On The Brink with Castle Island - Brian Foster on The Evolution of Coinbase (EP.484)

Episode Date: December 12, 2023

Brian Foster, Global Head of Wholesale at Coinbase, joins the show. In this episode we discuss: Brian's career and the path that led him to joining Coinbase. An overview of the Coinbase business model and how the company is segmented. The evolution of the Coinbase Institutional business. The Wholesale business at Coinbase and how the company is positioned with brokers, banks and ETF issuers. Views on the Bitcoin ETF proposals and how Coinbase is positioned in this market segment. The BlackRock partnership and how Coinbase and BlackRock are collaborating. Views on the evolution of the competitive landscape for Coinbase. BASE, RWAs and stablecoins. Learn more at coinbase.com

Today on the podcast, I sat down with Brian Foster, the head of the wholesale business at Coinbase. Brian is a friend who have known for a long time dating back to the early days in the Boston Bitcoin ecosystem, and I was excited to have him on to talk about all of the exciting things that are happening right now at Coinbase. In this episode, we discussed Coinbase's institutional business, their partnership with BlackRock, his perspectives on the Bitcoin ETF, and a whole lot more. I think you'll enjoy this one. So without further ado, here's my conversation with Brian Foster at Coinbase. Matt Walsh and Nick Carter are partners at Castle Island Ventures. All of these expressed by them or the guests on this podcast are solely their opinions

and do not reflect the opinions of Castle Island Ventures. Guests and host may maintain positions in the assets discussed in this podcast. You should not treat any opinion expressed by anyone on this podcast as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of their personal opinion. This podcast is for informational purposes only. Brought down by bad mortgage investments, Lehman, which has 25,000 employees will be liquidated. The federal government loans American International Group, AIG, $85 billion.

This is a different kind of market, and the Fed is asleep. The federal government is stepping it to stabilize Fannie Mae and Freddie Mac, the two mortgage giants that have been threatened by the housing crisis. The Bank of England has pumped 75 billion pounds more to Britain's ailing economy with a new round of constituted easing. You print a couple trillion dollars, and all of a sudden, people start to worry. So out of this worry, we have something called the Bitcoin. Bitcoin. Well, Brian, thank you for joining us today on the podcast. I'm excited to have you on.

I feel like I've been asking you for a couple of years. now we finally made it happen. Thanks, Matt. It's great to be here. Well, why don't we just teed up a little bit with your background, how you got to be over at Coinbase and what your journey was in this industry? Sure, happy to. I've had a exciting career that's been, I would say, about pursuing things on the frontier now for a number of years. That really started out with a bootstrap startup. So that was my first foray into company building. And that was an online travel agency. So I learned how to write janky code, process payments, negotiate, and deal with liability. So that was an awesome education and a lot of fun. After that, I went and joined a venture

back startup in the world of foreign exchange trading software. And that was a company called BySide FX run by a mutual friend of ours, Matt, who I think actually introduced us many years back, Ty Danco. That's right. It was like this really interesting and fun guy to work for. He was, for those who don't know, Ty, a prolific angel investor in Boston at the time and a serial founder and had a ton of energy. So working for him was a blast. I was kind of the first. I was kind of the non-co-founder of that company to join. And we focused on building trading tools for the buy side focused on the FX markets. That company didn't have what I would call a kind of traditionally successful outcome. But a couple very positive, serendipitous things happened there for me. One was

that Ty was a huge Bitcoin geek. He introduced me to Bitcoin at the time. This was kind of pre a lot of the other stuff. And I was hustling and doing all kinds of fun projects for Ty on the side. And he would pay me in Bitcoin. So that was a fun part of that. that experience. We also got involved setting up the Boston FinTech meetup where we met a bunch of people who you and I both know and we're hanging out with a lot of the early Bitcoin people in the Boston scene. So that was a great experience after that company I moved on to work in venture capital for a firm that at the time was called Marker later merged with another fund called Innovation Endeavors. And we focused on early stage technology investing, spanning cybersecurity,

FinTech and harder enterprise software plays coming out of Israel and also the U.S. So a great experience. I could not convince that partnership to pursue crypto directly, but kept working on it part-time nights and weekends on my own. And then at the very end of that journey, after a few years at Marker when I was living in Tel Aviv, we finally took our first step into crypto and helped stand up a company called Curve, which was the first MPC institutional wallet provider. So I got to work with that company and helped them with their go-to-market and get off the ground. We were later required by PayPal. After the stint in Israel, which was a blast, I decided to move back to the U.S., went to business school

at Harvard and wanted to really build a career here in the U.S., focused on crypto in a way where I felt I could hopefully do things that would really scale. So as I was thinking about what the next move would be coming out of business school, Jim Migdal, our former global head of business development, who's an awesome guy, reached out based on some of the work that I'd done at Curve. And he said, hey, let's talk about Coinbase. I obviously knew Coinbase well, although at the time it was a much smaller company. And Jim said, we're trying to build this institutional business.

They'd had some false starts, I think, trying to get an institutional business off the ground at Coinbase, but the timing wasn't quite right. And this was around 2019. We were in a bear market, and it was really an opportunity to try to do it again with, I think, a new cast of characters and kind of a different timing outlook as well. Then I said, hey, that sounds great, but my background's mostly in venture. and Jim said, not to worry, we also have a venture fund and you can help come work on that too. And that sounded super compelling. So as I spoke to more and more Coinbase people, I love that

everyone here was all in on crypto. At the time, that was a really unique thing. A lot of the other places that I had been around, the crypto people were like the crazy folks in the corner. At Coinbase, it was all those people. So I said, like, these are my people, let's do it. It ended up being a great decision. You know, I had this view at the time that Coinbase was doing things the right way. I had a conviction that the market would grow a lot, but also a feeling that if that happened, Coinbase would probably be one of the much bigger companies. So now I've been at the company a bit more than four years, and I'm really glad I made that decision to take the plunge and come on board. That's a great origin story. And I forgot a little bit about that

with Ty with the Bitcoin. That's so funny. But that HBS class that you came out of, I mean, that was really like the 1994 Montreal Expos, when you look at the amount of talent coming out of that class. Jeff Sotoyal from Pintu, I think, was in that class. Yeah, Jeff is a good friend. It's funny. Business School in Silicon Valley is like a dirty word. I had a great experience there personally. And like the best thing that happened to be there was you get to hang out with a bunch of really smart people who challenge you. And there are a lot of really smart, skeptical crypto people there who had come from hedge funds and private equity. You got to sharpen the iron with each other. So Jeff was one of the other crazy folks who was a good friend of mine. And we had a couple

others, Anne Lee and Justin Blumenthal, who were like taking the plunge into crypto. But initially, because it was a bear market, it was a small percentage of our class. And over time, I think more and more people went into the industry. Talk a little bit about what Coinbase looks like now. Obviously, the company has evolved over time. But how do you guys describe the businesses that you're in? And what does Coinbase do at the moment? So I think I can give kind of the 10,000 foot view. The company's obviously grown a lot. But today we really organize ourselves around, I think, three pillars that are really focused on client segments who we serve. So the first is obviously our retail segment, which is our largest business and our oldest business. The second pillar is about

developers. So we provide all kinds of great tooling, base, wallets, staking infrastructure and things like this for developers and who want to come build on chain. And the third pillar, which is my neck of the woods, is the institutional business. And we deal with asset managers, hedge funds, brokers, banks, fintechs, and the like. And this looks much more like a kind of prime business today with a lot of crypto-specific nuances. That's how we kind of organize our business and everybody generally works in one of those three pillars. But as a company, our goal really is to try to be the most trusted destination globally for crypto, whether you're an institution, developer, or retail. And on the institutional side, really to help shape crypto into a sort of first class asset class.

And I think we've made some great headway against this goal, but still have a long ways to go. Today we have about more than 100 billion in assets on our platform. About half of that is institutional capital. And we operated more than 100 countries. So this is a global operation. So lots of great progress, but I think a long way to go and achieving our mission. And obviously, institutional, that means different things to different people. It's kind of a buzzword now in certain parts of the industry.

So when you guys think about what that institutional business is, maybe talk a little bit about what the focus is and maybe the evolution. since you've been at the firm? It's certainly been a tremendous amount of change in a short amount of time. You can kind of tell the story of the growth of the institutional business at Coinbase in two ways. One is in terms of the product evolution, and two is in terms of the types of clients who we serve. Maybe I'll start with the product side. When I joined the company in 2019, we really had just the early kernel of the base of the pyramid, I would say, which is our custody business.

And this is like the foundation for those in crypto. Acid safekeeping is the most critical thing to start from when you're building new products. And that's how we thought about the world. So retail had some tools at the time to do this reliably, but institutions had unique needs around multi-user controls and segregation and the regulatory kind of encasing of these products. And we went out and solved those problems and built what we think is the best crypto custodian in the world.

We sort of augmented that effort by acquiring the custody business. from Zappo, which at the time was another large player focused on this, and really started to grow our market share. And so the idea was, hey, if you're an early institution moving in this space, come to Coinbase, and we'll help the asset safekeeping in this trusted and regulated way with a super robust security model. That was kind of the base of the pyramid. From there, it became clear that we need more advanced trading tools as we really started to address hedge funds and some of the more sophisticated institutional clients. And so we moved from this single exchange model to building out a prime broker, which was again a combination of build and buy. We built some great tools and

also acquired what we felt was a best in class early crypto prime broker in Togomi. As part of that acquisition got some great tech in addition to great talent like Greg Tussar and Kevin Johnson and others who have been instrumental in leading our institutional business. So post that effort, we really had now the custodian and the advanced trading capability and started to tie all of that together. And really, the third core piece of the product evolution was about prime financing, which you can think of as kind of a lubricant that makes all of that actually work for traders. So that business has been growing for us. It's super important when we think about our actively trading clients and those who need

to turn what is an instantly settled asset into a T plus one asset. And this really kind of made it all come together. Beyond that core custody, trading and prime financing, we have a bunch of other products we're excited about, particularly this year. We've spent a ton of time expanding our derivatives product capability. So we now have the onshore regulated derivatives capability. We have our own FCM license now and are regulated by the CFTC here, but also offshore out of Bermuda. We've launched our international exchange, which offers perpetual futures. The think of this is, for those who don't know, is a very kind of efficient way for more advanced traders to get leverage. That's a new thing this

year, but we're really excited about the growth we're seeing, and it's another way to kind of augment the trading business. There's some other pieces, but those are the nuts and bolts of it. Staking is also huge for us. We've built and acquired there as well. We are one of, if not the largest staking providers in the world. And then we also spent a ton of time on USDC and stable coins where we're trying to support people who need to hold stables or transact in them, and that's become a really important business for us as well. That's like the product story. I'll tell a shorter version on the client side. I think the punchline has said we saw this crazy evolution where we went from lemonade stands to BlackRock in three years, which was

pretty unbelievable. And I don't think it's something we've seen in other asset classes ever. And it really, I think, put a ton of strain on us as a business, but we're really proud to have risen to the challenge and gone up the food chain very quickly to now address today what are super demanding and large institutional clients. We started in crypto with retail and then the early institutional clients were family offices and VCs, endowments, then hedge funds. And ultimately now we have kind of the largest task managers of the world in the space. And I think you'll have the allocators, kind of pension sovereigns, be the kind of final stop that we're rapidly approaching. It's such an interesting product roadmap because if you just look at

it through the lens of, okay, other asset classes have these categories, you just build them for crypto. It kind of all makes sense when you look at it from that perspective as just filling in missing gaps that exist in other markets. So double-clicking a little bit into the wholesale strategy, which is a business that you lead up at Coinbase, maybe talk a little bit about that. Maybe let's just define what wholesale even is for those who might not be familiar with the industry term. Wholesale is a really exciting business for us. What we've tried to do here is along the way of building all the products I just described in our institutional business, we've really pushed the firm to say, let's build APIs for everything and offer these products, not just as a direct place

where an asset manager can come point and click on the UI or engage with us directly, but let's also offer all of that as an infrastructure for other companies who want to build their own crypto products to come to us and say, hey, Coinbase, you do the hard part of managing private keys in custody and staking and liquidity, and we'll do the part that we're really great at and maintain control of our clients and our brand and what have you. This is a super exciting effort that I think for us is still in the very early days, but is growing quickly. And what this looks like in practice is we work with a bunch of fintechs, banks, brokers, and exchanges, as well as ETF and ETP issuers. These are kind of the main segments that are relevant to the wholesale business.

these firms have their own branded products that they're pushing out into the world, and we work behind the scenes to power them. I think the impetus for this, we started out with these really strong branded first party products at Coinbase through our retail business and through institutional, but we have this view that this is going to be a big market, and we can't build everything, but we do want to create a healthy ecosystem and help monetize the rest of that ecosystem. That's really the crux of the whole stale strategy is let's go help fuel the growth of the rest of the non kind of first party Coinbase market and make sure that we're that leading infrastructure

provider behind the scenes. Very needed category there. So you brought up exchange traded products. Obviously, there's a ton going on right now. I mean, I feel like every day I'm seeing five or six amendments to various proposals that have been made to the SEC here. And I want to get into Coinbase's role in this. But maybe before I do, how do you guys think about the ETF in the context of the spot business at Coinbase? And does this cannibalize existing products at Coinbase? base or is this collaborative with how you guys see the market evolving? I think there's been some divergent opinions about this in the public. We have a strong view on this. The fact that we're really going for it and leaning in aggressively probably tells you what that view is. But first,

I'll speak to the I think importance of this overall. So we think that the ETF is a monumental moment for crypto. And the reason for this is that it's unlocking these kind of new and huge pools of capital that historically have had challenges accessing the market. And you know this Matt. Well, you have some investments in the space. When you're dealing with registered investment advisors, you need complex SMAs and sub-accounting tools, as well as the tax-advantaged world and certain institutions you have to buy securities per their remits, this is a huge unlock for those groups. And so it's really about, I think, just reducing friction or activation friction for these really large pools of capital that today have been precluded from investing in Bitcoin and crypto.

That's, I think, the impact. We've seen what this has looked like in other higher friction asset classes when there have been ETF approvals. Gold is, I think, a really important case study for people to revisit. There was multi-hundred percent growth in that market following the advent of ETFs. And although I'm not in the business of forecasting, it would not surprise me if we saw a similar arc here over the next few years. In terms of your question on kind of cannibalization and like, why does this make sense for Coinbase, I think that fundamentally this is about appealing to a different user persona than the retail client coming to the Coinbase main app or an institution that's going to be trading 24-7 with us on our prime platform. So it's definitely additive rather than

cannibalizing. It's important to remember these are 24-7 markets. There's many assets here, not just Bitcoin. And I think a lot of the people who are really maybe more advanced or like leaning in aggressively to this asset class, they want a really wide range of tools to engage. And so they're going to come to those kind of higher-powered on-platform capabilities that we offer. The ETF is really about making this simple wrapper for those demographics I mentioned earlier. That's how we think these are really distinct things and that this makes sense for us as a business. From the outside looking in, it seems like Coinbase has a big role in a number of these applications. So Coinbase is listed as the custodian for a number of them.

There's a publicly available BlackRock SEC comment presentation that also has Coinbase Prime brokerage involved in a schematic. So how do you guys see yourselves playing into this ecosystem with ETFs in terms of the role that Coinbase would play on these things? Obviously, the custodian is kind of the starting point. This is about asset safekeeping for the Bitcoin that comes into these ETFs. And we sit behind the scenes and secure that Bitcoin inside of a fully segregated, bankrupt, your remote, highly regulated entity. Coinbase custody is a New York limited purpose trust co-structure regulated by the NYDFS. And I think this regulatory structure, as well as all of the assurances and our perfect security

track record are things that have been really recognized by these issuers as critical and giving them the confidence to even get to that starting line. Then we can talk more about that later in the discussion. BlackRock, I think, is a great case study there. But it really starts with the custodian and securing the assets. Around that, there are a couple of other really important tools we've developed for the ETF platform with the goal being to make this turnkey for the issuers. And so we've built an atomic matching and settlement capability that allows us to intermediate in a very efficient way between the market makers and APs and the issuers where the funds will ultimately sit at rest. And that reduces risk and increases efficiency in this

whole process as well. And then obviously, if we do end up with a cash model, which is sort of still an open question as opposed to an In-Kine model, Coinbase will also play a kind of more direct role in agency trading in that model for the firms who want to trade with us through our multi-venue prime brokerage as well. Following up on just the Bitcoin product, and I don't want to get too far ahead of ourselves in terms of other assets, but it would seem that this model is pretty extensible to any other cryptocurrency, crypto asset that the SEC would deem to be not a security, I would imagine. Bitcoin is a beachhead and the most natural place to start. Our view is that.

that this will expand over time. And so we've tried to build a platform with that in mind. ETFs are a super high growth industry in the world of financial services and hold a increasing portion of the world's financial assets. And so we expect that to play out in crypto as well and can see a world where we have many non-Bitcoin ETFs, kind of multi-asset ETFs. And then later, I think things get really interesting when we start tokenizing other assets. That can all live on the same platform as well. So while we're starting with Bitcoin, we see the ceiling for this platform being much, much higher than that and are excited about a kind of multi-asset future where we'll be able to provide that infrastructure. So one of the bigger stories, I'd say, of the past

couple of years in the crypto industry was the emergence of BlackRock. And obviously, BlackRock has a spot Bitcoin ETF proposal, but there's also a lot of other things that the firm appears to be doing. And it's a huge partnership for Coinbase. So maybe talk a little bit about how this all came to fruition, what it means for the industry? We're obviously thrilled with the partnership with BlackRock. I think just first speaking to their team and strategy at a high level, this is a great case study that others can learn from. Black Rock's crypto team is world class led by Rob Mitch Nick and Joseph Falom. They're incredible partners to us. And I think that they have this really unique situation

of they have the combination of real crypto sophistication on the team there, also with the blessing and sponsorship of their exact team. And that's a thing that might sound obvious. But as you know, Matt, in your dealings with the market, is actually quite rare to find at a really large firm. Oftentimes you have folks who have great domain expertise, but maybe not the sponsorship or like resourcing continuity challenges in the traditional finance world when it comes to crypto or maybe some sponsorship, but like not the right. talent. In this case, you have both. And I think that's the reason for their success in the space. So we're huge fans in what they're doing and grateful for the partnership. In terms of what we've done

together, this was really a long-term and patient journey that was about, I think, building a lot of collective trust over time. Four or five years ago, there weren't a lot of large asset managers raising their hand to say, let's dive into Cryptout. That was viewed as at the time, I think, a risky and not worthwhile expedition. Fortunately, we had some great champions. at BlackRock led by Robbie, who said, I'm going to take this firm on a long-term journey of education. And so our initial work with them was really about supporting that education effort. We did a ton of teach-ins and from 101s all the way to kind of more advanced market structure and trading and security calls. And so I think that groundwork was key just from a trust-building

standpoint. Once Black Rock did have the confidence to say, I'm ready to actually act on this and engaged in the market, we were kind of sitting there as a trusted partner and a great position to actually get something done. To that end, we decided to do a few things, some of which I can speak about publicly. The first piece was about a partnership with Aladdin. For those who don't know, Aladdin is the brains behind BlackRock's business and also a tool that faces their clients as well and constitutes portfolio management, risk tools, order and execution management capabilities to kind of manage your portfolio across the entire transaction life cycle. and in a multi-asset portfolio context.

I think embedding Coinbase Prime inside of that foundation at BlackRock was really strategically important for us to be able to power not just BlackRock's own asset management businesses, but also eventually those of their clients as well, who are some of the largest through Aladdin, some of the largest asset managers and allocators in the world. This was step one, which was about connecting Coinbase Prime and Aladdin. And then step two was activating the businesses.

that use that infrastructure. The first of which we've been public about is, of course, iShares. And so this ETF capability will benefit from that integration. And we're super proud to be acting as custodian and prime for the iShare's Bitcoin ETF. It's a remarkable journey. I couldn't agree more with you around at these bigger firms, you need to not only have the junior people that are actually into crypto and can get the work done, but you also need to have that executive level sponsorship. It's no surprise that places like Fidelity and Square, have been first movers here because the top of the house really gets it. And seeing BlackRock emerge with Larry Fink going on and almost doing commercials for Bitcoin

on TV now is just such a remarkable journey. It feels like if you told me that three years ago, I'd been very skeptical that that would have happened. I agree, Matt. And I think we told Robbie and some folks early on in the journey as much. And they proved us wrong. So we're thrilled that they're in the market. This is huge for the industry.

We initially thought we're worlds apart in terms of tax. and capabilities, but we're very pleased to learn that we weren't. I think it was Joseph who said we were afraid you'd speak Greek and we'd be speaking Spanish or something. There was really kind of Portuguese and Spanish, so pretty close. Once we got our teams together and we were really proud to have made it work. So maybe shifting gears a little bit. It's been an incredibly volatile market. I would say a lot of competition has fallen by the wayside for Coinbase. You know, you had this period of time where you had these offshore unregulated venues like Binance and FTX that appeared to just be running wild. And I'm sure there were times when folks at Coinbase really questioned the strategy of

being compliant and building this thing in the right way. So maybe just talk about what it's been like to be at the company during such a turbulent hypergrowth period, contraction. What has that journey been like over the past few years? It's been exciting and certainly challenging. I think that our competitive landscape has changed a lot. People come and go. But I think our exec team culturally has really establish this mentality of we're going to focus on ourselves and do things that we believe are important and long-term oriented and keep our eye on the competition, but not let what other people are doing to drive us. And that's been an important part, I think, of our strategy that's paid off for us. In terms of some of the really concrete things that we focused on that are

just bedrock tenants of how we do business, first and foremost, we will never compromise on security, compliance, regulatory assurances, and trust with our clients. And these are things that I think can sound boring on a podcast and aren't like the most exciting to talk about. But in the long run, they matter the most. Our goal is let's show up every day and be the most trusted and not take any shortcuts in the background from a technology, personnel investment standpoint on any of those really key things so that we maintain that pull position in terms of trust. Another key thing for us has been, in risk management, I think when we do extend into new businesses, we try to get the balance

of product development speed and risk management right and really don't compromise on that risk management piece. The leaders we have at Coinbase running our financing business and our derivatives business are seasoned veterans who have done this before and are not taking shortcuts. Candidly, we can't afford to. We have the scrutiny of being a public company, the privilege of being a public company, but as I think a leader and with a lot of attention on us, we have to get that stuff right. Very proud of the way the company is operated with that mentality. I think the last thing I'll call out that I think Coinbase has done well competitively is this mentality of like resourcing continuity throughout the cycle. There's this tendency in crypto because of how volatile the market can be

to really change course cycle to cycle. And we've seen so many firms do this, particularly the ones that have traditional finance routes, when things get dark and sometimes they do in crypto. it's very tempting to shift gears and focus on things that feel safer. We're fortunate to have a core business model that allows us to keep our foot on the gas, but also the conviction, starting with Brian and our exec team, to be all in on crypto. That's a really important competitive advantage for us. We're doing this thicker thin, and it allows us to just extend on product in a way that not every firm can if they're focused on other things in addition to crypto. I'd imagine the service model has had to evolve quite a bit. It's one thing to service a family office. It's another thing to service BlackRock. So I'd imagine that's been a pretty interesting evolution just from a delivery perspective. It has. And you're right. We've built out great specialized teams here spanning, trading, staking, custody, derivatives, a great middle office and account management function. And obviously, a great product and engineering team carrying all the water technically day to day.

We built in anticipation of getting to these super demanding clients so that when they arrived, we weren't entirely off sides. We said, hey, even if this might slow us down a little bit right now, let's think about what this market's going to look like in a year or two and invest so that we're ready for BlackRock and friends when they do arrive. I brought up the FTX and finance issues. The cast of characters has changed quite a bit over the past few years in the crypto industry. There's been a number of them that have come and gone. Coinbase is still a real. round, you're facing competition from the likes of decentralized finance protocols. You're facing still offshore unregulated venues. Maybe you'll see more regulated players coming to this market

in the U.S. I guess we'll see on that front. But how do you see Coinbase just fitting into the broader competitive landscape today in this market? A couple of the large crypto-native names have started to disappear mostly by their own doing in the last year or two. And that's market share. we're very happy to go scoop up. At the same time, I think we very much anticipate that more firms will enter the market as it's rebounding. And we welcome that. It's a healthier market to have a diverse set of large and trusted players in the space. Right now, candidly, it feels like it's as wide open as it's been in my time at Coinbase. I'm really confident in our positioning. But we do expect that many of these large traditional financial institutions are going to get there eventually.

I think we welcome that. We'll absolutely partner with them. in some cases already are through the wholesale business that we discussed earlier and find ways to to support them on subcustody providing access to our markets, staking infrastructure, and more. So welcome that change when it comes. We're going to continue to invest aggressively to make sure that we do our part and really grow our own business. But you're definitely excited for a future where we have a larger and more diverse market. Me too. Maybe looking a little bit out at the frontier, you guys have been involved in some really

interesting developments just at the protocol level with base. And, you know, someone who has been deeply skeptical about real-world asset tokenization over the years, dating back to all of these private blockchain hype cycle plays that tried to disintermediate existing infrastructure by building new layers of intermediation, I would say. You don't have to squint too hard to see that base could actually be a pretty interesting platform to launch some of these real-world assets. We'd love to get your take on that, just both on base and then this real world asset category that is emerging. You'll have to have Jesse as well on the podcast. He's like Mr. Bass, and this is very much his baby.

But I'll give you my perspective from our sort of institutional advantage point. And I'm super excited about base. This is, for those who don't know, in L2 that Coinbase developed under our developer pillar and is really designed to, I think, enable scalability for those who want to live on chain with a reliable and trusted L2 solution. What's cool about this product, and there's not many examples of this I can think of at our company or certainly even in the broader market,

is that it kind of appeals to like two different worlds. So early on, this is a product that's able to be focused on the developer world and a lot of the kind of bottom-up crypto-native market. A lot of the kind of early adopters of this are defy participants and some more nimble corporates. Big picture, this platform, to your point, Matt, also appeals to the world of asset issuers as we get into growth in the tokenization market. And so Coinbase is very much interested in appealing to both of these markets.

I won't say too much more about our strategy there right now. We're just in the early innings. But I'm super excited about base. We've seen some nice early traction. And I think it's going to matter to many different constituents in the market. With respect to your second question around, how do we think about tokenization and real-world assets? Yeah, this has been, I think, a contest. area for debate, and we see interest in this kind of hem and haw throughout the various cycles.

I think this is a very real thing long term, but I see some challenges for where we are today, and I think this takes a few years to get going. So I came up the sales track at Coinbase, and I like to look at things in terms of the go-to-market and think really in kind of two key variables, which we can use to predict, like, how something's going to get adopted. And one is, how compelling is the value prop to the buyer? And the other is, what's the activation friction? Is that friction high or low? And today, I would argue that I think a lot of the tokenization effort fails that test of you want to be in the upper right quadrant and have like both of those things going. I think today you have a lot of situations where you have incremental rather than like

step function value props to the client, mostly around cost savings and efficiency. You unfortunately also have pretty high friction for adoption. So we need to change both of those things over time or make the adoption friction so low that the incremental benefit is good enough to get a ton of distribution of these products. I think it's worth speaking to that adoption friction for a second. That is mostly a function of the regulatory climate where we have regulators in the US at least, I think very intent upon separating the world of crypto from the regulated broker dealer and ATS world that underpins much of the tokenization market. So we need that dam to kind of break down and these two worlds to come together until we can have really low activation friction and I think

get tokenized assets out into the mass market. At the same time, I would challenge the issuers on the kind of scale of the benefit here and to really market these things correctly and focus on the cost savings, which is what I really think this is all about. I think that's well said. Obviously, on the regulatory front, if you had clarity from the SEC on possession and control of a digital asset security that would go a long way on the bank front, having clarity on how to treat these things from a balance sheet perspective and whether or not banks can hold them without taking a capital charge that would go a long way. But I agree with your point around the issuers. I really think you need quality issuers with assets that can scale very rapidly. It's one thing to tokenize

a individual piece of art. There's just not going to be a big market there. But doing things like stable coins is a good first foray, I think, into the asset tokenization world. So it'll be really interesting to see how this evolves. And maybe that dovetails a little bit into the stablecoin strategy and would love to get your thoughts on where that's going. I agree with you, by the way. We're going to see the proofs of me in the pudding kind of in this coming year as we see more and more tokenization launches. So we're excited about that. My expectations are tempered for what the pace of adoption looks like based on these things we've just discussed. But it's an effort I'm really excited about. And we're going to play a key role there through base and through

custodying these assets. Stable coins, this is another huge area. I think it's one of the subcategories of crypto that we could definitively say has found super strong product market fit. And it's a really important part of our business that's been a focus for us as we scale the business and try to operate in all market cycles to diversify our revenue away from just concentration and trading. And stable coins have been a key lever that's enabled us to do that and also something that we think is super valuable in supporting our goals to grow the crypto economy. We remain excited about stablecoins. I think the last year or two, as the markets have shifted and the interest rates, hikes have happened very violently, has been an interesting wake-up call

for the stable-coin world. In a Zerp environment where crypto kind of came of age, I think you had this conflation of what I would call like transactional use cases and savings use cases. And it was kind of all jumbled together because no one was really focused on the savings side in the same way they are now with many kinds of substitutes that created a really sort of wide-assified. aperture for stable coins to take off. I think now you're seeing the market become much more discerning about how they use which types of products. And the service providers in the crypto space are adjusting to that. And they're doing the work now, the kind of catch-up work of getting more sophisticated about the transactional use cases for stable coins, which I think are the most

valuable part of this. And hey, what kind of products can I push out into the world that really take advantage of instant and free 24-7 global settlement. That's like the key thing that I think has been the magic of stable coins all along. We've just been late, I think, in crystallizing those products that really do that well and pushing them out into the market because of how the time in which crypto grew up. I'm really encouraged by the work I see firms including Coinbase doing now to promote stable coin growth. I think you're going to see a ton more exciting cross-border payments and other transactional use cases for stables in the next year or so, and equally interesting ideas for savings-based products.

It's so frustrating to me living in the United States under this regulatory regime that is just missing the ball on stable coins. I mean, you talk about something that could just expand the reach of the U.S. dollar at massive scale. It's already doing that. But, you know, if we had some sort of a framework and regulatory clarity around what it takes to issue one of these things in the U.S., you just couldn't tell. how big this could be. The emergent behavior around people internationally just wanting to hold

dollars on a smartphone is just one of the more interesting phenomenons I've ever seen in this industry. I couldn't agree more, Matt. And I think one major effort that our policy team is working on is, I think, helping lawmakers and politicians around the world to really understand these products. This is, if done correctly, an upgrade for your fiat currency. Some folks, I think, are starting to come around to that, but there's still plenty of education work to do. All right, Brian. Well, this has been awesome. You guys are obviously incredibly busy over there. It continues to be amazing to me how little the by side understands all the things that Coinbase is up to. But where can we send people that want to learn more about the company or look at some open roles at the firm? Thanks, Ken, for having me, Matt, really enjoyed the discussion. So people who want to learn more about Coinbase can visit us at Coinbase.com, which is a homepage for all of our things, including the retail business. And then institutions, we welcome reach out to sales at coinbase.com, which is our email. We'll reply and get a conversation started.

Well, based on the applications here on the Bitcoin ATF front, I think you're going to have a very busy holiday season. So I appreciate you joining us today and making the time. Thanks a lot, Matt. Great chatting. Thanks for listening to another episode of On the Brink with Castle Island. To find out more about Castle Island, visit castle island. Visit castle island. To listen to all of our podcast episodes, please go to On the Brink dashpodcast.com or just click on the tab in our website. Thanks for listening.