Coinbase CEO Brian Armstrong talks FTX, crypto regulation and DeFi

Big picture

Is the crypto industry in an existential crisis?

No, not existential. It basically has a black eye because it’s attracted its unfair share of scammer[s] and fraudulent people over the years. Some of it was just bad management if you look at something like Mt. Gox, but with FTX it appears to be actual fraud.

But that’s not representative of the entire industry, and crypto isn’t going anywhere. It’s just like Bernie Madoff or someone like that in the traditional financing system. It’s frustrating and makes everyone look more closely at everything.

Madoff was a relatively small player. Wouldn't it be more like if something like Fidelity had gone under?

Sort of, but it’s a new industry. Fidelity has been around a long time. FTX only started a few years ago, and kind of rocketed up and it was too good to be true.

I went to an a16z [Andreessen Horowitz] Crypto conference a few weeks ago and there were around 100 companies in the audience that were all working hard — legitimate — but they don’t get the headlines.

That’s one of the frustrating things, that sometimes the people who are the most attention seeking, or flamboyant, get too much of the attention. But for every one of those companies there’s so many doing good work — heads down computer science; They’re nerds, so they’re not the most outgoing people.

Where does this crypto winter fall on the severity spectrum?

It’s kind of like Mt. Gox... after 18 months people moved on and nobody asked me about it after that.

Has the FTX contagion been stemmed?

I think there could be a little more contagion from FTX, but my hope is that [everything moves] through the system in the next couple of months, or quarters at most.

Regulation

SEC chair Gary Gensler has said he has enough tools to regulate crypto. Is he wrong?

It’s not my place to say if he’s right or wrong.

Crypto is a variety of things, so there are crypto commodities that should be regulated by the CFTC, there’s crypto securities that should be regulated by the SEC, and there’s other things in crypto like stablecoins that should be maybe regulated by the Treasury, or even crypto not related to financial services like artwork.

The CFTC and SEC have the tools they need to regulate their respective areas of crypto, but what they don’t have is clear agreement on which crypto assets are commodities and which are securities. There’s been a missed opportunity to come together to publish that clarity and protect U.S. citizens. Since that hasn’t happened, I think we’re going to have to see Congress pass new legislation that forces clarity so those two regulators stop having a turf battle.

Will that happen?

I hope that FTX is a catalyst, just like after Enron we saw Sarbanes-Oxley and after the 2008 financial crisis we saw Dodd-Frank.

Do you think we'll get a crypto bill passed in 2023?

It could start with a stablecoin bill, and I think there’s a good chance to have that passed in Q2 because there seems to be a lot of interested in it from everyone from Rep. Maxine Waters (D-Calif.) to Rep. Patrick McHenry (R-N.C.). Even Sen. Sherrod Brown (D-Ohio) sent a letter to Treasury Secretary Yellen calling for guidance. I think it’s relatively uncontroversial.

Then, if we can get that clarity, I think something for the centralized actors could also happen in 2023. A bill that includes things like AML/KYC programs for centralized exchanges and custodians, and clarity about what’s a security vs commodity.

It's also important to preserve the decentralized aspects of crypto in terms of innovation potential.

FTX was based in the Bahamas. How do you envision the U.S. regulating offshore actors?

We have to see a level playing field enforced. I can sympathize with the regulators because their general operating mandate is to focus on their domestic markets … so they’re not always thinking about how to engage with a foreign company seeking to serve domestic citizens. But the world’s major financial markets do have global arms, and they’re going to have to work with international law enforcement to collaborate on more of these things.

DOJ, for example, does have international reach, which is why they’re engaging on the FTX situation.

What was Sam Bankman-Fried's legacy when it came to crypto regulation?

He was very active in D.C. In some ways he drove some parts of the conversation forward, but ultimately didn’t add very much to the discussion given the fraud that all blew up.

The company

Is Coinbase's core business transitory, given the growth of DeFi?

No. We’ll be sitting here two decades from now and people will still be trading a lot of crypto through centralized exchanges. But decentralized exchanges and self-custodial wallets will also grow, and Coinbase is participating in both of those areas as well. For instance, Coinbase Wallet is the most downloaded self-custodial wallet in the U.S. over the past year or so.

I think it’s important for people to get into crypto first by converting fiat into crypto through centralized products, but then they often want to graduate from that into the decentralized economy.

Coinbase succeeds when crypto trading volume and prices rise. So what's the argument for buying Coinbase stock, as opposed to just buying bitcoin or a basket of crypto assets?

I think people should do both. The bull case for Coinbase is we’re the leader in the market from a trust point of view and the largest [exchange] in the U.S. The market is giving us very clear feedback that they want to work with trusted companies if they’re going to be centralized actors ...

We’ll also be a beneficiary of increased regulation and diversifying our revenue stream away from trading fees. For example, 36% of our Q3 revenue was subscriptions and services. We planted these seeds years ago and they’re beginning to come to fruition and make us more resilient.

Your stock is down around 86% this year, and your debt is trading at around 50 cents on the dollar even though you have plenty of cash on hand. So which annoys you more, equity investors or debt investors?

I don’t know what to say about that. We’ve been tempted at times to think about our options there...

You mean purchase back some of the debt?

We’ve considered all kinds of options but have nothing to share at this time.