The Journal. - Coinbase’s CEO on the Future of Crypto

Episode Date: July 8, 2024

After high-profile collapses and government crackdowns, Coinbase CEO Brian Armstrong is one of the last big digital-asset founders standing. He speaks with Ryan Knutson about taking up the mantle, clashes with the SEC and the future of crypto. Further Listening: - The Trial of Crypto’s Golden Boy  - The Fall of (Another) Crypto King  Further Reading and Watching: - Who Is Brian Armstrong? Coinbase CEO Is Taking On the SEC  - Coinbase CEO Says He’ll Challenge the SEC for ‘Clarity’ on Crypto  Learn more about your ad choices. Visit megaphone.fm/adchoices

For years, there were three giants in crypto. Sam Bankman-Fried, the founder of FTX, Chengpen Zhao, the founder of Binance, and Brian Armstrong, the founder of Coinbase. These companies, all crypto exchanges, allowed people to buy, sell, and store cryptocurrencies. And for two of these CEOs, Bankman Freed and Cheng Pen-chao, who is known as CZ, there's been a lot of bad news over the

past few years. One of the largest exchanges in the world, FTX, collapsed this week after a chain reaction set off by a leaked document that raised questions about the company's finances. The head of cryptocurrency company Binance has pleaded guilty to failing to maintain an effective anti-money laundering program. Binance founder, CZ, sentenced to four months in prison on anti-money laundering charges. FTX founder, Sam Bankman-Fried,

was sentenced to 25 years in federal prison. All this has left only one crypto titan still standing, Coinbase CEO Brian Armstrong. How did it feel to watch those two other CEOs, Sam Bankman-Fried and CZ, get sentenced to prison time? It was cathartic in a way. I spoke to Brian late last month. I mean, we knew that Binance and FTX were cutting corners. Like, that was pretty obvious.

We knew that there were some things that they were launching, which we felt like were breaking the rules. But I did not anticipate that FTX was actually stealing customer funds. That was a big shock to me. I felt actually pretty duped by it because I had spent time with Sam. But it was nice to see that the justice system still functions and that something reasonable happened there. Welcome to The Journal, our show about money, business, and power.

I'm Ryan Knudson. It's Monday, July 8th. Coming up on the show, a conversation with Brian Armstrong about the downfall of his rivals and the future of crypto. I'm Scarlett Johansson. My family relied on public assistance to help provide meals for us. These meals help fuel my love for acting.

When people are fed, futures are nourished. Join the movement to end hunger at feedingamerica.org slash act now. Brought to you by Feeding America and the Ad Council. Brian Armstrong first got interested in crypto more than a dozen years ago, when he was a software engineer at Airbnb. Since then, he's spent his career building Coinbase into one of the world's largest cryptocurrency exchanges. So, you've been called the new face of crypto. Do you accept that mantle?

I try not to think about those things, to be honest, because, you know, crypto goes through these cycles, right? So when it's up, there's sort of too much hype. And you get these things like Sam Bankman freed on the cover of magazines and stuff, right? And then when crypto is down, you get too much to spare, and people either ignore it or they hate on it. So whether the media or the zeitgeist or whatever is calling you a genius or an idiot, like, you kind of have to ignore it because both of them are not true. Brian co-founded Coinbase in 2012 and took the company public in 2021. And he says he was more risk-averse than Bankman Freed at FTX or CZ at Binance.

I mean, I do think Coinbase has always taken a little bit more of a long-term approach. We're not trying to, you know, get rich quick and rock it up in the numbers. We've been around much longer than both of those companies. And so I think we're like a little less flashy, but a little hopefully higher on substance. You know, and we've tried to just become a trusted brand. But, you know, I don't know, maybe it just comes from my personality a little bit.

I'm a bit more of an introvert. I like to just work with our teams on building good products. Unlike Coinbase, FTX and Binance focused more on overseas customers, where there's usually less financial regulation than in the U.S. And Binance and FTX offered complex financial products that let customers make huge bets on crypto by borrowing money. Coinbase was much slower to adopt things like that. And for a while, its business seemed to suffer as a result. When FTX was rocketing up and they were on the cover of all these magazines and people would say, oh, they have 300 employees,

but they're doing similar volumes to Coinbase. And we all remember we had all these conversations internally. We're like, wow, are we missing something here? Like, could we be running this company more efficiently? Are we not moving fast enough? Why haven't we launched these products? And we looked at it closely. And in many cases, we said, no, I think we have the right risk tolerance.

That these decisions they're making seem to exceed our risk tolerance. They seem to exceed what the law allows, especially for U.S. customers. And it was a very difficult time, actually, as we saw our market share erode and some of these competitors come on the scene. And there was moments where we were sitting there questioning, like a year or two years had gone by, and we're like, are we going to see the enforcement action come? And so it did eventually come. In March, Bankman Freed was convicted of fraud and sentenced to 25 years in prison. He's appealing his sentence.

FTX is effectively defunct. And in April, Binance and its CEO, CZ, pleaded guilty to violating U.S. anti-money laundering requirements. The company was also ordered to pay a $4.3 billion fine. And CZ spent four months in prison and was forced to step down. Did you ever talk to law enforcement or regulators and say, hey, like, what FTX is doing or what Binance is doing here doesn't seem okay? So we never went out proactively

and communicated with any law enforcement about that sort of thing. I don't like this idea of trying to use the government to win in business. But periodically, we would have lots of conversations with regulators almost every week or various... We work with law enforcement on different subpoenas, legal cases, and things like that.

And periodically, they would ask us, and they'd say, well, what's going on with X? And we'd say, we don't understand that either. As far as our reading of the law, it doesn't seem like it's legal, but, you know, you should go do your own research. So we tried to keep a clear line there. Do you think the fact that these two CEOs went to prison

says that there's something wrong with crypto? No, I don't think that. And oftentimes when a new industry emerges, you get kind of this Wild West phenomenon. What happens in a lot of these new industries is that they mature over time. And you see kind of clarity emerge and who are the good players, who are the bad players. And so I think that's happening in crypto as well. Obviously, there was a lot of things wrong with FTX. But the thing that instigated its downfall, of course, was sort of the run on the bank, so to speak. Everybody was coming to pull their money out of FTX very quickly.

And that's something that for everything you do as a company, as Coinbase, you can't always prevent that kind of thing from happening. From a lot of customers, at some point, they get spooked for some reason. They come to try to withdraw their funds out. Is that something that you worry about happening to Coinbase? And how do you defend against that? Yeah. So I'm not worried about it in our case. And the reason is that there's a very different underlying structure of a bank, which does something called fractional reserve. In other words, they don't have all of the funds there. They've lent it out. And that's part of what a banking license allows you to do. Now, Coinbase does not have a banking license. And so we don't

do fractional reserve. We have 100% reserve. And so if 100% of people wanted to come withdraw, they would be able to withdraw. In FTX's case, they did not have a banking license. They could not do fractional reserve. And they moved customer funds into their hedge fund, essentially, and had invested it without notifying customers or without their permission. Crypto's challenges haven't ended with the imprisonment of Bankman Freed and CZ. Brian says the industry is in need of a total regulatory overhaul. How he's pushing the crypto agenda in Washington? That's after the break. end hunger at feedingamerica.org slash act now. Brought to you by Feeding America and the Ad Council. So you've spent a lot of time lately in DC lobbying lawmakers and talking about the need

for regulation in the crypto space. What's wrong with the current situation and what kind of regulation would you like to see for the crypto industry? Yeah, so we've been advocating for regulatory clarity for quite some time. Some parts of the rules are already clear, for instance, around anti-money laundering and know-your-customer rules. So those are things that Coinbase has been following for over 10 years now. But there's other areas of crypto where the law currently is not clear. One of the big debates is around which of these assets are commodities and which of them are securities, because in the U.S. we have two different federal regulators for those. This is an important distinction, because commodities and securities are regulated very differently.

Securities are things like stocks and bonds, financial instruments that are issued by a single company or entity. And there are lots of rules people who sell securities have to follow. Like, if a company wants to sell stock, it has to disclose information about its business, like its revenue, balance sheet, and cash flow. Commodities, on the other hand, are more like raw materials, stuff like corn, wheat, or copper. There generally isn't just one company behind it.

So commodities are subject to far fewer disclosure requirements. Corn doesn't have cash flow or a balance sheet. It's just a vegetable. Cryptocurrencies don't fall neatly into either category. They're kind of like commodities in that a cryptocurrency isn't exactly a business, but it's also like a security because oftentimes there is a group of people behind it who can get rich if a coin becomes popular. Brian says a Coinbase, which offers over 200 cryptocurrencies on its exchange,

looked at thousands of individual crypto assets and decided against listing 90% of them, in part because the company couldn't decide if it was a security or a commodity. A couple years ago, Coinbase tried talking with the Securities and Exchange Commission about which cryptocurrencies should be considered commodities and which were securities. But Brian says they didn't get a clear answer. commodities, and which were securities. But Brian says they didn't get a clear answer. The impression I got from them is everything other than Bitcoin is a security. And we said, interesting, I mean, that's not our, that's not what it says in the law, according to what we can tell. So can you tell us how you got to that conclusion? And that's where we, you know,

they said, we're not going to be your lawyer. It was kind of a shut, a shut door. So. Well, sorry, but why would that be bad? I mean, if the SEC is saying, well, everything other than Bitcoin is a security, like, okay, so what? I mean, how would that affect Coinbase? First of all, that's not what the law says in our reading of it and every external firm that we talk to. And then if that were true, there's not a way to actually go and trade those securities. There's a number of unanswered questions about how that would even work. And so it's sort of like saying, hey, we think they're all securities, but there's not a way to actually trade them as securities. It's kind of like de facto saying the whole industry should just shut down. And so if you're in that case, it makes the

decision easier. You need to go to the courts to get the clarity. Coinbase doesn't want crypto to be classified as a security because it would create a major headache for the company. If all cryptocurrencies were determined to be a security, Coinbase would have to do a ton of work in order to sell it. First, Coinbase would have to delist all its cryptocurrencies and get a license from the SEC to sell securities. Then, Coinbase would have to go to issuers of individual cryptocurrencies, some of whom are currently anonymous, and convince

them to go through the onerous process of registering as a security with the SEC. Coinbase might also have to pay fines for having illegally sold securities in the past. Last year, the SEC sued Coinbase, alleging that some of the cryptocurrencies listed on its site were actually unregistered securities. Coinbase is fighting back. How far are you willing to take this fight with the SEC? Would you ever consider settling? I think we're prepared to take this case as far as we need to go.

There's no reason why we would settle it. I think we have a good chance of winning it. And I suspect even if we win, they would appeal it and we may have to go further, you know, maybe even to the Supreme Court. But I think we'll ultimately prevail. And so we think of it as a service that we're providing to our customers in the industry to create clarity in the rules because we haven't gotten it, unfortunately, from the regulator themselves. The SEC has said its regulations are designed to protect consumers from bogus investments and that many cryptocurrencies display clear characteristics of a security. What needs to happen, I believe, is that Congress needs to pass new laws

to clarify this new industry, make sure that it's built onshore in America. And we started to see broad consensus around that. So, for instance, in the House of Representatives earlier this year, they passed a bill, a comprehensive crypto market structure bill called FIT21, which stands for Financial Innovation and Technology in the 21st Century. which stands for Financial Innovation and Technology in the 21st Century. But it passed with more than two-thirds majority in the House, which is pretty rare actually in this Congress to get bipartisan support like that. So now the Senate is taking up that bill. And so it's really exciting to see that progress.

And you never know exactly when new legislation will get passed. It kind of requires the stars to align. But we've certainly been big advocates for that. And I think it's become a major voting issue in the U.S. as well. People, they really want to see candidates in government. They're going to help create clarity here. Brian and Coinbase have put millions behind pro-crypto organizations to lobby for new laws in Washington. One is a super PAC called Fairshake, and the other is an organization called Stand with Crypto,

which gives politicians a rating based on how strongly they support the industry. Is that what you're basing your voting decisions on in the election? Is a politician's stance on crypto? I mean, that's certainly one of the factors for me personally. Yeah. But it's not really, I'm not personally kind of sharing anything about what I'm, who I'm voting for or anything like that. I don't think it's necessarily my place to do that. I just think that, you know, voters should go get educated on it and see, make up their own minds. I mean, Stand With Crypto gives Joe Biden a D on his support of crypto and Donald Trump an A, which is a pretty big difference.

But you're saying that's not necessarily, or you're not going to say whether that's a reflection of how you'll vote in November? No, I mean, I've made a decision that I'm not going to talk about it publicly because I don't think, again, we want to be bipartisan and support pro-crypto candidates. That's what is in line with our mission as a company, but I don't think that it's

necessarily my place to come out and talk about my personal voting or endorsement or anything like that. Do you think that Americans care that much about crypto, even if they happen to own it, that they would vote along those lines as to who supports crypto and who doesn't? Well, I think there's a spectrum. So I think some of them, they're a single issue voter on, right? Some of them, it probably wouldn't be in their top 10. But I do think that there is a mismatch of understanding in DC and in Congress right now about the number of voters who care about this, because it does, it's, you know, crypto skews a little bit younger. It's a little bit of a, it's a generational divide, right? And so oftentimes when I meet with members of Congress,

which the average age of Congress is a little bit older, right? And they'll tell me, oh, you know, I haven't used crypto, but my kids use it. All my staffers use it. They have the Coinbase app. And so DC, I think many of them have gotten educated on this, but some of them haven't realized yet that it's a massive constituency. And they feel, you know, they feel disenfranchised or frustrated by the current lack of clarity. And so they're definitely looking for candidates to come and represent their values there. And so they're definitely looking for candidates to come and represent their values there. What do you think it would mean if you don't succeed in getting the clarity that you want for the industry and the status quo stays the way it is?

Nothing is frozen in time, right? So it's just a matter of when it'll improve. I can't tell you with any certainty whether it'll happen in this Congress or the next one or the one after that. But I do feel pretty clear that more and more Americans are going to start using this over time. If we imagine where the world is in 10 years from now, more people will be doing digital payments and using crypto rails. So eventually it'll happen. It's just sort of a matter of when, not if. So you're obviously pushing hard for the future of cryptocurrency, but what is the future that you imagine? I mean, do you see cryptocurrency being something that slowly over time replaces

the existing financial system? Do you see it as something that everybody uses for most of their economic transactions? Like what does the world look like in 5, 10 or 20 years? And how long is it going to take to get there? Yeah, well, the future vision here is that we'll have a financial system that's more fair, free, efficient, more global access. I think that over the next 5, 10 years, you'll see a greater and greater percentage of global GDP run on crypto rails because it's more efficient. The fees are lower. You can do real-time settlement. It's more

global. So it's not like every country having its own proprietary system. It's a more global connected system, kind of like the internet. I think in the next 20 years, we'll see more and more of it happen over crypto rails. And that'll be an incredible accelerant for economic freedom and human progress. That's all for today. Monday, July 8th. The Journal is a co-production of Spotify and The Wall Street Journal. Special thanks to Vicky Huang and Caitlin Ostroff. Thanks for listening.

See you tomorrow.