did. We plan for it could be as early as today in the spirit of hope for the best and plan for the worst sort of thing. But I think there's a process where the SEC is going to comment on the S-1 filings, and there's no statutory clock for that. I don't have a defined timeline, nor for the options either. I wish.
Fair enough. So you have a built-out spot trading platform that's up and running. But you also have launching derivatives as well. Why don't we talk about that? That expands the adjustable market. So maybe just talk about the derivative product set as it exists today, how it's likely to evolve as you look out over the next couple of years, particularly with the FCM license approval.
Yeah. So we acquired a company called FairX. And FairX was operating a regulated CFTC-regulated futures market geared towards retail investors. The idea was to bring that over to Coinbase, file to be an FCM so that we can offer those contracts to our own retail investors, and then use that underlying matching engine as a technology to launch what we've now done for non-U.S. investors, our international exchange. So starting with the U.S. exchange, we now offer, I believe, six contracts that are both small-sized geared towards the retail investor and large-sized contracts that are designed to compete head-to-head with the CME products. I think the CME has had most traction with the large contracts. We, in contrast, have been mostly focused on the retail investor, given that's our advantage and our distribution and so forth, that we're really starting focused on our Nano contracts.
That's where we've had the most success. Now, through Coinbase's advanced trading platform, you can trade through our FCM onto that exchange. I think we're one of the few or maybe the only firm to have both an FCM and a DCM together. We spent a lot of time with the CFTC and the NFA getting everyone comfortable with that. It's actually gone very well. We're starting to see a lot of traction, our advanced traders finding the benefit of trading futures rather than spot with respect to being able to go long and short and employ leverage. That's the U.S. side of things.
We launched the international exchange based in Bermuda, working with the BMA and perpetual futures there, and have started with the same group of market makers and intermediaries that are coming from the U.S. to be able to provide liquidity on that exchange. We've had some early success. But that's a longer-term effort for us. We're focused on building market share. We're off to a good start, but we've got a long way to go to catch up to people that have been in the space for four or five years.
As you're making this big push into the derivative space in the U.S. and overseas, I guess, how do you think about the differentiation in your offering and platform versus others, say, the CME in the U.S. or some of the other folks that are overseas? You mentioned perpetual derivatives. Why perpetual versus limited life, which is what we see, let's say, in the CME? Just how do you think about the differences there?
Yeah, it's a good question. So I think in the U.S., while we think of the CME as a competitor, we're mostly focused for the moment on serving our retail investor, which in the futures space is a less well-served client demographic, I would say. And I think that the integration of our brokerage services together with the exchange means we can tailor products and contracts and other things to those users. And so we've had a lot of success there. And so our share in those relative to the CME's micro contracts, for example, which is what I would compare our Nano contracts to, has gone quite well. We will turn at some point to competing on the larger contracts, but that hasn't been our focus to date, I would say. Interestingly, the perpetual futures are really quite similar to like a CFD in structure.
And so it hasn't taken off in the U.S. because outside of an experiment years ago for rolling FX spot, that hasn't been a contract structure that has been allowed. But it is, without an expiry, much easier for the retail user to use. And therefore, that's what really has driven its popularity offshore.
Any difference in leverage between the two?
Not from our point of view. I mean, we think of those. We risk manage them the same way. And so I don't really see leverage as being it's really less that you have to remember expires coming up, and I'm going to have to roll my contract. And every day, or in some cases, every hour, it resets. And that's just a much easier thing to use.
Got it. Aladdin, you had mentioned that earlier. Maybe we could just dig in a little bit there. About two years ago, you partnered with them to provide Prime services to a lot of institutional client base. Maybe you could just remind us how this offering works, how it has evolved, how it's contributing today, how you expect that to sort of broaden out, and then just more broadly on institutional partnerships. How else are you thinking about that?
So Aladdin, for those not familiar, is BlackRock's OMS platform that's used not just by BlackRock, but also by its clients. It's the largest asset managers and asset owners in the world. So that was important to us for a few reasons. One, because BlackRock, as a client, requires this to do any business with us. It's how they risk manage and all those things. But secondarily, from our point of view, it's a great distribution vehicle to the largest asset managers and owners in the world. So we started down that path two years ago. It's taken a long time, but we could not have launched the Bitcoin ETF without it, for example. I think BlackRock has really led the way here.
I think some of the more conservative institutions, asset owners, etc., that were engaged in the course of the last cycle are still interested but have not been as engaged and are now sort of returning. I think the Aladdin platform is a good vehicle for us to engage them and distribute through. Aladdin isn't the only platform we're doing that with. We've integrated with a lot of different order management systems. Again, we want to make this as easy as possible for any fund that otherwise is using an Eze Castle or any order management system like that to trade crypto with it side by side. So we've done a lot of those kinds of integrations.
Any thoughts on other potential partnerships over time on the institutional side?
Not at the moment that I know.
No. Okay. Maybe just coming back to the ETF side, I think the spot Ethereum ETF approval caught a lot of people by surprise. Did it catch you guys by surprise? And just how are you thinking about what this means for Coinbase and other market participants?
For me personally, it caught me by surprise. I think I'm excited about it for a number of reasons. Number one, it solidifies what we knew to be the case already, which is that Ethereum is not a security. It's a commodity. Therefore, by extension, that the other layer one proof of stake networks and so forth are also not securities and are commodities. That's been our point of view all along. Then secondarily, I think it means that there's more things on the shelf for institutional investors that want to own crypto but don't want to do it through a spot, don't want to own spot. There's more opportunity for them to engage. I think that's just good for the space overall. What we've seen in the case of the Bitcoin ETF is more engagement sort of all around.
It has not hurt our business in any way. If anything, if we look at our own activity, both in the retail and the institutional side, the advent of the ETF has been unanimously positive. And I expect the same thing in the case of the ETH ETF as well. And in fact, I think the ETH ETF may end up driving more volume in the Bitcoin ETF than in the ETH ETF itself, just by virtue of there being more excitement and activity in the space.
Interesting. Okay. Stablecoins. Can we just talk about that for a moment? Just how is that part of the institutional offering today? How meaningful is this? And how do you see the role for stablecoins evolving?
Stablecoins are one of the most interesting use cases outside of crypto as an investment. What we see are a lot of funds, professional traders, others that want and need the ability to move crypto 24/7, around the clock from exchange A to exchange B, preferring to use USDC rather than trying to move through bank wires and those sorts of things. So it's, for institutions, probably the single most important utility use case aside from investing that we see. We see a lot of different folks holding USDC rather than dollars as a result.
Maybe we could shift back to some of the engagement commentary. I think you were alluding to earlier. I think there was an interesting stat on the last conference call. I think about 40% of institutional customers engaging with three or more products. How many products are there on the institutional side? Which products are you seeing more engagement and penetration versus where it's the least? And what's the typical journey?
That's a good question. So if I think about the Prime markets and asset management, that platform tends to generally be within each of those domains. And so within Prime, I think about trading, financing, staking, custody, Web3 wallet as being the primary things. And we're constantly adding more to that. And what we see is that users begin their journey with just the same way you and I would. We buy some Bitcoin. But next thing you know, you're buying something that's Proof of Stake, and you want to stake it. Or you want to do some on-chain activity. You want to trade in a DEX, or you want to do all of these things. And so institutions go on the exact same journey that individuals do.
Being able to be that bridge and that intermediary that helps you go from, "I bought my first Bitcoin," to, "I traded on Uniswap," to trade some asset that I, for whatever reason, I couldn't elsewhere, we want to be that. We want to be that bridge. Importantly, the single place where somebody goes to transact and to store. Our ambition is to we think there's power in being that platform. But we also recognize one of the challenges: people can unbundle too. So we can't just be okay in any of those things. We have to be really good in order to attract and retain that. Making sure you're really good in all of those products is one of the biggest challenges that we have.
Any particular area where you're more penetrated, I guess, the custody?
Custody, I think, is the oldest thing where the institutional business is probably most known for. But I think there's huge synergies between custody trading and financing. I think those are the three things that have a flywheel effect we see. ETFs are a good example of that. Being able to do all of those things in the same place proved to be incredibly powerful.
Great. And just as we wrap up here, it's been a great year for crypto and also for Coinbase. I guess as you head into the back half of 2024, what are some of the biggest priorities for the institutional business?
I think for us, first and foremost, as I just said, it's making sure each of those product pillars is of the highest quality possible. And number two, that we're scaling each of those. Because I think in the long run, the scale of each of those is a huge competitive advantage for us. I feel like custody is well-scaled. Trading is now well-scaled. Growing the financing business with portfolio margin, for example, is a big focus. On the market side of things, it's really derivatives and focusing on growing the non-US derivatives footprint, growing internationally. And then on the US side of things, continuing to push through our advanced trader on the US-listed futures side.
Great. Want to.