The Exchanges

Q Which operates inside of FTX as well as in other places, right? But again, Alameda seems to have Blown up. Sorry, Brian back to you.

A Yeah. So it seems that they had this solvency issue and instead of just letting it blow up, Sam basically said, um, Hey, we have a bunch of customer assets over here at FTX, or he somehow basically made a loan from FTX into Alameda to try to prop it up. I don't, I don't know why he did that. I mean, that that's the moment in my mind where he crossed the line into probably committing fraud. And I, I think he probably lied to users lied to investors. And he went around and tried to bail out these different companies like, like Voyager and BlockFi and to sort of prop up this thing. And maybe he thought he could trade his way out of it or something. I I'm not sure, but that seems to be where the mistake was made.

AI assessment note: “he somehow basically made a loan from FTX into Alameda to try to prop it up”

Q Everybody wants to know, ah, how that worked out for the company. So maybe you could tell us what it was like to go through that, because, I mean, you were a target for, for, for a period of time. We all thought, seems reasonable. And then how has that actually impacted day to day life for the people who decided to opt into working at a single focused coinbase?

A Yeah, so I would say, you know, short term, it was quite a painful transition. I think it created a lot of consternation. There was, you know, some folks in the media decided to go call a bunch of people who'd left the company and, you know, write hit pieces and all that kind of thing. And frankly, you know, about five percent of the company opted into the exit package package. So there was some teams that were shorthanded. A lot of people had to work extra time to fill in the gaps. But long term, I think it turned out to be an incredibly positive decision for the company. I do think there's a lot of companies in Silicon Valley right now and probably elsewhere is that, you know, the CEOs and the management team almost feel like they're being held hostage by employees. And I feel for some of these organizations, you know, Sundar probably has an incredibly difficult job right now. We saw that, that video from Microsoft, I think last year with, with Satya and kind of was with people talking about their hair color and stuff. And They don't feel like that they can really lean in and move the company in the direction they want. And they're, they're fearful of kind of all these internal dynamics. So, you know, I think there's probably a better way to do it than what I did, which is if you're starting a company today, just make that clear upfront. I didn't make it clear upfront. And so…

AI assessment note: “short term, it was quite a painful transition.”

Q of people were tricked into trusting FTX and having their deposits there. And it was a centralized exchange, which caused all these problems. So it's like, it almost violates the principles of what the whole product market fit was supposed to be. So what, what should sort of the observer expect and what do you expect as a business in terms of how governments now react to all of this?

A Yeah. Well, I think it's really important to distinguish between the centralized players in crypto, which are custodians, exchanges, et cetera. Coinbase has a big business there and the decentralized players, which are, you know, self custodial wallets, defy protocols, web three, that whole world. So the centralized players, um, should be regulated. And today they're regulated already likes, like kind of traditional financial service businesses. But they don't have the regulation clear when it comes to the crypto aspects. So, for instance, in the US, we, we actually don't still have clarity about what is a commodity, what's a security, should, which one should CFTC regulator versus SEC, that kind of thing. And that lack of regulatory clarity, and frankly, the, the climate of regulation by enforcement, the negative rhetoric from, you know, chair Gensler in particular, has created this sort of chilling effect in the US that has pushed a lot of that centralized actors activity offshore. In fact, 95% of the trading volume in crypto is now outside the United States, and it's come down a lot since the beginning of this year even. Now the decentralized players, self-custodial wallets, DeFi, Web three. This is where crypto really has an opportunity to make a more fair and free and transparent system because you can go look at any smart contract to see exactly what it's doing. Anybody c…

AI assessment note: “So the centralized players, um, should be regulated. And today they're regulated already”

Q doesn't a lot of that complexity arise from the sort of the, the substrate, which is you're building on top of blockchains, and people want that decentralized, like, trustless sort of layer? I mean, isn't that, I mean, I think, I think all these companies could be doing a much better job with UI. I agree it's a problem, but does it arise from the limitations of the tech stack?

A Yeah, well, it's, you know, it's just like, um, people used to only write desktop software, like Microsoft Office, and then Google came along, and they're like, hey, what if we could do everything in a browser? And, you know, Google Docs and Sheets was initially, like, way worse than a desktop software. It was always gonna be slower, because it was a new, you're building on a web stack, and all this. And, you know, the tools got better, and JavaScript engines got better, and, and, and I think that's the, you know, broadband happened. I think that's the era that crypto's going through, and it's our responsibility as the companies in the space to make this happen. No one's gonna do it for us. We, you know, there's all these competing protocols, there's big, there's big egos, there's personalities, we've got to come together, make the tools simpler, integrate them, make them interoperable. Um, I, this is where I feel like I should have, I could have done so much more over the last five years, you know, and I- Same happened in hardware, early on. What's that?

AI assessment note: “I think that's the era that crypto's going through”

Q The space, you would agree, is rife with crime. So if they want to, you know, and that's their counter, so respond to their counter. What's true about what they say?

A Well, they're, they're absolutely correct that this industry has attracted some really bad people, right? I will admit that, um, if you look at the beginnings of any new technology, you know, the internet, there was lots of scams, um, even in traditional financial services, we have Bernie Madoff and Exxon periodically, right? So, what you should do in a free society is, if somebody commits fraud, absolutely, that's what the justice system should do, is go after them, create a deterrent, put them, put them in jail. You know, Sam Bankman-Fried should go to jail. It does not mean... It does not mean that the industry should be outlawed, and the, one of the really dangerous things that's happening is that, you know, the Constitution says that Congress creates the laws. What's happened, sort of, is that we've created these agencies, and because they can just send subpoenas to everybody, or publish these guidance letters, you know, this is kind of the administrative state, if you will, um, they are de facto creating laws. You know, other industries, like in the FDA, if the FDA puts out a guidance letter, And you don't like it. Well, what's, what are you going to do? It's a de facto law. And so there's an interesting constitutional argument around this is like, is the administrative state overreaching? And I think we've seen that in this example with the SEC.

AI assessment note: “they're absolutely correct that this industry has attracted some really bad people”

Q business and the US business and Alameda research all rolled up into this one frozen entity, right? With now regulators having to, so do you know what happens in a process like this? Like, is it that the, the DOJ and the SEC get priority or is there some international monetary, like who, who's, who unwinds all of this? How, how do people get their money back if at all?

A Yeah. So I'm not an expert at this, but my high level understanding is that the bankruptcy courts will essentially, and I believe they filed bankruptcy in the US, which is an interesting thing. I didn't know why they did that versus Bahamas. But anyway, the bankruptcy court will basically go through and try to find any assets of value. So, I mean, they must, they still have some tokens and value. They have a venture portfolio. They, you know, I think Sam owns nine percent of Robin hood. There's various things that they may own. And then they'll kind of auction those off to various bidders on distressed assets, and then try to distribute those funds to the customers. I don't know the exact process beyond that, though.

AI assessment note: “the bankruptcy court will basically go through and try to find any assets of value”

Q Well, I mean, I think it's a very interesting one. Brian, what do you, what do you think of this?

A I get it. These are complicated issues, right? We want to balance protecting people, but we also want to not have the government be in a position where it's picking winners and losers. And so, you know, just because something is legal doesn't make it make it a good investment. I guess, you know, you could have, you could have owned Netflix last week or something like that. And you guys might talk about that in a minute. But Look, I think we all want to get rid of fraud, right? So if you commit fraud, meaning you lied to investors, Then that's going to be a crime, right? Like we, I want to, I want to work with anybody in government to go put that, make that stuff not happen. The danger is if we ever get into a place where we say, well, only wealthy people can now invest because somehow there's an accredited investor test. That's inherently exclusionary. I don't, I don't like the accredited investor laws. If we ever get into a place where the government is saying, you know, well, you have to, you have to have XYZ criteria and a person with this many years of experience on their resume. And then now we get into like the government Sort of designed by committee to pick winners and losers. And that's, that's inherently flawed because, you know, a lot of true breakthrough innovation, they look like bad ideas at the beginning. They're the kind of things that a government body would ne…

AI assessment note: “We want to balance protecting people, but we also want to not have the government”

Q Do you think that it was his altruistic intent that allowed himself to convince himself to do this? Or do you think this was like malicious the whole way? Or what, what's your sense of the guy?

A So again, I'm speculating here. I mean, I I've spent time with, I've, I've met him a bunch of times and I have to say, I did not see this coming. Like he, he appeared to me to be, um, a very bright, credible, competent person, perhaps a bit young, perhaps, you know, a bit reckless at times, but not unethical and not Not committing fraud. I, I definitely did not see that. You know, if I look back to see, were there any warning signs that I should have thought twice about it? You know, one of the things I noticed was that in 2021, you know, Coinbase had a good year. We, we did seven billion in revenue, four billion of positive EBITDA. We went, we became public as a company. At that time, FTX did about one billion in revenue. And I knew how much money we had for our venture budget and just like different investments we wanted to make. And I, and I knew their revenue and I had to scratch my head a bunch of times and I was like, where is this guy getting all this liquidity? Because he was like buying nine percent of Robin Hood. He was putting like a billion dollars into this. He was donating to all these politicians. And I was like, I, I, it did not make sense to me where he was getting all this cash. People just kept telling me, oh, his market maker Alameda is just printing cash. I guess like, okay, I guess, you know, it seems like a conflict of interest to own an exchange in a mar…

AI assessment note: “I can't explain the psychology of it at this point”

Q would have to be limited to accredited investors, etc. What should the United States do here? And how close are we to getting clarity? Because I know you're trying to talk to the SEC directly about can we just get some clarity here? Can people buy these tokens or not? What is the status of are they tokens? Are they securities? Or are they not here in the United States?

A Yeah. So luckily, since then, we have had a lot of productive dialogue with both the SEC and the CFTC and Treasury and all kinds of people in Congress. And I do think the US is making some steps in the right direction. There was actually, there was a bill going through Congress recently called the DC CPA or the Stab now Bozeman bill. Although it's having some challenges now, frankly, due to this FTX blow up because SPF was one of the people sort of pushing that bill forward. But regardless of that, the sort of system that we should have is There should be a clear designation between what is a crypto commodity, and that can be regulated by the CFTC. And what is a crypto security? Now this is one of those legal and by the way, what is also a stable coin and artwork and other things that are not any of those things. The challenge lies in that there's kind of a fuzzy line between what is a commodity and what is a security. And a lot of this law is based around the Howey test, which says a security is an investment in a common enterprise with an expectation of profit. And so it's basically a point based system. And in the absence of really getting a clear list between the CFTC and the SEC are in this turf battle, I would love it if you know, they could basically put out a list, get their heads together and put out a list. Hey, CFTC is going to do these SEC is going to do these a bun…

AI assessment note: “I would love it if you know, they could basically put out a list”

Q action in Canada. Uh, people are concerned about their attestations or lack of clarity on their commercial paper. What, what do you think of these stablecoins getting very big, and maybe USDC seems to have it pretty tightly, um, covered, but there's all these concerns and regulatory actions against Tether. Is that a big nothing burger? Or does it concern you that there's a lack of transparency into their holdings?

A Yeah, so I would say, you know, some of the early stablecoin efforts definitely didn't have all their ducks in a row from a reputational point of view. You know, I'm not an, I'm not an expert on tether. My understanding is that there have been some investigations and enforcement actions which have required them to go in there and clean up some things. And, um, you know, our, our digital asset listing group kind of looked at a lot of this in depth and made that judgment call that where they where they were and where they are now. But yeah, I do think that we're seeing the emergence of new groups like, you know, USD coin is one of those that I think has some better controls around it. And there's actually a bunch of stable coins now that are decentralized. You know, dye and fracks.

AI assessment note: “investigations and enforcement actions which have required them to go in there and clean up”

Q opportunity? I'm a private market investor. I would love to be able to take my early position in Robin Hood or my early position in Uber as it was going up and put it into a market and let people trade it. And yeah, that would be very interesting to, for VCs, for, you know, angel investors to be able to move that around. How do you think about it?

A Well, I think it has to be done with the permission of the companies. Cause you know, if you're, if you're a private company, you don't want your employees to be able to get liquid after one year. You're trying to, you know, that's why you have vesting. It's why it's, it's a retention mechanism, right? Let's all build this together. And then like, maybe when we go public, cause there are stories of founders who like took a little secondary too early, then the company didn't, didn't work out and it's, you know, bad off. So I think what's going to happen in, in crypto is that, um, in the private markets, like, first of all, we should make On-chain capital formation way easier for private companies. So if you want to go, um, this is, this is what we're chatting with the SEC about and others is like, you know, can you go register a security? Um, right now you'd only be able to raise money from accredited investors in the U S I know you, you and I agree on this. Like we'd like to expand how you can become an accredited investor.

AI assessment note: “I think it has to be done with the permission of the companies.”

Q your customer, you've obviously taken a very conservative approach to what tokens you, uh, put on the platform, and then you have competitors who are offshore, who it's kind of YOLO, anything goes. Um, what is the current administration doing right, wrong, and, and what needs to happen here in the US to, for us to be competitive in crypto while still protecting citizens from, you know, being bag holders?

A Yeah. It's a big question. So, you know, as a startup, you're always trying to thread the needle here. You don't want to wait too long for clarity, because sometimes these things take five, 10 years, and so you'll just never launch a product. But if you, if you're too aggressive, you can blow the place up. And so what we always did in the early days of Coinbase is we said, we want to go do what we think is going to be required in the future, go get licenses, go do KYC, go, go, go do AML, anti-money laundering. And so we tried to basically do the right thing, go and talk to these regulators proactively. Now, the US has actually been pretty forward thinking on this. I'd say every year we get more and more clarity. So Coinbase is now a very regulated financial service business. You know, I can go through the whole list. We have a license from the CFTC, a federal regulator. We acquired some broker-dealer licenses, which the SEC regulates. We have money transmission licenses. We're a bit licensed in New York, et cetera. And that's just in the United States. So we're in many, many countries around the world. So how do we get more clarity? Well, one thing I'll just say is it's actually better for there to be lack of clarity than to be clarity that is punitive or bad. So it's good that there's a little bit of lack of clarity as long as it's not curtailing the industry, but would be eve…

AI assessment note: “US has actually been pretty forward thinking on this. I'd say every year we get more”

Q individuals You know, that you viewed interesting models that give people the ability to affect social change in a way that kind of historically may have been more of a hill to climb, where people can kind of aggregate resources and aggregate a voice in a way that can kind of affect outcomes. And do we think that that kind of becomes a mechanism for social change in the future?

A You may you make me think of DAOs and things like that. But I think a lot of that is kind of unproven. The DAOs are probably good ways to get new kind of governance systems in place for allocating capital, or maybe even managing a city or Or a society. But I, you know, I kind of agree with David. I think the best way to affect change right now today is for young people is start a company or join a company. I think young people are sometimes a little enamored with like becoming an activist, but I think fundamentally that's, you're, you're sort of giving up your power by saying like, well, they have the power and I don't. And so I'm going to speak truth to power. But I think, you know, some, there's context for that historically, whether that may have been more true, but I think today, a lot of people, they have more power than they realize. And if you go start a company, which by the way, companies are decentralized too. You can have lots of little companies all over the world. Um, they're not like, you know, monolithic usually. And so if they start a company, they can have a good impact, I think, on the biggest issues out there.

AI assessment note: “DAOs and things like that. But I think a lot of that is kind of unproven.”

Q It's unbelievable. But Brian, to the question I asked before about the SEC and what should happen, you said, I want to pick up on what you said, which is the SEC doesn't seem motivated. Why is the SEC in your mind not motivated?

A Well, I think you're right. I hope that they use this as a moment to come together and help, you know, local companies in the US being built here to end up in a better place. And I do believe, you know, David, I think said it's right. It is a political issue at this point. There's going to be a major impetus to get the clarity here in the US and hopefully to help build the companies here in the US that are going to serve the rest of the world and in every major financial hub. So we're committed to building that together with all the regulators around the world. And crypto is here to stay. This is a temporary setback, but I'm here to keep building and make this thing happen.

AI assessment note: “It is a political issue at this point.”