You like the music. Thanks for joining us. I'm Michael Grimes from Morgan Stanley and really pleased to have Alesia Haas and Brian Armstrong from Coinbase. We've got safe harbor statement and disclosures on the Morgan Stanley website in here. Please refer to those for appropriate disclosures. In that, we're going to go ahead and get started. I don't know which of you wants to take this, but, you know, we're here to talk about in part our, you know, financial system. We know there's parts of it that work, but parts of it that are dated. One of the simplest ways to illustrate that is you want to send money to someone, you know, your choices are Venmo, Cash App, Apple Pay, PayPal. We can all use them, super convenient, but it takes a little while to get through the system and free.
If we want to do it fast, wire transfers are expensive. People know the systems need updating. You know, where can blockchain and crypto make whether that use case or other use cases more efficient to make the financial system more efficient is question one. Related to that, how would Coinbase be part of that?
Yeah. Well, thanks for having us here, first of all. Happy to talk about some of the use cases. I think you laid it out well. 80% of Americans today, they feel the current financial system is not serving them. It takes too long, the fees are too high, it's not serving everybody equally. Cryptocurrency is one of those technologies that can really update the financial system. Whether it's, you know, every time you're sending a payment, why isn't it as fast and cheap and global as sending a text message or a WhatsApp message, right? Why is it that every time you swipe your credit card, you're losing 2%, or at least the merchant is?
Similarly, you know, we talk about T+2, T+3 settlement, why can't that be instant and just eliminate an entire category of risk in the financial system? A lot of these tools that we're using, they're based on code that's 40 years old running on these COBOL mainframes and, you know, the laws are sometimes 100 years old or more. cryptocurrency is really a way, you can think of it, is to create new financial infrastructure that's more efficient and global and fair and free. You asked about what Coinbase's role in this is . I mean, we have a role to play as the primary financial account for people engaging in the crypto economy using this new technology.
We also have a role to play as the most trusted and compliant player in the space. I think recent events and this increased regulatory scrutiny are really. You know, I believe Coinbase is going to be a net beneficiary of that environment because for the last 10 years, we've been following an approach that is compliant, it is trusted. It sometimes caused us to move a little bit slower, but we're doing things for the long-term game here. We want to make sure that this company is around for many generations to come.
You mentioned those recent events, pretty eventful. Hard to overstate the events of FTX, LUNA, et cetera. Yet you have messaged, you know, your customer assets safe the entire time. You've had a set of seismic events that didn't really affect your customers. You've been through cycles. Is that what helped there? How did that come to pass? You know, how do you take the mechanisms you've developed there and take them to the next level given that you have been the strongest on that in the space?
I think what we view is the events of 2022 are not crypto-related events. Yes, they happened to crypto companies, but the events there were tried and true risk management practices that we've seen since the dawn of time. FTX was fraud, pure and simple fraud. Terra LUNA was bad asset liability management. We saw concentration risk. We saw poor credit underwriting. These are just standard ways that we've seen hedge funds fail, banks fail, et cetera, since the dawn of time. What's different at Coinbase is that we recognize those are the types of risks that we could have engaged in, and we've structured our products to be very risk conscious. We've hired risk professionals. We focus on asset liability management. We focus on holding assets one-for-one. We take security very seriously.
We were able to bypass and navigate through these events because that is not how we've ever approached our business. It sounds pretty simple, but we've really approached.
Had you seen it coming or you just knew that was the right way to operate the business?
We, one, saw that there were poor risk management practices in the industry. We did not see fraud coming at FTX. We were very shocked by that. We didn't think they were operating as cleanly as we were, but we did not see fraud. With others we definitely saw people who are offering unsecured lending in crypto without underwriting their counterparties. When you offer unsecured lending and you don't underwrite your counterparty, you're at high risk of loss. That is a very basic fundamental truth. We knew there were bad practices. We did not engage in those practices. We structured our lending products to have collateral, to have liquidation rights, to not concentrate with any single counterparty. These are how we've navigated the events of 2022.
Yeah, we shouldn't underestimate just the basics. I mean, Coinbase is founded right here in the United States. Some of our biggest competitors were not. We became a public company with audited financial statements. We've approached, you know, regulation by seeking it out. We've run towards regulation and seek out to get licensed in any way that we possibly could. We have a variety of licenses just in the U.S., but across all the jurisdictions. You know, in Q4 we actually saw an increase in the number of institutions onboarding to Coinbase Prime, our prime brokerage, I think because they said, "If we're gonna-
This is the one.
Yeah, this is the one. I mean, I think as long as we can continue to scale up our compliance and our regulatory efforts, it's gonna be a major advantage for us over time.
Let's talk about regulation since that's the theme. You know, what are the initiatives that you're behind on federal or other legislation to modernize regulation, as you've suggested, is necessary to be able to have crypto safe and secure and regulated in a way that protects the consumer and has the regulators, you know, in a place that makes them content?
Our policy efforts are really my top priority for this year, and I've been spending more and more time in D.C. There's a lot we can get done with the current rules and laws that are on the books, which are really around how traditional financial services is regulated. For a lot of our business as a custodian exchange, you know, we've built our business to date, and we feel very comfortable continuing in that vein. It would be very helpful to have additional clarity from the regulators or new legislation that's passed by Congress, as we've seen happen in E.U. with the MiCA legislation, comprehensive legislation around crypto that just got passed, or we just saw the same thing in Hong Kong. The U.S. Congress is continuing to become more and more interested.
There are maybe three different groups we're aware of that are drafting different bills in Congress. There's strong bipartisan support for this. Now, you know, it takes the stars have to align anytime new laws become actually enacted through the various, you know, branches of government in the U.S. I do think that's an important area to push on. Now, separate from that, there's a lot of other things that we can do. One thing we're doing is we're trying to organize the base of customers out there who have used crypto. About 20% of the United States citizens-
Organize them, you know, politically, kind of lobbying?
Exactly. Yeah. One in five households in the U.S. have now used crypto, I mean about 50 million Americans. It's a massive group. What we're doing is we've launched something called Crypto 435. It references the 435 congressional districts. For a lot of these 50 million people, or at least, let's say at least 1 million of them, you know, crypto is almost like a single issue. They're a single-issue voter on that.
How many of those districts would they be in, by the way, those 20%? Are they in all 435?
Yeah. Crypto is widely distributed across-
They're 435. They're not concentrated in certain spots?
No, I mean.
The coast.
I'd say the largest demographic is 25-35-year-olds.
Okay.
in every jurisdiction. I think that we need to make sure that in upcoming elections, we see candidates that are pro crypto and say, "Hey, I want, I want the crypto vote." you know, in America, the government is a representative of the people in any democracy, right? The people want this, and eventually that's going to have to make its way into government.
That could be a campaign theme, "I want the crypto vote." You've talked about international. You mentioned E.U.
Oh, sorry. I'll mention one other thing on that quickly.
Okay.
Yeah, sorry. I mean, while a number of us on the executive team are really focused, and we have an amazing head of policy, who we hired from Goldman Sachs, many of us are focused on the policy efforts. I want to make sure, one of the things I'm really pushing on as CEO is that we can't let the whole company be focused on this. We also need to keep innovating. And we'll talk about this later, I'm sure there's a number of really important technological innovations we're building just to drive the utility of crypto in the meantime. We can't just be 100% focused on policy.
On policy and regulation. You mentioned international, E.U., U.K., Hong Kong. You know, where else, where do you see things headed regulatory-wise internationally? Reducing friction while also putting in safeguards? What's happening internationally that's different than here in the regulatory regimes?
Yeah. Alesia, I don't know if you want to add anything too, but for instance, in the U.K., Rishi Sunak, the PM, is very pro crypto, right? Singapore, when I go there to meet with their folks in government, they're saying, "We want to be a Web3 hub," right? Hong Kong just did the same thing. We saw this legislation passed in the E.U. Basically, every financial hub in the world is saying, "We're open for business. We want crypto companies to be built here." The U.S., actually, strangely, they're not really thinking very much about FTX in those regions. It sort of is not in their collective consciousness maybe as much as it was here in the U.S.
The U.S. is a little behind here, but the types of legislation that we want passed, it's nothing, you know, rocket science. It's really just taking some of the best practices and applying it to crypto, whether that's let's make sure we have audited financials, let's make sure that customer funds and corporate funds are segregated.
Segmented, one-to-one backing stablecoins.
Have a great AML, KYC program, avoid wash trading, some of these really basic controls that we can get. There are things we could do beyond that, like if we had more clarity about what a commodity is , what is a security, what is a stablecoin, et cetera, in crypto. That would be even more beneficial, but that, you know, that might take a little bit more time. Anything you wanna add?
That's right. I think that MiCA is an important one because MiCA did recognize that crypto assets are distinct, that they do have consumptive use, and that is really the key here, that crypto has consumptive use in a way that a traditional bond security doesn't have. I think that's the nuance that we're trying to tease out in the asset taxonomy and clarification.
That's what is at the core of some of these international regulations of c onsumptive side.
Some of them.
More some of them. What if you had someone playing devil's advocate that said, "Take your scale, compliance, KYC, AML advantages," which are significant. You've built them up. You were ahead of some industry turmoil. They powered you through it as a strength. Ran further towards existing regulation, just as a devil's advocate, and said, "Go meet the SEC where they are on existing regs, on registration, complexity and all." Well, what would you say to that hypothesis as a different way to go at it than either waiting for or precipitating new legislation, which would certainly clear things up, but what if they don't get cleared up? Could you meet them where they live somehow, the current regulators?
Yeah. We're definitely trying to do that, and we're spending an inordinate amount of time with the SEC, the CFTC, various other state regulators, et cetera, doing exactly that and saying, you know, "We've heard the message that come in and register. Here's something we'd like to register. Here's another thing. Here's another thing," right? By the way, the things that are commodities, we don't think we're going to register those as securities. I don't know, Alesia, you've gone through a lot as we both have.
Ooh. You know, I wish it were so easy. I wish we could just show up and register and be done and move on with our lives and grow crypto. It's a bit complex. What's complex is today we do think there are crypto securities out there. We have not listed those on our platform because we are not a registered securities exchange. We believe we have listed utility tokens that have consumptive use. I think that there is agreement Bitcoin is not a security. Everyone's heard that podcast.
It's uniformly agreed.
Uniformly agreed. You're not allowed to trade a non-security and a security on the same exchange. That's prohibited. You would have to then come up with, are we gonna have Bitcoin-only exchanges out there? Things that look like Bitcoin? Are there other things that are sufficiently different to be like...
Where do you draw the line?
Where do you draw the line? Absolutely, security tokens should trade on a securities exchange. We agree with that. We think that a lot of crypto that exists today, that are the biggest cryptos, are there for consumptive use. You don't need to call those a security because you can use those in the protocol. They're there to actually exchange for goods and services of the underlying protocols. You don't need an Apple stock to buy, use your Apple phone. You don't need a Disney stock to go to Disneyland. You do need to have Ethereum to send a transaction on the Ethereum protocol, to pay the gas fees. Those are different things that we have to address that are not so clear in the existing rules.
Right.
Yes, we should run through the rules, but we also need to recognize that these rules were written before the advent of blockchain, and that we need to find some ways to meet the spirit of the law with a different execution of those laws.
The two paths are policy and legislative change, and then where you can, the existing regs and working with the existing regulators as best you're trying to do, so that one way or another to close the gap, and then use your KYC, AML compliance mindset and processes in either version of the world that plays out.
That's right. Yeah. I mean, I think we have a lot of mutual goals with the regulators, which is let's bring this in within the regulatory perimeter and make sure there's strong consumer protection. We are creatively looking for any kind of win that we can give them fit it within their system just to kind of advance the conversation one step further. We'll keep doing that.
Thank you for that. On the financial front, you've had a lot of growth and you've had then the turbulence, and now you're talking about EBITDA in all market conditions. Tell us about that change.
Well, when we went public, I mean, we really wanted to make clear in the S-1 that crypto has gone through these cycles, and our trading revenue has been relatively volatile. It's in these markets where it goes up and down. We've now shifted more and more to subscription and services revenue. We showed in our Q4 earnings that 47%, almost half of our revenue now is from subscription and services, which is more predictable. That's going to allow us to be kind of an all-weather company, if you will. We realized, kind of in this down market that the market conditions had changed, and we needed to change along with it. We've now moved to this posture of wanting to be able to generate Adjusted EBITDA in any market environment.
You saw us kind of take really strong actions to reduce our operating expense and our costs with a layoff that we did in January. We did one actually last year in June as well. Those were 18% and 20% respectively. Then we also started to focus a lot on stock-based compensation as a very real expense. I know many people are talking about that now. We believe that actually between Q4 and Q1, we'll have our stock-based compensation reduced about 50%. We did that with both the headcount reductions and also some changes around compensation within the company. We're definitely making a big effort to be able to generate adjusted EBITDA in any market environment.
I'd add two things. One is we're not going to be able to do this overnight. That this is the goal to grow more subscription and services, such that our subscription and services cover all of our OpEx. That means we will still see volatility in transaction revenue, but that will change profitability up and down at the bottom line. All of the costs will be covered by more predictable revenue streams, and that's what we're building towards. The other thing I wanted to say that I think changed last year is in the events of 2022, is we saw a lot of companies go bankrupt, and that shook consumer sentiment. What's important for Coinbase is also the market has changed, but also, we want to make sure that our customers never have a doubt about our financial strength and our ability to navigate these market conditions.
We also believe that this will help give customers confidence in us that we are profitable in all market conditions. I think it's a change in both.
I see. As a step towards that, One River and asset management in this sector because that can be a source of recurring revenue and increase that percentage. May you talk about that acquisition?
Thanks for raising that, Michael. Yes. This week, some of you may have seen, we did a small acquisition. We announced that we bought One River Asset Management, which will be our first kind of step into asset management, which is another type of revenue stream that is asset-based, more predictable revenue and will have less volatility than our trading revenues. One, we think this builds out our product portfolio in a way that's really a nice adjacency for our, especially for our institutional client suite and gives us the ability for that more predictable future revenue stream. It is small. We're going to grow. This is not necessarily impacting today's revenues, but I think it sets us up nicely for the next.
Directionally on that recurring revenue. Let's talk. I feel like we're in Steve Ballmer mode, developers, developers. Let's talk about your focus on developers. You know, the monthly active developers on the blockchain have increased despite all the recent turbulence, and you've got a couple initiatives going on now, a big one, with Base, and now you've, I think, Wallet as a Service in the last 24 hours. Talk about the focus on developers and those two initiatives.
Actually. If you look at the number of developers working on cryptocurrency and blockchain projects, you know, you can get this data by looking GitHub and things like that. The number of developers has roughly doubled since 2020. It's continuing to increase. I think that's a great indicator of where the future is going and, you know, what the smartest young people, the engineers, are working on. Coinbase has been continuing to innovate in this market. As I mentioned earlier, in addition to focusing on policy, we launched a product today called Wallet as a Service. This basically takes all of the core technology that we've built that integrates with the blockchain, stores crypto securely, and exposes this as an API through our Coinbase Cloud product to any company in the world who wants to integrate crypto into their offering.
Coinbase Cloud is a little bit like our Amazon Web Services product. There's another developer tool we released very recently as well called Base, which is a Layer 2 solution. The simple way to understand it is that crypto is still not very scalable. We need to get these Layer 2 solutions, kind of like moving from dial-up to broadband on the internet. It's going to allow us to scale up the number of Ethereum transactions, for instance, that we can do, get the cost down to under a penny per transaction. Hopefully, get it up to hundreds of millions, a billion people someday. These are examples of really powerful innovation that Coinbase has been able to drive in this environment. Helps grow the ecosystem around crypto as well and drive those use cases.
You launched Base with dozens of developers, if I remember correctly. I mean, you said a whole bunch. What are they building?
There's a number of things that can be built with it. We launched it actually in partnership with a firm called Optimism.
Yeah.
Yeah. It's built on the OP Stack. It's probably far more than dozens at this point.
Okay.
To give you an example of the kinds of things that we could more, you know, vertically integrate into our product when we have a layer two solution that we have some influence over is, for instance, you know, with USD Coin, which is our stablecoin, in partnership with Circle, we could make those payments, zero fee, for instance. You know, with our NFT platform, there's still a lot of work.
Can you just pause there and say what that means? Like zero-fee global instant settlement on, in a U.S. dollar. Like, that's what this enables faster, cheaper than any existing payment rail and crosses borders. You're not having to now move money between the U.S. payment system and the European payment system, and like, having your dollar touch multiple intermediaries to settle if I want to send an overnight payment to India. This is now peer-to-peer, cost-free instant settlement in the U.S. dollar. Sorry.
Yeah. No, no.
Big deal. That's a big deal.
It's a big deal.
That's a big deal.
It's a really exciting use case.
Anyone who's tried it without it knows it's a big deal.
Sorry.
That's, I mean, that's a great example of updating the financial system.
Updating the financial system.
Yeah. I mean, another example where we can leverage Base is with Coinbase NFT, for instance, there's kind of a complicated, if any of you have tried it, you know, it's pretty complicated today. You have to buy crypto on Coinbase, and then you have to bridge it off into an L2 so that you can get your, you know, your NFT in some kind of self-custodial wallet in a Chrome extension. It's way too complicated.
My grandmother just did that.
She did exactly that.
I was really amazed. In the 2021 period, I was like, "How many people are using this thing and it's that complicated?" That just tells you a little bit of the potential. I mean, imagine if we'd actually made it easy to use. The vision here a little bit with Coinbase is like, well, if you already have your crypto on Coinbase, you know, just one click, and now you have the NFT in your, in your wallet too. That's the kind of thing we can start to just make it just work underneath it with when we have these kinds of solutions like Base.
Yeah.
Yeah, Go ahead.
We talk a lot about the three pillars. We need scalability, which we worked on with Base. It's more scalable, faster. We talked about usability, which is then making that wallet, and then it's regulatory clarity. Those are the three things that we need to focus on to really unlock the doors of a crypto's potential.
With speed, is speed in there in scalability? That means-
Scalability
Scalability with speed.
Volume and speed.
That's how you did it by taking.
Like, that's the dial-up to broadband.
A layer two, and then, you know have it.
Yeah.
Right
All that stuff.
Let's up-level now what you've been through from startup phase through go-go growth through the turmoil and everything you went through. What did you learn with all of these lessons, and how are you applying those?
Lots of things that we did well, some that we probably could've done better. I mean, one that we learned is it's never as good as it is, as it seems in crypto, and it's never as bad as it seems. I mean, in 2021 was a crazy year. I mean, our revenue grew 600%. We did $4 billion of positive EBITDA in a year. The biggest issue we had as a newly public company was there was a line out the door of people who were begging to onboard to our platform, and we were just trying to grow as I mean, 600% at scale is crazy. I mean, everything was breaking, you know, like systems, processes. We were trying to scale as fast as we could. Of course, 2022 was a massive correction.
How do you actually grow and manage a business responsibly through those kinds of periods of volatility? It's basically don't grow as fast as you think you do during the up period. Still keep investing in the down periods. Don't fall prey to despair, right? Make sure that we're investing in these down periods in the infrastructure around compliance and cyber and, you know, it's just literally scaling the servers and the applications so that in the next upswing we'll be ready to grow even better. I think the strongest companies get even stronger in down periods. You know, the herd gets a little bit thinned.
That's been the best thing that It's allowed us to achieve success over the last 10, 11 years, is just long-term focus. Don't get too excited in the up periods, don't get despair in the down periods, you're going to end up in a really good place.
Where is that? Let's get before, and then audience, you can do some questions in a moment if you have any. Where is that place you end up? What's the long-term vision? What's true north for you for Coinbase?
Okay, the mission of the company is around increasing economic freedom in the world, I think it's going to be a little bit like the birth of e-commerce. You know, back in 2020, we were probably sitting here early Amazon or whatever, it was what percent of global GDP was e-commerce at that time? It was probably 0.1% or something, right? Now sitting here today, it's probably almost 20%, right? What happened over that 23-year period? It basically all the tools had to get better. We had to have broadband proliferation. We had to get, you know, the payment infrastructure to work a little better. All these little pieces had to fall in place; it eventually started to work. Fast-forward, you know, from here, where do we want to end up?
We want to have a more global, fair, free financial system where cryptocurrency has now updated it in a massive way. We think that, you know, there's going to be hopefully 1 billion or more people accessing this system. Everything from earning money to borrowing and lending to sending remittance payments, you know, these things will all be more efficient. There's lots of non-financial use cases as well in crypto. If you've heard about Web3, we're seeing people create decentralized identity systems, decentralized social networks, new kinds of business models for creators. We're seeing, you know, central bank digital currencies come online. Probably in the next five years, we'll see more countries actually adopt crypto as a legal tender, kind of like we saw with El Salvador. It was, like, a very early one to, you know, to start, but others may happen in the future.
These are all things that are on the horizon, and, you know, our goal is basically, at Coinbase, we wanna be the primary financial account for people in this crypto economy.
Terrific. Anything from the audience? Right here in the front. We'll get you a microphone.
My question is, Brian, Coinbase, and you are the white knights. Unfortunately, there are a lot of bad players. FTX is one of them, and I suspect there are other bad players that haven't been caught yet, perhaps the biggest of them all. Every time these bad things happen, like FTX, LUNA, Terra, the regulators, they zone in, partly because they don't understand what's going on. They don't understand crypto, partly because so many people have lost so much money. My question is, what are you doing to proactively educate these regulators and make certain that the laws and regulations that are passed will enable the crypto industry to grow in a productive way and not react to negative publicity like FTX or another player blowing up in the future?
Great question. You're correct. There have been some bad actors in crypto, no doubt. You know, although it's gathered a disproportionate amount of the headlines, there are many legitimate companies in crypto. I actually just hosted a dinner in New York. I'm going to host one tonight in the Bay Area. I'm basically getting together with all the legitimate companies in crypto and saying, like, "Let's build back this industry better." Anyway, we don't want to let a few bad apples gather the biggest mindshare. I think the core of your question was really how we are educating regulators and policymakers. The way we're doing it is, for one thing, I'm just showing up a lot more in D.C.
Is our policy team, so is Alesia, so is everybody on our team. We've also done things like we've drafted a set of principles. It's really, it's a binder that we basically give out to people in Congress when we meet with them. It's just our friendly suggestion about here's some of the challenges, here's some potential solutions. We don't wanna overstep because I think there's a way we could, you know, send the wrong signal and say, "Hey, we drafted something for you." I mean, it's their job to do it. We're here only to help if asked. We wanna do it respectfully.
We also filed a petition with the SEC kind of articulating, it's public on their website if you wanna look at it, sort of articulating some of the challenges in the existing regs and how they could potentially be solved. There's a lot of education that can be done, but a lot of it is just you gotta show up over and over again and help that happen. You wanna add anything?
We have white papers on stablecoin regulation. We have white papers on how the SEC could think about securities versus non-security tokens. A lot of it is drafting and policy influence with, we have Coinbase Scholars that we have engaged in these topics that have conferences. We do a lot of, like, hands-on technology learning, with members of staff of lawmakers as well that go really well. Yeah, it's education.
What about forming an alliance for the white hat?
Well, we were a founding member of the Crypto Council for Innovation, CCI. We've worked with Blockchain Association. I mean, there are a number of industry groups for crypto. I think that we could probably do even better on that dimension as an industry, frankly. I don't think. You know, we've looked a lot at what the banking industry has done from a lobbying efforts or oil and gas or these different industries, and I think there is a professionalization effort, if you will, that's emerging in a lot of the dinners and conversations I've been having in the crypto world. I mean, donations are another key piece of this, right? There's kind of the hard money, soft money.
There's the PACs. There's also just, you know, 50 million Americans who have used crypto. Many of those people, they're going to want to donate, you know, $100 or up to the, even if it's $5,000 or whatever the max is. They're going to want to donate that to pro-crypto candidates. That also obviously influences the policy cycle.
Last question.