Coinbase founder Brian Armstrong: The Desire for Regulation and Thoughts on the Reality of Cryptocurrency

Source: Stratechery

Original: "An Interview with Coinbase Founder and CEO Brian Armstrong about FTX and Crypto Realities"

Translation: 7UpDAO Overseas Returnee Association

Brian Armstrong's Growth Experience

As a child, I was a bit shy and nerdy, not very confident, and not good at talking to people. So I liked computers and became fascinated by them. I had several different computers in my room as a kid, I built computers myself, learned Linux, and so on. In middle school, I tried to learn a bit of programming, but I knew nothing about what I was doing. In fact, I took a few community college courses, read a few books, and started building websites. It was easier for me to use PHP and similar languages rather than C++, which was really challenging for me, especially at that age.

So I tried to figure out technology. I loved tech; I just found it fascinating. I was also a night owl, staying up until 2:00 AM every day, just playing on the computer and reading. When I finally got online, I was endlessly fascinated by consuming different things. I was a zombie in the morning, barely passing my classes. But I was most interested in technology, which was what I wanted to spend all my free time doing.

People always look back and tell their success stories as if they started at a certain moment, but it’s not that simple. I didn’t know what I wanted to do with my life. In college, I tried to start a tutoring company, but it wasn’t very successful. So after graduating, I got a steady job and tried working in several different places. I interned at IBM, and at that time, I didn’t know what I wanted to do because I liked programming and things like that. When I tried to work at a big company like IBM to write software, I didn’t really like the feeling.

So I wandered around, honestly feeling a bit lost. I tried a lot of different things. Eventually, I read a book by Seth Godin called The Dip. It’s a simple book, but at that time, it was something I needed to learn to think about in my life, which is, "There are many things you’re interested in, but what do you really love to do? How do you excel in the field you want to love and stick with it for the next 10 or 20 years and become great?" Because there’s a big gap between being a beginner where everything is interesting and becoming a professional where you get paid for it. There’s a long way to go.

So when I sat down with a blank sheet of paper and thought, "What will I love to do in 10 years, even if I’m not very successful at it yet?" I was doing a lot of things, like investing in real estate, learning martial arts, and all sorts of random stuff. The only thing I wanted to do long-term on my list was tech entrepreneurship. That was the only thing I could think of that I would be interested in for my whole life, and I would still be interested in it 10 or 20 years from now. So I started doubling down, moved back to the Bay Area, and decided to make a living out of it. This undoubtedly helped Coinbase move in the right direction.

Crypto Regulation

I’m curious, when you look back, are there instances where being constrained by regulators, whether it’s a lack of regulatory transparency or enforcement, ultimately turned out to be a good thing for Coinbase in the long run? Yes. Looking back, first, we planned to offer products with very low yields and had very strong risk controls in place. So I think even if we launched it, it might have been fine. But it was a bit controversial because my reaction in that tweet was part of what bothered me. There’s no fair competitive environment; either regulators should allow it, in which case these competitors have been in the market for years.

If they are allowed to do it, we should also be allowed to do it. If they are not allowed to do it, then we shouldn’t be allowed to do it either. What bothers me is the hypocrisy of saying, "Well, these competitors have been in the market for years."

I can also understand the other side of the argument; regulators are busy, they are overwhelmed, and they might have been working behind the scenes with people we are not fully aware of. I think it’s basically just a fog of war, like things lost in translation. Yes, my frustration was expressed on Twitter. Then I think it does help with fair competition, but I don’t know. As a CEO, you’re doing a lot of things, you’re trying to do the best you can think of at the moment, but you don’t really know what’s right.

I do think that a lot of the crypto industry has been pushed outside the U.S. due to the lack of regulatory transparency from U.S. regulators. While the job of regulators is tough, I sympathize with them. But I think it’s really important to let people know this because the simple narrative people say is, "Well, if bad things happen in crypto, we need stricter regulations." But it overlooks the nuances of what’s actually happening in that situation.

Because first of all, FTX is not in the U.S.; they are overseas. By the way, they may or may not be serving U.S. customers through ftx.com. So that’s another interesting point about creating a fair competitive environment.

But due to the lack of regulatory clarity in the U.S., companies are registering offshore and trying to serve the world from these profitable havens (if you will). So this doesn’t really benefit U.S. customers or investors. In fact, it harms them more. They are pushed into these unregulated offshore affairs, which doesn’t benefit U.S. companies because it again undermines our ability to build companies in the U.S. So I think the more important question might be, where do we go from here? Coinbase seems to be trying to comply with existing rules; do you feel a real burden? You’ve mentioned this before, but has it intensified in the past month? I’ve been working in the crypto space for the past 10 years, and over the years, many people have come to me saying, "You know, you can be there; you can be that person." In some ways, I think we are. In the past two weeks, I’ve done a lot of interviews and media appearances on CNBC, CNN, and ABC News.

I’m happy to be part of that, but I actually think the best CEOs are not the ones who are just doing media appearances 100% of the time and trying to be on TV. For me, that overlooks what the company is about. Because you have to do something valuable in the world to create a product or service that’s better than anything that exists.

There’s a book I really like called Outsiders, which is about eight unconventional CEOs showing how they outperformed the market.

Many of them are actually a bit introverted, and they are technically proficient. So I actually think introverted people can become truly great CEOs, and this industry doesn’t necessarily need someone who can shine on TV and attract everyone’s attention. They just need someone trustworthy, someone with good judgment who builds solid, reliable companies and infrastructure. I think that’s 100% me.

So I’m happy to play that role, and I’m happy to do all the things like appearing before Congress, doing interviews, and going on TV when I need to, but that’s not my main focus. My main focus is, how do we build better products for our customers?

The Face of FTX and Cryptocurrency

FTX, what can I say? It not only violated the terms of service that I know and have written about, but it may also have violated the law; it’s outright fraud.

Honestly, I think I have a clear understanding of what happened, and I think every time he’s asked these questions by the mainstream media, people are giving him an escape route. Of course, some reporters do a better job than others in really holding him accountable for this. But to be honest, I just want to turn the page on this. Bankruptcy lawyers, the Department of Justice, and everyone else needs to figure out how to put these people in jail. Not just Sam, but others involved. I’d rather think about where our industry goes from here.

Maybe it seems like some bias; he donated a lot of money to Democrats. But he seems to have admitted in an interview with VOX that many of the causes he claimed to believe in, he actually didn’t believe in. So I’m not sure where that loyalty comes from. It kind of breaks my mental model of the world; I think if someone in tech and crypto turns out to be a fraud, that’s the simplest layup for him. Yet we still see some people believing in him. It’s clear that something is happening here that I haven’t fully figured out.

Is Crypto Real?

I think the answer is yes. The reason is you can see more and more people using it every year, or using it in every cycle. So now there are two to three hundred million people in the world who have used or own some cryptocurrency, it rises in the up cycles and falls in the down cycles, but it’s in an upward channel. Cryptocurrency absolutely exists, and in many ways, it is real.

First, it’s a new form of currency, which is actually a very important thing. In many places around the world, people don’t have stable currencies, and the poorest in society are being eroded of various wealth. This is just a foundational part that we take for granted in the U.S. because we have an 8% or 9% inflation rate, and we think that’s extreme. In many places in the world, it’s about 25% a month.

So it’s money, then it’s new financial services, and it’s also a new application platform. For example, identity and decentralized social, so it has many different aspects. But is it regulatory arbitrage? Maybe, I think I would describe it differently, it helps alleviate the inefficiencies of the global economy. Some things are well justified.

For example, if you want to build a global lending market or something similar, you have to go to over 200 countries and all the states in the U.S. Only then can you establish a more efficient global market for how to get a loan between someone in India and someone in Brazil or anywhere else, but the amount of bureaucracy and rules and the patchwork of different proprietary systems in every country makes it unfeasible. So yes, crypto is a new, more globalized, fairer, more transparent, and freer system.

It’s not just about inefficiencies and global regulators; it also involves technological improvements, meaning you can send assets somewhere quickly or trade on a decentralized ledger. So it’s permissionless, decentralized, and global, which has technical advantages. That’s why there are so many innovative parts at the forefront of crypto right now. It’s like what happened with the internet 20 or 25 years ago.

It may lean towards virtualization in the early stages because that’s more natural. But it will ultimately play an increasingly larger role in the physical world. So virtual may be easier to follow; if you’re going to build a new community on the internet, using a currency from a particular country in something that’s open to people around the world would be discriminatory or strange.

I absolutely believe that cryptocurrency could be seen as an asset people would flee to in uncertain times. Bitcoin is a bit like gold. But the broader macroeconomy is still much larger, and in that environment, they view all cryptocurrencies as a growth stock rather than something to flee to. And it’s very liquid; people can easily cash it out.

Basically, the share of the virtual economy in the global economy and GDP is growing. I find it interesting to look at e-commerce; back in 1999 and 2000, people said, "Oh, I would never put my credit card online." It was a tiny fraction, less than 1% of global GDP, right? Now, fast forward 20 years, I think COVID accelerated it, and it’s almost reached 20% of global GDP. For people like you and me, that even sounds low. I probably have 70% of my spending done online or otherwise. But there are always people in the world living in different worlds and circumstances than us.

So consider this trend from the perspective of cryptocurrency. If we fast forward another 10 years, will there be more people doing things virtually rather than actually doing them? Will a larger proportion of the economy happen virtually? Therefore, cryptocurrency, as the inherent currency of the internet, is very well positioned as a transnational global currency of the internet. I find it hard to imagine a world in 10 years where there’s more e-commerce, more people using the internet, more virtual economies, and cryptocurrency will also grow larger with it.

Coinbase's Stock

You made billions in 2021 and lost hundreds of millions in 2022; Coinbase's stock dropped 80% last year and has been downgraded to junk status. Given that you said this would happen, is it still very frustrating? Or is this what you expected? Or is the reaction and negativity stronger than you anticipated? I think we anticipated this would happen.

If we were the first truly public cryptocurrency company to go public, it would be good in some ways and help us complete transactions. We completed a deal with BlackRock, the largest asset management company in the world, and now we’ve been doing deals with Google and Meta. Last year, when prices were very good, we raised a large amount of debt, $3 billion in debt, at very attractive interest rates. So there are many benefits to being a public company.

But yes, some of the challenges we knew were that it would be tough to be a public company without super predictable revenue, and our revenue would still fluctuate with trading fees. But over time, we’ve done very well in differentiating and diversifying. So now, more and more of our revenue comes from subscriptions and services like custody and AUM fees, dollar tokens, staking revenue, etc., which does help smooth out revenue.

I think our stock is basically very suitable for growth investors, like Cathie Wood from Ark, and there are many such funds that are excited about the future. They hope to see high returns, and they are tech progressives.

There are other companies that are actually just looking for more stable assets that are more mature in their lifecycle, and they are paying dividends and similar things. We are not that kind of company yet. I think the next 10 years look very bright, at some point, we will become a target company for other types of investors. But for now, growth investors are the ones most interested in our stock.

I think Crypto, like all other tech growth companies, benefits from the stock market crash, from DoorDash to Zoom, or anything you want to look at; I think the market has contracted a bit, and many tech and biotech stocks have done the same. I don’t think this reflects the long-term potential of biotech, streaming platforms, or anything.

We are in the early stages, and the leaders in these industries will go through down cycles to become stronger. This is actually a very big opportunity for us not only to survive through it but to thrive through it and actually acquire many of the best assets in these down environments, whether they are people, companies, etc.

That’s what Coinbase has done in the past five or four crypto cycles; this time is different because it coincides with a broader macroeconomic recession, we are in a global war and pandemic, and various things like that, but we are a company that is happy to go through cycles.