everybody, for joining us. Before we get started here with Coinbase, and I know there's some confusion around the room, so thanks to everybody for being flexible. The team from Coinbase has asked me to read their quick safe harbor. Before we get started with Q&A, is it working now?
Yes.
Oh, great. Thank you so much. Oh, it works better. During today's discussion, Coinbase may make forward-looking statements. Actual results may vary materially from today's statements. Information concerning risks, uncertainties, and other factors that could cause these results to differ is included in Coinbase's SEC filing. The discussion today will also include references to certain non-GAAP financial measures. Reconciliations to 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 out of the way, Alesia, thank you very much for being here.
Thank you, James. I'm delighted to be here for the second year in a row. I love it.
Yes, no, it's great. So maybe I'll just kick right off and get into, at least I'm sure, a lot of the questions you've been getting and want to set the stage for everybody about the market generally. The trading activity has been very volatile of late, the last couple of months at least. From your perspective, kind of what set that off and how would you characterize who has been trading, who has been selling, and what the reaction of other participants in the market has been so far?
Great. Well, it's important to note that volatility is not new to crypto. And what we've seen over the last few months does have historical precedent. But as always, there's new drivers to what caused recent volatility in the markets. So we are seeing crypto more heavily correlated with broader macro trends. So on October 10th, we saw a significant sell-off in the market. Three things were happening at the time. One, Trump had announced tariffs against China. Two, there was a view on change in Fed rates. And three, and probably the crypto-specific incident was what caused the largest sell-off and liquidation, is there was a poor price feed that came in from one of the large global exchanges into some of the DeFi protocols. And as a result, it showed, and so the price being here, the price was here, and it resulted in auto deleveraging.
And that auto deleveraging then had a cascading impact where there was $19 billion of liquidations, the largest liquidation event in crypto's history, concentrated amongst the non-U.S. exchanges, concentrated on a few very specific platforms. And so that's really what caused then.
Got it. So that's kind of what has set it.
That's the triggering event.
Right, triggering event, and what's your sense of, has that been entirely cleaned up? I think there have been some people speculating that maybe more recent kind of sustained weakness where we've kind of, at least for Bitcoin, been around this $90,000 level has been just ongoing cleanup from that, or what's your, any sense as to what the follow-on trading activity has been like?
So we're really business as usual on our platform. I want to share that we are very concentrated within our U.S. market, is our large home market. Our second largest market is actually the U.K. and then Europe. So we do not have as much exposure to Asia and rest of the world as many other platforms do. So we are business as usual. And what I think is important to look at recently is in the last week alone, you've seen positive net inflows now back into the ETFs. And so I think that we are starting to see stability again, and people are really buying the dip in the $80,000, $85,000 Bitcoin price level.
I think what this is demonstrating, though, unlike past events where there has been significant dislocation in crypto, I mean, 2022 was not too long ago when we saw significant disruptions, we also saw numerous bankruptcies. We haven't had any bankruptcies. We haven't had any systemic fallout of any firms. People took some losses, but it shows the depth and maturation of the market. I think that we are renormalizing, moving back, and starting to see the net inflows and the buying of it.
Yeah, I think that resilience is notable. So what about incremental implications? What do you think, are there implications from recent volatility on market structure, winners, losers, et cetera, or do you feel like most of the market has absorbed it relatively well, so we kind of move forward as we have been?
That's a great question. In the U.S. and in other regulated markets, we definitely have rules from the CFTC as an example in the United States around how much leverage we can have in contracts. We have many non-regulated market participants within crypto where leverage is much higher. And so I do think that it's important for market participants, for traders to understand leverage levels, understand their counterparties, understand the risks that they're taking as they engage. And you're going to have rules in many parts of the world that will then dictate those leverage limits. But as we can see with decentralized finance and other markets, there's always going to be some aspect of unregulated entities that have higher leverage.
High leverage can lead to, we've all seen this in all asset classes around all of history, high leverage, deregulation, you can have bubbles, you can have bankruptcies, you can have price dislocation. I think as more and more of wealth flows into crypto in markets that have more concentrations of wealth, it will balance out and kind of create more broader stability over time.
Got it. And then just kind of last market-related question before we kind of move on specifically to Coinbase and how you see the landscape. But how do you track elements of leverage or are you able to get a good sense of how much leverage is in the different parts of the market, et cetera? Just because that's a question that we often get and one that I find hard to answer.
It is hard to answer. And it's hard to answer because there's not a lot of disclosures among many of the platforms that then offer levered products. We are unique in that we are public. You can read our financial statements. You can see the leverage. You can see that our products offer nominal leverage and that we're fully collateralized. And so we don't have the same types of highly levered products that you can see throughout the market. But no, because of lack of disclosures, it is hard to get that level of transparency.
Got it.
We do, for at least our own customers, underwrite our customers where we're extending leverage and have a very good sense of the leverage within our own portfolio and our book, and we're proud to say that we haven't had any losses in our credit book. We're proud to say that we haven't had any significant deleveraging. On October 10th, for example, we had two margin calls. It was immaterial. We didn't talk about it with the market because it was so single digits millions type of thing.
That's really encouraging. So let's talk about regulatory. You mentioned that just a moment ago, but spending a couple more minutes there, I guess arguably doing business as a crypto firm has not been easy over the last few years. But seemingly it seems like, I guess, we're moving into a more favorable backdrop with a supportive new administration, et cetera. From your perspective, how are conversations with regulators and policymakers generally compared to a year ago?
I can't help but quip that when you're innovating at the edge of a new technology, nothing is supposed to be easy. This is supposed to be hard. Otherwise, we'd all be doing it. We've obviously in the United States had a sea change. I mean, Europe led with MiCA. We've had leadership in Singapore to bring crypto regulation forward in other countries. But the U.S. had really, in the past administration, been quite antagonistic against the industry. So I cannot tell you what a sea change it's been, what the pendulum has shifted in the other direction. I was meeting with a bank officer yesterday, and his comment to me was, "In banking, we've been beat up for so long that when we got the new administration, we started saying, 'Oh, can we move from here to here?
“One inch forward?” and all of a sudden, the regulator was like, “No, we'd like you to move over here, like maybe a foot forward.” and he was like, “I have to drag my own risk teams all the way across.” He’s like, “We've been so conditioned that innovation is incremental, and now we have this opportunity to have constructive, data-driven discussions with our regulators.” so one, we've got the GENIUS Act passed in the U.S. The GENIUS Act is stablecoin legislation that brings forth who can issue stablecoins, what reserves look like, what disclosures look like, very straightforward rules that we can now use stablecoins as payment vehicles. This is opening up the opportunity for payments growth on stablecoins. How do we think about stablecoins as collateral in trading and markets activity? All opening up possibilities because of the GENIUS Act.
You've seen a growth in overall stablecoin market cap. You've seen growth in overall payments volume. So regulatory clarity brings in market participants, brings in confidence in operating in this ecosystem. We are pursuing the same with market clarity rules. And the CLARITY Act has received markups from both Senate Ag and Senate Banking. Good bipartisan support. Getting everything through Congress in the U.S. is not a straight line, as anybody who's tried to get legislation passed in the U.S. knows. And so we move forward. We get distracted by something else going on, but crypto keeps pushing. So we are still very optimistic that this will get passed given the number of days left in calendar year 2025. Less likely this year, but really strong momentum coming out of Senate still. So we think that this is near term.
So on that point, one of the things that obviously everybody is waiting for is the next piece of legislation, the proposed CLARITY Act. And it seems like with that passage, once again, is that you could encourage or at least have more people be amenable to looking at the market and entering the market. So how do you, with that being the case, though, it also seems like you could see more competition for Coinbase. How do you win with that additional competition, potentially entering the space? And what is, from your perspective, the unlock anticipated from a regulatory clarity that you're looking for?
Okay. So let me ask what CLARITY is, and then we'll talk about competition as the second step. So the CLARITY Act is going to give us asset taxonomy. So what does that mean? It's going to share with us what is a security, what is a commodity. It's going to create delineation between what falls under the SEC's jurisdiction and the CFTC's jurisdiction. It's going to cement these into law so that we are not at the whims of administration changes to say what we can and cannot do as a business. And we believe that this will bring more developers back to the U.S. It'll drive innovation as everyone's going to be able to focus on their product roadmaps versus their legal bills to defend themselves against government inquiry.
So it'll just provide the rules of the road for how we bring forth crypto commodities, crypto securities into the market. Absolutely, though, we expect that once we have these rules and there's not a threat of enforcement action, it will bring more market participants in. It'll bring more banks in. It should bring in more fintechs. It should bring in more corporates. Broadly, we think this will grow the overall market. So in addition to being risks to Coinbase, it's opportunity for Coinbase because of just the growth. So we believe that we're going to see more competition against our products. I think it's important to share that we are the most diversified platform in crypto in the United States. We have products for our retail investors, for institutions. We have developer tools. And we have, amongst those different customer sets, trading products, financial services products.
We see today spot competition. We have competition against our custody business for institutions, as an example. That's one of our many products. We have competition for our retail. We're definitely going to see it in spot. I don't think we're going to see on the broad. What's also important is this competition provides a new revenue stream opportunity for us. We have a business that we call Crypto -as -a -Service. What we recognize is that we can provide tools to banks, to fintechs, to others who want to then build in crypto and provide crypto to their end customers, where we white label our solutions and allow them to use our APIs to then serve their end customers. In that way, we're an infrastructure company, very much like Amazon was an infrastructure company.
They built their logistics business and their cloud business to serve their merchant needs. Then they sold all those services to others who needed similar. So we can offer custody. We can offer back-end trading. We can offer on-ramps, fiat to crypto on-ramps. We have over 260 businesses who are now building on our platform. And so that will then feed into our institutional revenues. It feeds into our custody revenues, into our institutional trading revenues, into the USDC balances. But this is a way that we can also grow because we can enable many of those companies to get to market very quickly through building on our tools versus building vertical stack on their own.
Got it. So let's talk about in terms of your business development and kind of your capabilities. Coinbase has been quite active on the M&A front. Can you help us understand what are you looking for when you're looking to do acquisitions? What are you looking to add to Coinbase's capabilities?
Sure. We are very acquisitive. We're probably the most acquisitive in the crypto space. We've done eight deals this year. Many of those deals, most of you will not have heard of. We do what we call acqui-hires, where we're looking for unique talent. And those would be teams of maybe five, ten people that will just bring very unique talent in to accelerate our existing organic roadmap. We count those as M&A. And then we have the other end of the spectrum, things like Deribit. Deribit was a platform that we acquired and closed this August. It's a derivatives platform that brought us options capabilities. We can talk more about Deribit later. We don't know if to go into depth here. But the spectrum is we're looking for talent. We're looking for product.
We're looking for things that can bolt on to our platform to offer more types of tradable assets to our universe. We look for new licenses. So as we enter new markets, oftentimes we need to get a license to be able to operate. Last year, we bought a MiFID license in Europe so we could then offer certain products to the European customers on a go-to-market versus a reverse solicitation by obtaining that MiFID license. So those are the types of things. It's people, it's products, it's licenses. It's anything that's going to advance our roadmap that we think that will add unique capabilities and serve our end customers.
Got it. So let's spend a minute or two on Deribit. It's, as I understand, a non-U.S. derivatives exchange, et cetera. Is there a plan, I guess, with Deribit to bring it into the U.S. or leverage their platform to scale internationally? What might make sense in how you would approach taking advantage of what you got in that acquisition?
Absolutely. Deribit is an options platform, as I just mentioned. They have 75% of the options trading market share. They are the market leader in options. That is not all they do, but that is where their dominant position lies. Coinbase is dominant in spot trading. That is where our historical strength has been. We are more than 50%, for example, of the U.S. spot trading market. We are a growing share in the international spot trading market. We had just recently launched derivatives, meaning futures. So we have perpetual futures for that outside the U.S. We also have now perpetual futures. We're really proud to say, in the U.S. Adding options, we now have futures, options, spot that we can bring all in one platform. So this is currently. Deribit had only offered this to institutional customers and advanced traders, so sophisticated individual traders outside the U.S.
Step one is to just integrate options into our international business, so then all of our customers, both Deribit customers and Coinbase customers, will have one trading platform where they can trade spot alongside futures, alongside options. What we think this provides is capital efficiency. We offer cross-margining, for example, on spot and futures today for institutional customers. That's typically 2x more capital efficient, so people can put less dollars to work and trade more, which they find very attractive. Adding options just continues to expand out the collaterals, expand out the tradable universe on our platform. Step one is international. Step two is we absolutely would like to bring this to the U.S., but that's going to be further on down the roadmap. We just closed in August, so we are good at many things, but integrations are complex, and we want to do this right.
So let's talk about for options and that kind of thing. It seems like the natural and you mentioned earlier that you have product for not only consumers and individual trading, but also institutional. And institutional has clearly been kind of the aspiration for the industry for years, right? And with the GENIUS Act and now with the CLARITY Act presumably going to pass at some point, the expectation is that there's going to be increasing interest from institutional investors generally. Can you give us an overview of Coinbase's institutional offering today? And how has that business evolved over the last few years, but really with the setting the stage to help us understand what you see as the growth opportunity within institutional for Coinbase?
Sure. So our institutional business looks and feels very much like any other prime services business today, except for crypto. So we offer integrated custody, trading, financing. And in the trading, we're expanding out the asset classes that one can trade. What we're seeing is that we have over a third of the top 100 hedge funds as clients of our platform. We won 80% of the ETF custody business. The ETF providers not only custody with us, but they source the crypto that they need to back the ETFs on our exchange. They use financing products. So we have an integrated offering. And what we have found is that we're the only institutional-grade player in the market at this point in time. And you can see that by evidence that there are other Bitcoin custody providers. There's many of them.
But when we can win 80% of that business, it demonstrates that we are at the scale that can serve institutional clients in the ilk of BlackRock, et cetera, that we can pass that operational due diligence. So we have a very robust institutional offering. We are finding that we are continuing to be a platform of choice. So for example, we just had news, was it yesterday, this morning? I'm a little bit off in my time zones right now. PNC Bank has become a partner. They're now offering Bitcoin to their high-net-worth customers and executing that all through our platform. That we are sub-custodian. There's trading on our platform to offer that to their end users. PNC Bank is one of the major regional banks in the United States. So institutional has the foundation to grow, as you pointed out. We do see post-regulatory clarity.
We get inbound interest from new corporates, governments. Many governments now is an interesting new client set are looking to acquire Bitcoin and hold that as a strategic reserve asset, the U.S. included. Many of these are the types of customers that we are now poised to serve with our business.
Talking about different types of product that are in the market, we've seen multiple crypto ETFs start up over the past year or so. You've also taken, and you mentioned a moment ago, some additional custodian role for the vast majority of these assets. How do you think about the long-term opportunity and role of Coinbase to support the ETF world? What do you think that ecosystem of players looks like in the long run?
It's a great question. I think what's really interesting is you can see the demand for access to crypto. And so you've seen new wrappers come out, such as the ETFs, such as the digital asset treasury companies, providing different wrappers, different structures to enable more and more asset categories, more and more investor types to find exposure to underlying crypto assets. And our role in the ETFs is that we are acting as sub-custodian for all of the Bitcoin that sit behind the ETF. We are also supporting the ETF issuers through being a deep liquid market to be able to buy that crypto to support that. And oftentimes we're also using financing because crypto is a 24/7 instant settlement asset class.
As an ETF issuer, you can choose to either pre-fund Coinbase and other platforms where you want to buy your coin, or you can get trade finance from Coinbase to say, "All right, I'm going to take credit from Coinbase and I will settle out my wire in hours, days, whatever the case may be for normal fiat settlement time." We can offer that full integrated service. But importantly, and many of you probably have this within your own businesses, when you get to a certain size and scale as many of these ETF issuers are, business continuity is of critical importance. You do have to have multiple service providers for each service that you have to ensure that you can provide 24/7 constant uptime. We will see many of these adopt additional custodians, additional financing partners. I think that is a natural evolution.
It shows also just the demand and maturity of the asset class to get to the point where we're focused more on business continuity and redundancy and crisis management than just, "Can I buy crypto? How do I put it on my balance sheet?
Right, right, right.
Where we were five years ago.
Right, so let's talk about just a few minutes left here, but I did want to touch on a couple of specific products, and let's start with USDC and in particular on the institutional side. Where are you seeing demand or growth increasing the amount of USDC they're holding? Is it primarily individuals or is it institutional, and what are they using for anything those stablecoin assets to transact for?
It's both. We see demand both on the retail and on the institutional side. On the institutional side, what's important about what USDC started as a trading pair, so we just talked about how crypto markets are 24/7, they're instant settlement. Fiat's not a 24/7 instant settlement market. There's market hours. The banks aren't open on Sunday, and so what traders, what market participants needed was the ability to settle back to fiat and to have a stable asset to be able to sit in a market, but not around the world, so what the institutional clients are mostly doing is holding it as a settlement asset. They use it to provide liquidity across all the trading pairs. They use it to have arbitrage trades across various different liquidity pools and exchanges around the world, and with our international exchange, for example, we only quote in USDC.
So if you want to buy a perp, you have to have USDC in that account. So we don't quote back to fiat. We've done it as crypto only. So it's all crypto to crypto trading, essentially, or crypto to stablecoin, I should say. So the institutions are holding it predominantly there. And that's where the bulk of it is, trading behavior. But increasingly now, post-GENIUS, we're seeing companies want to hold it for payments. That is nascent behavior, starting to see real growth there, but that's a trend that we expect to continue.
So, key question has been, and love to get kind of how you think this plays itself out. There is the open question of, for example, Coinbase is paying out rewards on stablecoin, whether that, in the rulemaking process, will be categorized as interest payments effectively and hence be prohibited, or if it won't be, or if maybe it'll just be. I think everybody would prefer if it was just addressed in the CLARITY Act to clean up the uncertainty there.
It was addressed very cleanly, actually, in the GENIUS Act. We have law on this right now that issuers cannot pay interest on the stablecoins. Coinbase pays rewards. We're paying this on the behavior of the total client activity on our platform. Lots of companies have rewards programs. It's very structurally different than passing on interest on a balance, what we have designed on our own platform.
Got it. That's helpful. Lastly here, just quickly on credit card, you recently launched your own credit card. What are your expectations for that product and what is the early response? And I guess really, what is the customer profile you're going after and how is your offering different than what's already in the market?
It's an incredibly unique offering as we're offering up to 4% Bitcoin back. That is a unique rewards program to receive Bitcoin back on your purchases. And it's unique because Bitcoin is an asset that many believe, including myself, has long-term asset appreciation value, where many points programs have had deflation in them over time. And so now to have effectively your points go into an investment vehicle versus going into something that could have a deflationary impact, we think is really differentiated. What we've seen is rapid adoption of the card. It is gated behind the Coinbase One membership. So we're also seeing growth of Coinbase One.
We use the card as a customer acquisition vehicle quite candidly, and we're really focused on building that Coinbase One subscriber base because what we see with Coinbase One subscribers is that they tend to be more actively engaged on our platform with many of our other products and services. So we're monetizing through the product stack with the acquisition vehicle at the Coinbase Card. But we're delighted to see that it's become a top-of-wallet card. We've had incredible positive feedback both on the design of the card and the utility of the card.
Got it. Last question. How do you think about managing and operating the business through crypto cycles? I mean, there seems to be cyclical volatility, but how do you think about managing business through those?
I think that we've become very good at this. I'm almost going on eight years here at Coinbase. Prior to that, I was at a hedge fund where I wasn't able to forecast returns very effectively either. So it does feel the last decade of my career has been managing and forecasting businesses that are crystal balls. So the answer is we are never right at one forecast, but we are very good at swim lanes and we are very good at scenario planning. And so we manage the business through scenarios. And we have triggers on various scenarios and various levels of revenue about what that means to our operating expenses and how do we then manage the OpEx. So we focus on components of variable expenses, how do we bring those up and down with various revenues.
We're always planning risk scenarios and downside scenarios and ensuring that we can cover those operating expenses and be EBITDA positive in all operating conditions if those low revenue periods emerge.
Got it. Well, that's all the time we have. We're right at the top of the hour. Thank you so much. Appreciate it.