Coinbase Global, Inc. (COIN) Earnings Call Transcript & Summary

Okay, everyone. Welcome back to Piper Sandler's Global Exchange and FinTech Conference. It's my pleasure to introduce Brian Armstrong of Coinbase, who has not shied away from going to the public and expressing his opinion. Too bad you weren't here the last session, Doug Cifu of Virtu is pretty strong in his views. So first, I'll just turn it over to you, Brian, if you have any comments in general you want to make about Coinbase and sort of what has transpired over the last couple of days, I guess.

Yes, sure. So obviously, we got this complaint from the SEC yesterday, and it was not unexpected. We've gotten the Wells Notice before that. And actually, for the last year or so, we've been in dialogue with the SEC about our business, and they asked us to come in and answer a bunch of questions. We're happy to do that with regulators we work with all over the world. And so we met with them about 30 times over the last year. Every time they asked us a number of questions, we give them answers. We told them, do you have any feedback for us? What -- when you say come in and register, what does that mean? What license can we go get? We even went out and acquired a broker-dealer license hoping to activate it with the SEC, so we could trade cryptosecurities. They -- we haven't found a path to do that with them yet. We formally filed a petition with the SEC to get clarity around rule making. They have yet to respond to that. And so after all those 30 meetings, we -- and no feedback, we basically got this Wells Notice and now an enforcement action from them. So unfortunately, it seems like the SEC is taking this path of regulation by enforcement instead of creating a clear rule book. That's not good, obviously, for us, but it's not good for the -- more importantly, the crypto industry and America because this is one of the most important technologies that America should invest in. And America risks being left behind in this regard. Every other financial hub in the world is embracing this technology, creating clear rule books. Europe has already passed comprehensive crypto legislation. When I go to U.K., they say the PM meets with me and he says, I want this to be a web 3 hub, how do I get companies like you to build and invest here? Same thing in Singapore. Same thing in UAE. So the U.S. is a little bit of an outlier. It risks falling behind. And I think the most likely path in addition for us going to court now is to help get some clarity for the industry. We're going to see Congress actually step in and act to create a clear regulatory framework just like we've already seen in Europe and the U.K. is about to do, et cetera, and Hong Kong has already done. So anyway, we're -- this will get resolved. We're not going anywhere. This company is staying in America. We're going to be a multinational investment in countries all of the world, but we're staying in America. We're the leader here. And somehow, some way America is going to get this right, whether it's our court case, the Elections in 2024 may shift things, maybe Congress will get some of this legislation passed, like the bill we saw come out last week. So I'm optimistic, and I think we hope we're doing a service for the industry and for America here.

Brian, you've talked a lot about that the SEC charges are saying that you haven't registered, but can -- and you see Gary Gensler said publicly -- come in and register, he said it on news programs. Can you talk about the process of coming in and registering? And is there a coin my test, and I'm trying to be as impartial as possible. But my test, is there a significant coin right now that besides Bitcoin and Ethereum that has gone through the process that is currently traded -- passed the security -- as a security pass and is trading now?

Yes. So when we say coming in -- or he says come in and register, I think that could mean an exchange like us, it could mean a token, so I'll talk about each of those separately. So for an exchange like us, when we heard that, we said, great, we want to work with regulators. That's when we first started reaching out, trying to get more meetings. And frankly, it was -- we got a bit of an ICE reception, I would say, the first time. In that first meeting I finally got with him and he said, you've asked us to come in and register. We're here to register. How would you like us to proceed into -- to come into the regulatory perimeter. And his response was, I'm not going to give you legal advice, talk to your lawyer. That was literally his answer in the meeting. So that didn't seem like a very good start. So anyway, we decided, okay, well, maybe a broker-dealer license. And we went out and acquired one of those, it's still dormant. They haven't allowed us to find a path to activate it, right? We're sort of trying to animate the SEC to help get it within the regulatory perimeter but it hasn't had any luck yet. So my conclusion from that after all these meetings was that, I don't really think there is a way to register. It's not -- there's basically no way to do it. We've tried repeatedly in the U.S. Now for tokens, it's pretty similar. Most of these tokens -- if they're truly decentralized, there is no central authority to come in and register or to create these disclosures, right? A true cryptosecurity, which, by the way, I want there to be a healthy market to trade cryptosecurities in the U.S. as well, that would be an important market. They should have a path to come in and register and do that. But there's only, I think, maybe 3 tokens that I'm aware of that have tried to actually go in and register with the SEC and basically all 3 failed. And for various reasons it doesn't seem to be a good path for the token -- the asset issuers to go through.

I mean to the best of my knowledge is that there isn't a significant token that has gone to the process -- registered and trading at this point. And again, I'm just trying to be neutral in the process, but we're not aware of any that have made it through this process. Next, you've talked about -- we've talked about -- we had Mike Novogratz this morning -- about how people are still steadfast that they're going to -- they want crypto to grow in the U.S. But I guess my question is now, does it -- I think you've already talked about doesn't really impact your strategic vision of Coinbase in the U.S. You've gotten a number of what I read of cease and desist orders from 10 states or maybe more than 10 states. How does -- are you going to -- how does that impact Coinbase? Will you continue to operate? Does that impact your revenues at all? Or just some color on how you're going to navigate what's going on there?

Yes. So on the back of the SEC complaint coming in, we did see a number of our state regulators as well not specifically about our staking program. They sent us a note, issuing like [ you see us ] assist in some cases. And so they basically followed on the SEC action and said, specifically your staking program. We have an issue with -- so my -- we're going to be in dialogue with the states as well just as we are with regulators all of the world. My guess is that what will happen is they'll follow -- they'll basically wait for this court case to proceed with the SEC, get some clarity and then they'll probably follow on from that. Just in terms of your bigger question about what does this mean for our business? Frankly, it's business as usual right now, right? There was no injunctive -- immediate injunctive relief sought or anything like that in the SEC complaint. So all the assets that they mentioned, which is 13 of the 200-plus that we trade. So it's a pretty small percentage of the total assets that we trade. But those -- we're going to continue to trade those. Our staking program is still up and live today. So we'll continue trading those while this court case is figured out, which could take some time. And I guess I would say that our revenue -- I don't expect there to be a significant impact to our revenue. Again, it's 13 of 200-plus assets. But a lot of our revenue also comes from non-trading fees now, things like stable coins, custody for institutions, et cetera, it's about 50% of our revenue now. We also have revenue outside of the U.S. So we have $5 billion of assets. And in Q1, we kind of turned the corner and become adjusted EBITDA positive. So I think we're well positioned to kind of weather any storm here, and we have a lot of resources to make sure that we're going to court to win here, right? I think it's important to set a good precedent and it creates some case law so that the U.S. finally starts to get some clarity.

And that is -- do you think that the -- is that really the only way that's going to enable the U.S. to be competitive in that if there isn't -- well, is that the only way to [ buy ] a route through the U.S. right now. There has been some legislation as late as Friday that appeared promising, at least from my standpoint, I guess, what are your ideas? Is that a good start? What -- is it McHenry-Thompson bill, is that correct? What they've put out is -- is that a good start of the legislative process of how do we navigate to get the U.S. in a position to -- for clarity so you can grow your company.

Yes. So there's a couple of different paths that could take. I mean the first and easiest option would have been that the regulator just publishes a clear rule book and then everybody in the industry follows it. That would have been the idea. But if that's not going to happen with the SEC, then another option is to have the courts, create case law. That's great. Another option is to have Congress create new legislation, of course, because Congress oversees the SEC and the CFTC. A third option would be to have the CFTC step up and actually take over the spot market authority on the commodity side. Another option would be, frankly, in 2024, it could change the whole landscape, and we have different regulators. So somehow, some way, America is going to get this right. This is too important of a technology to just have it be pushed offshore, not only would American customers be harmed as we've seen with other things like FTX, but it would also just really put at risk America from a national security point of view because crypto, it's not some financial product. It's a technology that can be used to update the financial system at large. And that's very important for America's role as a financial hub in the world. I guess just 1 final thought on that. I mean think about some of the other major technology trends like with 5G or semiconductors, now with AI, right? I mean with 5G and semiconductors, we let a lot of that stuff go offshore. And now there's a massive kind of impetus within Congress, how do we get it back onshore. And so America has a good position in crypto. It started with a good one. It's kind of losing its position and most members of Congress who I meet with, they're like, okay, we need to get clear legislation pass, so we don't end up in a situation like with semiconductors or 5G.

So the SEC in the last several days has brought charges against finance as well. You've obviously had a chance to look at it very closely. So can you talk for the investor purpose about there's some differences there. Can you point out sort of the differences of what you see has been what's been alleged at Coinbase versus finance?

Yes. So it was definitely curious that those 2 announcements came out 1 day to the next. It was right ahead of this hearing that's happening, but it was also probably a deliberate attempt to kind of paint the industry with a broad brush. So I think people are probably smart enough to see through that. But -- and again, I don't want to talk too much about any other company in the space, but I'll just tell you about Coinbase. So the complaint that we received was really different. It didn't have any allegations of misappropriation of customer funds or wash trading, myself and the executive team were not named personally. We are also a company that's just -- we're based in the U.S. We're a public company, so we have to follow all the standards of that, including audited financial statements by a big 4 firm, so people can trust it. We've never created our own hedge fund that trades on our platform. We think that that's a conflict of interest. We've never issued our own token. So the difference is kind of go on and on. Yes, I think that most people can see through that and -- the exciting thing, by the way, about getting clarity from the courts is that, that is actually kind of -- has the potential to increase the TAM, right, or the revenue of this industry. So yes, I think people right now are thinking about it in terms of well, what's the downside risk, but the way I'm thinking of it is if we start to get regulatory clarity, what's the upside potential.

I think whether it's your call or whether it's Galaxy or other, when you have crypto discussions, anybody in the industry says more regulatory clarity would be help is needed. That's helpful.

Yes. And you mentioned that McHenry-Thompson bill that came out on Friday. I thought that was certainly a great step in the right direction. I mean it basically starts to outline, okay, here's the role of the CFTC, here's the role of the SEC. So we stop having this kind of turf battle that everyone -- and contradictory statements by the head of 2 federal regulators. And then it says, okay, let's just introduce some basic consumer protection best practices around AML, KYC and auditing financial statements and things like that. So it's a pretty common sense bill from what we've seen so far. And there may be a few things that we'd want to tweak on the edges. But my hope is -- I don't know if it's this bill or the next one or the next one, but one of these bills is eventually going to get through the Senate and actually become law because the rest of the world is already doing it. And the U.S. is kind of -- is falling behind.

And then if we don't move some bill, and I think -- again, correct me, you're the expert on this. But if there isn't some build to start, which you say from your opinion, a good start, we're not going to get through this process here quickly unless you need to start. So I don't think the bill is bipartisan, but it's at least some place where you can start the negotiations. So I guess my question is, if we don't get the bill, do we get to the U.S. so far behind that we can -- that eventually, you say, hey, I've got to really move operations and I got to generate revenue where I can, where there is clarity, that not -- because you're not a patriotic guy, but you're doing what's best for shareholders. Like how close are we that we really put in a road block to the U.S. being a strong marketplace for Crypto?

Yes. I mean I don't think we're too close to that yet despite the negative headlines and rhetoric. Obviously, we have a budget every year, and we can choose to allocate a certain -- more or less of that to our overseas operations. And we want to be a U.S. company that's really a multinational, right? But I think we're not really close to that red line in the U.S. yet. I mean the great thing about America is not only is it a big market where we're the leader, but there's rule of law here, right? And we have to follow the rule law, but so does the SEC. And the current rhetoric from the SEC about every asset in Crypto other than Bitcoin is a security, that just doesn't really -- that's not what the law says. And so if we need to go to court to get that clarified, if we need to have Congress Act to get that clarified, America has a great kind of self-healing system, right, not just with these higher authorities that we can go to. But it's also politically, right? I mean every 4 to 8 years, sometimes the winds blow a certain way and then they kind of blow the other way. And imagine if we were in a country that was a dictatorship where someone was there for life, this would be a much bigger issue. In the United States, the average tenure of an SEC chair is about 3 years. So it's partly just we have to wait until the right people are in the right roles if this one doesn't work.

Before -- and I do want to -- I have a question more on the fundamentals or at least the story of coin base all by itself apart from regulation. But one last thing. You've talked about how these disconnects not only between Coinbase and the SEC, but the CFTC and the SEC. Can you point out, I guess, what do you think are the biggest conflicts? And then why has this -- in the best European disconnect where you -- in your blogs and what you said today, what you've said in the press today, is there such a disconnect between the communication, I guess, between the regulator and promising company like yours -- like Coinbase?

Yes. So in the U.S., we're in kind of a unique situation where there's 2 financial federal regulators, right, the CFTC and the SEC. When I go to meet with the regulator in the U.K., there's just one, The Financial Conduct Authority, right? So they regulate both commodities and securities. And maybe not surprisingly, this whole issue of, like, what is a commodity, what's the security in crypto. In the U.K., it's basically a nonissue, like nobody talks about it. The same thing in Singapore, where the MAS, right, or in other UAE, there's just one reg. So basically, in the U.S., it's kind of become politicized with the 2 federal regulators and that's just led to this massive debate and tons of legal billable hours for every start-up in the ecosystem, trying to figure it out. But it's sort of a moot point in these other regions. So anyway, I think there's something called the Howey test, which kind of helps determine if some things of security. And the basic version of it, of course -- I'm not a lawyer, but the basic version of it is, was there an investment of money in a common enterprise with an expectation based on the profit of others. So it sort of has these 4 prongs. And those 4 need to be true for it to be a security. So you can imagine there are some things which satisfy 1 or 2 of those prongs, like, for instance, somebody might buy a Picasso painting with the expectation of piece of fine art, hoping that it would go up and value. So there is an expectation of profit. But Picasso painting is not a security because it's -- there's no common enterprise or a bar of gold, right, or baseball cards, like there's lots of examples of things that kind of then validate 1 or 2 of those. And so we need to basically get an updated version of the Howey test or a new case law that helps clarify some of these questions like -- if something is decentralized, so there's no common enterprise, does that make it a commodity? I think most lawyers would say, yes, right? If it has a certain amount of utility, meaning the network is live and people are using it for something, then maybe it's primarily about the utility and not some expectation of profit, right? But if you're -- legitimately if you're just trying to raise money for your company to launch something like that's probably a security, and we should have a way to have people go register crypto security in the U.S. and make capital formation more efficient, right? So these are some of the areas of the law that need to probably get addressed in these bills that are being drafted and -- or through the courts with some case law. And if we get that, then the potential for the industry goes up.

Aside from regulation, I'm going to show my age. I was around during the Internet bubble, the bubble and the burst, cover the e-brokers in '99. So I tried an analogy on what is happening in the crypto markets that not all technological advances go straight up in to the right. You do have some pullbacks. So I guess my question is, Brian, when I looked at the Internet, we went through a burst -- or excuse me, an upward movement and then a burst. And you saw the e-brokers trade dramatically down. Trading activity go dramatically down. But was the firms that stayed focused on their job -- their 1 job was to do retail trading. And everyone would say to me, well, Merrill Lynch is going to overtake E-Trade or Ameritrade because they have all the technological capabilities as each, but they never woke up every day like E-Trade and Ameritrade having to make all their revenue and shareholder value generated just from online trading. So the question is your focus, and this is why we've been supportive of Coinbase because your focus has been solely on crypto that you can be more nimble that the ones that made it to the Internet collapse. It took 10 years, but they traded, they sold $10 billion plus. So can you talk about your focus, your vision to give the audience because I've heard it, but to give the audience a little bit of a glimpse into Coinbase on how you've been so focused on moving crypto and your belief in crypto forward.

Yes. I mean I think that's a great analogy because there are lots of firms now who are dabbling in crypto, I would say. Actually, most of the big financial -- traditional financial firms. Fidelity is -- Goldman Sachs has a thing, and JPMorgan has a thing, right? So it's Franklin Templeton is doing stuff with crypto. So it's actually gone -- it's gotten pretty integrated into most of the big firms. But to your point, it's a side project for them. And so it is really valuable to have a firm that's 100% dedicated to crypto, and it's also valuable to have a firm that is taking a trusted and compliant approach based in the United States, a public company. So we're kind of in the nice -- I think the Venn diagram of that there's sort of [ N-of-1 ], which is Coinbase. So a little bit of our vision, I guess, that you asked about just in terms of our focus on crypto. So crypto, it's going through these kind of 3 stages of evolution in my view. And it started off as a new form of money or a new type of asset class that people were trading. And for the early years, that was primarily what people did with it. They traded and they speculated on it, right? And then we saw people start to use it for new types of financial services in Phase II. So whether that was international payments, with remittance or commerce, they were doing decentralized lending and DFI, making decentralized exchanges. So we started to see crypto as a technology that could update various aspects of the traditional financial services. And then in this third phase, we're seeing crypto start to be used for things which have nothing to do with financial services, which is commonly kind of called Web 3. And it's really like a new application platform for the Internet. So it's people making decentralized identity and new forms of ways for creative people to get compensated to have direct relationships with their fans and artwork like NFTs or metaverse type stuff. And decentralized social media, right? And so we're kind of seeing that as like the third phase and we're seeing startups start to do some activity in that space. So in that whole world, I think Coinbase can be people's primary financial account in this new crypto economy. And that's how we hopefully will get this to 1 billion people eventually using it. There's a lot of things that need to happen for that to become a reality. I mean we need to get the regulatory clarity, like I talked about, but we also need to get the blockchains to be more scalable. We're kind of still in the dial-up modem era like your Internet analogy of crypto where the fees are too high and too slow. And so we got -- with these layer 2 solutions, they're called, we're going to get to that broadband era, I think of crypto, and we'll see another range of applications emerge on the scene.

I just want to thank -- I appreciate you coming. It was sort of a last-minute thing, but your willingness to communicate with investors. And I know you've been out there publicly today, but to tell -- get the message. I'll give you the last sort of voice or statements to talk to investors. We've covered a lot of ground, I guess, is there anything else that you would like to clarify or you would want the investment community to know about Coinbase and sort of something the happenings over the last couple of days.

Well, I was just thinking back to your comment about the Internet bubble and E-Trade and everything. And I think you're right. Technology does go through cycles. I'm a student of history, I like reading these books about -- like if you look even back at the radio and television and the telegraph, the railroads, we kind of had a bubble in fiber optic cable being laid for a while, and that corrected. So we often see these kind of Gartner hype cycles where there's sort of irrational exuberance, things correct down and then the real work is being done over a long period of time to get the value out to more and more people in the world. So I think Coinbase is a company that's really unique in that sense. We're based here in the U.S. We're adjusted EBITDA positive last quarter in the depths of this bear market by really managing our costs thoughtfully. We are a public company, we're hoping to really bring this to a large number of people. And so I think that this technology is the single most important one that we have to update the financial system, to create more economic freedom in the world. There's billions of people out there who don't have the financial infrastructure that we have here in the U.S. From a global perspective, that's pretty exciting, just about as more and more of those people come online, how are they going to participate in the global economy, it seems likely that over time, they're going to use more of like the native currencies of the Internet rather than their local fiat or the dollar or something like that in a global context. On the Internet economy, I think crypto will be more and more of a standard over the coming decade. And I think we're the best positioned company to build that and take advantage of it.

I want to thank you again for stepping out there and communicating with the investment community and we appreciate you making the effort to stop by today. Thank you, Brian.

Thanks for having me.