Coinbase Global, Inc. (NASDAQ:COIN) Barclays 2023 Global Financial Services Conference September 12, 2023 11:15 AM ET
Company Participants
Alesia Haas – CFO
Conference Call Participants
Benjamin Budish – Barclays
Benjamin Budish
All right. Hello, everyone. Welcome to our next session here. I’m Ben Budish, Barclays analyst, covering the U.S. brokers, asset managers and exchanges. And with us, for our next session, we have got Alesia Haas, CFO of Coinbase. Alesia, thanks so much for joining us.
Alesia Haas
Thank you.
Benjamin Budish
Just to start, I’m going to read the Safe Harbor statement.
Alesia Haas
I appreciate that.
Benjamin Budish
During today’s discussion, the Coinbase may make forward-looking statements. Actual results may differ materially from today’s statements. Information concerning risks, uncertainties, and other factors that could cause these results to differ is included in Coinbase’s SEC filings. The discussion today will also include references to certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are provided in the Shareholder Letter on the company’s Investor Relations website. Non-GAAP financial measures should be considered in addition to, but not as a substitute for GAAP measures.
So with that said, Alesia, great to have you here. It feels like every week that goes by in crypto is, like, a year in our regular lives. Like, so much has happened since we last spoke.
Question-and-Answer Session
Q – Benjamin Budish
So maybe starting with, we are a month after your Q2 earnings call. Some of the major themes in that call were financial discipline, product excellence, driving regulatory clarity. But before we dive into those buckets, what’s top of mind for you? Like I said, a lot has kind of gone on. What are you most focused on?
Alesia Haas
Those are our three strategic priorities right now. So we continue to make progress against each of those, and I know we will talk about those later. [Technical Difficulty]
Talk more loudly. Okay.
It dovetails with the regulatory goals that we have. And we think there is a combination where the regulations, our most trusted brand and the product innovation will really drive growth for us as a company. So that’s an exciting initiative that’s announced in Canada since we last spoke. We’ve been working on the global expansion. We also are just continuing to accelerate our product momentum and I’m really proud of our efforts to continue to innovate, to diversify the revenue streams. We launched SPACE. We can talk about Onchain Summer and kind of the growth with that protocol. And then on the discipline, you saw that we’ve done a debt repurchase. We are looking to be more financially strong, build an efficient and financially prudent company, so making good progress there as well. And I would just say our morale is strong and I’m so proud of our employees and our ability to focus, execute what we see in the headlines despite of what we see is the dramas that we all get kind of uncomfortable within crypto, the ups and the downs.
Benjamin Budish
Up for the course.
Alesia Haas
A little bit. For better or for worse, here we are.
Benjamin Budish
Well, so on the product side, let’s talk some — to a little bit about derivatives from your futures business. So Coinbase recently received approval for its FCM license, but let’s start with the DCM. So you’ve been running a futures exchange in the U.S. for some time now, mostly through other retail brokers and clearing firms. And more recently you’ve kind of expanded to institutions with some larger notional based products. So maybe start with an overview of the product set here. What’s the behavior like on the platform? Who are the typical users so far? Are they hedging? Are they speculating? And what sort of growth have you seen?
Alesia Haas
All right. Let’s zoom out broadly. So Coinbase has been a spot trading platform up until just recently, which means that we were participating in roughly 25% of the global trading market for crypto. Derivatives represents 75% of the global trading part of market. So bringing forth a derivatives platform and offering has been one of our core strategic priorities. And we’ve been working towards this goal for many years. Working towards this goal — because these are in the U.S. highly regulated products and so it requires requisite licensure to be able to offer.
So the DCM was the very first product that we offered and that is the crypto derivatives exchange. We couldn’t offer that directly to our end users. You had to then bring in derivatives brokers to that product platform. And so the goal there is to start to be building liquidity. We offer a few different contracts of different sizes. We are building smaller, what we call, nano contracts that are designed for retail users and larger contracts for institutions. And onboarding more and more brokers to enable that development on our platform. But the key — and I think we’re going to talk about this next, is being able to then broaden this product suite to enable more and more of our end users and our customers to access derivative products. The goal here is for them to express a variety of trading views, whether it’s speculative trading, hedging positions. Even for ourselves, we earn a lot of revenue now in crypto. So like our staking revenue is crypto-native revenue. Being able to hedge that effectively if we can’t sell it right away is an important thing to manage our company and we think if others need that, we’ll both speculative and non-speculative in these cases for non-derivative products.
Benjamin Budish
Well, you let me to ask my next question. So what changes now that you’re approved to FCM? What can you share in terms of what the product might look like, the target user, if you can share any details around like the fee structure, what that might look like in P&L considerations that we should keep in mind?
Alesia Haas
So this is the next step on our journey. So we got the exchange and now we just recently were approved for Coinbase Financial Markets to be targeted broker. So that means now we can build products direct to our end customers, direct to our retail customers, direct to our institutional customers. So now the broker will trade on our exchange, in addition to other brokers that can trade on our exchange. But our direct to retail is one of the key parts of our journey.
We’re really proud to be the first crypto-native platform to receive this license. And we can now have a platform where we can do derivatives, spot all within the same family of products and services. This is a highly regulated product by the CFTC and the NFA. This is the license that we receive. We have not yet launched this product. We are in — I think we’re technically now in beta testing of it. And so this is coming soon that we’ll be able to start rolling this out. Our goal is to offer retail products that are small contracts that are commensurate with how retail investors traded crypto on the global market, but in a highly regulated way. We also think that this — securing this application or this license demonstrates our commitment to compliance and demonstrates that we are willing to do the hard things and obtain the licenses when there is clear regulatory structure to do so. So we’re excited about this. We haven’t launched, but it is coming soon and we think this will be an important part of our story going forward.
Benjamin Budish
We’re all looking forward to it.
Alesia Haas
Thank you.
Benjamin Budish
Maybe lastly on the topic of derivatives. Can you give us an update on the international exchange? What’s the behavior like for early adopters, which as we understand is more institution-focused? Maybe what does that kind of profile look like? Is it market makers crypto hedge funds, trading firms? And what are your thoughts on rolling this out to retail around the world?
Alesia Haas
Absolutely. So what we just talked about was the derivatives offering in the U.S. which as I mentioned, CFTC regulated products. For non-U.S. customers, we have started to offer derivatives products through what we call the International Exchange. These are perpetual futures, which means they look different than U.S. derivatives. They don’t have an expiry date. They roll essentially. And what we are doing there is we’ve just launched this product to eligible users in global markets. This should come with no surprise, but other countries like the UK, Europe, they have other licenses that we would need to obtain to offer derivatives within certain markets. And so we are obtaining licenses to be able to grow these products and we will kind of have rolling announcements within the derivatives product offering as we obtain new licenses. But for select customers in global markets, the Coinbase International Exchange will serve that platform.
Today we are still in the process of building liquidity. We’ve opened up order books. We are just getting started with onboarding customers. So initially, it’s market makers to develop the liquidity that is the key foundation of any market platform. And we’ll go from there to onboard customers, but we’ll serve retail and institutions abroad.
Benjamin Budish
If I could ask maybe one more sort of ancillary question, I think sort of as we think about — or as we understand the crypto landscape outside the U.S., we tend to see more of a concentration in retail traders, more of a concentration in the institutional side in the U.S. Why do you think that is and why you sort of start your International Exchange with an institution focused approach rather than retail?
Alesia Haas
So I think the answer is, it’s both. Importantly when we looked at the market and we obviously talked to our customers, as the competitive landscape changed with certain implosions in 2022 and certain changes in banking rules that we’ve seen in 2023, the market has changed materially. Market makers though are the foundation of these platforms, regardless if there’s a lot of volume from retail or not. And so we need to start with the liquidity market. We think our most trusted brand and what we bring to the market in terms of just simply the transparency of our financial statements, our commitment to doing the right thing in compliance is going to lead us well to be able to onboard to institutions that will provide the foundation that we can then offer it to more — and corporate, more retail users, et cetera. But it’s really step one to get the hedge funds and market makers there.
Benjamin Budish
Makes sense. Maybe changing gears a little bit, let’s talk about USDC and Circle. So you’ve recently announced a revision to the relationship with Circle. Can you talk about what drove that new agreement? What do investors sort of need to know to understand the background, any context you can provide?
Alesia Haas
So USDC is our stablecoin. We think stablecoins are a really important part of the overall crypto ecosystem as they offer the benefits of crypto, which we think is the promise of faster, cheaper, more accessible products without the volatility that you see in so many crypto assets. And so these are U.S. dollar backed cryptocurrencies that have instant 24-hour settlement.
We have been in partnership with Circle since 2018. We jointly launched USDC. And at that time, we did it through a consortium which we referred to as Centre. We have learned a lot over the last 5 years of this relationship, and so we thought there was efficiencies to be gained. We think there is accountability for Circle to be the sole issuer and Coinbase plays an important reseller opportunity in this ecosystem. This transaction unlocked the ability to put USDC on 6 new protocols. Importantly, it put it on Base. Base is the Coinbase’s new Layer 2 solution. And we think that Base starts to open up the opportunity for us to build this future of our goal of, like, very fast, very cheap transactions on a global payment rail. And the commercial relationship that we have with Circle was slightly amended as well. So we have always had a commercial relationship with Circle by which we earn a portion of the revenue from the underlying reserves on USDC. We continue to earn revenue on that, but what we simplified is now for the off platform, i.e. USDC that’s held not on Coinbase on our platform, not on Circle but just these DeFi wallets in other platforms, we now split that equally. So that was the key economic change within their relationship. And then we took an equity stake in Circle as a result of finding Centre.
Benjamin Budish
Got it. So maybe let’s talk about USD itself a little bit. So what are your thoughts on the decline in market cap over the last 6 months? What is the company doing or what can you do to try to remedy this?
Alesia Haas
Yes. So going back to Q1, we had a really unfortunate event in Q1 with the banking collapse that Circle had just over $3 billion of reserves of USDC reserve at Silicon Valley Bank. And over the course of the weekend before it became clear what would happen with uninsured deposits, USDC depegged i.e. in secondary trading in various crypto platforms, people were selling their USDC for less than $1. Nobody ever burns their USDC. So with USDC, you mint it, which means you give the issuer $1, you receive a USDC. When you burn it, you give the issuer USDC, you receive $1 back. So the minting and burning continued at 1-to-1, but secondary trading rate said I will just trade on a secondary platform USDC for something else, started to depeg. As a result of that depeg, market makers needed to restore the peg back to par, and the trade that they did to restore the peg, resulted in a significant decline in the market cap of USDC.
So, what we’ve seen then is, that has been since Q1 compounded by then from other platforms choosing to not offer USDC and moving to non U.S. dollar backed stablecoin or non-U.S. domicile issuers because they were clear of the overall what was going to happen to banks in the U.S. We saw money move to Tether. No comments, no judgment, but interesting to observe. But now it’s really stabilized. And over the last few months, that means, what it looks like a new the USD schedule, right, roughly the $26 billion level.
So what are we doing now at Coinbase? I think it’s really important now with this new deal. The other thing that I didn’t mention is, previously Circle and Coinbase would compete for mint share to drive their share and the economics. The new deal removed competition because it’s split equally, which means, we are jointly motivated and equally goaled to just grow the market cap again. So Circle is doing things, Coinbase is doing things.
So focus on what Coinbase is doing, we are really working on integrating USDC in our products. I mentioned that, we are USDC now on Base. USDC on Base, we believe we will get us to a future where pennies will be spent for international payments, that really changes what people can spend right now on, like, compared to Western Union compared to a wire, compared to so many expensive payment rails. So these are 24 hour, few pennies, few seconds of confirmation time, money can move anywhere in the world. We also have added a reward rate on USDC. So just today we were now up to 5% reward. So you hold USDC on our platform, you can earn 5% on your USDC. We find that when customers hold more assets on our platform, they’re more likely to trade, more likely to integrate in other products and services that we offer. And so this is net additive to the behavior within our platform.
We’ve also made USDC the primary trading pair on our International Exchange that we talked about. So encouraging then market makers and others to use USDC at that primary currency and especially in crypto with this 24×7 market you have to move money more quickly, you can’t move if you have 24×7 through the banks, through moving it through the exchange system. And so stablecoins are a key to that. And so integrating that deeply in our exchanges is one of the other things we’ve done. So we’re working through all of our products to see how we can more drive behavior, drive adoption towards USDC, which will in turn, we believe will help drive the market cap up.
Benjamin Budish
So maybe from now thinking about Coinbase’s P&L, so you’re now generating a pretty meaningful portion of revenues from interest income. There is presumably a future risk that if you were to see rates fall, you could see a disproportionate bottom-line impact. So how are you thinking about hedging this risk and thinking longer term? I mean, I know Brian is a dreamer, right? He’s thinking about the next 30 years of what the financial ecosystem looks like. But how do you anticipate interest income will evolve? Will it remain a meaningful portion of Coinbase’s revenues? Or as we look farther and farther out, does it get diversified away? How do you think that kind of shakes out?
Alesia Haas
I’m really cautious to say that I have a crystal ball about how anything shakes out in crypto. And so one of the things that we do is we just run scenario after scenario after scenario and we continue to invest in diversification. So with USDC specifically, obviously if interest rates fall, that will impact USDC revenue. We’re hopeful now that we can grow our market cap, that volume offsets price and we can see a change in that revenue trajectory. But it is a scenario that interest rates fall, it’s a scenario that we then see degradation in net revenue, no different than we saw interest rate rise and we saw growth in net revenue in this year.
What’s important though is we’re building multiple uncorrelated revenue streams. And I think that’s kind of an important part of our story. And we have multiple new products that monetize in very different ways and our goal is to build diversified revenue. So just like as we saw when interest rates rose, that investors went to a more risk off behavior, so we saw less trading in crypto, because volatility has come down, because risk behaviors has transformed. We think that lower interest rate environment changes risk on behaviors and so you could see more specificities. So those naturally offset each other.
But now we also have a custody business that grows with assets on platform. We have a staking business that’s growing with assets on platform that is offering validation of transactions. Ethereum has been an important protocol that is underpinning multiple new utility use cases with decentralized applications. And so the behavior is, just speculations for utility. Base is going to monetize this protocol, as I mentioned, Coinbase has through sequencer, every single transaction on Base that is monetizing through just like a payment for sequencing the transaction, uncorrelated with price, uncorrelated with interest rates.
So the key for us is continued diversification, continuing to ensure that we’ve got good product adoption and then our revenues will have correlations of broader macro factors, but we can hedge them out through different things. No different than if a big bank has trading revenues go up one year, maybe asset management changes another year, maybe investment banking piece. We’re looking for that type of diversification and to lower the beta of our revenue streams.
Benjamin Budish
Moving on to another topic, Bitcoin ETFs. So a number of applications have been filed with the SEC and Coinbase has been listed as a partner, either as a custodian, prime broker, surveillance sharing partner or all of these. So I guess first, what are your thoughts on the potential fund approvals? That I think there seems to be a market view that BlackRock is coming at this, they probably are going to crack the code and that seems to be kind of a view that’s developing. But what are your thoughts there? And second, how should we think about the P&L impact to Coinbase as the partner in those various ways?
Alesia Haas
We were absolutely honored to be selected in so many ETF applications. And we think it just speaks to the trust and the value of our platform because you can imagine the level of due diligence that we went through to have been awarded these mandates to be selected as these participants.
The primary revenue stream for us is custody revenue. So we will be custodying the underlying spot asset that supports the ETF of these various funds. We believe that over time that they go to trading, as they buy additional Bitcoin to put into the products or sell as the case may be. So we think these bring ancillary revenues.
As it relates to the timing, as it relates to the certainty of the SEC approving or not approving these, I honestly can’t speculate as to when that will be. We are heartened to see the quality of the names that have submitted these applications and I think it speaks to that they’re seeing their end customers seek out these products and services. They’re not doing this for the fun of going through an application process, but I also think they have the credibility and the reputation of bringing high quality financial services products to market. And so I hope that they’re taking very seriously.
We are heartened to see the recent court case with Grayscale where the judge ruled that the SEC can’t act in an arbitrary and capricious manner and that we have to have a leveled playing field for these ETFs. These are good signs, but it’s still subject to approval and timelines are uncertain. They’ve been recently extended. So we’re doing all we can to support the applicants.
Benjamin Budish
Fair enough. So how do we think — or how do you think about sort of the pros and cons of these products? So on the one hand, we could see Bitcoin volumes — maybe on the negative side, move away from Coinbase, you could see that sort of incremental user say, well I could buy the ETFs in my Fidelity account. On the other hand, it brings in a whole group of new investors into the asset class that maybe weren’t able to — or were hesitant because of this sort of onchain nature of Bitcoin which could be quite beneficial. So how do you think about those sort of pros and cons? Good for the ecosystem, but could you see volumes activity migrate off of Coinbase?
Alesia Haas
We’re definitely in a camp of good for the ecosystem and — but I think it’s so important. It’s one in five Americans owns crypto today and predominantly that’s Bitcoin. That is 50 million Americans that is 5x the number of people that own an electric vehicle. So we already have lots of spots Bitcoin holders. But importantly you can’t have a spot crypto asset with registered investment advisors. They can’t advise crypto to go into portfolios and so they can advise for an ETF. And so we think that this opens up new pools of capital, many new market participants now that can now invest assets into crypto in a regulatory compliant product that meets their then requirements. So for us, we think this is additive. We think this is going to continue to grow adoption of crypto assets. We think this legitimizes the asset class. It just brings it more and more into traditional mainstream products and services and it will benefit in other ways like providing custody services. We can provide support. That’s broadly our goal then because what we do want to be direct-to-consumer in many of our products and services, we also want to build important tools that enable other financial services providers to offer credit for their products to their end users. And this is an important way we can grow value.
Benjamin Budish
That makes sense. Maybe move over to sort of trading, thinking about the competitive environment. Starting off on the trading side, you surprised again on the last earnings call on a fee rate side, but as you kind of explained, that was largely due to mix shifts in the customer base. At the same time you’ve always maintained that over time you expect your fees to contract. So given that that’s not really played out over the last three quarters, nine months, what does that trajectory look like? What does the timeline look like? And what are the factors that you weigh internally when you think about balancing revenue versus volume growth?
Alesia Haas
Absolutely. We fundamentally believe that at some point in time, crypto trade will be commoditized, no different than many assets services that become commoditized. I mean, equities took 20 years to get to the level of fees that we see today, no fees, and to be truly commoditized. So crypto will go on a same journey. I don’t know that it will be 20 years. I don’t know it will be 5 years, but we do believe that when we get to the level of commoditization with multiple participants being able to offer these services, these will go down. They’re not commoditized. What we are seeing is instead companies blowing up for poor controls. Like, that’s the opposite of commoditization. We are seeing Ethereum move from proof-of-work to proof-of-stake, like changing the underlying technology about how you hold and validate those assets and say, we are not at the point of maturity. We are seeing consolidation of activity on certain protocols where then people know these protocols they have been stable and mature for many years.
So we do believe that we are not yet at that point of decompression. And so today, what we think about is that we are a premium product. We are offering safety and trust, like, access to the breadth of products and services that’s Coinbase offers. And if that commands the fees that we charge today, we also look at the competitive environment and say, how do our fees stack up broadly against alternative platforms, and what is the value proposition there? We are happy to see that we have not lost market share as a result of fee changes that we made in Q1. Q2 is we thought it was just mix shift, so nothing changed. And that’s an indicator that we don’t believe that these fees are then causing us to lose business or gain business. We also changed fees on the institutional side, and we saw growth in our trading quarter-over-quarter.
So we look at ourselves, as I said, as the premium provider. We definitely did see what is the right price equilibrium. Our goal is to grow revenue. Our goal is to grow trading volume, and we will hold the fee at the right level in order to fulfil sequential growth.
Benjamin Budish
You kind of touched on competition, as it relates to trading which I wanted to ask about next. But maybe — it’s sort of a topic that always comes up because there are fewer than there were before, but there are other sort of providers of crypto trading services. So in terms of beyond the volumes that we can sort of track just on a daily or monthly basis, what else are you sort of seeing out there in terms of, do you see — or there are customers moving funds from platform to platform? Or given the nature of crypto asset transfers, this is all a bit more obfuscated, you can see it filling into a while, but you don’t know where it is? Any kind of insights to that kind of behavior, or what switching looks like in general in crypto?
Alesia Haas
Yes. So retail still doesn’t have a lot of switching. And the reason being is that the other platforms that we are now offering, crypto trading, tend to be retail financial service provider. So we have seen the growth of Robinhood and we’ve seen it both as PayPal. We see Block offering Bitcoin, we see Fidelity offering Bitcoin. This is great. What’s different about most of those platforms is you have to buy it on the platform than holding on the platform. You can’t actually spend it back and forth. So that’s an observation. The other observation I have is as we shared in our Shareholder Letter, we have seen an increasing amount of our customers just holding their Bitcoin. So, yes, they are not trading, but they are not selling it, moving to fiat, and exiting the platform. They’re just moving into a HODL mentality, which is no different than the behavior we saw in the last few crypto winters, that when volatility is low, like we see today, people just sit and hold. They are sitting and holding it. They are not exiting our platform.
That’s not just to say that, people don’t have multiple accounts on multiple platforms and are buying it in multiple places. But what we think is our unique value proposition of where we sit in the overall spectrum is, yes, we are an easy place to buy and sell crypto. But increasingly, we are now a place that you can buy, sell, but you can stake. You can explore DeFi. We’ve had on Onchain Summer where we saw many people then buying Coca-Cola NFTs, engaging with Frontech, engaging with these new early, early stages. I mean, I need to underscore it, like, early stage, decentralized assets. And this is the future of crypto, the utility that’s using crypto as a consumable in the way that it was designed. And so that is how our platform grows and evolves and what provides the unique attribute. And to do that, you have to be incredibly crypto-native. You have to be able to handle bridging of assets, movement on chain. We hope to really obfuscate that complexity and continue. We’re not doing it well today. This is sort of like we’re so early in the tech, this is like, think about early dial up modems when you like heard the sound of your modem connecting to the Internet and then you like logged on to AOL. Like we’re in that day in crypto where it’s like we’re showing the tech, it’s like nothing, like not easy to use.
Our goal is to use that technical strength that we have to push that technology below the surface and just create like, hey, I want to buy NFTs, wait, push by, it shows my wallet. Today, you’re bridging your asset to the protocol you want. And then getting Ethereum on Base and finding NFT and as we embrace. So that’s basically that we can really differentiate versus just I bought crypto, I’m sitting and watching the prices in my account.
Benjamin Budish
Interesting. Definitely want to come back to that sort of topic, but a few other maybe kind of financial questions. So maybe on the capital market side, you’ve been in the market repurchasing debt the past few months, albeit in a relatively small amount. So are you being opportunistic or is this sort of an important part of your capital allocation strategy?
Alesia Haas
I want to — we’re being opportunistic. So we generated cash flow in Q2, we shared, about 150 million and we looked at that and said this is a good opportunity for us to reduce leverage given where the bond for trading vis-a-vis other related companies. And so this is an opportunistic way that we could deleverage, move us forward one more step towards stronger financial health, continuous financial prudence and operating efficiency.
Benjamin Budish
And then otherwise, what are your top capital priorities? What areas of the business make sense to accelerate? How are you thinking about M&A in that context?
Alesia Haas
We’re always thinking about M&A. We’re always thinking about product growth. I think Brian did a call to founders that you might see on Twitter where he has 10 more ideas that can be built in crypto that we don’t have the ability to do. So there’s no shortage of ideas of what could be built here. Our capital priorities are though, just continue organic growth. We always look at M&A in service of our organic roadmap to say, could we accelerate this by buying? We partner? Is it the most efficient for us to build directly? A lot of companies raised a lot of capital in 2021 and are sitting on a fair amount of cash in crypto and are not excited about the change in valuations that we may be interested in exploring with them today. So with that, we’ll be opportunistic in M&A, but it’s a little bit slower today than it was in the past.
Benjamin Budish
And how do you think about the right cash balance for Coinbase? Feel like it’s sort of an ongoing topic. I think investors view, maybe there’s some — you want to be conservative because you don’t know what’s going to happen in the environment. You don’t know what’s going to happen with the regulator. But how do you think about that? How much is available on hand for M&A or just feel like in that business how much is permitted? How much do you kind of stick to kind of…?
Alesia Haas
We were opportunistic in raising the $3.5 billion, $3.4 billion of debt in 2021 as we looked at that overall interest rate environment and thought these were good liabilities to put on the balance sheet with no covenants, with low interest rates that we could then use that opportunistically. And when we think about using it opportunistically, we could use it in M&A. We also are using it to bootstrap our institutional financing business where we’re using some of it to lend out to customers, to enable them to take leverage positions on the institutional side.
We had some of that on the retail side and we’ve deprecated that product at this point in time. We also use this as self-insurance against the potential what ifs, what could come in the overall market to ensure we can invest through a cycle. We did burn cash in 2022. Having that balance sheet gave us confidence we could do that and continue to invest through that trough, because importantly, crypto has gone through price cycles. And what we’ve seen is that in price cycles you get big run ups and then it comes back down. But that trough is higher than the last trough, and then that next peak is higher than last peak. And so having that ability to invest through that time period was important to us. And so this felt like the right decision to run a large cash balance, to just have the ability to be incredibly opportunistic at that time.
Now we’re in a positive carry situation where that we’re earning more on the deposits than we do pay on the debt. We are being opportunistic at selectively repurchasing assets to deleverage a little bit, but it still provides all of that same optionality around opportunistic investment in products, whether they were organic or inorganic, continuing to work on the financing business and continue to prepare for the unknown and knowns that may occur in this space.
Benjamin Budish
Maybe switching gears again to the regulatory side. I think as we’ve discussed before, your sort of views on the SEC, the ongoing lawsuit, that’s all pretty well understood. So maybe a question about something new. So the Treasury and the IRS recently proposed some new rules around crypto tax reporting rules. So can you maybe talk about these rules a little bit and what’s your reaction here? What sort of impact could this have, if any?
Alesia Haas
So IRS came out with broker reporting rules. Think the types of rules that you have for any of your current brokerage accounts. You get a 1099-B in the mail every year in tax season that said here are your gains and losses, that same form goes to the IRS. You get interest on IRS. We’ve long been advocating for broker reporting rules for crypto because our customers crave us to provide this distinct so they can file their taxes. It’s long been required to be able to pay for your taxes when you have a gain on a crypto sale. Great.
That’s all very good news. Like we’ve advocated, we have rules, we’re moving forward with like parity. But unfortunately the proposed rules go beyond just parity with analogous assets. And that’s where we’re going to have some comments in the comment letters and we’ll be asking participants through this process. And I encourage all of you to be active too quite candidly because where the IRS has gone in the proposed rules now is they’re asking for all transaction reporting for anything you do in crypto.
If you spend $1 in U.S. — you spent on a cup of coffee, that has to be reported to the government. A stablecoin in this instance is just $1 that you just spent on a cup of coffee. That goes far beyond. We don’t show dollars that you spend on coffee for any other bank reporting. If you buy an NFT, that is a collectible, now that has to be reported. There’s no financial reporting, tax reporting in art today. There’s none in collectible lands that has to be reported by brokers. That has all been scoped in for reporting. So we believe that there should be charity with analogous asset classes. We believe that the IRS has ability to audit any, at any point in time if they want. That on their own they don’t need financial reporting of centralized providers for all data. And we think this amount of data will overwhelm them. So there’s privacy issues that we would like to flag. There’s just overwhelming data that we don’t believe that the government can all leave with transactions, given the amount of small business transactions and then the timeline for supply for non-centralized platform based protocol and find holding amount of that data, how on earth will they do it? So those will see some pushback. But at the core of it, we think driving charity is a good thing in getting progress for that.
Benjamin Budish
Well we talked about it a little bit earlier, so maybe let’s return to Base and some of your sort of onchain initiatives. So I think it’s always helpful to get kind of a refresher. Can you sort of remind the audience, what is Base and what is sort of — how is the Base used for help grow and develop the crypto ecosystem at large?
Alesia Haas
Yes. So this is where I’m deep in the technology. So there’s Layer 1 solutions. These are protocols, this is Bitcoin, this is Ethereum, this is the blockchains about how we move value on chains. The challenge with that is Bitcoin has a consensus mechanism for proof-of-work that is taking so much computing power. And so it’s, like, quite expensive. It is quite slow to be able to, like, confirm a transaction on the blockchain. Maybe it’s testing. It’s nearing improvement on that point to proof-of-stake. So it’s less energy efficient — I’m sorry. It’s more energy efficient, it’s cost-less energy. It was getting to a faster speed, but it’s still not as fast as a Visa payment, as fast as, like, when you put the Apple Pay, it’s not as fast yet.
So what Layer 2s do is they sit on top of these Layer 1 solutions and they package transactions. It’s like they are batching them. And so they can increase the speed of a transaction, they can then lower the cost of a transaction. And so what we see is Base now. And when we have done early 3 months, a few seconds, it’s a few pennies. And so that starts to be really competitive against other premier rails. And then when thinking about Base and what we’re doing about all crypto, this is a common thing is, these are going to be centralized protocols where anybody can plug into them and build applications on top of them. They are global payment rails, meaning they are not unique to a certain country or unique to a certain group of companies as, like, which works for the bank or if this works for Brazil or these are now these global protocols that can be built on top of my application. I can have fax, sheet, transactions. And that’s what we are really excited about with these. And so, again, transactions will earn a little figures for fees. They get paid. We are going to make sure other people can sequence transactions. So this will be a decentralized protocol for the community, at which we will commit to total hours because it is near and dear to our hearts, and then continue to build out an ecosystem around these.
Benjamin Budish
So what does that look like as the platform becomes more decentralized? Is Coinbase currently — are you validating pretty much all the transactions on Base and…?
Alesia Haas
Honestly, we’re the only single pair now. We are building more sequencers on top of it.
Benjamin Budish
And then in terms of just kind of overall activity, I think for anybody that’s unfamiliar, there are a bunch of places that you can kind of easily track the amount of activity. We have already seen quite quickly that the average transactions on Base are quite comparable to some of the other, like, leading eligible roll ups. So what are you sort of seeing, where is the most sort of excitement, what are developers kind of coming to the platform to do?
Benjamin Budish
First of all, these are early days. And so we have — Base has been launched just over a month. We are, like, at 35 days that we were the fastest l, 2 layer of solution to get to over a 100,000 users for, like, 1/3 in terms of total value locked on the contract. And so we have really seen rapid adoption in it, and it’s notoriously hard to build two-sided marketplaces then. I mean, in this case, we are building the developer community to build development applications on Base, and then bringing users to those developers. And so it’s really building a two-sided marketplace on Base. But what we are pleased to see with the developers is just the breadth in the, like, creativity of these applications, and that goes back to Onchain Summer. So Onchain Summer, as we launched SPACE, we wanted to share with our customers and with the overall ecosystem just the creativity of these new apps. So every day, we had a new onchain event that people could do. And let’s see if it connects to any wallet, I use the Coinbase wallet, I’m a loyalist. But you could use them as you can use all these wallets.
And people bought on chain an NFT that represented a real life object and so they could connect goods and services back to that, an online representation and an offline representation. There was a thing called Frontech around social networks that you are on, your gaming. There’s big brands with Coca-Cola, Atari, others that got some loyalty programs. We need artworks that was tied to their brand that people bought. So we are seeing all sorts of different people experiment with different things. I was missing up, like, the early.com era in the Internet where people were like, okay, I am going to bring on something online and see how that goes, with the development community having a base.
But what we are most excited about is, these are very core utility. These are gaming, social, messaging, collectibles, not speculative trading in nature, but a whole new behavior in crypto, which we’re excited to see develop.
Benjamin Budish
Well that’s the developer side. We’ve talked about the retail. Maybe let’s return to the institutional side. I feel like I remember an investor letter pre FTX before the fall of last year where you kind of outlined a number of your institutional initiatives. You have partnership with BlackRock and Aladdin and several others. So can you kind of — I think that’s sort of taken a back seat in the narrative as we had collapses, as the regulatory environment has kind of changed. But where are you kind of in terms of the pipeline or the rollout of institutional partnerships? What kind of traction are you seeing on Aladdin? What can you share with us there?
Alesia Haas
So I can’t share specifically on Aladdin. Although I continue to share that BlackRock is very active in the crypto space with applications. This is the core part of their service offering that they’re continuing to build out. And we’re happy to be a partner in many than through the ETF application, et cetera. But what we’ve shared in our Shareholder Letter and what we continue to see and we refer to it as like the coiling spring of institutions and it’s appropriate to put an end on this, because you are all institutions and represent institutions.
Like we have seen growth in onboarding quarter-over-quarter. We’ve seen growth in our prime trading quarter-over-quarter. People are gearing up, they’re testing the pipes. There’s definitely some that are sitting there and waiting for regulatory headlines to clear. There’s definitely some that are sitting there to say, well, I mean I’m not — this is not something I’m speaking about broadly, but like NFTs, you had to buy Ethereum, Coca-Cola, initially at room from them. How are they going to hold them in the Treasury? Corporates are like thinking about how do I then build crypto into my pipes and services? So we are getting continued momentum in driving those conversations, providing our tools and services to buy, sell for receiving commerce, liquidate to be honest is the heads we need to do that for our business and that we see nice momentum. But I don’t think we’ve seen this like open the gates of huge institutional capital, but it just feels like every quarter we continue to momentum towards that future.
Benjamin Budish
We’ve got just over 30 seconds left. Maybe the last quick one, but on the institutional theme, you mentioned the institutional finance business. That’s sort of something that the ecosystem saw come and go again with the perhaps of a lot of these platforms last fall. But where are you with that rollout…?
Alesia Haas
To get started, we launched that in Q2 with just the first few customers and we’re going to be slowly building that right now. People are onboarding.
Benjamin Budish
Well, we’re just about out of time there, but Alesia, thanks again.
Alesia Haas
Thanks much for having me.
Benjamin Budish
Yes. Thanks, Alesia. It was a pleasure.
Alesia Haas
Thanks, everyone.
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