Okay. Everyone, welcome back to Piper Sandler's Global Exchange and Fintech Conference. It's my pleasure to introduce Brian Armstrong of Coinbase, who has not shied away from, you know, going to the public and expressing his opinion. Too bad you weren't here the last session, Doug Cifu, Virtu, was pretty strong in his views. First, I'll just turn it over to you, Brian, if you have any comments in general you want to make about Coinbase and sort of what has transpired over the last couple days, I guess.
Yeah, sure. Obviously, we got this complaint from the SEC yesterday, and it was not unexpected. You know, we'd gotten a Wells notice before that, and actually, for the last year or so, we've been in dialogue with the SEC about our business, and they asked us to come in and answer a bunch of questions. We're happy to do that with regulators we work with all over the world. We met with them about 30 times over the last year. Every time they asked us a number of questions, we gave them answers. We told them: "Do you have any feedback for us? When you say come in and register, what does that mean? What license can we go get?" We even went out and acquired a broker-dealer license, hoping to activate it with the SEC, so we could trade crypto securities.
They, you know, we haven't found a path to do that with them yet. We formally filed a petition with the SEC to get clarity around rulemaking. They have yet to respond to that. After all those 30 meetings, and no feedback, we basically got this Wells notice and now an enforcement action from them. Unfortunately, it seems like the SEC is taking this path of regulation by enforcement instead of creating a clear rule book. That's not good, obviously, for us, but it's not good for the, more importantly, the crypto industry and America, because this is one of the most important technologies that America should invest in. America risks being left behind in this regard. Every other financial hub in the world is embracing this technology, creating clear rulebooks. You know, Europe has already passed comprehensive crypto legislation.
When I go to U.K., they say, the PM meets with me and he says: "I want this to be a Web3 hub. How do I get more companies like you to build and invest here?" Same thing in Singapore, same thing in UAE. The U.S. is a little bit of an outlier. It risks falling behind, and I think the most likely path, in addition for us going to court now, to help get some clarity for the industry, we're going to see Congress actually step in and act to create a clear regulatory framework, just like we've already seen in Europe and the U.K. is about to do, et cetera, and Hong Kong's already done. Anyway, this will get resolved. I'm, you know, we're not going anywhere. This company is staying in America.
We're going to be a multinational, invest in countries all over the world, but we're staying in America. We're the leader here, and somehow, some way, America is going to get this right, whether it's our court case, you know, the elections in 2024 may shift things. Maybe Congress will get some of this legislation passed, like the bill we saw come out last week. I'm optimistic, and I think, hope we're doing a service for the industry and for America here.
Brian, you've talked a lot about that, you the SEC charges are saying that you haven't registered. You see Chair Gensler's said publicly, "Come in and register." He said it on news program. Can you talk about the process of coming in and registering? Is there a coin? My test, and I'm trying to be as impartial as possible, but my test, is there a significant coin right now that besides Bitcoin and Ethereum, that has gone through the process, that is currently trade, passed to secure, as a security passed and is trading now?
What, when we say come in or he says, "Come in and register," I think that could mean, you know, an exchange like us, it could mean a token. I'll talk about each of those separately. For an exchange like us, when we heard that, we said: Great, we want to work with regulators. That's when we first started reaching out, trying to get more meetings. You know, frankly, we got a bit of an icy reception, I would say, the first time. You know, in that first meeting, I finally got with him. I said: "You've asked us to come in and register. We're here to register. How would you like us to proceed and to come into the regulatory perimeter?" His response was: "I'm not going to give you legal advice. Talk to your lawyer."
Like, that was literally his answer in the meeting. Anyway, we decided, okay, well, maybe a broker-dealer license, you know, and we went out and acquired one of those. It's still dormant. They haven't allowed us to find a path to activate it, right? We're sort of trying to animate the SEC to help get it within the regulatory perimeter, it hasn't had any luck yet. My conclusion from that, after all these meetings, was that I don't really think there is a way to register. It's not. There's basically no way to do it. We've tried repeatedly in the U.S. For tokens, it's pretty similar.
Most of these tokens, you know, if they're truly decentralized, there is no central authority to come in and register or to create these disclosures, right? A true crypto security, which, by the way, I want there to be a healthy market to trade crypto securities in the U.S. as well. That would be an important market. You know, they should have a path to come in and register and do that. There's only, I think, maybe three tokens that I'm aware of that have tried to actually go in and register with the SEC, and basically all three failed, and for various reasons. It doesn't seem to be a good path for the token, the asset issuers to go through.
I mean, to the best of my knowledge, is that there isn't a significant token that has gone through the process, registered and trading...
Yeah
... at this point. Again, I'm just trying to be neutral, in the process, but we're not aware of any that have made it through this process.
Yeah.
Next, you know, you've talked about and we've talked again, Michael Novogratz this morning, about how people are still, you know, steadfast, that they want crypto to grow in the U.S. I guess my question is now, I think you've already talked about, doesn't really impact your strategic or, you know, vision of Coinbase in the U.S. You've gotten a number, from what I've read, of cease and desist orders from 10 states now or maybe more than 10 states. How does that impact Coinbase? Will you continue to operate? Does that impact your revenues at all, or just some color on, you know, how you're gonna navigate what's going on there?
Yeah. On the back of the SEC complaint coming in, we did see a number of our state regulators as well, not specifically about our staking program. They, you know, sent us a note issuing a cease and desist in some cases. They basically followed on the SEC action and said, "Specifically, your staking program we have an issue with." You know, we're gonna be in dialogue with the states as well, just as we are with regulators all over the world. My guess is that what'll happen is they'll basically, you know, wait for this court case to proceed with the SEC, get some clarity, and then they'll probably follow on from that. Just in terms of your bigger question about, you know, what does this mean for our business?
You know, frankly, it's business as usual right now, right? There was no injunctive, immediate injunctive relief sought or anything like that in the SEC complaint. All the assets that they mentioned, which is 13 of the 200+ that we trade. It's a pretty small percentage of the total assets that we trade. Those, we're gonna continue to trade those. Our staking program is still up and live today. We'll continue trading those while this court case is figured out, which could take some time. You know, I guess I would say that our revenue, I don't expect there to be a significant impact to our revenue.
you know, again, it's 13 of 200 plus assets, but a lot of our revenue also comes from non-trading fees now, things like stablecoins...
Sure.
custody for institutions, et cetera. It's about 50% of our revenue now. We also have revenue outside of the U.S. You know, and we have $5 billion of assets, and in Q1, we kind of turned the corner and became adjusted EBITDA positive. I think we're well positioned to kind of weather any storm here, and we have a lot of resources to make sure that. We're going to court to win here, right? I think it's important to set a good precedent, create some case law so that the U.S. finally starts to get some clarity.
Is that really the only way that's gonna enable the U.S. to be competitive in it? If there isn't, well, is that the only way to find a route through the U.S. right now? There has been some legislation as late as Friday...
Yeah.
that appeared promising, at least from my standpoint.
Yeah.
I guess, what are your ideas? Is that a good start? What was it the McHenry-Thompson bill, is that correct?
Yeah.
What they put out is that a good start of the legislative process of how do we navigate to get the U.S. in a position to, for clarity so you can grow your company?
There's a couple different paths they could take. I mean, the first and easiest option would have been that the regulator just publishes a clear rule book, and then everybody in the industry follows it. That would have been ideal. If that's not gonna happen, with the SEC, then another option is to have the courts create case law. That's great. Another option is to have Congress create new legislation, of course, because Congress oversees, you know, the SEC and the CFTC. A third option would be to have the CFTC step up and actually, you know, take over the spot market authority on the commodities side. Another option would be, frankly, in 2024, it could change the whole landscape, and we just have different, we have different regulators. Somehow, some way, America is gonna get this right.
Yeah.
This is too important...
One minute.
of a technology to, you know, pushed offshore. Not only would American customers be harmed, as we've seen with other things like FTX, but it would also really put at risk, you know, America from a national security point of view. Because crypto, it's not some, you know, financial product. It's a technology that can be used to update the financial system writ large, and that's very important for America's role as a financial hub in the world. I guess just one final thought on that. I mean, think about some of the other major technology trends, like with 5G or semiconductors, now with AI, right?
I mean, with 5G and semiconductors, we let a lot of that stuff go offshore. Now there's a massive kind of impetus within Congress to say: How do we get it back onshore? You know, America has a good position in crypto. It started with a good one. It's kind of losing its position. Most members of Congress who I meet with, they're like, "You know, okay, we need to get clear legislation passed so we don't end up in a situation like with semiconductors or 5G.
The SEC, in the last several days, has brought charges against Binance as well.
Mm-hmm.
You've obviously had a chance to look at it very closely. Can you talk for the investor purpose about. You know, there are some differences there. Can you point out sort of the differences of what you see as being what's being alleged at Coinbase versus Binance?
Yeah. It was definitely curious that those two announcements came out one day to the next.
Yeah.
It was, you know, it was right ahead of this hearing that's happening, but it was also probably a deliberate attempt to kind of paint the industry with a broad brush. I think people are probably smart enough to see through that. You know, and again, I don't want to talk too much about any other company in the space, but I'll just tell you about Coinbase. The complaint that we received was really different. You know, it didn't have any allegations of misappropriation of customer funds or wash trading. You know, myself and the executive team were not named personally. We are also a company that we're based in the U.S. We're a public company, so we have to follow all the standards of that, including audited financial statements by a Big 4 firm, so people can trust it.
You know, we've never created our own hedge fund that trades on our platform. We think that that's a conflict of interest. We've never issued our own token. The, the differences kind of go on and on. Yeah, I think that most people can see through that and, you know. The, the exciting thing, by the way, about getting clarity from the courts is that is actually kind of has the potential to increase the TAM, right? Or the revenue of this industry.
Absolutely.
Yeah, I think people right now are thinking about it in terms of, well, what's the downside risk? The way I'm thinking of it is, if we start to get regulatory clarity, what's the upside potential?
I think on whether it's your call or whether it's Galaxy or other, when you have crypto discussions, anybody in the industry says more regulatory clarity is needed...
Yeah.
if not helpful.
Yeah. You mentioned that McHenry-Thompson bill.
Yes.
That came out on Friday. I thought that was a, certainly a great step in the right direction. I mean, it basically starts to outline, okay, here's the role of the CFTC, here's the role of the SEC. We stop having this kind of turf battle that everyone's contradictory statements by the head of two federal regulators. Then it says, "Okay, let's just introduce some basic consumer protection best practices around AML, KYC, and auditing financial statements, things like that." It's, it's a pretty common sense bill, from what we've seen so far, and there may be a few things that we'd want to tweak on the edges, but my hope is...
You know, I don't know if it's this bill or the next one or the next one of these bills is eventually gonna get through, you know, the Senate and actually become law. The rest of the world is already doing it, and the U.S. is falling behind.
If we don't move some bill. I think, you know, again, correct me, you're the expert on this, but if there isn't some bill to start, which you say, you know, is from your opinion, a good start.
Mm-hmm.
We're not gonna get through this process here quickly. You need to start. I don't think the bill is bipartisan, but it's at least some place where you can start the negotiations. I guess my question is, if we don't get a bill, do we get to the U.S. so far behind that eventually you say, "Hey, I've got to really move operations, and I got to, you know, generate revenue where I can.
Mm-hmm
Where there is clarity?" That, not because you're not a patriotic guy, but you're doing what's best for shareholders. Like, how close are we that we really put in a roadblock to the U.S. being, you know, a strong marketplace for crypto?
Yeah. I mean, I don't think we're too close to that yet, despite the negative headlines and rhetoric. Obviously, we have a budget every year, and we can choose to allocate a certain more or less of that to our overseas operations. We wanna be a U.S. company that's really a multinational, right? I think we're not really close to that red line in the U.S. yet. I mean, the great thing about America is not only is it a big market where we're the leader, but there's rule of law here, right? We have to follow the rule of law, but so does the SEC.
The current rhetoric from the SEC about, you know, every asset in crypto other than Bitcoin is a security, that's not what the law says. If we need to go to court to get that clarified, if we need to have Congress act to get that clarified, you know, America has a great kind of self-healing system, right? Not just with these higher authorities that we can go to, but it's also politically, right? I mean, every four to eight years, you know, sometimes the winds blow a certain way, and then they kind of blow the other way. You know, imagine if we were in a country that was a dictatorship, where someone was there for life, this would be a much bigger issue.
In the United States, you know, the average tenure of an SEC chair is about three years. It's partly just, we have to wait until the right people are in the right roles if this, one doesn't work.
I have a question more on the fundamentals or at least the story of Coinbase all by itself apart from regulation. One last thing. You've talked about how there's disconnects, not only between Coinbase and the SEC.
Yeah
But the CFTC and the SEC.
Mm-hmm.
Can you point out, I guess, what do you think are the biggest conflicts? Then why has this, in the best of your opinion, this disconnect where, you know, you've in your blogs and what you said today, what you've said in the press today, is there such a disconnect between the communication, I guess, between the a regulator and a promising company like yours, like Coinbase?
Yeah. In the U.S., we're in kind of a unique situation, where there's two financial federal regulators, right? The CFTC and the SEC. When I go to meet with the regulator in the U.K., there's just one, it's the Financial Conduct Authority, right? They regulate both commodities and securities. Maybe not surprisingly, this whole issue of like, what is a commodity and what's a security in crypto, in the U.K., it's basically a non-issue. Like, nobody talks about it. The same thing in Singapore, where, you know, the MAS, right, or in other U.A.E.
There's just one so basically, in the U.S., it's kind of become politicized with the two federal regulators, and that's just led to this massive debate and tons of legal billable hours for every startup in the ecosystem trying to figure it out. But it's sort of a moot point in these, in these other regions. Anyway, I think there's something called the Howey Test, which kind of helps determine if something's a security, you know, and the basic version of it. You know, of course, I'm not a lawyer, but the basic version of it is, you know, was there an investment of money in a common enterprise with an expectation based on the profit of others?
It sort of has these four prongs, and those four need to be true for it to be a security. You can imagine, there's, there are some things which satisfy one or two of those prongs. Like, for instance, somebody might buy a Picasso painting with the expectation or piece of fine art, hoping that it would go up in value. There's an expectation of profit. A Picasso painting is not a security because there's no common enterprise, or a bar of gold, right? Or baseball cards or like all, there's lots of examples of things that kind of invalidate one or two of those. We need to basically get an updated version of the Howey Test or new case law that helps clarify some of these questions.
Like, you know, if something is decentralized, so there's no common enterprise, does that make it a commodity? I think most lawyers would say yes, right? If it has a certain amount of utility, meaning the network is live and people are using it for something, then maybe it's primarily about the utility and not some expectation of profit, right? Legitimately, if you're just trying to raise money for your company to launch something, like, that's probably a security, and we should have a way to have people go register crypto securities in the U.S. and make capital formation more efficient, right? These are some of the areas of the law that need to probably get addressed in these bills that are being drafted, or through the courts with some case law. If we get that, then the potential for the industry goes up.
Aside from regulation, I'm gonna show my age. I was around during the internet bubble, the bubble and the burst. Covered the e-brokers in 99. I've drawn an analogy on what has happened in the crypto markets that not all technological advances go straight up and to the right.
Mm-hmm.
You do have some pullbacks. I guess my question is, Brian, when I looked at the internet, we went through a burst or, excuse me, an upward movement and then a burst.
Mm-hmm.
You saw the e-brokers trade dramatically down, trading activity go dramatically down. It was the firms that stayed focused on their job. Their one job was to do retail trading. Everyone would say to me, "Well, Merrill Lynch is gonna overtake E*TRADE or Ameritrade because they have all the technological capabilities as E*TRADE." They never woke up every day like E*TRADE and Ameritrade, having to make all their revenue and shareholder value generated just from online trading. Like, the question is, your focus, and this is why we've been supportive of Coinbase, is 'cause your focus has been solely on crypto, that you can be more nimble, that the ones that made it to the internet, you know, collapsed. You know, it took 10 years, but they sold for $10 billion plus.
Can you talk about your focus, your vision, to give the audience, you know, 'cause I've heard it, but to give the audience, you know, this a little bit of a glimpse into Coinbase and how you've been so focused on moving crypto and your belief in crypto forward?
Yeah. I mean, I think that's a great analogy because, you know, there are lots of firms now who are dabbling in crypto, I would say.
Yes.
Actually, most of the big financial, traditional financial firms, you know, Fidelity is, and Goldman Sachs has a thing, and JP Morgan has a thing, right? It's Franklin Templeton is doing stuff with crypto. It's actually gotten pretty integrated into most of big, the big firms. To your point, it's a side project for them. It is really valuable to have a firm that's 100% dedicated to crypto, and it's also valuable to have a firm that is taking a trusted and compliant approach based in the United States, you know, public company. We're kind of in the nice I think the Venn diagram of that, there's sort of an N of 1, which is Coinbase.
A little bit of our vision, I guess, that you asked about, just in terms of our focus on crypto. You know, crypto, it's going through these kind of three stages of evolution, in my view, and it started off as a new form of money or a new type of asset class that people were trading. For the early years, that was primarily what people did with it. They traded, and they speculated on it, right? Then we saw people start to use it for new types of financial services in phase two. Whether that was international payments with, you know, remittance or commerce, they were doing decentralized lending and DeFi, you know, making decentralized exchanges.
We started to see crypto as a technology that could update various aspects of the traditional financial services. In this third phase, we're seeing crypto start to be used for things which have nothing to do with financial services, which is commonly kind of called Web3. It's really like a new application platform for the internet. It's people making decentralized identity and new forms of ways for creative people to get compensated, to have direct relationships with their fans and artwork, like NFTs or, you know, metaverse-type stuff and decentralized social media, right? We're kind of seeing that as like the third phase, and we're seeing startups start to do some activity in that space.
In that whole world, you know, I think Coinbase can be people's primary financial account in this new crypto economy. You know, that's how we hopefully will get this to a billion people eventually using it. There's a lot of things that need to happen for that to become a reality. I mean, we need to get the regulatory clarity, like I talked about, but we also need to get the blockchains to be more scalable. We're kind of still in the dial-up modem era, like to your internet analogy...
Yeah
of crypto, where the fees are too high and too slow, with these layer two solutions, they're called, we're gonna get to that broadband era, I think, of crypto, and we'll see another range of applications emerge on the scene.
I appreciate you coming. It was sort of a last-minute thing, but your willingness to communicate with investors, and I know you've been out there publicly today, but to get the message. I'll give you the last sort of voice or statement is to talk to investors. We've covered a lot of ground, I guess. Is there anything else...
Mm-hmm.
that you would like to clarify or you would want the investment community to know about Coinbase and sort of some of the, you know, the happenings of the last couple of days?
I was just thinking back to your comment about the internet bubble and E*TRADE and everything, and I think you're right. Technology does go through cycles. I'm a student of history. I like reading these books about, you know, like, if you look even back at the radio and television and the telegraph, you know, the railroads, we kind of had a bubble in fiber optic cable being laid for a while, and that corrected. We often see these kind of Gartner hype cycles, where there's sort of, you know, irrational exuberance, things correct down, and then the real work is being done at, you know, over a long period of time to get the value out to more and more people in the world. I think Coinbase is a company that's really unique in that sense. We're based here in the U.S. We're adjusted EBITDA positive last quarter...
Yeah
...in the depths of this bear market by really managing our costs thoughtfully. We are, you know, a public company. We're hoping to really bring this to a large number of people. I think that this technology is the single most important one that we have to update the financial system, to create more economic freedom in the world. There's, you know, there's billions of people out there who don't have the financial infrastructure that we have here in the U.S. From a global perspective, that's pretty exciting. Just about as more and more of those people come online, how are they gonna participate in the global economy?
It seems likely that over time, they're gonna use more of like the native currencies of the internet rather than, you know, their local fiat or the dollar or something like that in a global context. On the internet economy, I think crypto will be more and more of a standard over the coming decade, and I think we're the best-positioned company to build that and take advantage of it.
I wanna thank you again for, you know, stepping out there and communicating with the investment community. We appreciate your, you know, making the effort to stop by today. Thank you, Brian.
Thanks for having me.