Good morning,

Today’s Stratechery Interview is with Coinbase Founder and CEO Brian Armstrong. Coinbase was flying high a year ago, earning billions of dollars as crypto soared to new heights; over the last year, though, as crypto valuations have crashed, Coinbase is losing money, conducting layoffs, and has seen its stock plummet by 85%.

I had a chance to talk to Armstrong about that roller coaster ride, as well as get his perspective on what happened with FTX and Sam Bankman-Fried. We also covered whether or not crypto is anything more than regulatory arbitrage, Armstrong’s desire for regulation, and whether this current down cycle is different because of the end of easy money.

To listen to this interview as a podcast — which I recommend! — click the link at the top of this email to add Stratechery to your podcast player.

On to the interview:

An Interview with Coinbase Founder and CEO Brian Armstrong about FTX and Crypto Realities

This interview is lightly edited for clarity.

Armstrong’s Background

Brian Armstrong, CEO of Coinbase, welcome to Stratechery, it’s good to have you here.

BA: Thanks, Ben. I’ve been reading your work for a long time, so it’s been really cool to have a chance to chat with you on here.

Well, I mean, I know you don’t do that much media, you’re not a big interview sort of guy, so I have to ask even before I get into my regular background question, why talk now? I mean, I could come up with reasons, there’s lots of interesting stuff going on with crypto, but I’m curious what your thinking is there?

BA: More recently I’ve been getting out there and doing lots more media just because I think in times of crisis for the industry, it’s important for me to be more visible and take more questions, and help maybe even chart a little bit of a path forward for the industry. Not to overstate our role here — I think there are many great crypto companies — but it’s really kind of given us a moment to highlight why Coinbase is different. We’ve taken a very different approach over the last 10 years in terms of just leaning into compliance and security and trust, and it’s been frustrating sometimes because it feels like we have to move a little bit slower. And following the rules is not always fast, but it’s been a good validation of our strategy. So anyway, that’s been a moment for me to come out recently.

I guess if you look over the last few years, why have I not been out there doing tons of press? I mean, Sam Bankman-Fried was famously a media darling I guess. And I don’t know, it’s a mix of things. I think one is that, naturally I’m just a little bit of an introvert. My favorite sweet spot is to be building cool products with the team, with technology, that’s the thing I like doing the most. I’m happy to do it. As a public company CEO, you’ve got to get out there and preach a little bit, but it’s not always my favorite thing.

Then I think the other shift that I’ve been making over the last three, four years has been, I want to talk with more what I call new media, or go direct to our constituents as opposed to talking as much through mainstream media. I still do some mainstream media because there are important constituents of ours on the East Coast, and regulators, policymakers and bank partners that are primarily use that as their mediums. But most of our core customer base and our employees, they get the majority of their information now through social channels or things like our podcast, or podcasts like this one. So that’s where I do 80% of my time, and then I do 20% with mainstream media, and try to avoid a journalist that’s not going to give us a fair take basically.

Well, you literally just hit on five of the questions that I had, so I’m both impressed and flustered. But let me start out as I usually do with these things: tell me a little more about yourself. Prepping for this and reading past profiles, the “shy guy from San Jose” is sort of the framing that exists. Given that you grew up in the Valley, were you always into tech? Was that the obvious career path? Take me back to a young Brian Armstrong long before crypto, or before the Bitcoin white paper. How’d you get started?

BA: As a kid I was kind of shy and nerdy. I wasn’t very confident or good at talking with people. So I did love computers, I just got fascinated with them. I had a couple of different computers in my room as a kid. I would build my own computers, learned Linux, all that kind of stuff. Eventually, in middle school or high school, I tried to learn how to program a little bit, and I didn’t understand anything that I was doing. I went and took a couple of community college classes actually, I read a couple of books. I started building websites, that was easier for me to do with things like PHP and stuff like that, as opposed to C++ which was really challenging for me, especially at that age.

And so I was trying to figure out technology. I liked technology, I just found it fascinating. I was kind of a night owl too, so I somehow end up staying up until 2:00 AM every morning just playing on my computer, reading things. When I eventually got the Internet, I was just endlessly fascinated, consuming different things. And I was a zombie in the morning, and tried to get through school, and get passing grades basically. But I was most interested in tech, and that’s what I ended up spending my free time doing. So yeah, it was an interesting thing as a kid.

Yeah, no, I can definitely relate, we’re a similar age, so I think I know exactly the steps you would’ve progressed to. Fast forwarding a bit, part of the Brian Armstrong origin story is you reading Satoshi’s white paper, and being inspired by Bitcoin. I mean, is it really just as straightforward as that? Like, oh this is cool, this makes sense, I want to make it possible for people to buy this stuff?

BA: No, I mean it’s never quite that simple. People always look back in hindsight and they tell these stories, but it was a little more complicated. I didn’t know what I wanted to do with my life. Like you were saying in your last question, I knew I was interested in technology. I’d built a couple of websites, things like that. In college, I tried starting a company which was in the tutoring space, it was not really that successful. And so after college, I went and got a regular job, and I tried working at a couple of different places. I did an internship at IBM, and I didn’t know what I wanted to do with my life because I liked programming and stuff like that. But I had tried working in big companies writing software like IBM, I didn’t really like it.

So I was kind of wandering around and I felt a little bit lost to be honest. And I was trying lots of different things. Eventually, I read this book, Seth Godin wrote it, it’s called The Dip. And it’s a simple book, but at that time, it’s what I needed to learn to think about in my life, which was, “There’s lots of things you’re interested in, but what do you love doing enough where you’re going to do it for the next 10, 20 years, and to become great at it?” Because there’s a big gap between being a beginner where everything’s fun, and then being a professional where you get paid for it. And in the middle, there’s this long slog where you need to build your audience or become professional, and actually become good enough at it.

So when I sat down with this blank sheet of paper and was kind of like, “What would I love doing 10 years from now, even if I hadn’t been very successful at it yet?”, I was doing a bunch of things at that time, like real estate investing, and learning martial arts, and random stuff. And the only thing I had on my list that I wanted to do for the long term was tech entrepreneurship. That was the only thing I could think of that I had been interested in my whole life, and I was going to be interested in it 10, 20 years from now. So I kind of doubled down and I moved back to the Bay Area, and I decided I was going to make that my life. And that definitely helped get Coinbase going in the right direction.

Coinbase’s Differentiation

So you started Coinbase originally as a way to trade Bitcoin. Over the years, I think Coinbase and you have sort of staked out a position as, if I could give you branding, it’s the one exchange you can trust if you’re an American. It’s obviously particularly pertinent these days given what happened to FTX, which we’ll get to in a moment. But I’m curious, what was that transition for you? Did you start out Coinbase saying, look, there needs to be a place that abides by US regulations? Or was this a slow realization where, okay, we started this exchange, but this is going to be a very competitive market. Abiding by U.S. law is actually a potential differentiator because lots of folks are going to Singapore, they’re going to Hong Kong, they’re going to The Bahamas, because they don’t want to deal with US regulations? And there’s a bit where all that stuff’s a big pain in the ass, but precisely because it’s a big pain in the ass, it might be a moat for us in the long term. Is that something you discovered over time, or what was the progression in your positioning of Coinbase from when it started to now?

BA: Yeah, great followup, because I realize I didn’t fully answer your question.

Don’t worry. We’re going to touch on almost everything you said, so we’ll get to it.

BA: So you’re right. When Coinbase started, I remember having this thought, which was, this technology seems super cool and super interesting, and it could create more freedom in the world, and some of the things like that, which eventually turned into the mission for Coinbase. But I also had the thought at that time, if someone’s going to do this right, they’re going to have to build a company that’s not sketchy. They’re going to have to probably base it in a legitimate area, they’re going to have to work with regulators, they’re going to have to go get a bunch of licenses.

There were a bunch of people creating crypto companies even at that time, where they were anonymous, they were pseudonymous on the Internet, and the founders didn’t even want to be identified. They wanted their identity to not be associated with their company; I was like, “That just doesn’t make sense. How are we going to get a billion people using this thing? Someone’s got to go put their name on this, and do it in the hard way. Go suit up, go talk to the regulators, whatever needs to be done.” And so I did have this thought, I could be that person. I mean, it took me a while to get there. Initially, I was just tinkering with prototypes and stuff like that with my friends, and I was thinking, someone’s going to build a huge company in this space. I was thinking it’d be Google or someone like that.

But ultimately nobody started doing it, and so I did start getting that prototype further along. And eventually I was like, “Okay, I’m going to do this. I’m really going to go make an effort to do this.” I wanted to do another startup, I wanted to be an entrepreneur. This was the idea I kept getting excited about, and I couldn’t stop thinking about it. So eventually I was like, yeah, let’s go in and do it. And from the inception of the company, the goal was to be the most legitimate, be the most trusted one, and not try to fly under the radar.

Are there any internal red flags for you personally that come up from the fact that, look, we can differentiate by being legitimate? I mean, there’s a certain view you could take of that, where there is a broader meta question about this sector generally, where the hard path, and risking being considered sellouts or whatever it might be, comes by virtue of trying to be legitimate? Do you ever step back and wonder about, yeah, this position makes sense within crypto, but is there a question that raises about the overall meta view of things?

BA: In terms of a reflection on the industry overall, I actually don’t think it is a negative reflection. Because if you look at almost any industry, in cloud computing or whatever, what is the most legitimate one? And in electric cars, what is the most legitimate one? And even when the Internet first started, I mean, you had tons of this stuff, and PayPal was the more legitimate one, or Square, or whatever. So I think in every industry you want to have something that is the most trusted brand, and that’s not unique to crypto. And so I think that part was good. Sorry, the second part of your question was really around what?

Is there a meta question around the industry, that’s raised implicitly by your seeing this opportunity for Coinbase specifically?

BA: Well, I do think we have to admit as an industry that crypto has attracted more fraudsters than we’d like. It probably is getting too many people like that into this industry, which does frustrate me, I have to tell you. I still think 95% of the people who I meet in crypto are legitimate people trying to do really good work. They don’t really get the lion share of the attention, because everybody loves the salacious story. And so it’s kind of like everybody knows Bernie Madoff and not the 10th largest hedge fund manager or something like that.

Yeah, that’s a good analogy.

BA: But I don’t know, I try to just ignore that. And there are enough great people working in crypto that I think this industry is going to do really well. We do have a responsibility as an industry and policymakers and regulators to get a bunch of regulatory clarity, especially for the centralized pieces of crypto. I can talk more about that if you want. And then the decentralized pieces of crypto, which Coinbase also plays in that space, those are the ones that are going to actually, I think, provide consumer protections and things using something even better, even more powerful, which is open-source code, self-custody. Anybody can go in there and audit these smart contracts to see if they’re doing what they claim to be doing. So there’s even a better system we can create in the future. But I think for the centralized players in crypto, regulatory clarity is the next step that we all need to focus on.

Crypto Regulation

I want to go back to back in 2021: you wrote a Twitter thread about the SEC and the Howey Act, and how Coinbase felt constrained in its ability to offer a yield product. I criticized that at the time because it seemed too direct — you sort of seemed to be alienating a potential regulator. After I wrote that a very smart person reached out to me and told me that the thread was actually quite strategic, in that, Coinbase would prefer that if they couldn’t offer these products, that no one should be able to. And I think that makes a lot of sense, number one.

But number two, in retrospect, did your inability to offer some of these products, which certainly would did give customers a reason to not be at Coinbase, or to go to another exchange that was overseas, did it end up saving you from yourself in a certain extent, because you didn’t have a bunch of these products that went sideways in the current downturn? Back then everyone in crypto is talking about, oh, it’s collateralized 3X, well, let me introduce you to counterparty risk. I’m curious, as you look back over the last little bit, is there a bit where you were constrained by regulators, whether it be lack of regulatory clarity, or regulation by enforcement as opposed to laying down rules, that it ended up being a good thing for Coinbase in the long run?

BA: Yeah, I think that’s a very smart question, and thanks for giving us the benefit of the doubt in terms of being strategic. I’m still debating that with myself.

Well, the smart person did, although it made sense to me.

BA: I think there are a few things looking back on that. Number one, I think we were planning to offer that product with much lower yields, and we had really strong risk controls around it. And so I think even if we had launched it, it probably would’ve been okay. But it’s sort of a moot point, because the thing that I was reacting to in that tweet thread, the part that bothered me, was there wasn’t a level playing field, like you said. Either the regulators should allow it, in which case, these competitors had already been out in the market for a couple of years. If they’re allowed to do it, we should be allowed to do it. If they’re not allowed to do it, then we shouldn’t be allowed to do it either. The part that was bothering me was the hypocrisy of it to say, well, these competitors have been out there in the market for years, but suddenly if we try to do it, the answer is no.

Look, I can understand the other side of the argument as well, which is regulators are busy, they’re overwhelmed, they may have been pushing on things behind the scenes with those folks that we weren’t fully aware of. I think it was basically just sort of a fog of war, like something lost in translation. But yeah, my frustration was called out there on Twitter. And then I think that did help level the playing field a little bit maybe, but I don’t know, maybe I’m being charitable there. A lot of things you’re doing as a CEO, you’re trying to do the best thing you can think of in the moment, but you don’t actually know exactly what’s right.

So in your most recent earnings call, kind of building on this point, you blame the decline in US-domiciled crypto assets on the regulatory environment. You cited the fact that overall crypto assets haven’t decreased that much relatively speaking, but the amount in the US has gone down significantly more. Walk me through that. What are customers responding to? Is it this sort of thing where they can go to foreign exchanges and get these yield products? Why do you see that as being the real constraint?

BA: It is unfortunate, because I do think a lot of the crypto industry has been driven outside the US by the lack of regulatory clarity with US regulators. And again, they have a tough job, so I’m sympathetic. But I think it’s really important for people to know this, because the simple narrative people say is, well, okay, if something bad happened in crypto where were the regulators, we need tougher regulation. It’s missing the nuance of what actually happened in this case. Because first of all, FTX was not in the US, they were offshore. They may or may not have been serving US customers by the way, through ftx.com. So that’s another interesting point about creating a level playing field.

But what happened as a result of this lack of regulatory clarity in the US is that it became more profitable for companies to incorporate offshore and try to serve the world from these kind of favorable havens, if you will, these jurisdictions. And so that didn’t really benefit customers or investors in the US. In fact, it caused them more harm. They were pushed into these offshore things that were not regulated. It didn’t benefit American companies because, again, it harmed our ability to build our companies in the US. And so it’s really hard to imagine what benefit was gained from this. I think the more important question is maybe where do we go from here? Because I don’t want to focus too much on the past. I mean, mistakes were made, and it doesn’t really help anybody…

FTX and the Face of Crypto

What’s your take? I mean, you jumped to FTX, what’s your take on the FTX situation?

BA: Oh, well, I mean, FTX, what can I say about it? I mean, it appears that a massive fraud was committed. I think that customer funds appear to have been moved over to his hedge fund that he owned 90% of, and that those customer funds were lost. I mean, this is a violation not only of the terms of service as it’s written as far as I understand it, but it’s also probably just against the law and outright fraud.

It’s been pretty bizarre to kind of watch the whole thing unfold, primarily because I do feel like mainstream media has given a lot of softball interviews, and even this tweet back and forth with Maxine Waters very politely asking him to attend a hearing, and him politely deferring, it was bizarre. I mean, this guy just committed a $10 billion fraud, and why is he getting treated with kid gloves? Compare her tweets about Mark Zuckerberg for instance, who never stole $10 billion from people, whatever you think about the guy. So these kind of things are just, it’s a little strange for me to see it all happening.

What’s the one question, if you had a chance to interview him? You had a disguise on, you’re Mr. Mainstream journalist, Brian Armstrong. What’s the one question you would want to ask him?

BA: Honestly, I don’t think I have any questions at this point. I think it’s pretty clear what happened, and I think every time he’s being asked these questions, that people are giving him a chance to evade. There’s some journalists who have done better than others in terms of really pinning him down on this stuff. But I kind of just want to turn the page on the whole thing, to be honest. The bankruptcy lawyers, and the DOJ, and everybody are going to have to figure out how to hopefully put these folks behind bars. Not just Sam, but the other people involved. I mostly want to think about where do we go from here as an industry.

Do you feel vindicated or outraged, particularly over the customers that you lost to FTX? Because it’s very visible. Tons of branding in the US. Yes, they had FTX.us in the US, but then they had FTX abroad. And to your point, how many Americans ended up there? It’s an interesting question. Is it just really irritating, or do you feel like, hey look, that’s the problem. You should have stuck with Coinbase, your reliable friend in crypto?

BA: Well, look, I mean I think it does validate the approach and the strategy that we’ve taken over the last 10 years, which is not always the most sexy thing. It’s not the most hyped thing. I do think it’s the right strategy long term, and we think it’s going to be the right strategy to build a company for the long term. But look, this is not a moment for me to take any victory laps or celebrate. I mean, a bunch of people lost money, it’s a terrible, terrible thing for the industry and those customers.

I think one of the smartest takes I heard about the mainstream media, I mean, obviously it’s very tempting to spin a tale of bias, particularly given his political contributions. But I thought the better take was, which isn’t original to me, is that a lot of people in the media find crypto generally hard to understand, number one. And number two, because there are always stories about hacks or whatever might be, or this money was stolen from this person. It’s sort of been put in the same bucket, like, oh, it’s another crypto thing. As opposed to the reality, which actually seems to have very little to do with crypto. It seems to have a lot to do with just straight-up fraud.

BA: Yeah, I would agree with that. I’m struggling to explain it as well. Maybe it seems like some sort of bias, and obviously he made a bunch of donations to Democrats. But it seems like he admitted in the Vox interview that a lot of these causes he was professing to believe in, he didn’t actually believe in. And so I’m not sure where the allegiance is coming from. It broke my mental model of the world a little bit, which I thought, look, if somebody in tech and in crypto comes out to be a fraudster, this is the easiest layup to go dunk on him. And yet we see some people giving him the benefit of the doubt. So clearly something was happening here that I had not fully baked into my model of the world.

A friend gave me a question I should ask you which was, what was SBF right about? And I think something he was right about is that, crypto needs — maybe needs is the wrong word, but just the way the media works, it’s always looking for a figurehead. It’s sort of looking for a face for the entire concept. And for the case of social media, that might have been a Mark Zuckerberg. For the case of early computing, it was Steve Jobs or Bill Gates. Just because the media tends to be narrative driven, and a narrative needs a protagonist. That protagonist might be a hero or might be a villain, but that’s just how this works. And again, the problem with Bankman-Fried being the face of crypto is he turned out to be almost certainly a fraud and a pathological liar.

Meanwhile, you’re sort of this shy guy from San Jose, who as we talked about, prefers a Twitter thread to necessarily an interview. But as we talked about, you’re running a company that seems to be trying to follow the rules such as they exist. Do you feel a real burden, I mean, you kind of alluded to this before, but is that intensified over the past month that, hey, someone’s got to be out there in front for this industry just because that’s how the environment works, and I guess it has to be me?

BA: Yeah, it’s funny, people have been telling me this for a long time. I’ve been in crypto the last 10 years, and I’ve had a number of people come to me over the years and say, “You know, you could be out there, you could be the one.” And in some ways I think we are, right? I don’t want to undersell it. I mean, just in the last two weeks I was on CNBC, and CNN, and ABC News, and I just did a ton of media.

I’m happy to do parts of that, but I actually think the best CEOs are not the people who are a 100% of their time just doing media tours, and trying to get in front of a TV camera. To me, that’s missing the point of what a company is about. Because you have to be doing something valuable in the world to create a product or a service that’s better than anything else that’s out there. There’s a really great book that I like, called The Outsiders. It’s about eight unconventional CEOs, and it shows how they outperformed the market. And a lot of them were actually kind of introverts and they were deeply technical. You can think of examples of that in tech: Larry Page was kind of an introvert, and there’s lots of people like that. So I actually think introverts can make really great CEOs, and the industry doesn’t necessarily need somebody who is going to ham it up and charm everyone or whatever on TV. They just need somebody who is trustworthy, who is going to have good judgment, and build solid, reliable companies and infrastructure. And I think that’s 100% me.

So I’m happy to play that role, and I’m happy to go do all the things like appearing before Congress, and interviews, and TV when I need to, but that’s not going to be my primary focus. My primary focus is going to be, how do we build better products for our customers?

Is Crypto a Real Thing?

Well, now that you said you’re happy to have that role, I now get a seize the opportunity to hold you to that. And so here’s a question that I would imagine that some of my readers are going to have. Why is crypto a real thing, and not just regulatory arbitrage? I think that’s a question particularly when it comes to exchanges and the more financial products — there’s a separate product question. But what’s the pitch? And yes, it’s a question you’ve had to answer for 10 years, but it’s one that arguably is even more pressing today given what has happened.

BA: Yeah, okay, so is crypto a real thing? I think the answer is unequivocally yes. And the reason is you can just look at the fact that more people are using it every year, or every cycle that happens. So there’s two or 300 million people in the world now who’ve used crypto or have some, and yes, it goes up in up cycles, it goes down in down cycles, but it’s in an upward channel. So every cycle, if you look even just back to the year, I think 2020…

The floor today is still like 5X what it was a few years ago.

BA: Yeah, exactly. So I mean, yes, crypto is definitely a real thing, and it’s a real thing in a number of ways. I mean, first it’s a new form of money, and that’s actually a really important thing. Many places in the world, people don’t have stable currency, and there’s all kinds of wealth that’s eroded from the poorest people in society. It’s just a foundational part that we take for granted in the US, given that we have eight or 9% inflation, which we think is extreme. In many places in the world, you get 25% in a month or something.

I mean, one of the most compelling cases made for Bitcoin I’ve ever heard was someone, I believe he was from Venezuela, but I’ve heard similar things from people from Argentina, about this sort of inflation protection. Is it fair to say that that is still regulatory arbitrage, it’s just maybe good regulatory arbitrage that protects people and keeps them safe? I mean, I’m trying to steelman this argument here. But is that okay to admit, or is there something beyond that?

BA: Yeah, okay. Well, just to finish the thought, so it’s money and then it’s new types of financial services. It’s also this new application platform. We can talk about that too, with identity and decentralized social, so it’s lots of different things. But is it regulatory arbitrage? I mean, maybe. I think I would say it in a different way, which is that, it’s helping alleviate inefficiencies in the global economy. Some of those things are put in place for a good reason and some of them are not there for a good reason. For instance, if you wanted to build a global lending marketplace or something like that, you’d have to go to all 200 countries in the world, and all 50 states in the US. Only then could you make a more efficient global market for how to get a loan between somebody in India and somebody in Brazil or whatever, but the amount of bureaucracy and rules in place and everything, from having this kind of patchwork quilt of different proprietary systems in every country of the world, makes that infeasible. And so, yeah, crypto is a new, more global, more fair, more transparent, more free system.

It’s not just that inefficiency and the global regulatory apparatus though, it’s also dealing with the technology improvements of just how quickly you can send an asset somewhere, or make a transaction on a decentralized ledger. So it’s permissionless, it’s decentralized, it’s global, there’s technological benefits to that. There are, I would say, inefficiencies that it helps you get around. And that’s part of why a lot of innovation is on this frontier right now. Just like what happened with the Internet 20, 25 years ago.

Well, I mean, one argument that I think I’ve made in the past is that this concept of digital money makes a lot of sense when you’re in the virtual world. Now virtual world could be a full-blown metaverse sort of thing, it could just be the Internet broadly. Real money makes sense — fiat money or whatever you want to call it — in the real world. But where I’m a little skeptical is when there’s an intersection between the two. There’s the famous story of the guy that bought two pizzas with a Bitcoin or whatever it might be, which I’m skeptical about in the long run.

What’s your view on this? Is this a virtual-only thing, or do you see a real porous interchange between the two? Obviously a porous interchange would be in Coinbase’s interest, given you are an exchange, you sit at that interface. What do you see as the interaction between the virtual and the “physical” as it were?

BA: I think it’s both. It’s probably going to lean virtual in the early days, because that’s just a more natural fit. But it’ll eventually do more and more in the physical world as well. So virtual is probably easier to follow just in terms of if you’re going to build a new community on the Internet, it would be discriminatory or weird to use the currency of one country in something that’s open to people all over the world.

You’re talking to the guy that sells Stratechery in US dollars. But hey, I started it 10 years ago, that’s my defense.

BA: Hopefully you probably have subscribers all over the world, and I’m assuming they’re paying in various currencies and things. You may not see it on your end, but you’re paying the cost of it in terms of FX fees and things like that. So yeah, I think online it makes a lot of sense, and it’ll happen there first, and it is happening more there first. But the physical world has so many inefficiencies with money, that it’s clearly going to make its way there too, and it has to some degree already. Just like every time you swipe your credit card at Starbucks or something, they lose 2% of that, the merchant loses that. And those fees get passed onto the consumer. And if you have a low margin business like Amazon, they might only be making 5% margin or something. And if 2% goes to the credit card processor, that’s 40%, right? Sorry, that’s a bad example, because Amazon’s online too, but Walmart in-store, whatever…

I get your point. At the end of the day though, credit cards, I mean, credit cards are my biggest expense, so I can definitely relate to that. But the win is that, it’s just super convenient. Network effects are a real thing, and that’s something you can rely on being there, and that’s very valuable to me. How does this stuff get to a similar state, where it’s not just that you’re saving 2%, which is hard, especially over an aggregate merchant base, where you have lots of individual merchants making individual decisions? What’s the step change? What’s the huge increase that makes it worth some sort of broad based switchover?

BA: So I think network effects, you’re right, they are very powerful. And if it was Coinbase versus Visa or something like that, I don’t think we would win. That’s one company trying to build something from scratch, and we don’t have the network effect. But it’s not Coinbase trying to build, it’s Bitcoin, it’s Ethereum. These are global decentralized protocols, and that means there’s going to be thousands of companies building on these protocols, not on a proprietary standard like Visa. Why did the Internet beat New York Times or something like that? Another example would be, in the birth of the Internet, people were trying to make more private internets, I think it was called Microsoft Network or something. And so all the best developers wanted to build on the open platform, the open standards. So that’s where the apps went, that’s where the users went.

I think that’s going to be similar in this case. And it’s kind of already happening. I mean, again, we go back to the numbers. Every crypto cycle, we’re seeing three to 5X the number of people in the ecosystem participating there. The sorts of things that can unlock that step change to get to the next big areas of growth I think, again, number one, it’s regulatory clarity. And number two, it’s scalability of the blockchains. I mean, we can talk a bit more about both of those if you want. But regulatory is probably the biggest one right now, because with stablecoins and with centralized exchanges and custodians, there’s still this fear that people have, and there’s a lot of institutional money for instance, sitting on the sideline waiting for there to be a little bit more regulatory clarity.

Companies like Coinbase, we’re already regulated. It’s kind of a misnomer that people think we’re unregulated, but we’re actually very regulated today. We have many, many regulators, but we’re regulated kind of like a traditional financial services company. And the part that’s still not quite clear is the crypto specific stuff. Is this a commodity? Is it a security? And regulators just someone needs to officially come out and say, by the way, the crypto stuff, also a lot of these concepts from traditional financial services apply in the centralized crypto areas. Once that happens, I think you’ll see a huge amount of institutional money and other retail apps kind of come online. And then the other big one would be scalability of the blockchains. So that’s another, it’s kind of like, again, moving from dial-up to broadband. I think we’ll see another wave of applications come online when that happens.

Coinbase Products

So is crypto a commodity or a security? Or is it the case, Bitcoin’s a commodity but everything else is security, what’s your take?

BA: So there’s many different types of coins and assets and things like that. And many crypto assets are commodities. This is where, the ones that we trade on our exchange for instance, are commodities. We’ve done a 72-point legal analysis of every asset that we’ve decided to list or not list. There’s a bunch of them we have decided not to list. We would like to trade crypto securities also. In fact, we went and acquired a broker-dealer license. It’s still dormant at the moment. We’re trying to work with the SEC and others to make it active and develop the right market structure to allow crypto securities to also be traded. Because I think that could be a big market.

By the way, crypto is not just commodities and securities. There’s other types of things like stablecoins which are probably more like currency. There’s things like NFTs, which are more like artwork. Things like ENS, which are really more like your identity. So crypto, that’s the crazy thing, is like different parts of crypto are going to be regulated by different regulators, and that’s good. It’s kind of like the Internet, it’s going to be many different things to many different people.

So when it comes to products, and you referenced a couple of them, what is Coinbase’s role? Are there blockchain use cases where you can make a big contribution that doesn’t have to do with money? I mean, given your heritage as an exchange, that’s where you’re going to focus more, so is the assumption there will be other people elsewhere building products? Where do you see your role in a more product oriented space? Or is all crypto is ultimately about money because you need the incentive structure and the mining, whatever it might be? Or staking I guess now would be a better way to phrase it.

BA: So yeah, Coinbase has a broader view here, in the sense that we want to be people’s primary financial account in the crypto economy. So yes, we’re going to help people trade crypto, but we’re also going to help them use it for a wide variety of different applications. That could be anything from earning yield, borrowing and lending, doing peer-to-peer payments, commerce, but also even non-financial related applications like having your decentralized identity, participating in decentralized social media or games or DAOs. So we want to be the people’s primary financial account, and access that entire range of the crypto economy.**

I’m not the first one to say this about Coinbase, but this talk of being the front end, the aggregator where its your entry point to crypto broadly, and your hope and expectation — you talk about a billion people getting into it — you want a huge chunk of them to be on Coinbase.

BA: Yeah, that’s right. I should mention also, I mean, we’re doing that both with our centralized products, where we store customer crypto on their behalf, and that’s all very regulated. And then we’re participating in the decentralized aspect of crypto with our self-custodial wallet called Coinbase Wallet. And also things like Web 3, and decentralized protocols, making those all easier to use, DeFi, decentralized exchanges, we’re supportive of all of these things. And I think to oversimplify it, the first thing people usually think about is how do I get my fiat money into crypto? But once they have crypto, eventually they start to think about, all right, how do I start to participate in the crypto economy and crypto-to-crypto transactions. That’s going to be a big area for us — increasingly, it is already a big area for us — but it’s going to be bigger and bigger over time.

Coinbase’s Stock

I want to ask a couple of threads about Coinbase and crypto, but the question that has to be asked first is to what extent are these two things just really deeply intertwined? I mean, you said in your S-1, I’m going to quote:

You can expect volatility in our financials given the price cycles of the cryptocurrency industry. This doesn’t phase us because we’ve always taken a long-term perspective on crypto adoption. We may earn a profit when revenues are high and we may lose money when revenues are low, but our goal is to roughly operate the company at break-even, smooth out over time for the time being. We are looking for long-term investors who believe in our mission and will hold through price cycles.

That prediction of volatility has certainly proven to be the case. I think that was a very good prediction. You made billions of dollars in 2021, now you’ve lost hundreds of millions in 2022. But I think the challenge is that investors have not taken your advice: your stock is down 80% over the last year, and it has been downgraded to junk status. Is that very frustrating, given that you said this would happen? Or is this what you expected? Or has the reaction and the negativity been stronger than you anticipated?

BA: No, I think we expected this to happen. And we knew that if we went out first as the first crypto company to really go public, in some ways that would be good. I mean, it would help us get deals done. We closed this deal with BlackRock, the largest asset manager in the world and we’ve been doing deals now with Google and Meta. So it’s been great for that. It’s helped us. We raised a bunch of debt last year when prices were really good. $3 billion of debt at a very attractive rate. So there are a lot of good things about being a public company. But yeah, some of the challenges that we knew were that it’s tough as a public company if you don’t have super predictable revenue, and our revenue is still a little bit volatile with the trading fees…

The biggest part of your revenue is trading fees. So both the price and the volatility affect your revenue.

BA: Right. But we’ve done a really good job of differentiating that over time and diversifying it. So more and more of our revenue is now coming from what we call subscription and services, and that’s things like custody and AUM fees, USD Coin, staking revenue, things like that, which are really helping to smooth out that revenue.

Just a quick question on that. I actually had a technical question, what’s the margin profile of that sort of thing? You can see the trading fees being very high margin, but when it comes to helping your customers stake something, presumably you’re passing on a fair bit of that revenue to whoever it is you’re staking on their behalf. So is this an issue where it’s more predictable revenue, but the trade-off is maybe the margin profile is not as attractive as your core trading business?

BA: Yeah, that’s a fair assessment I think. So we charge a fee on the staking, but pass most of that back to the customer. That’s correct. Still, it depends how you want to think of it, because we charge a trading fee, we pass most of it to the customer, right? Anyway, it’s sort of a semantics thing.

What I was going to say was that, I think our stock is basically a good fit for growth investors like Cathie Wood at Ark, and there are a lot of funds like that, that are excited about the future. They want to see high upside, they’re tech progressives. And then there are other firms that are really just looking for more stable assets that are more mature in their life cycle, and they’re paying dividends and things like that. And we’re not that kind of company yet. I think that the next 10 years look incredibly bright, and at some point, we’ll be the right kind of company for those other types of investors. But for right now, the growth investors are the ones that are most excited about our stock.

The Role of Easy Money

So something you’ve said several times, and why a fair number of financial analysts think your stock is very attractive, is that the assumption is, just like has happened with crypto in the past, things are very cyclical. There have been big downs and then it comes up, and the ups are much higher than the previous ups. And then the down that follows is actually higher than the old up. We’ve talked about that before, and that is I think the core bull case, because as we saw last year, you can make a whole bunch of money in a bull market.

Are you sure that this time is not different? I mean, you said in your S-1 actually, you had a chart where you show that Bitcoin pricing has been largely divorced from equity pricing, and that actually ended up not being the case in the current downturn where Bitcoin actually ended up being very correlated. That raises the question, are we sure that crypto wasn’t just the result of easy money? If it was, then there is something that is different from all the other cycles. Yes, those cycles happened, but they happened in the same broader fiscal environment of easy money. What gives you confidence that there isn’t actually an exogenous factor that is going to be fundamentally depressing the value of crypto going forward?

BA: Well, I think, look, all tech benefited from low interest rates, it wasn’t just crypto.

Yeah, don’t worry. I could ask the plummeting stock price question to basically any CEO I bring on right now.

BA: I think crypto benefited from that along with every other tech growth company, from DoorDash to Zoom, or whatever you want to look at. Look, I think that the market has contracted a little bit, and that’s true of a lot of tech stocks as well as biotechs. I don’t think that that’s a reflection on the long term potential of biotech, or streaming platforms, or anything. I think that we’re in the early innings, and the leaders in these industries are going to kind of go through the down cycle, come out even stronger. And this is actually a really big opportunity for us to not only survive through it, it’s just to thrive through it, and actually pick up a lot of the best assets, whether those are people, companies, et cetera, in these down environments.
That’s what Coinbase has done in the last five crypto cycles or four crypto cycles, so I don’t see any reason why this one would be different.

The reason this one is different is that it coincided with a broader macro downturn, and we’re in a global war and a pandemic, and various things like that. But we’re a company that’s comfortable going through cycles. This is our fifth one, and so I don’t think this will be too different.

Did it shake your belief a little bit though, that as inflation went up, Bitcoin’s price went down?

BA: No, it didn’t shake my belief. I definitely thought that crypto might be viewed as an asset people would flee to in a time of uncertainty. I think in the crypto economy, Bitcoin is sort of the gold.

People did flee to Bitcoin, but they were the people who were already in crypto.

BA: Right.

That’s a good point.

BA: But the broader macro economy is still much bigger, and in that environment, they treat all of crypto as a kind of growth stock as opposed to the thing to flee to. And it’s also so liquid that it was easy for people to liquidate it.

I like that analogy because it does kind of get to my theory about the virtual being in many respects, in a different economy than the physical. That bit about within crypto itself, Bitcoin is gold. And maybe it was just a little too presumptuous to say that it’d be gold for the broader economy, at least at this point in time.

BA: Yeah, I think that’s right. But if you look, I think the trend is very clear, which is basically virtual is becoming a bigger and bigger percentage of the pie in terms of the global economy, GDP. I think it’s really interesting, look at e-commerce, right? Back in 1999, 2000, people were saying, oh, I’d never put my credit card on the Internet. And then it was a tiny, it was less than 1% of all global GDP, right? Now, fast forward 20 years, and e-commerce is now I think about 15, 16, 17, and I think COVID accelerated it, right? It almost hit 20% of global GDP. For people like you and me, that even sounds low. I probably do 78% of my spending online or whatever. But we’re sort of living in a different world.

So think about that trend in terms of crypto as well. If you fast forward another 10 years, are more people going to be doing things virtually than physically? Probably. Is a larger percentage of the economy going to be happening virtually? Probably. So crypto is incredibly well positioned as the inherent currency of the Internet, the more transnational global currency of the Internet. And so it’s just very hard for me to imagine a world 10 years from now, where there’s more e-commerce, more people using the Internet, more virtual economy, and crypto is not much bigger right along with that.

Yeah, more virtual micro transactions and things along those lines, where credit card fees are impossible, or App Store fees, which we’ll get to in a moment.

But I asked about the crypto environment generally. For Coinbase specifically, I mean, one of the problems is that in your S-1 vision you said you expect the company to make money in bull markets and lose money in bear markets, which obviously has happened. But you did sure seem to hire and grow the company as if it would be a bull market forever. Did you think you overestimated the extent to which that bull market would go on? And perhaps not quite batten down the hatches, or limit your growth? Would you look back at yourself internally in your decisions, did you get a little too enthusiastic, and now you’re paying the price for that?

BA: I think in hindsight we definitely overhired. I overhired, right? And I have to take responsibility for that. You can’t really predict what’s going to happen in the global macro economy. The market will always kind of fake you out. For instance, going into COVID, I kind of naively thought, well, it’s a global pandemic. There’s going to have to be a crash of the stock market and the economy. But it turned out the opposite. It rallied on, it went on this big run. And so you can’t always predict these things. People always look back and they say, oh, it was so obvious, but in the moment, you never exactly know.

So the best thing you can do as a CEO is basically just try to react quickly. So yeah, I think we overhired. We were growing the company, and it was easy to grow the company that fast, frankly, because we’d made $4 billion of EBITDA on $7 billion of revenue. We had a line out the door of customers. The biggest problem we had was angry customers who were trying to sign up to our product and give us money, who could not onboard to the product.

And so you feel this tremendous pressure to fix that problem.

BA: Right, right. And so that’s a high quality problem to have in business, it doesn’t come along very often. So I was like, “Hey, let’s keep growing, let’s take it on.” And we kept seeing billion-dollar competitors emerge all around us, who these were opportunities that’s like, well, we had that idea a year and a half ago.

Well, you go back to your core thing where you want to be the front door for the crypto economy. Every customer you’re losing at signup, is sort of decreasing your long-term strategic position.

BA: Right. So anyway, that happened. I think in hindsight, we probably should have capped it at maybe 2X growth in a year or something. I think we hit 2.6 or 2.7, I can’t remember exactly. But that definitely strained the limits of how far you could go with this. And so we had to make a correction on that obviously. And yeah, all good learnings.

Apple and No Politics

So Apple’s made it impossible to buy NFTs through apps unless you use their in-app payment system. But Coinbase Wallet recently tweeted that you can’t even send NFTs because Apple wants you to use in-app payment for gas fees. Just for clarification, is this a total ban on functionality, you can’t even use Ether already in your account? Or is this a limitation on buying Ether on the spot to pay for those fees?

BA: As far as I know, the specific feature that got blocked in this case was just sending NFTs. And my understanding as well is that they’ve actually blocked purchasing of NFTs. The other thing that we’ve had an issue with in the past was, people want to access dApps or these decentralized apps, which are essentially websites, but people want to make it easy to connect your wallet into this website…

You can access if you have the right NFT or whatever it might be.

BA: Right. And they’re very sensitive about this idea of having any kind of competition to their own App Store. And so these are just people accessing websites. And so we’ve made that argument to them, this is more like a browser. But they’re saying, well, it’s more like an App Store, and you need to pay 30% tax on every transaction that would go through these. And we’re sort of like, first of all, we don’t really like the idea, but even if we did, does in-app payments allow you to send crypto through, and then, no. And it’s like, okay, well, can you allow it until maybe you guys consider that? No.

Look, I like Apple, I think it’s a great company. There’s really smart people there. I use Apple products, but this whole thing with the 30% tax in the App Store, I do think is an issue looming for them. It feels a lot like the Microsoft, DOJ antitrust stuff with browsers on their operating system, competing browsers. And I don’t think Apple should be blocking competing App Stores, or people using NFTs, and creatives and artists, and people like that. And it really creates a risk for them, I think, not only from a regulatory point of view, but from just their own customers. I mean, there are more and more people, Apple customers who want to use crypto, and I don’t think they even know that Apple is blocking some of this functionality.

Right, I agree it’s a risk for them, but the problem is, it’s a reality for you. And it’s kind of like the regulatory arbitrage question I asked before, but in reverse, where crypto is fundamentally handicapped relative to other things on mobile. I mean, is this one of those things where you have to sort of hope and pray that something changes?

BA: Well, I think it’s a bigger risk for Apple than it is for us long term. I mean, imagine you’re Blackberry and you’re like, well, we’re not going to use the Internet. We’re only going to allow Blackberry Messenger or something, I don’t know what the right analogy is. But at a certain point, Coinbase may be a much smaller company than Apple, but Bitcoin has a roughly a trillion dollar market cap or a little bit less today. And all of crypto is going to be much bigger than Apple. And so I don’t think that they can really give the cold shoulder to crypto for too much longer. Just in the same way they can’t avoid having the Internet on the iPhone. So customers have choice. They can go to Android, they can go to Samsung, et cetera.

Anyway, I don’t know exactly when it will happen, but I do think that it’s going to require a lot of good conversation from the crypto community and Apple customers, they’ll probably listen to them more than us, but we’re happy to engage with them as well. Generally, they’ve been open and receptive to having great conversations with us, but they don’t always make timely and efficient choices on this matter.

Timely and efficient is not usually used to characterize the App Store!

So last question. When you look back, you had the blog post about how you’re going to embrace a mission-driven culture, you’re not going to try to get into other issues. And then you had the episode with the New York Times, where you sort of jumped out ahead of an article they had coming in. Is there anything you would do different looking back? I mean, is there an aspect where the last year and losing lots of money, and the stock being down has felt humbling in that regard? Or has that fortified your conviction that that was the right thing to do?

BA: Well, yeah, I mean I think the two things are totally unrelated. So in general, I think we did things pretty well. I would do it over again. The thing I would do differently on it is, I would try to set that clarity in the company sooner, so that it’s not creating some sort of a division that has a rift, and 5% of people have to leave. That created extra work for people, things like that, and some hurt feelings, and unfortunate press and attention, I didn’t really want any of that. So that part was unfortunate. But the decision we landed on, I feel very good about. I think that’s a much better way to run a company, and many companies have followed suit and emulated it since then. You want to have an environment where everybody’s respected, treated fairly, you can learn from your colleagues, do great work, but it’s focused on the mission. And people aren’t just fighting with each other all day or getting distracted by unnecessary things. Or you don’t have, in the worst case, activists actually hijacking the company for their own purposes, and that’s kind of even worse. So I feel good about that decision.

Did it set you up better for being this role, this sort of the face of crypto that we talked about? Do you think it makes you more well suited to it, or does it feel like a little bit of a limiter because there is maybe a certain constituency that now sees you as someone to oppose?

BA: I don’t know. I think there are people from all backgrounds and walks of life who want to work in that kind of environment. I think it’s proven to be the right call. And actually even the companies that were the most against it, some of them have reached out and said, “Oh my God, we’re having this problem, how did you guys handle it?” Behind the scenes. So that’s been validating. But I don’t think this is even really that important in the big scheme of things. Crypto is about something much bigger, and it is about decentralization, and freedom, and economic freedom. And so that’s something that’s empowering and useful to people all over the world.

I think maybe the biggest thing that it helped me do as a leader, to develop as a leader was, if I have conviction about something, it’s to make a decision and go, as opposed to trying to make everybody happy. That’s one of the failures. You’re not being a good leader if you’re trying to be everything to everyone. You have to stand for something as a company and make hard calls sometimes, even if they’re unpopular. And that’s what being a leader and a good CEO is all about. So I think that was a good development moment for me, and I probably grew up a little bit through that process.

Do you feel weird? We talked about you being a leader and a face of crypto. But crypto, at its core is theoretically about decentralization, and you’re a centralized exchange, as you noted. Is that just a paradox that you just have to manage going forward? Or do you think that’s not a big deal at all?

BA: Well, I don’t think it’s too big of a deal. I mean, Coinbase is going to help people in the centralized world with crypto. We can do that for you if you want, with our retail and institutional product. But we also are doing a lot in the decentralized world, again, through Coinbase Wallet. If you want to do “Not your keys, not your crypto”, you can do that with Coinbase Wallet, do self-custody, and you can access all of Web 3, and smart contracts and all that stuff, DeFi, so you don’t have to trust us. My hope is that I can be somebody who is a reasonable voice in crypto, but you don’t have to trust me if you don’t want to.

Can you trust Coinbase? Yes. We’re based in the United States. We’re a public company. We have audited financial statements. You don’t have to take our word for it. You can show that we haven’t commingled funds, and all these things that happened with other companies. But if you don’t want to trust me, you don’t have to. And I can still hopefully be a reasonable voice. We can build products that allow people to store crypto themselves, and use decentralized protocols. And so I think we’re embracing the paradox, and that’s what’s ultimately going to allow this technology to flourish.

Well, Brian Armstrong, thanks for coming on. And hey, I think the more interviews the better. So all good from my perspective.

BA: Yeah, that was great, always happy to chat. And thanks for being such a consistent, thoughtful voice on many topics in tech as well. I guess you’re one of those leaders as well.

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