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

[Presentation] Conference attendees, please welcome to the stage, FIA President and CEO, Walt Lukken.

All right. All right. Hopefully, people enjoyed the first couple of days at Boca, and we have a great final day, really the crescendo of the entire Boca50 anniversary. Thank you to Coinbase, our sponsor today. Obviously, crypto is hot, Coinbase is hot and the branded hot sauce is hot. So the DeFi Diablo hit. We appreciate you doing that as well. But synonymous with crypto, Coinbase is the largest cryptocurrency exchange in the United States, where everybody can use, buy, sell, store and trade digital currencies. And today, we have Coinbase Vice President for Institutional Product, Greg Tusar, to introduce our keynote speakers. So invite Greg to the stage.

Good morning, everyone. I love that video. It really captures the excitement and the moment in crypto. As Walt said, I'm Greg Tusar. I'm responsible for the institutional business at Coinbase. And it's been a really, really eventful few years in the space, with everything from regulatory battles to the moments like the launch of ETFs and the rise of stablecoins and a whole host of things that bring us to this moment where, for the first time, we have legislation passing through Congress that gives us our much sought-for regulatory clarity. And a really exciting time ahead. We've talked about 24/7 new things that are possible in a regulatory environment that supports innovation. And I think in many ways, this could be one of the most sort of consequential years in the world of digital assets in the coming 12 or 24 months. And so we're -- we thank you very much for joining us for our first Coinbase keynote breakfast. And we're grateful to have 2 guests this morning who are going to help us do a tour-of-the-horizon of all of these things, what's ahead in the coming year: Owen Lau, who is Executive Director and Senior Analyst at Oppenheimer; and our own, Alesia Haas, Chief Financial Officer and seasoned voice in the world of crypto. And please join me in welcoming Owen and Alesia to the stage. Thank you.

All right. All right. Thank you very much. So before we get started, I would like to -- I have a safe harbor statement to read for Coinbase. So I would like to remind you that during today's chat, Alesia may make forward-looking statements. Actual results may vary materially from today's statements due to risks, uncertainties and other factors that are described in their SEC filings. Our discussion today may include references to non-GAAP financial measures, and a reconciliation of non-GAAP financial measures is available in the company's latest shareholder letter. So first of all, thank you very much, Alesia. Thank you for having this -- doing this fireside chat with us.

Maybe let's start off with a more interesting question, which is the crypto summit in Washington last week. So we saw that there are lots of development in the White House, in the new administration. We had the first ever White House crypto summit last Friday. To kick things off, could you please give us a better sense for the conversation around crypto in the White House these days?

Absolutely. So first, thank you for having me. Thank you for coming this morning. I could not be more shocked, quite candidly, because the speed of change, the commitment to crypto that is coming out of this administration is the best blessing that we could have hoped for, for our industry. There was the first White House summit last week. It was joined by the President; by key members of his cabinet; by Brian Armstrong, our CEO; and by other industry leaders. And they had a robust discussion. And the tone was a positive. The tone was on innovation. The tone was on growth. We are on offense. We are on offense as a country and we are on offense as a company. So coming out, we got a Strategic Bitcoin Reserve. This will not be at cost to taxpayers. There's a commitment to never sell bitcoin. This bitcoin will come from confiscated bitcoin that the U.S. government has obtained through various enforcement actions. We also got, and this is a commitment, to stop Choke Point 2.0, which was de-banking of crypto companies, and many banks had not been able to work in crypto. And the President made a commitment to remove reputational risk as a condition or a precondition to not bank crypto. So we now think we'll be able to partner more deeply with banks and drive these on and off ramps. And third, and I think probably the most important, is the President said that he would like to see both a stablecoin bill and a market structure bill by the August recess. This means that we could get legislation this year. So incredibly productive, incredible energy.

So let's dive a little bit on the legislation part. So what is the outlook for this year for these 2 bills?

All right. We are anticipating 2 bills. First is the stablecoin bill. And the stablecoin bill we expect to go to the Senate Banking Committee as early as tomorrow, Thursday. What this will provide is clarity on reserves, clarity on disclosures, clarity on who can issue a stablecoin. And we believe this is the condition precedent for payments. We can talk about the innovation that we think comes from this legislation in a little bit. The second bill then that we anticipate going for President signature later this year is a market structure bill. And the market structure bill will do a few important things. It will ensure that we have a taxonomy for crypto assets. It will give clarity as to what is overseen by the SEC, by the CFTC. What is a stablecoin, which will be a payment instrument. And then maybe what is something else, maybe a collectible, maybe NFTs. Maybe there will be new types of assets that we'll define. But will create asset taxonomy, which has long been a challenge in crypto. The next thing that this will do is it will give spot authority to the CFTC for crypto commodity trading. This has been a gap that there hasn't been a regulator for spot commodity trading in crypto. This will enable consumer protection, enable a regulatory regime that we think will drive more interest in the space. i.e., will help institutions and corporate put more capital into crypto because there'll be a clear regulatory framework. So these are the 2 bills that we think are of critical importance that will be passed, hopefully, this year. This is one of those forward-looking statements that I can't control, I think it's important to note. But we have just been impressed with the speed and the commitment of the entire administration.

There's a good possibility for this year. Let's hope for that.

Absolutely. it will be a win if we get these bills this year.

So you get the tailwind from White House, you get the tailwind from the Congress so far. How about with the regulators, which is the third pillar? Recently, you just got a huge win against the SEC. Could you please talk about your conversation with the SEC and also the CFTC?

It's equally been a 180. Both the CFTC and the SEC could not be more interested now in working with industry and driving forward new rules within each of their areas and driving innovation in America. We are excited that they are moving with speed. I cannot tell you, we think we want to move with speed, they're moving even faster than we are. So I'll start with the SEC. And the SEC has a Crypto Task Force. We actually had an opportunity to meet with the Crypto Task Force last week. The agenda is public on the SEC's website. And we went to speak to them about 2 topics. One, around security tokens and market structure around security tokens. How do security tokens register with the SEC? What is that path to registration? That concept that we've talked about now for many years that there wasn't actually a path, we now think that we can build a path to registration. And we also talked about staking with the ETFs. How can we enable the ETFs to offer staking and how can they participate in securing those underlying protocols? So healthy conversation. And again, we are just impressed with the knowledge, the expertise at the SEC. They understand these issues deeply. And the last thing I would comment is the open transparency that they want to bring, the invitation to come and discuss. What we experienced for the last 4 years was request for information. "Coinbase, please send us X, Y, Z." We would send. "Thank you." No reciprocal dialogue. We are now having reciprocal dialogue. We are brainstorming. We are talking about what we need in order to bring forth this innovation, and I couldn't be more excited. Switching now to the CFTC, Greg Tusar, who you just met, had an opportunity to meet with Acting Commissioner Pham last week in a roundtable setting. And similarly, the CFTC is also looking to drive innovation in their space. Things that we talked about -- things that Coinbase broadly talked about, I was not there. We're bringing 24/7 trading to crypto futures. And we've announced, I think, as Greg has shared with you earlier, that we are going to bring forth both a Bitcoin and Ethereum 24/7 product. This is completely within the CFTC's control to do this, and so we can work with them on bringing forth that product. We also discussed, can we hold stablecoins as collateral? This would enable much more efficient markets, because it would match the 24/7 nature of spot crypto with then a 24/7 nature of the derivative and then a stablecoin which can move 24/7 and is not limited by banking hours. So this would drive just speed, efficiency and enable better risk management for folks who are participating in trading in crypto derivatives. The last, and the thing that we think is the most important here, is the opportunity to bring forth perpetual futures to U.S. retail customers. And this is a product that generates the majority of international trading. It is a very deep and liquid market outside the U.S., but not in the U.S. And so those are the 3 topics. But again, constructive dialogue, open for engagement. The other area that we need to get -- we need legislation from Congress to get the CFTC that spot authority. But on the derivative side, there's deep innovation at this point in time.

Got it. So we covered lots of landscape in the U.S. How about international, right? Crypto, it's a global phenomenon, it's international. Could you please talk about the evolution of the regulation or regulatory framework outside the U.S.?

It's been a lot less dramatic. International markets have put forth regulation. We have MiCA in the EU, we have VASP licenses, which are virtual asset service provider licenses, in a number of international markets. So we just announced yesterday, we obtained a new license in India, which will enable us to start building products for the Indian market. Earlier this year, we announced that we had obtained a VASP license in Argentina. So these markets, it's much more orderly. They put forth a license requirement. We march through the process to get our license so we can compliantly offer products in those markets. And we're pleased that we are now going to continue our international expansion with our proven playbook. So we have the first step of obtaining these new licenses in new markets, and we'll continue to roll out products and services and build banking partnerships, build the products and localize. So we are seeing international growth. We also are pursuing our MiCA license in Europe. This will be the first comprehensive legislation that we have adopted globally, and feel that that's progressing really well. Stablecoin has already gone in effect under MiCA, and we're pleased that USDC is already MiCA compliant and is the largest MiCA-compliant stablecoin in Europe.

So India, Europe, Argentina, those are key markets.

Key growth markets for us in 2025.

Got it. So we talked a lot about regulations already. I know you are more excited about product development. But before then, I got lots of questions from investors about competition, right, given that we may have -- or we are having more regulatory clarity, I think the consensus here is more and more players, even [ stratified ] companies, will come to this space. How do you think about that? And how do you think about the competitive landscape to evolve over time?

Welcome. Come join us. I cannot wait for there to be hundreds of companies and hundreds of investors and more people in this space. This is the next technology generation. We are going from off-chain to online to onchain. And we want everyone to come participate in this new technology and asset class. So welcome. We believe this is TAM expansion. We believe this will unlock new products and services, new use cases that we haven't thought of before. This is not cannibalization. We saw when we launched Bitcoin and Ethereum ETFs earlier this year, those ETFs just drove more spot trading volume. It was a -- everybody wins more money and more dollars coming into this asset class. And we believe with this regulatory clarity, with these innovations, we're just going to bring more assets onchain. We're going to create more opportunities. So we are thrilled. So come on in.

Not worried about that. Welcome. Okay. Welcome. And then another interesting kind of conversation I had with investors about: what are the innovation you can have for this technology? When you look at your product roadmap, your business strategy, what are the implications when you have more clear rules? I think, in particular, what products or opportunities do you think you can move into more aggressively?

All right. I was going to cover 3 topics. This is not a limited list. I think that this will grow over time. But the 3 areas that I think will see more innovation this year is, first, we talked about derivatives. We talked a little bit about recent meetings with the CFTC. We think that we can bring non-U.S. products to U.S. customers. And that will just bring more -- level playing fields around the globe, quite candidly, and bring more customers into crypto trading and derivatives. Two, with innovation on legislation with the SEC, we think we'll be able to tokenize securities. We think we'll be able to bring forward security trading onchain in 2025. This would be amazing. And then third, with stablecoin legislation, we think this will drive payments. And so I think just clarity on well-defining a stablecoin, well-defining what the underlying reserves, the accounting and tax considerations, this will enable corporates to use stablecoins for payments. One of the challenges today is stablecoins still are an intangible asset. I think getting it to be a cash and cash equivalent becomes much more ubiquitous. It's just another dollar on a new technology. So those are the 3 areas of innovation, I think, that we'll see more closely unlock as we go through the year.

So the first one, let's dive into derivatives. Let's talk more about that. I think crypto derivatives account for the majority of the digital asset trading globally, but not much happen or happening in the U.S. How is Coinbase looking to capture more of these volume and opportunities?

Absolutely. So of total crypto trading, about 75% of trading is in derivatives. Of that 75%, less than 5% is in the United States. So this is really a non-U.S. phenomenon and non-U.S. volume that we see. With the things I talked about previously, 24/7 products, perpetual futures in the U.S., collateral in USDC or other stablecoins that meet stablecoin definitions in the future, we think these things will unlock U.S. trading. This is our deep market. We are a U.S. company. We are looking to expand internationally, we're absolutely growing our international share. But we think this will really unlock growth for our customers, both our retail institutions. The other thing I would comment on is, this regulatory clarity, I do believe that customers would like to work with a more trusted, regulated platform. Currently, the market works with many players around the world with not clear regulations, not clear protections for investors. And so I think that our brand being a trusted brand, being a compliant brand, we'll be able to attract many customers to our platform, and we can meet the same products that they would like to trade in other platforms.

Got it. Maybe my final question is the onchain future, right? I think you talked about the -- how to make these online transactions to onchain. Maybe the onchain is the new online, that kind of movement. How do you think about what's next for this blockchain technology? I mean right now, we have to dream big and think about the use cases and stuff like that. I guess the question is: how do you like think about the future of this technology?

Absolutely. So we're building new rails. These protocols are new rails. And previously, we've seen a lot of innovation at the user interface level, but now we are innovating from the rail on up. And so the first thing and the important things that we've done over the last few years is work on capacity. So transactions will be moving very slow on Ethereum, like Bitcoin and Ethereum proved you can send peer-to-peer payments. But they were slow. When you've got a large transaction volume, it became expensive, it became slow. And so we had to build Layer 2s. With Base now, we've been able to scale it so it's under $0.01, under a second. This is an important kind of progress. It's just like going from dial-up to broadband, right? We used to dial up with modems and it was slow and clunky. You could get online, but it wasn't a great user experience. Very similar analogies to getting on-chain. So scale and kind of the Base products. Can they move with the same speed? Can they move with a lower cost than alternative rails? So now that we have foundations, we need to get more assets onchain. So opening up use cases, opening up customers, more assets onchain, whether these are security tokens, whether these are T bills onchain, whether these are different assets that people want to transact with, getting onchain, growing onchain will bring more assets. One of the stats that Brian likes to talk about is the percent of GDP that's executing or transacting on crypto rails. And it's about 0.5% today. We have an ambitious goal to 100x that, to 50%. So we want to move more and more transactions onchain. So stablecoins can be a big part of this. Securities onchain can be a big part of this. So getting more assets onchain. The next pillar of growth to get onchain then is we need to make developing onchain easy to do. So for engineers who are getting into this space, how do we give them developer tools? And we have a whole series of tools that we are building like Base, like Agent Toolkit, as an example, like our Developer Platform, to just make it easy for these engineers to build amazing applications onchain. And third, and this is within our own product suite, we just need to make crypto easier to use. And every year that goes by, I believe we are getting there. But I was the most vocal, kind of like, "Huh?" 2 or 3 years ago when we had our first kind of De-Fi Summer, Onchain Summer on Base. And we had to have like employee sessions to teach everybody, okay, buy your Ethereum, bridge it to Base. Okay, now you've got your Ethereum on Base. Now let's go buy an NFT. Okay, here's how to do it. Handholding. Too hard. I couldn't explain it to my mom. Too hard. And we need to create magical journeys for customers. We need to create one-click experiences. We need to push the technology below the surface, much like we pushed the Internet below the surface, where you just kind of click on the WiFi and it just pops on and it works. We need crypto to be the same way. It needs to just work. And so this is something that we're really investing in within our own product suite to make it easy to use. A good example of this, this year, we announced that you can take loans on Morpho. And so you take your Bitcoin that's in your Coinbase Wallet, on our product, our main app. And with very few clicks, you can say, I would like to lend that out and get -- or sorry, enables -- use that as my collateral to borrow USDC. So that becomes collateral. You got USDC. It's seamless. There's a lot going on under the hood to provide that experience, to move onchain to off-chain to find this lender, but these are the experiences that we want to make easier to use. And I actually believe that getting legislation makes crypto easier to use because that builds trust. And I think easy-to-use and trust have long been the Coinbase brand values. We believe we've earned that trust with our customers by securely storing their crypto now for over a decade. Bringing regulation to these markets will give people more confidence that there's trust, that there's overseers of each of these platforms and how to interact. And those tenets, more assets, more developers, easy to use, this is what we will bring people onchain. We welcome you all to get onchain. Please talk to any of us. We would love to help you. And we would see many corporates, new customers doing pilots onchain and looking about how crypto will work for their business. Do they have remittances? Do they have the need to own Bitcoin on their balance sheet and put it in a hedge? Lots of conversations going on, and we're really excited for everyone to join this market.

Very excited about -- very excited about the technology.

Yes.

All right. I think we should give a round of applause to Coinbase CFO, Alesia Haas.

Thank you to you.

Thank you very much. Thanks a lot.

Thank you, Owen. Thank you.