How Coinbase Became the Godfather of Crypto | LFTC
Summary
Market Position: Coinbase has grown to become one of the largest financial companies in the U.S., surpassing major exchanges like NASDAQ and CBOE, with a market cap of nearly $80 billion.
Crypto as an Asset Class: The discussion highlighted the evolution of crypto from a speculative asset to a foundational financial system and app platform, emphasizing its potential beyond just a store of value.
Regulatory Challenges: Coinbase's legal battles, including a significant lawsuit against the SEC, underscore the ongoing regulatory challenges and the need for clearer market structure legislation to support the crypto industry's growth.
Decentralization Efforts: Despite its size, Coinbase is committed to decentralizing its operations, enabling customers to self-custody their assets and promoting the use of decentralized applications.
Stablecoin Strategy: Coinbase's partnership with Circle for USDC highlights their strategy to build a stablecoin with broad network effects, positioning it as a utility layer in the crypto ecosystem.
Institutional Partnerships: The company has secured significant partnerships, including with JP Morgan, to expand crypto on-ramps and solidify its position as the infrastructure provider of choice for large institutions.
Future Vision: Coinbase aims to become the "everything exchange," bringing a wide range of assets on-chain, including tokenized equities, to offer a comprehensive trading platform.
Market Dynamics: The podcast discussed the impact of ETFs on crypto adoption, the role of Bitcoin treasuries, and the potential risks and opportunities associated with leverage in the crypto market.
Transcript
[Applause] [Applause] Ladies and gentlemen, welcome to live from the compound. Uh, Coinbase has become one of the largest financial companies in the United States over the last few years with a market cap of almost $80 billion. Uh you guys, I don't know if you know, you are a top 25 market cap in the XLF right now. Um pretty big. Okay. Um Coinbase is now larger than NASDAQ, larger than MEI, and larger than the CBOE. Just to give you guys an idea of the scale of this company, um you are the Coinbase the sixth best performer in the sector year to date as well. uh you've reported 245 billion in assets and over 80% of the assets of the Bitcoin and ETH ETFs are held at uh Coinbase. Our guests today are Paul Gruell, the chief legal officer of Coinbase Global, where he is responsible for Coinbase's legal compliance, global intelligence, and government relations group, and Alicia Hos, who is the chief financial officer of Coinbase, where she has served in that role since 2018. Guys, welcome to the compound. Thank you for being here today. >> Thanks for having us. >> How's that for an intro? Pretty good, right? >> I'm pretty damn good. >> Alicia, what would you give that out of 10? I want to just note that we have over 400 billion of assets on our platform forever. Uh 400 billion. Let me correct the record. All right. Um guys, what is it like being on the management team at the largest crypto business in the world? How does it feel? What is the day-to-day like these days? It's pretty exciting. I would imagine >> we're pioneers. Okay. >> It feels like you're sitting on the brink of history and watching the world transform in front of your eyes. It's incredibly motivating. Yeah, it really feels like the world is changing quickly around us and we get to play some significant part in seeing what that change looks like in the future. >> I think the world is changing but then you guys are also responsible for shaping that change and I know that's very deliberate. I know that's she's she's pointing at you. I know that >> he's opening doors for us. Opening doors and then we have to chase >> knocking a few down as well but yes >> knocking down some doors. Okay. Um I think we want to where do we want to start? >> So Bitcoin let's start with Bitcoin. Bitcoin started, I think, as self-s sovereign money. It is yours. The government can't seize it. Like, it is yours and it is yours alone. And the story has evolved a lot over the years um to the future of finance. But it seems like the story today is a new asset class. Last week, Eric Belrunis reported that spot, Bitcoin, and Ether ETFs did about $40 billion in volume this week. And if you just look at the ETFs alone, that's like it's up there with VO and the Q's in some case bigger. Like >> to me right now, the story is about crypto as an asset class. Is that how you guys see it? >> That's the first chapter. We see crypto as an asset class, being a foundation, but then we think of crypto moving to a financial asset in which you can transact, you can use it for lending, you can kind of broaden the financial transactions versus just a store of value and a savings vehicle. And then we think of crypto as an app platform. And that's where it gets really exciting about like thinking about base as a layer two where we're seeing new social, new messaging, things built on top of crypto that's embedding data and dollars all in the same platform. So we think about it as we've moved from this offline world to online world and now we're moving onchain. And that is then the evolution of crypto, an asset, a financial system, an app platform. >> Yeah. And I think that evolution from offchain onchain into an app platform is what creates some of the most interesting but frankly challenging regulatory issues that we've confronted. But what's also I think unique about crypto is that all of this has taken place in the course of roughly a decade. I don't think we've ever seen that in global financial history. How much of what you guys are building is looking at the analog or the tradition traditional world and saying let's do the digital equivalent versus truly pioneering things that no one is doing in any way shape or form. Like if you could maybe talk a little bit about why you're able to move so rapidly because there is this groundwork laid by traditional finance but then like going in off into areas where people are like wait what are you doing because it seems like you're doing both at the same time. Do you want to start or should I start there? >> I'll start there. Okay. Um I I would say that um what we are what we're doing um certainly builds upon I think a lot of traditional financial infrastructure and you know I think in the first instance um Bitcoin and later digital assets that followed were about offering alternatives to that system that frankly weren't serving a lot of people. The reality is that um even in the United States let alone all over the world today access to the financial system is limited for way too many people. And so I think correctly the industry as a whole and certainly Coinbase in particular has focused on that as an initial priority. But as Alicia alluded to, the goal here is much bigger than that. The goal is to build a true platform for all sorts of decentralized applications that can go far beyond just asset speculation, appreciation, trading, and the like to really fundamentally changing how people interact with their data online and ownership of their identity online in ways we think are powerful. One of the um one of the things that the crypto skeptics have been saying all this time is if I'm not Venezuelan, there really is no day-to-day use case for me other than speculation or accumulating wealth. I would argue it's been an incredible tool for accumulating wealth just looking at the prices. Like it's been really hard to at least in the last couple of years lose money in cryptos. Okay, so we know that works. How do you answer those skeptics? What do you tell those people about the daily use case of crypto who just don't see one or maybe it exists in the background but they don't know that they're interacting with crypto or like what's what's your answer these days to those people. >> Crypto is more than just Bitcoin today and I think that you have to look at what are the pain points of each individual customer and how can crypto solve their problems. Yes, Bitcoin and Ethereum, many of these assets have been tremendous investment returns, but you also now have stable coins with product market fit that are enabling faster, cheaper transactions. You have the emergence of decentralized social and what we're seeing with decentralized social and we have a product that is in its beta. We are just onboarding to it. It's this magic moment of if you're a creator and you are posting content, that content now is a coin. You own that content. You can monetize that content that immediately flows into your wallet. From that same wallet, you can send a payment. You can buy a crypto asset. It's combining social trading, payments, identity, messaging, all within super apps. And so, just reducing friction, lowering costs, giving it more boundaryless transactions was what we see the real value out of crypto in people's lives. >> Can we double click on that? In the creator economy, you still have gatekeepers. They're different than the prior gatekeepers, but his Patreon, his Only Fans, his Instagram, his Tik Tok. What you're what you're describing sounds like a direct payment to a creator who can then put their content anywhere. Um, but surely you're going to want to get paid for that, too. So, do you just replace the existing gatekeepers or are you suggesting an entirely different sort of experience? Well, I think payments are certainly an important part of um the opportunity um that crypto offers to content creators, but payments are just the beginning. Fundamentally, what we're talking about is ownership, right? In the traditional web 2 world, who owned uh the content that so many creators added to that uh to those platforms that drove a lot of the value? It wasn't the content creators, it was the platforms themselves. With decentralized um assets and with cryptocurrency, you offer the opportunity for the content creators themselves to own their identity and own the content in ways allow them to port that content to whatever platforms allow them to reach their intended audiences and share value with those audiences ways that they deem most appropriate and most valuable. That's the fundamental opportunity that we see there. >> So that's the transition to an app platform, you know, financial app for >> That's right. >> Okay. Um, so this is in distinction with let's say your former employer, Facebook, YouTube. Um, so basically you'll have a scenario where people can take full ownership of their work, not just contribute it to someone else's app or someone else's website, but they do have to put it somewhere. So I it sounds like it's going to be a situation where it's a little bit of both and not fully I have my own video platform now, right? Am I describing that? I think that's right. But I think what's important to understand is that in in that in in in this scenario, in contrast to the the old world of web two, the content creator makes that choice. The content creator decides where that where that content is hosted. That content creator decides how fans and and and and audiences will interact with that content and on what terms. And that ownership, that uh uh independence, that autonomy, we think it's what fundamentally different from the old gatekeeper world model that you were describing. I think part of the problem with crypto branding for the average person who doesn't see the technology doesn't understand the dollars that are extracted from the financial companies from the system all they know about are the scams and they remember FTX the collapse in 2022. Um, how surprised are you that the price of Bitcoin fell from 70,000 down to what it bottom 15 something like that >> and like two years later or thereabouts wherever it was it was at all-time highs and itexed from those levels. How damaging was the collapse to trust in crypto? And how surprised are you that it's only 3 years later and we're we're so back all the way back. >> Were you surprised, Alicia? I wasn't surprised. No, >> I think >> which part weren't you surprised by? The rec the fall or the recovery or both? >> Both. I wasn't surprised for either. Okay. >> Because when you saw the collapse, there was a lot of leverage in the system. So, whenever you have a highly leveraged environment and you have an event like FTX failure, you're going to watch a downward price trajectory. However, at the same time, we were watching new corporates on board into crypto. We were seeing new participants go like, "This is a buying opportunity. wanted an entry into this asset class. There was a huge chilling effect on the industry though because everyone reunderrote every platform. They said, "Could Coinbase be the next FTX? Coinbase, what are your controls?" Banks were definitely fearful of then interacting with these crypto companies. What did they not know? So, we definitely went through a re-education process. We had to really rebuild trust in the underlying controls and infrastructure. But once we did that with the tailwinds that we now see, with the regulatory clarity, with the increased institutional and government interest in this asset class. I'm not at all surprised to see the essential price as well. >> How much of the uh of the recovery that Michael's referring to? Um can you point to the fact that Trump won and Trump was highly supported by people who are crypto positive? Um because there's another world in which Trump doesn't win and your day is probably being spent very differently and your day is probably being spent very So like would you say that's 50% of the story of Bitcoin running to 125,000 or 30% like what would you handicap that uh election being >> well I don't think there's any question we now have the most pro- crypto administration in history and I don't have to imagine what that world could look like very frankly because frankly the previous four years uh offered us a tangible example of what um a hostile attitude not towards not just uh an American industry but frankly an American innovation could and would look like. There's no question though that the political support for crypto has now gone far beyond just the Trump administration or a a a small set of early adopters on one side of the political aisle. We've seen now because we've seen votes taken in Congress and legislation passed that Democrats and Republicans by and large understand that crypto is going to be part of the financial system and financial future of this country. And so we need sensible rules, sensible standards to govern that to protect against, you know, collapses like FTX and to make sure that people are kept safe even as they invest in this new opportunity. Are you surprised the Democrats weren't strategic uh and and smarter about recognizing that there was this huge demographic and it's young and it's energized and it wants to affect change. Are you surprised that they didn't grab that opportunity to be the party of crypto prior to Trump coming along? >> Well, some Democrats absolutely grabbed that opportunity. We've seen that actually here in New York with leaders like Congressman Richie Torres, Senator Christian Gillibrand who have staked out a very early claim to sensible ideas and sensible standards for crypto that are reflected in the legislation that was passed. What I think was disappointing and what you're alluding to was the fact that the previous administration, the Biden administration, as well as the Harris campaign, just couldn't get their minds around what opportunity crypto offered to the very con constituencies and communities that they purported to want to champion. We met over and over again with the previous administration and with that campaign to try to lay out for them the case for crypto for the very people that they sought to champion. And yet over and over again, we just saw either um a disdain at the very least or an outright hostility that was extremely counterproductive and ultimately I think cost them in that election. I >> think that's a good segue. I want to ask you about something that you guys did that almost no financial institution would um have the courage to do. Some would say the huts to do, but you guys sued the SEC. And uh it's it sounds like that was coming I mean obviously it's coming from Brian Armstrong the top down. Um it took a lot of guts but you actually won and uh it took a really long time. Um talk talk a little bit about why that was so important uh for you guys to once and for all say current securities regulation just does not apply or is not written so as to make it conducive for our industry and we need something different and you need to listen to us. What was that decision-making process like? how many sleepless nights and what did it feel like when uh things ultimately fell your way? >> Well, I give our CEO Brian Armstrong and our board a lot of credit because the um the decision to take the fight to the SEC um head on um was not an easy one and certainly ran against all conventional wisdom at the time and maybe even since then. I will certainly say that when I attended law school nearly three decades ago, maybe the second or third lesson, if not the first lesson that we learned, the very first uh day of class was don't sue your primary regulator. Um and yet there we were uh in 2021 already seeing that that day would come for us and then ultimately we were confronted with and forced to pull the trigger um on that in 2023. Look, I think if you just take a half a step back, it can seem like ancient history now, but not that long ago, we were in an environment where um the previous administration made it clear they did not want to see crypto flourish in this country. In fact, in many quarters of the White House in particular and um certain leaders um on on Capitol Hill, particularly Senator Elizabeth Warren, there was a mindset of let's try to drive this thing underground at the very least or out of the country entirely through lawsuits. We won't pass rules. We won't tell people what the standards are. all that we're going to do is take them to court and either grind them into submission or ultimately um make it so impossible for anyone in crypto to operate in the United States that people would leave voluntarily. And so in that environment and against that challenge, in some ways the choice was actually relatively easy because what other choice did we have? Nevertheless, I do think Brian and the board deserve a ton of credit because the fight was not only for Coinbase's survival, but frankly the thriving of the industry as a whole long term. And um it's maybe the thing I'm most proud of that we've done as a company. >> Can uh given the size of Coinbase, can you truly say that this is a decentralized asset class in the way that the original uh Satoshi paper laid out? Like can we all kind of admit that maybe there's a limit to how decentralized anything of this size can really be? and that ultimately throughout history, crypto or otherwise, power tends to consolidate uh and and institutions tend to get large when there's money in motion. Like we can kind of all I think say >> no, not if you're in our executive meetings. >> Okay. >> Um >> that's still an important part of the ethos what you're saying. >> Incredibly important part. >> Okay. Talk about that. >> I think we might be the only company that is actively working to decentralize everything that we do to ensure that each one of our customers has the ability to withdraw their crypto to a self-custodied wallet to take their money anywhere around the world, pass through borders, that we fight through legal and policy efforts, that we build products to enable this, that we are bringing in decentralized applications into our main platform to give our customers direct access to moving into onchain apps. We are not putting up barriers. No, >> we are doing quite the opposite of trying to really encourage this movement into an onchain economy. >> I think we have a record to prove that. I mean, it it really goes back to, for example, the very first significant win in our fight with the SEC was establishing legal clarity for non-custodial wallets is falling outside the scope of the federal securities laws. That was huge. That was huge. If you look at sort of where we're really drawing hard lines and in our advocacy efforts for new legislation, DeFi and protecting DeFi is critical. You could argue that each of those efforts and a dozen others I could list actually run counter to our narrow short-term self-interest as a company. But our vision is for something much bigger than just as you would suggest by your question replication or duplication of the way we've run the traditional financial system for decades in this country. >> Tailwinds for crypto right now there's a lot. Um I think maybe number one is a lot of people still don't own it. in fact like nobody owns it practically speaking. Um, and the limited supply and the race to own it. Then there's the political landscape. There is the ETF which was enormous. That was the spark that lit the latest bull run. Um, one of those tailwinds though can potentially turn into a headwind. I don't know when or how or why, but the number of treasury Bitcoin treasury companies that are using you guys, I would assume in many cases to secure their Bitcoin and to store it. Um, so Sailor tweeted this morning, Strategy has acquired 430 Bitcoin. Uh, they now hold or hold, excuse me, 629,000 Bitcoin. Acquired for, not worth, acquired for $46 billion. in and this is from the FT. In the year to August 5th, some 154 public companies have either raised or committed to raise a combined total of 98 billion to buy crypto. Um, I don't know what stops this, but the more and more companies are getting in on the action simultaneously has to excite you. This company ETZilla just recently converted, this is today. It's not that noteworthy other than it was today. converted from a biotech company into an ETH treasury company. So on the one hand a rational person sees this and this says like all right time out like I this is getting crazy I want to get off the train. But the other person might say but this is sort of one of the points is that there is a limited number of supply and there's an allout race to accumulate them which should be should be very supportive of the price but I guess does this cut both ways? like what happens if there's a geopolitical event and at the end of the day these are risk assets and they can go down and interest can wayne. So how do how should investors think about the simultaneous tailwind that can might turn south in a hurry. >> I think you have to have a long-term hold on these assets. These are not assets that should be viewed as linear risk-free assets where you're looking for great annual or quarterly returns. We've seen crypto go through cycles. Even ignoring the 2022 events that led to a significant decline. Prior in 2017 and 2015, you saw definite waves. If you zoom out, Bitcoin, Ethereum have had long returns over time. And so, you have to take that long-term mindset. These are store of value assets. These are not daily speculative assets for the majority of investors. What I think about these treasury companies though is very few institutions had access to buy spot crypto commodities. Many funds have a prohibition. They couldn't buy ETFs. They couldn't buy spot bitcoin. They couldn't buy spot ethereum. And so they're using these as equity rappers because they can hold equities. And so it's introducing new capital into the crypto ecosystem. What I think is an untested theory is is this a moment in time and will the world change where then more investors can go into spot commodities once you have market structure in place? Will funds change what their investable asset classes are over time? But these rappers are just giving more and more capital access to crypto since really what they're doing. Well, >> I think everyone would like to be long-term and zoom out and historically if they had done that it will would have served them well. But there's a lot of leverage in the system as a result of the Bitcoin and the ETH treasuries, and that doesn't allow you to zoom out always. Um, when you get a margin call, you can be as long-term oriented mentally as you want. Financially, you have to come up with the money. I think that's the risk that Michael's alluding to. Do you think that there's as much or more leverage currently given the the size of these crypto treasuries as there was back in 2022 or is it a different type of leverage that maybe >> it's a different type of leverage but it's hard to tell because you don't have transparency into the global holdings and you have a lot of crypto held not outside the US in companies that don't have any financial reporting obligations which makes it very difficult to look at total leverage in the system today >> if you think about so Bitcoin has been the best performing asset over the last 10 years, right? Since inception, it's crushed everything. There's nothing that's even remotely close. As you think about the future opportunity set and as Bitcoin matures, you would expect all else equal that volatility will come down a little bit. >> And that returns cannot possibly continue to compound that 50 60% because ultimately it will swallow the globe in just terms of asset size. We were talking recently about this. How do you think about the size of Bitcoin? because it's not a market cap like equity is which means that maybe the size of it can be way larger than we think because it's not a true market cap. >> Correct. >> So like talk about how you think about supply price. >> If it's if it's not a stock and we know it's not then maybe market cap is just a term we're borrowing from TRDFI that's not applicable. So maybe we need to think about it like the supply of US dollars. Well, I think it is an out it is a bit of an outdated or outmoded term of market cap. >> Yeah. Because if you think about it right, even even now under US law after a lot of struggle and and a lot of heartache, we have established that Bitcoin is not a security. It is not an equity. It is properly considered as as a commodity. Um and and I think treating it and considering it as a commodity class is probably a better way to think about it. The other point I'll just make in terms of like its potential for growth, I think you're exactly right. we don't need to see compound annual growth in terms of historical norms for Bitcoin to continue to grow and continue to play a much larger role in our system. Um, and I think that's in large part because now we not only have the ability to buy and acquire and hold Bitcoin um in custod in in custodial wallets and non-custodial wallets um by individuals, but we have a lot of other ways to get at the asset class. There are the digital asset treasuries for sure. strategy is certainly one way to go about it, but the ETFs you mentioned earlier, I think were the catalyst for so much retail and institutional adoption. I actually think in terms of the law, the single most significant event in the history of of of crypto was the decision of the DC circuit forcing the SEC to grant those ETF applications have been pending for years. That was a watershed moment and that has brought in a whole new class of investor that has access to this market that never was there before. >> I think it smooths out the flows into into the asset class because it's not fully reliant on people who decide every day I want to place a crypto trade. Now you've got money coming from the asset management world, pensions, insurance companies, wealth management, where it's scheduled each month I buy X dollars of uh >> you know the bit one of these Bitcoin ETFs or every time I rebalance my portfolio or whatever the case may be. I think it kind of that decision to your point for me that was a moment where it's like okay this is now permanent. You can't get rid of this now. It's financial system. >> The game is now on. >> All right. You guys mentioned uh stable coin. Stable coins had a big moment this summer. I have to be honest with you. I read the S1 and then I listened to the last uh earnings conference call. I still don't understand why Coinbase allows Circle to exist. Why isn't it the Coinbase stable coin? Why why are you guys taking marketing or distribution fees from a company that you could very easily just replicate overnight? What's the rationale behind doing that? And I know that's a client of yours, but like >> it's an important partner of ours. >> It is. >> I I understand all that and I know why it is, but why don't you guys just do your own? >> We really firmly believe that you need to have network effect in stable coins and we want many distribution partners. We want to have an interoperable stable coin. We want to build stable coins as a utility layer of the overall crypto ecosystem. And we thought starting in 2018 when we partnered with Circle to create USDC that doing this as a multi-party ecosystem was the best way to do that. We have an important role in this through distribution. We were a key catalyst in getting USC adopted by DeFi really embedding it into like the trading community because we have such a large exchange and distribution capability. But we are both incentivized to add even more partners. We want to add more people. We want to add more on-ramps and off-ramps, which is why we partnered, for example, with Shopify to embed USDC to Shopify's merchants and why you see Circle going out and bringing their own partnerships to the table as well. This is going to be a utility that we bring to this overall. >> Most of the money in Circle to be clear though is custody to Coinbase or or do I have that wrong? >> We hold more assets on platform than they do at this time. So at the end of the second quarter, we had over 14 billion on our own platform, but that's out of the 60 billion in the overall ecosystem. So a large percent are just held in self-custody wallets, held in DeFi protocols, distributed throughout the ecosystem. >> I think that distribution in 2025 and presumably, you know, beyond validates the original vision back in 2018 that more participation, broader distribution and ecosystem would lead to greater adoption. Um, how important are ETF custody and trading solutions? We referenced this statistic before that about 80% of the money um that's being custodied for the ETFs is at Coinbase. Um I was dead wrong about this. Prior to Coinbase coming public, I said I said very publicly and incorrectly. I viewed the ETFs as being competitors to people having Coinbase accounts. Why would you even bother opening an account and trading crypto at Coinbase if you can just do it at Fidelity and Schwab? Horrible take turn. >> It takes a big man to admit where he got it wrong. >> Very big man and horrible horrible take, but I'm on the record and everyone knows I said it. Okay, so that was wrong. What ended up happening was it was such a hugely beneficial thing to the overall crypto ecosystem that it was a net positive, but also you guys became a substantial player in the ETF product. So talk to me about um why that's so important to you and what you see happening there these days. I think it just further cements that we are the partner of choice. We have built a platform that is institutional grade that you've had these large reputable asset managers kick the tires of our platform and compare us against many others tradi players other crypto players and overwhelmingly chose us. But what we are trying to do as I mentioned in the opening like we are trying to become an infrastructure supplier to the overall crypto economy. And so that is our deep liquidity on our exchange. That is our custody platform where we can custody all types of these bare instruments, different protocols with different security considerations. We are unique in this. We've done this for over a decade to safely store these assets. And this is where it enables other banks, other fintexs to build on top of us. And so the custody is the route. We announced in the second quarter for example that PNC bank is a new partner of ours where they have chose us to embed our products underneath their platform so they can offer crypto trading and storage to their customers. >> So it's just further support for us being the platform of choice of large institutions to turn to when they want to build. >> You're the picks and shovels or the arms dealer in that analogy. You don't care if Black Rockck Garners more uh Bitcoin assets for their fund this month versus another player or another player. It's just about you can work with everyone and they can all use your systems. >> We want to see the partners succeed and indeed thrive. And by the way, you were hardly the only one to to raise those questions or concerns a short while ago. I will tell you I mentioned um the DC circuit's seminal decision ordering the SEC to um issu grant those uh ETF applications. We actually issu we actually filed in that particular case that Gayscale brought uh to to achieve that result an amus briefing. I can't tell you the number of people who reached out to me afterwards and said why are you guys supporting a firm looking people trading u crypto on your platform if they can just do it in an ETF. But you guys had the forethought to understand the bigger picture. Um, Robin Hood would say that they are as large a player in crypto as you guys are. But then they also transcend crypto with a brokerage uh platform and custody for traditional assets. How long before you guys have to acquire Interactive Brokers or Public or E Toro or a Trady brokerage firm so that you also can offer stocks because in the eyes of the consumer, the younger brokerage account holder, they don't see the difference. They would love to be able to do everything and all in one place. So, you have meetings about that? You thinking about starting your own? Where where does that have to get to? >> Absolutely. And as we shared on our second quarter earnings call, it is our vision to be the everything exchange. Our vision is to bring every one of those assets onchain. >> This is a critical difference, which is the critical difference. Tell me about that. So, just like we've been talking about decentralized finance, the ability to self-custody, to own your own assets, we want to bring all of those assets, securities, prediction markets, commodities, real estate, restaurant shares, you name it, assets, broad categories of assets on chain as tradable, ownable individual assets. We started with being the easiest place to buy spot commodities, Bitcoin, Ethereum. Recently we've been diversifying into derivatives and so we launched futures. We now have 247 futures in the US. We just closed our acquisition of derbit which is going to bring options to the platform. So now we have spot derivatives. The next frontier is equities and the next frontier is being able to offer tokenized equities. We haven't given the exact road map of how we will do that but we believe that we also need to bring that to our >> get a brand new set of uh competitors. You're going to get Vanguard, Schwab, Fidelity in addition to all of your crypto competitors. >> We are. We are. It'll be a deep friendmy and coopetition space. >> Okay. >> Why are spreads still so wide with spot digital assets? Like why am I paying Robin on 85 basis points and whatever you guys are taking? It's not nothing. Why is that still the case? >> It's not commoditized yet quite candidly. So I think that what you see is when things become commoditized, spreads will compress. When things are broadly available, when you can then buy every asset everywhere, you can stake your Ethereum and Salana on every platform, you'll start to see spread compressions. We offer a more differentiated experience today where products and the depth of our products have enabled us to have premium pricing. We run price experiments all the time, but we absolutely believe with commoditization will come spread compression. >> Why do you think more people don't use more traders don't use Coinbase Pro? Are they not familiar that that's an option? >> Everyone's familiar is an option. It's sidebyside in the app. I think that people enjoy the more simplistic experience. >> You can miss it. >> Fair. I'll take the feedback. >> We also have Coinbase One. So, we have tiered pricing where you can now even pay $5 a month and get fee free trading. So, we offer a number of ways. >> I didn't know that. I would have I would have signed up for that. I will sign up. >> Brand new brand new day. The day is young. You >> know, okay. >> Um, you guys have been striking tons of deals with some really big players. I know Michael wanted to make sure we asked you about uh the JP Morgan deal which is fresh I think last week or the week before >> two weeks two weeks the biggest bank in the country and >> the largest bank in the country one of the largest financial institutions in the world >> and pretty vocal about like Jamie Diamond was not shy about his feelings about the >> they have not been shy in the past that's for sure >> so this has got to be a huge win for you guys >> but their customers want to be in the right thing >> yes exactly they are and they've been an important partner of ours they've provided bank accounts to us for years and we're really pleased to continue to broaden the partnership. But I just want to underscore partner of choice. Yes, JP Morgan chose to partner with us. We're now enabling more and more on-ramps to crypto by enabling their credit card customers to redeem points into our platform. >> I mean, who else were they going to choose? I mean, maybe that's credit to you guys, but >> but this is credit to ours. We've built this space. We are the infrastructure provider of this space. So, >> we've done it in a completely compliant way from day one. I think that has also been a critical element of our appeal to our partners. Another coming unlock is banks and they they spoke about this the head of the FHA said this is coming. The ability for banks to look at your digital assets as assets that count towards your net worth as opposed to we see you have $100,000 in Bitcoin, sell it, convert to cash. We'd be happy to lend loan against it. >> That's right. I think we'll unlock collateral to pledge against various loans you're taking. This is all coming and I think maybe we should go into market structure because I think market structure rules are critically important to us looking at all of these assets as collateral for the enabling trading and cross margin as well. >> What do so tell tell our audience what you mean by market structure and why is that relevant to this? >> Yeah, by market structure we're referring to maybe the most important piece of the legislative puzzle that uh the industry as a whole and Coinbase in particular have been working on Capitol Hill now for well over 18 months. Just recently, you saw Congress pass and the president sign a massive new bill on stable coins genius act and we're thrilled to have it and we're grateful to the political leadership for that will. Um but the market structure legislation that we believe is critical to completing this the task at hand um remains pending in in the Congress and um awaits you know a final vote in the Senate to match the vote in the House so that we can see this thing signed by the president in short order. What a market structure bill will do uh among other things is confirm for the first time a framework for deciding what assets may fall to the federal securities laws and which assets are properly treated as commodities. What is the appropriate role for the SEC in that world versus the commodity futures trading commission? What requirements need to be in place for disclosures so that people acquiring digital asset commodities can understand what it is they're buying and what it is they're getting. Um so these basic uh standards need to be in place um in order to provide full confidence and full clarity. Hence the name of the legislation in the house um on these issues. But the good news is we think this is coming. Um the president made it very clear he expects to see a bill sign uh passed by the uh congress uh this year that he can sign and uh leadership in the Senate is working diligently to >> Is there division though in the community amongst the diehard crypto native people who would say why do we want this? leave us outside of the financial system. We're decentralized. We don't need rules. We don't need frameworks. What we need is to be left the hell alone. Yeah. That kind of crypto libertarian mentality still does exist. Or is it sort of dying down as >> even the hardcore crypto people realize >> it's a fairy tale to exist in your own bubble and you have to learn how to play? Yeah, there there there are still purists out there to be sure, but I to them what I would what I would say is, you know, let's not forget recent history. We saw that what we saw what can happen in the absence of legislation when an administration comes into power. Yeah. They're they're going to rely upon regulation by enforcement in the future just as they have in the past because the current law doesn't provide for guard rails around that. What this market structure bill, this clarity act passed in the house um will would do is finally enshrine in US law standards that limit the ability of a new administration or new regulators to take a very different view. And I would say even in a world where we have very positive um of uh even visionary leadership from the regulators like we do right now. Um, just look for example at the recent speech that SEC chair Paul Atkins gave laying out a vision for crypto that I think could not have been uh more more expansive and and welcoming. >> Almost as if the industry itself wrote the speech and pass. >> Well, I can't I can't say any of us picked up the pen, but I certainly didn't have any I didn't have any red lines for him if that's for ask a personal question. Okay. Um you're a veteran of Facebook where um you worked with uh Mark and Cheryl in the endless uh battles with Congress, various agencies, foreign governments, foreign regulators. You're a wartime consiguary. What do you do now? The industry is at peace. Some would say the industry is more influential over the government than any other industry in the country. I'm not suggesting that that's a negative thing. It seems like it's constructive. I don't see who the victims are, quite frankly. Um, the more your industry institutionalizes, the better for the retail community. So, I I'm actually in favor of all of it. So, I don't want to sound overly cynical. What does someone like you do now that you're not at war and you're not forced to sue your own regulator and you're not necessarily battling with 50 different states individually? What's the >> Well, I appreciate the uh the reference to one of my favorite films of all time, The Godfather. >> Godfather. So you you you were definitely a wartime consumer at Facebook in 2016. I think we could all establish that. >> Well, look, the reality is that even though we are in a much more favorable climate at the federal level today than we were just a short time ago, um there are real challenges that remain. I would start with, for example, the states. Not all of the states have fallen in line. Several have chosen to continue this senseless and >> which are the most which are the most um uh anti-crypto right now? Well, I would say that the handful of states that have chosen to pursue uh uh litigation even after the SEC withdrew its entire campaign would be at the top of my list. Right now, for example, Coinbase faces a completely meritless lawsuit by the state of Oregon for some reason that doesn't um seem to understand that it's 2025. It's not 2023. Um but we'll deal with that in in short order. And we also have, I think, um important issues to resolve outside the United States. We tend to focus only on Washington for obvious reasons here in the US, but there are other jurisdictions I think that are further behind where the current administration is on crypto policy. And now we need to make sure that they catch up. >> So your work is not quite done. >> Not quite. >> Okay. And one for Alicia. Alicia, last one for you, at least for me. I've listened to you over the years on the quarterly calls. Um, how has that changed from your perspective over the years? What are investors giving you in terms of roadmap, benefit of the doubt, higher multiples, all that sort of stuff versus say a couple years ago? >> Well, a couple years ago they were worried that we wouldn't exist after FDX. It was some pretty dark days. Now people are very focused on the future. Everyone's excited about the product roadmap. They are very excited about what we're building next and less focused on what are your expenses quarter to quarter. So I think that we now need to execute. We need to deliver on our roadmap that we have set forth a very exciting vision with everything exchange and continue to show the discipline of managing our expenses and continue to show topline growth. >> It's a great thing that I get fewer and fewer questions on the quarterly earnings calls than I did just a short while ago. >> Yes. >> Yes. Uh I would agree. The less you're talking the more positive the environment. >> We should all look to hear much more from Alicia than me. That's for sure. Well guys, I want to tell you um in the uh relatively short time this has been a publicly traded company, you guys have done an unbelievable job for investors. Stock has done very well. I know u most people would say you've done a great job for the customers of the company as well. And uh we really appreciate you stopping in talking with us and sharing your story with our uh listeners and viewers. Thank you so much. >> Thank you for having us. >> All right, guys. Make sure to like and subscribe. Um, go ahead and uh where where should people check out more information about the latest doings at Coinbase? Where can we send them? >> Well, there's always coinbase.com, but I am on X and uh posting frequently at I am Paul Greywall. I'd also encourage everybody to check out um our uh our our presence uh on Discord and uh Telegram and elsewhere where we have a pretty active presence as a company. >> I like that they're talking. Coinbase Coinbase talks. Okay. A lot of a lot of financial institutions don't really talk and you guys talk. So, all right. Congrats on all your success. We appreciate it and we hope to talk to you in the future. >> Thank you. >> Thank you.
How Coinbase Became the Godfather of Crypto | LFTC
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Transcript
[Applause] [Applause] Ladies and gentlemen, welcome to live from the compound. Uh, Coinbase has become one of the largest financial companies in the United States over the last few years with a market cap of almost $80 billion. Uh you guys, I don't know if you know, you are a top 25 market cap in the XLF right now. Um pretty big. Okay. Um Coinbase is now larger than NASDAQ, larger than MEI, and larger than the CBOE. Just to give you guys an idea of the scale of this company, um you are the Coinbase the sixth best performer in the sector year to date as well. uh you've reported 245 billion in assets and over 80% of the assets of the Bitcoin and ETH ETFs are held at uh Coinbase. Our guests today are Paul Gruell, the chief legal officer of Coinbase Global, where he is responsible for Coinbase's legal compliance, global intelligence, and government relations group, and Alicia Hos, who is the chief financial officer of Coinbase, where she has served in that role since 2018. Guys, welcome to the compound. Thank you for being here today. >> Thanks for having us. >> How's that for an intro? Pretty good, right? >> I'm pretty damn good. >> Alicia, what would you give that out of 10? I want to just note that we have over 400 billion of assets on our platform forever. Uh 400 billion. Let me correct the record. All right. Um guys, what is it like being on the management team at the largest crypto business in the world? How does it feel? What is the day-to-day like these days? It's pretty exciting. I would imagine >> we're pioneers. Okay. >> It feels like you're sitting on the brink of history and watching the world transform in front of your eyes. It's incredibly motivating. Yeah, it really feels like the world is changing quickly around us and we get to play some significant part in seeing what that change looks like in the future. >> I think the world is changing but then you guys are also responsible for shaping that change and I know that's very deliberate. I know that's she's she's pointing at you. I know that >> he's opening doors for us. Opening doors and then we have to chase >> knocking a few down as well but yes >> knocking down some doors. Okay. Um I think we want to where do we want to start? >> So Bitcoin let's start with Bitcoin. Bitcoin started, I think, as self-s sovereign money. It is yours. The government can't seize it. Like, it is yours and it is yours alone. And the story has evolved a lot over the years um to the future of finance. But it seems like the story today is a new asset class. Last week, Eric Belrunis reported that spot, Bitcoin, and Ether ETFs did about $40 billion in volume this week. And if you just look at the ETFs alone, that's like it's up there with VO and the Q's in some case bigger. Like >> to me right now, the story is about crypto as an asset class. Is that how you guys see it? >> That's the first chapter. We see crypto as an asset class, being a foundation, but then we think of crypto moving to a financial asset in which you can transact, you can use it for lending, you can kind of broaden the financial transactions versus just a store of value and a savings vehicle. And then we think of crypto as an app platform. And that's where it gets really exciting about like thinking about base as a layer two where we're seeing new social, new messaging, things built on top of crypto that's embedding data and dollars all in the same platform. So we think about it as we've moved from this offline world to online world and now we're moving onchain. And that is then the evolution of crypto, an asset, a financial system, an app platform. >> Yeah. And I think that evolution from offchain onchain into an app platform is what creates some of the most interesting but frankly challenging regulatory issues that we've confronted. But what's also I think unique about crypto is that all of this has taken place in the course of roughly a decade. I don't think we've ever seen that in global financial history. How much of what you guys are building is looking at the analog or the tradition traditional world and saying let's do the digital equivalent versus truly pioneering things that no one is doing in any way shape or form. Like if you could maybe talk a little bit about why you're able to move so rapidly because there is this groundwork laid by traditional finance but then like going in off into areas where people are like wait what are you doing because it seems like you're doing both at the same time. Do you want to start or should I start there? >> I'll start there. Okay. Um I I would say that um what we are what we're doing um certainly builds upon I think a lot of traditional financial infrastructure and you know I think in the first instance um Bitcoin and later digital assets that followed were about offering alternatives to that system that frankly weren't serving a lot of people. The reality is that um even in the United States let alone all over the world today access to the financial system is limited for way too many people. And so I think correctly the industry as a whole and certainly Coinbase in particular has focused on that as an initial priority. But as Alicia alluded to, the goal here is much bigger than that. The goal is to build a true platform for all sorts of decentralized applications that can go far beyond just asset speculation, appreciation, trading, and the like to really fundamentally changing how people interact with their data online and ownership of their identity online in ways we think are powerful. One of the um one of the things that the crypto skeptics have been saying all this time is if I'm not Venezuelan, there really is no day-to-day use case for me other than speculation or accumulating wealth. I would argue it's been an incredible tool for accumulating wealth just looking at the prices. Like it's been really hard to at least in the last couple of years lose money in cryptos. Okay, so we know that works. How do you answer those skeptics? What do you tell those people about the daily use case of crypto who just don't see one or maybe it exists in the background but they don't know that they're interacting with crypto or like what's what's your answer these days to those people. >> Crypto is more than just Bitcoin today and I think that you have to look at what are the pain points of each individual customer and how can crypto solve their problems. Yes, Bitcoin and Ethereum, many of these assets have been tremendous investment returns, but you also now have stable coins with product market fit that are enabling faster, cheaper transactions. You have the emergence of decentralized social and what we're seeing with decentralized social and we have a product that is in its beta. We are just onboarding to it. It's this magic moment of if you're a creator and you are posting content, that content now is a coin. You own that content. You can monetize that content that immediately flows into your wallet. From that same wallet, you can send a payment. You can buy a crypto asset. It's combining social trading, payments, identity, messaging, all within super apps. And so, just reducing friction, lowering costs, giving it more boundaryless transactions was what we see the real value out of crypto in people's lives. >> Can we double click on that? In the creator economy, you still have gatekeepers. They're different than the prior gatekeepers, but his Patreon, his Only Fans, his Instagram, his Tik Tok. What you're what you're describing sounds like a direct payment to a creator who can then put their content anywhere. Um, but surely you're going to want to get paid for that, too. So, do you just replace the existing gatekeepers or are you suggesting an entirely different sort of experience? Well, I think payments are certainly an important part of um the opportunity um that crypto offers to content creators, but payments are just the beginning. Fundamentally, what we're talking about is ownership, right? In the traditional web 2 world, who owned uh the content that so many creators added to that uh to those platforms that drove a lot of the value? It wasn't the content creators, it was the platforms themselves. With decentralized um assets and with cryptocurrency, you offer the opportunity for the content creators themselves to own their identity and own the content in ways allow them to port that content to whatever platforms allow them to reach their intended audiences and share value with those audiences ways that they deem most appropriate and most valuable. That's the fundamental opportunity that we see there. >> So that's the transition to an app platform, you know, financial app for >> That's right. >> Okay. Um, so this is in distinction with let's say your former employer, Facebook, YouTube. Um, so basically you'll have a scenario where people can take full ownership of their work, not just contribute it to someone else's app or someone else's website, but they do have to put it somewhere. So I it sounds like it's going to be a situation where it's a little bit of both and not fully I have my own video platform now, right? Am I describing that? I think that's right. But I think what's important to understand is that in in that in in in this scenario, in contrast to the the old world of web two, the content creator makes that choice. The content creator decides where that where that content is hosted. That content creator decides how fans and and and and audiences will interact with that content and on what terms. And that ownership, that uh uh independence, that autonomy, we think it's what fundamentally different from the old gatekeeper world model that you were describing. I think part of the problem with crypto branding for the average person who doesn't see the technology doesn't understand the dollars that are extracted from the financial companies from the system all they know about are the scams and they remember FTX the collapse in 2022. Um, how surprised are you that the price of Bitcoin fell from 70,000 down to what it bottom 15 something like that >> and like two years later or thereabouts wherever it was it was at all-time highs and itexed from those levels. How damaging was the collapse to trust in crypto? And how surprised are you that it's only 3 years later and we're we're so back all the way back. >> Were you surprised, Alicia? I wasn't surprised. No, >> I think >> which part weren't you surprised by? The rec the fall or the recovery or both? >> Both. I wasn't surprised for either. Okay. >> Because when you saw the collapse, there was a lot of leverage in the system. So, whenever you have a highly leveraged environment and you have an event like FTX failure, you're going to watch a downward price trajectory. However, at the same time, we were watching new corporates on board into crypto. We were seeing new participants go like, "This is a buying opportunity. wanted an entry into this asset class. There was a huge chilling effect on the industry though because everyone reunderrote every platform. They said, "Could Coinbase be the next FTX? Coinbase, what are your controls?" Banks were definitely fearful of then interacting with these crypto companies. What did they not know? So, we definitely went through a re-education process. We had to really rebuild trust in the underlying controls and infrastructure. But once we did that with the tailwinds that we now see, with the regulatory clarity, with the increased institutional and government interest in this asset class. I'm not at all surprised to see the essential price as well. >> How much of the uh of the recovery that Michael's referring to? Um can you point to the fact that Trump won and Trump was highly supported by people who are crypto positive? Um because there's another world in which Trump doesn't win and your day is probably being spent very differently and your day is probably being spent very So like would you say that's 50% of the story of Bitcoin running to 125,000 or 30% like what would you handicap that uh election being >> well I don't think there's any question we now have the most pro- crypto administration in history and I don't have to imagine what that world could look like very frankly because frankly the previous four years uh offered us a tangible example of what um a hostile attitude not towards not just uh an American industry but frankly an American innovation could and would look like. There's no question though that the political support for crypto has now gone far beyond just the Trump administration or a a a small set of early adopters on one side of the political aisle. We've seen now because we've seen votes taken in Congress and legislation passed that Democrats and Republicans by and large understand that crypto is going to be part of the financial system and financial future of this country. And so we need sensible rules, sensible standards to govern that to protect against, you know, collapses like FTX and to make sure that people are kept safe even as they invest in this new opportunity. Are you surprised the Democrats weren't strategic uh and and smarter about recognizing that there was this huge demographic and it's young and it's energized and it wants to affect change. Are you surprised that they didn't grab that opportunity to be the party of crypto prior to Trump coming along? >> Well, some Democrats absolutely grabbed that opportunity. We've seen that actually here in New York with leaders like Congressman Richie Torres, Senator Christian Gillibrand who have staked out a very early claim to sensible ideas and sensible standards for crypto that are reflected in the legislation that was passed. What I think was disappointing and what you're alluding to was the fact that the previous administration, the Biden administration, as well as the Harris campaign, just couldn't get their minds around what opportunity crypto offered to the very con constituencies and communities that they purported to want to champion. We met over and over again with the previous administration and with that campaign to try to lay out for them the case for crypto for the very people that they sought to champion. And yet over and over again, we just saw either um a disdain at the very least or an outright hostility that was extremely counterproductive and ultimately I think cost them in that election. I >> think that's a good segue. I want to ask you about something that you guys did that almost no financial institution would um have the courage to do. Some would say the huts to do, but you guys sued the SEC. And uh it's it sounds like that was coming I mean obviously it's coming from Brian Armstrong the top down. Um it took a lot of guts but you actually won and uh it took a really long time. Um talk talk a little bit about why that was so important uh for you guys to once and for all say current securities regulation just does not apply or is not written so as to make it conducive for our industry and we need something different and you need to listen to us. What was that decision-making process like? how many sleepless nights and what did it feel like when uh things ultimately fell your way? >> Well, I give our CEO Brian Armstrong and our board a lot of credit because the um the decision to take the fight to the SEC um head on um was not an easy one and certainly ran against all conventional wisdom at the time and maybe even since then. I will certainly say that when I attended law school nearly three decades ago, maybe the second or third lesson, if not the first lesson that we learned, the very first uh day of class was don't sue your primary regulator. Um and yet there we were uh in 2021 already seeing that that day would come for us and then ultimately we were confronted with and forced to pull the trigger um on that in 2023. Look, I think if you just take a half a step back, it can seem like ancient history now, but not that long ago, we were in an environment where um the previous administration made it clear they did not want to see crypto flourish in this country. In fact, in many quarters of the White House in particular and um certain leaders um on on Capitol Hill, particularly Senator Elizabeth Warren, there was a mindset of let's try to drive this thing underground at the very least or out of the country entirely through lawsuits. We won't pass rules. We won't tell people what the standards are. all that we're going to do is take them to court and either grind them into submission or ultimately um make it so impossible for anyone in crypto to operate in the United States that people would leave voluntarily. And so in that environment and against that challenge, in some ways the choice was actually relatively easy because what other choice did we have? Nevertheless, I do think Brian and the board deserve a ton of credit because the fight was not only for Coinbase's survival, but frankly the thriving of the industry as a whole long term. And um it's maybe the thing I'm most proud of that we've done as a company. >> Can uh given the size of Coinbase, can you truly say that this is a decentralized asset class in the way that the original uh Satoshi paper laid out? Like can we all kind of admit that maybe there's a limit to how decentralized anything of this size can really be? and that ultimately throughout history, crypto or otherwise, power tends to consolidate uh and and institutions tend to get large when there's money in motion. Like we can kind of all I think say >> no, not if you're in our executive meetings. >> Okay. >> Um >> that's still an important part of the ethos what you're saying. >> Incredibly important part. >> Okay. Talk about that. >> I think we might be the only company that is actively working to decentralize everything that we do to ensure that each one of our customers has the ability to withdraw their crypto to a self-custodied wallet to take their money anywhere around the world, pass through borders, that we fight through legal and policy efforts, that we build products to enable this, that we are bringing in decentralized applications into our main platform to give our customers direct access to moving into onchain apps. We are not putting up barriers. No, >> we are doing quite the opposite of trying to really encourage this movement into an onchain economy. >> I think we have a record to prove that. I mean, it it really goes back to, for example, the very first significant win in our fight with the SEC was establishing legal clarity for non-custodial wallets is falling outside the scope of the federal securities laws. That was huge. That was huge. If you look at sort of where we're really drawing hard lines and in our advocacy efforts for new legislation, DeFi and protecting DeFi is critical. You could argue that each of those efforts and a dozen others I could list actually run counter to our narrow short-term self-interest as a company. But our vision is for something much bigger than just as you would suggest by your question replication or duplication of the way we've run the traditional financial system for decades in this country. >> Tailwinds for crypto right now there's a lot. Um I think maybe number one is a lot of people still don't own it. in fact like nobody owns it practically speaking. Um, and the limited supply and the race to own it. Then there's the political landscape. There is the ETF which was enormous. That was the spark that lit the latest bull run. Um, one of those tailwinds though can potentially turn into a headwind. I don't know when or how or why, but the number of treasury Bitcoin treasury companies that are using you guys, I would assume in many cases to secure their Bitcoin and to store it. Um, so Sailor tweeted this morning, Strategy has acquired 430 Bitcoin. Uh, they now hold or hold, excuse me, 629,000 Bitcoin. Acquired for, not worth, acquired for $46 billion. in and this is from the FT. In the year to August 5th, some 154 public companies have either raised or committed to raise a combined total of 98 billion to buy crypto. Um, I don't know what stops this, but the more and more companies are getting in on the action simultaneously has to excite you. This company ETZilla just recently converted, this is today. It's not that noteworthy other than it was today. converted from a biotech company into an ETH treasury company. So on the one hand a rational person sees this and this says like all right time out like I this is getting crazy I want to get off the train. But the other person might say but this is sort of one of the points is that there is a limited number of supply and there's an allout race to accumulate them which should be should be very supportive of the price but I guess does this cut both ways? like what happens if there's a geopolitical event and at the end of the day these are risk assets and they can go down and interest can wayne. So how do how should investors think about the simultaneous tailwind that can might turn south in a hurry. >> I think you have to have a long-term hold on these assets. These are not assets that should be viewed as linear risk-free assets where you're looking for great annual or quarterly returns. We've seen crypto go through cycles. Even ignoring the 2022 events that led to a significant decline. Prior in 2017 and 2015, you saw definite waves. If you zoom out, Bitcoin, Ethereum have had long returns over time. And so, you have to take that long-term mindset. These are store of value assets. These are not daily speculative assets for the majority of investors. What I think about these treasury companies though is very few institutions had access to buy spot crypto commodities. Many funds have a prohibition. They couldn't buy ETFs. They couldn't buy spot bitcoin. They couldn't buy spot ethereum. And so they're using these as equity rappers because they can hold equities. And so it's introducing new capital into the crypto ecosystem. What I think is an untested theory is is this a moment in time and will the world change where then more investors can go into spot commodities once you have market structure in place? Will funds change what their investable asset classes are over time? But these rappers are just giving more and more capital access to crypto since really what they're doing. Well, >> I think everyone would like to be long-term and zoom out and historically if they had done that it will would have served them well. But there's a lot of leverage in the system as a result of the Bitcoin and the ETH treasuries, and that doesn't allow you to zoom out always. Um, when you get a margin call, you can be as long-term oriented mentally as you want. Financially, you have to come up with the money. I think that's the risk that Michael's alluding to. Do you think that there's as much or more leverage currently given the the size of these crypto treasuries as there was back in 2022 or is it a different type of leverage that maybe >> it's a different type of leverage but it's hard to tell because you don't have transparency into the global holdings and you have a lot of crypto held not outside the US in companies that don't have any financial reporting obligations which makes it very difficult to look at total leverage in the system today >> if you think about so Bitcoin has been the best performing asset over the last 10 years, right? Since inception, it's crushed everything. There's nothing that's even remotely close. As you think about the future opportunity set and as Bitcoin matures, you would expect all else equal that volatility will come down a little bit. >> And that returns cannot possibly continue to compound that 50 60% because ultimately it will swallow the globe in just terms of asset size. We were talking recently about this. How do you think about the size of Bitcoin? because it's not a market cap like equity is which means that maybe the size of it can be way larger than we think because it's not a true market cap. >> Correct. >> So like talk about how you think about supply price. >> If it's if it's not a stock and we know it's not then maybe market cap is just a term we're borrowing from TRDFI that's not applicable. So maybe we need to think about it like the supply of US dollars. Well, I think it is an out it is a bit of an outdated or outmoded term of market cap. >> Yeah. Because if you think about it right, even even now under US law after a lot of struggle and and a lot of heartache, we have established that Bitcoin is not a security. It is not an equity. It is properly considered as as a commodity. Um and and I think treating it and considering it as a commodity class is probably a better way to think about it. The other point I'll just make in terms of like its potential for growth, I think you're exactly right. we don't need to see compound annual growth in terms of historical norms for Bitcoin to continue to grow and continue to play a much larger role in our system. Um, and I think that's in large part because now we not only have the ability to buy and acquire and hold Bitcoin um in custod in in custodial wallets and non-custodial wallets um by individuals, but we have a lot of other ways to get at the asset class. There are the digital asset treasuries for sure. strategy is certainly one way to go about it, but the ETFs you mentioned earlier, I think were the catalyst for so much retail and institutional adoption. I actually think in terms of the law, the single most significant event in the history of of of crypto was the decision of the DC circuit forcing the SEC to grant those ETF applications have been pending for years. That was a watershed moment and that has brought in a whole new class of investor that has access to this market that never was there before. >> I think it smooths out the flows into into the asset class because it's not fully reliant on people who decide every day I want to place a crypto trade. Now you've got money coming from the asset management world, pensions, insurance companies, wealth management, where it's scheduled each month I buy X dollars of uh >> you know the bit one of these Bitcoin ETFs or every time I rebalance my portfolio or whatever the case may be. I think it kind of that decision to your point for me that was a moment where it's like okay this is now permanent. You can't get rid of this now. It's financial system. >> The game is now on. >> All right. You guys mentioned uh stable coin. Stable coins had a big moment this summer. I have to be honest with you. I read the S1 and then I listened to the last uh earnings conference call. I still don't understand why Coinbase allows Circle to exist. Why isn't it the Coinbase stable coin? Why why are you guys taking marketing or distribution fees from a company that you could very easily just replicate overnight? What's the rationale behind doing that? And I know that's a client of yours, but like >> it's an important partner of ours. >> It is. >> I I understand all that and I know why it is, but why don't you guys just do your own? >> We really firmly believe that you need to have network effect in stable coins and we want many distribution partners. We want to have an interoperable stable coin. We want to build stable coins as a utility layer of the overall crypto ecosystem. And we thought starting in 2018 when we partnered with Circle to create USDC that doing this as a multi-party ecosystem was the best way to do that. We have an important role in this through distribution. We were a key catalyst in getting USC adopted by DeFi really embedding it into like the trading community because we have such a large exchange and distribution capability. But we are both incentivized to add even more partners. We want to add more people. We want to add more on-ramps and off-ramps, which is why we partnered, for example, with Shopify to embed USDC to Shopify's merchants and why you see Circle going out and bringing their own partnerships to the table as well. This is going to be a utility that we bring to this overall. >> Most of the money in Circle to be clear though is custody to Coinbase or or do I have that wrong? >> We hold more assets on platform than they do at this time. So at the end of the second quarter, we had over 14 billion on our own platform, but that's out of the 60 billion in the overall ecosystem. So a large percent are just held in self-custody wallets, held in DeFi protocols, distributed throughout the ecosystem. >> I think that distribution in 2025 and presumably, you know, beyond validates the original vision back in 2018 that more participation, broader distribution and ecosystem would lead to greater adoption. Um, how important are ETF custody and trading solutions? We referenced this statistic before that about 80% of the money um that's being custodied for the ETFs is at Coinbase. Um I was dead wrong about this. Prior to Coinbase coming public, I said I said very publicly and incorrectly. I viewed the ETFs as being competitors to people having Coinbase accounts. Why would you even bother opening an account and trading crypto at Coinbase if you can just do it at Fidelity and Schwab? Horrible take turn. >> It takes a big man to admit where he got it wrong. >> Very big man and horrible horrible take, but I'm on the record and everyone knows I said it. Okay, so that was wrong. What ended up happening was it was such a hugely beneficial thing to the overall crypto ecosystem that it was a net positive, but also you guys became a substantial player in the ETF product. So talk to me about um why that's so important to you and what you see happening there these days. I think it just further cements that we are the partner of choice. We have built a platform that is institutional grade that you've had these large reputable asset managers kick the tires of our platform and compare us against many others tradi players other crypto players and overwhelmingly chose us. But what we are trying to do as I mentioned in the opening like we are trying to become an infrastructure supplier to the overall crypto economy. And so that is our deep liquidity on our exchange. That is our custody platform where we can custody all types of these bare instruments, different protocols with different security considerations. We are unique in this. We've done this for over a decade to safely store these assets. And this is where it enables other banks, other fintexs to build on top of us. And so the custody is the route. We announced in the second quarter for example that PNC bank is a new partner of ours where they have chose us to embed our products underneath their platform so they can offer crypto trading and storage to their customers. >> So it's just further support for us being the platform of choice of large institutions to turn to when they want to build. >> You're the picks and shovels or the arms dealer in that analogy. You don't care if Black Rockck Garners more uh Bitcoin assets for their fund this month versus another player or another player. It's just about you can work with everyone and they can all use your systems. >> We want to see the partners succeed and indeed thrive. And by the way, you were hardly the only one to to raise those questions or concerns a short while ago. I will tell you I mentioned um the DC circuit's seminal decision ordering the SEC to um issu grant those uh ETF applications. We actually issu we actually filed in that particular case that Gayscale brought uh to to achieve that result an amus briefing. I can't tell you the number of people who reached out to me afterwards and said why are you guys supporting a firm looking people trading u crypto on your platform if they can just do it in an ETF. But you guys had the forethought to understand the bigger picture. Um, Robin Hood would say that they are as large a player in crypto as you guys are. But then they also transcend crypto with a brokerage uh platform and custody for traditional assets. How long before you guys have to acquire Interactive Brokers or Public or E Toro or a Trady brokerage firm so that you also can offer stocks because in the eyes of the consumer, the younger brokerage account holder, they don't see the difference. They would love to be able to do everything and all in one place. So, you have meetings about that? You thinking about starting your own? Where where does that have to get to? >> Absolutely. And as we shared on our second quarter earnings call, it is our vision to be the everything exchange. Our vision is to bring every one of those assets onchain. >> This is a critical difference, which is the critical difference. Tell me about that. So, just like we've been talking about decentralized finance, the ability to self-custody, to own your own assets, we want to bring all of those assets, securities, prediction markets, commodities, real estate, restaurant shares, you name it, assets, broad categories of assets on chain as tradable, ownable individual assets. We started with being the easiest place to buy spot commodities, Bitcoin, Ethereum. Recently we've been diversifying into derivatives and so we launched futures. We now have 247 futures in the US. We just closed our acquisition of derbit which is going to bring options to the platform. So now we have spot derivatives. The next frontier is equities and the next frontier is being able to offer tokenized equities. We haven't given the exact road map of how we will do that but we believe that we also need to bring that to our >> get a brand new set of uh competitors. You're going to get Vanguard, Schwab, Fidelity in addition to all of your crypto competitors. >> We are. We are. It'll be a deep friendmy and coopetition space. >> Okay. >> Why are spreads still so wide with spot digital assets? Like why am I paying Robin on 85 basis points and whatever you guys are taking? It's not nothing. Why is that still the case? >> It's not commoditized yet quite candidly. So I think that what you see is when things become commoditized, spreads will compress. When things are broadly available, when you can then buy every asset everywhere, you can stake your Ethereum and Salana on every platform, you'll start to see spread compressions. We offer a more differentiated experience today where products and the depth of our products have enabled us to have premium pricing. We run price experiments all the time, but we absolutely believe with commoditization will come spread compression. >> Why do you think more people don't use more traders don't use Coinbase Pro? Are they not familiar that that's an option? >> Everyone's familiar is an option. It's sidebyside in the app. I think that people enjoy the more simplistic experience. >> You can miss it. >> Fair. I'll take the feedback. >> We also have Coinbase One. So, we have tiered pricing where you can now even pay $5 a month and get fee free trading. So, we offer a number of ways. >> I didn't know that. I would have I would have signed up for that. I will sign up. >> Brand new brand new day. The day is young. You >> know, okay. >> Um, you guys have been striking tons of deals with some really big players. I know Michael wanted to make sure we asked you about uh the JP Morgan deal which is fresh I think last week or the week before >> two weeks two weeks the biggest bank in the country and >> the largest bank in the country one of the largest financial institutions in the world >> and pretty vocal about like Jamie Diamond was not shy about his feelings about the >> they have not been shy in the past that's for sure >> so this has got to be a huge win for you guys >> but their customers want to be in the right thing >> yes exactly they are and they've been an important partner of ours they've provided bank accounts to us for years and we're really pleased to continue to broaden the partnership. But I just want to underscore partner of choice. Yes, JP Morgan chose to partner with us. We're now enabling more and more on-ramps to crypto by enabling their credit card customers to redeem points into our platform. >> I mean, who else were they going to choose? I mean, maybe that's credit to you guys, but >> but this is credit to ours. We've built this space. We are the infrastructure provider of this space. So, >> we've done it in a completely compliant way from day one. I think that has also been a critical element of our appeal to our partners. Another coming unlock is banks and they they spoke about this the head of the FHA said this is coming. The ability for banks to look at your digital assets as assets that count towards your net worth as opposed to we see you have $100,000 in Bitcoin, sell it, convert to cash. We'd be happy to lend loan against it. >> That's right. I think we'll unlock collateral to pledge against various loans you're taking. This is all coming and I think maybe we should go into market structure because I think market structure rules are critically important to us looking at all of these assets as collateral for the enabling trading and cross margin as well. >> What do so tell tell our audience what you mean by market structure and why is that relevant to this? >> Yeah, by market structure we're referring to maybe the most important piece of the legislative puzzle that uh the industry as a whole and Coinbase in particular have been working on Capitol Hill now for well over 18 months. Just recently, you saw Congress pass and the president sign a massive new bill on stable coins genius act and we're thrilled to have it and we're grateful to the political leadership for that will. Um but the market structure legislation that we believe is critical to completing this the task at hand um remains pending in in the Congress and um awaits you know a final vote in the Senate to match the vote in the House so that we can see this thing signed by the president in short order. What a market structure bill will do uh among other things is confirm for the first time a framework for deciding what assets may fall to the federal securities laws and which assets are properly treated as commodities. What is the appropriate role for the SEC in that world versus the commodity futures trading commission? What requirements need to be in place for disclosures so that people acquiring digital asset commodities can understand what it is they're buying and what it is they're getting. Um so these basic uh standards need to be in place um in order to provide full confidence and full clarity. Hence the name of the legislation in the house um on these issues. But the good news is we think this is coming. Um the president made it very clear he expects to see a bill sign uh passed by the uh congress uh this year that he can sign and uh leadership in the Senate is working diligently to >> Is there division though in the community amongst the diehard crypto native people who would say why do we want this? leave us outside of the financial system. We're decentralized. We don't need rules. We don't need frameworks. What we need is to be left the hell alone. Yeah. That kind of crypto libertarian mentality still does exist. Or is it sort of dying down as >> even the hardcore crypto people realize >> it's a fairy tale to exist in your own bubble and you have to learn how to play? Yeah, there there there are still purists out there to be sure, but I to them what I would what I would say is, you know, let's not forget recent history. We saw that what we saw what can happen in the absence of legislation when an administration comes into power. Yeah. They're they're going to rely upon regulation by enforcement in the future just as they have in the past because the current law doesn't provide for guard rails around that. What this market structure bill, this clarity act passed in the house um will would do is finally enshrine in US law standards that limit the ability of a new administration or new regulators to take a very different view. And I would say even in a world where we have very positive um of uh even visionary leadership from the regulators like we do right now. Um, just look for example at the recent speech that SEC chair Paul Atkins gave laying out a vision for crypto that I think could not have been uh more more expansive and and welcoming. >> Almost as if the industry itself wrote the speech and pass. >> Well, I can't I can't say any of us picked up the pen, but I certainly didn't have any I didn't have any red lines for him if that's for ask a personal question. Okay. Um you're a veteran of Facebook where um you worked with uh Mark and Cheryl in the endless uh battles with Congress, various agencies, foreign governments, foreign regulators. You're a wartime consiguary. What do you do now? The industry is at peace. Some would say the industry is more influential over the government than any other industry in the country. I'm not suggesting that that's a negative thing. It seems like it's constructive. I don't see who the victims are, quite frankly. Um, the more your industry institutionalizes, the better for the retail community. So, I I'm actually in favor of all of it. So, I don't want to sound overly cynical. What does someone like you do now that you're not at war and you're not forced to sue your own regulator and you're not necessarily battling with 50 different states individually? What's the >> Well, I appreciate the uh the reference to one of my favorite films of all time, The Godfather. >> Godfather. So you you you were definitely a wartime consumer at Facebook in 2016. I think we could all establish that. >> Well, look, the reality is that even though we are in a much more favorable climate at the federal level today than we were just a short time ago, um there are real challenges that remain. I would start with, for example, the states. Not all of the states have fallen in line. Several have chosen to continue this senseless and >> which are the most which are the most um uh anti-crypto right now? Well, I would say that the handful of states that have chosen to pursue uh uh litigation even after the SEC withdrew its entire campaign would be at the top of my list. Right now, for example, Coinbase faces a completely meritless lawsuit by the state of Oregon for some reason that doesn't um seem to understand that it's 2025. It's not 2023. Um but we'll deal with that in in short order. And we also have, I think, um important issues to resolve outside the United States. We tend to focus only on Washington for obvious reasons here in the US, but there are other jurisdictions I think that are further behind where the current administration is on crypto policy. And now we need to make sure that they catch up. >> So your work is not quite done. >> Not quite. >> Okay. And one for Alicia. Alicia, last one for you, at least for me. I've listened to you over the years on the quarterly calls. Um, how has that changed from your perspective over the years? What are investors giving you in terms of roadmap, benefit of the doubt, higher multiples, all that sort of stuff versus say a couple years ago? >> Well, a couple years ago they were worried that we wouldn't exist after FDX. It was some pretty dark days. Now people are very focused on the future. Everyone's excited about the product roadmap. They are very excited about what we're building next and less focused on what are your expenses quarter to quarter. So I think that we now need to execute. We need to deliver on our roadmap that we have set forth a very exciting vision with everything exchange and continue to show the discipline of managing our expenses and continue to show topline growth. >> It's a great thing that I get fewer and fewer questions on the quarterly earnings calls than I did just a short while ago. >> Yes. >> Yes. Uh I would agree. The less you're talking the more positive the environment. >> We should all look to hear much more from Alicia than me. That's for sure. Well guys, I want to tell you um in the uh relatively short time this has been a publicly traded company, you guys have done an unbelievable job for investors. Stock has done very well. I know u most people would say you've done a great job for the customers of the company as well. And uh we really appreciate you stopping in talking with us and sharing your story with our uh listeners and viewers. Thank you so much. >> Thank you for having us. >> All right, guys. Make sure to like and subscribe. Um, go ahead and uh where where should people check out more information about the latest doings at Coinbase? Where can we send them? >> Well, there's always coinbase.com, but I am on X and uh posting frequently at I am Paul Greywall. I'd also encourage everybody to check out um our uh our our presence uh on Discord and uh Telegram and elsewhere where we have a pretty active presence as a company. >> I like that they're talking. Coinbase Coinbase talks. Okay. A lot of a lot of financial institutions don't really talk and you guys talk. So, all right. Congrats on all your success. We appreciate it and we hope to talk to you in the future. >> Thank you. >> Thank you.