Surojit Chatterjee, chief product officer at Coinbase, comes to talk about what products Coinbase is building, how it can thrive in such a competitive landscape, how to onboard billions of users into crypto, and much more.
- how Surojit got into crypto and ended up at Coinbase
- what sets Coinbase apart from the competition
- how to bring billions of customers to crypto
- Surojit’s mental model of a bridge between the fiat world and the crypto world
- how Coinbase is integrating its main app with Web3
- whether crypto can become a utility rather than an investment asset
- how Coinbase is building a product in such a way that it attracts even “crypto-native” people
- what happened with Coinbase NFT Marketplace’s failure and whether the company will keep investing in NFTs
- whether Coinbase has lost crypto-embedded people among its employees
- how the partnership with BlackRock indicates how far crypto has come
- the amount of money that institutions could potentially pour into crypto
- how Coinbase will prevent itself from having the largest percentage of staked ETH
- how the company is monetizing the Coinbase wallet and what would happen to revenue if the trading volume were to move from the exchange to Coinbase wallet swaps
- why Coinbase is suffering a decline in trading volume
- whether Coinbase can compete with newer exchanges like FTX and Binance and why Surojit still thinks Coinbase will win
- why it is important to keep investing and building through this crypto winter
- Surojit’s take on the frontrunning of coins about to be listed on the platform
- why the Howey test (which determines whether something is a security) is outdated
- how Coinbase understands securities, and whether the firm thinks the tokens listed on the platform are securities
- how can Coinbase compete with decentralized exchanges like Uniswap
- why Surojit is worried about regulatory clarity and stablecoins
- how hacks and security give the crypto industry a bad reputation
- what Surojit’s dreams are for the industry
Thank you to our sponsors!
Ava Labs: https://www.avax.network/
- Twitter: https://twitter.com/surojit
Coinbase Q2 2022 Earnings:
- Shareholder letter: https://s27.q4cdn.com/397450999/files/doc_financials/2022/q2/v2/Q2-2022-Shareholder-Letter.pdf
- Summary: https://twitter.com/fintechintern/status/1557130836574539776?s=20&t=R-oDUTEaev-F8bPonC2q5Q
- Earnings call: https://s27.q4cdn.com/397450999/files/doc_financials/2022/q2/Coinbase-Q2%2722-Earnings-Call-Transcript.pdf
- Coinbase NFT launch: https://decrypt.co/99561/coinbase-nft-marketplace-150-users-first-day-public
- NFT Market data: https://dune.com/Marcov/0x-NFT-Market
- Gamestop NFT stats: https://dune.com/dataisking420/gamestopnft-stats
- Gamestop’s performance against Coinbase: https://decrypt.co/105069/gamestop-ethereum-nft-sales-dwarf-coinbase-nft
- Integration with META: https://www.coindesk.com/business/2022/08/04/meta-confirms-nft-rollout-across-100-countries-amid-coinbase-integration/
Regulation and lawsuits
- Insider Trading
- Court charges: https://www.justice.gov/usao-sdny/pr/three-charged-first-ever-cryptocurrency-insider-trading-tipping-scheme
- Cobie’s tweet: https://twitter.com/cobie/status/1550192546889998340
- Brian Armsontrg’s tweet: https://twitter.com/brian_armstrong/status/1550162989881253889
- Terra/UST lawsuit:
- IPO-related lawsuit: https://www.coindesk.com/policy/2022/08/09/coinbase-executives-mislead-shareholders-about-public-listing-new-lawsuit-alleges/
- Coinbase Does Not List Securities. End of Story: https://blog.coinbase.com/coinbase-does-not-list-securities-end-of-story-e58dc873be79#:~:text=To%20be%20explicit%2C%20the%20majority,SEC%20jumped%20directly%20to%20litigation.
- Coinbase Faces SEC Probe on Crypto Listings: https://www.bloomberg.com/news/articles/2022-07-26/coinbase-faces-sec-investigation-over-cryptocurrency-listings
- Previous Coverage of Unchained: Why a Coinbase Listing May Not Be a Good Thing for a Token:https://unchainedpodcast.com/why-a-coinbase-listing-may-not-be-a-good-thing-for-a-token/
Disclosure in the event of bankruptcy:
- Crypto market data: https://www.theblock.co/data/crypto-markets/spot
- FTX surpassing Coinbase: https://www.theblock.co/linked/149654/ftx-surpassed-coinbase-as-second-biggest-centralized-crypto-exchange-in-may
Coinbase Will Need Its Cash to Fend Off the Competition: https://www.theinformation.com/articles/coinbase-will-need-its-cash-to-fend-off-the-competition
Hi, everyone. Welcome to Unchained, your no-hype resource for all things crypto. I’m your host, Laura Shin, author of the Cryptopians. I started covering crypto seven years ago, and as a senior editor at Forbes was the first mainstream media reporter to cover cryptocurrency full-time. This is the August 16, 2022 episode of Unchained.
With the cyrpto.com app, you buy, earn and spend crypto in one place. Download and get 25 dollars with the code Laura. Link in the description.
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Today’s guest is Surojit Chatterjee, Chief Product Officer, at Coinbase. Welcome, Surojit.
Thank you for having me here, Laura.
Tell us the story of how it is that you got into crypto and came to work at Coinbase.
To go back a few years, actually, my first introduction with crypto, of course, I did read the paper, Bitcoin white paper and so on, but I was not really into crypto until 2016, and the story is, I was working in a company in India, so I worked at Google and moved to India for a couple of years, and I was head of product at a company called Flipkart, an e-commerce company. Now, what was unique about the company and unique about e-commerce, at that time, in India, was most of the payments were on delivery, so you go deliver your products, and people give you cash, so most of India economy was cash enabled and still is.
What happened in 2016 was, one fine day, the government surprised everyone and announced this thing called demonetization, which meant all the existing currencies were kind of useless, and basically, you had a little bit of time, within a couple of weeks, you had to go and deposit your currencies in a bank, and then you had to wait for the government to print new currencies and get those currencies.
Now, of course, as you can imagine, that immediately tanked our business because our business was about collecting cash, and people were just depositing their cash to banks. It’s not just our business, like I saw most of India is unbanked, was unbanked, is still unbanked. The government, of course, is doing a lot of work, so it was a huge pain for ordinary citizens to go open a bank account, deposit their currencies, and then wait for many days, sometimes, to get money in small amounts, and that’s when I bought my first cryptocurrency and my first bitcoin, my Ethereum, and I thought, okay, there must be a better way than public government-issued currencies, there must be a better way to run this whole monetary system, and that got me to crypto, but I was not really playing with crypto in a big way until I joined Coinbase, and that was late 2019, early 2020.
Yeah, I love the story because so often I’m asked by particularly like US reporters’ things like what’s the use for cryptocurrencies when we have credit cards and whatever, and I always say to them, oh, you should talk to people in other countries because people in countries that don’t have as good functioning financial services, they grab onto the use case for this much more quickly.
So, you’re a lead chief product officer at Coinbase, and that is a company that actually really started more like a fintech company. One of its greatest early achievements was creating a credible and solid connection to the existing banking system and also making the user experience of buying crypto simple and user friendly, but at this point, the company has over 100 million users, and the crypto space has grown exponentially in a number of directions. On top of that, a whole host of other companies also offer that great user experience, so at this point, what do you think sets Coinbase apart? What products would prompt customers to stay on Coinbase after they’ve purchased their coins?
Absolutely. Look, I think of Coinbase as a gateway to web3, right. As you said, we started as a financial company. We allowed people to buy and sell crypto, and that was really the first step. If you want to do anything in crypto, you need tokens, but you know how the industry is emerging, they’re seeing real utility, real applications being built on top of this blockchain, so my vision on the product side is, how do you bring a billion plus users, you know, million first, and then multiple clients to crypto and Web3, and how do you enable them to use all the applications, all the three services with ease and peace of mind.
I mean, I think, if we do that, not just as Coinbase, as an industry, we’re going to bring a major portion of the GDP to come on chain, and I think that just helps create more economic freedom, whatever you want, and that really ties with a company’s mission to create more economic freedom.
So, how do we do that, how do we realize that vision, and my mental image is of a bridge, if you allow me. So, it’s a bridge between the fiat world and the crypto world, and increasingly, the Web3 world with two foundational pillars under that bridge. One is trust and the other is ease of use, and you know, how do they build this bridge, so I think of two ways.
First, we build an integrated product suite to give our users access, both retail and institutional users, access to what I call all the assets, all the valves, all the apps, and all the chains.
By all the assets, I mean, you know, both assets on centralized exchanges like ourselves but also on DEXs, things like NFTs, things like ENS, you know, like valves, I mean, things like, you know, you can stake your asset, you can pay and receive, and you can borrow and lend, and so on. All the apps mean, all the dApps and Web3 services, and so on, and then the second part of this is how do we help escalate the ecosystem by giving developers the tools they need, and that’s what we are doing on this cloud, for example, we are building tools so developers can build quickly, easily, and securely the amazing Web3 services, so that’s kind of the overarching vision we have, today.
So, for that first pillar of the bridge, where you talked about giving access to these different services, that to me sounds like a custodial model, like a centralized model, would you say that is the vision going forward for Coinbase?
No, I didn’t use the word custodial. Actually, giving access both in a custodial fashion and self-custodial fashion, and let me give a couple of examples. The Coinbase Wallet is our flagship self-custodial product. It’s getting a lot of love on Twitter, these days, because we have invested in that product. We have built, I believe, the best multichain wallet out there, and of course, we have a lot of work to do still until we improve. The other part of this is how we are integrating DeFi and Web3 into our Coinbase main application, as well, main app, and we are doing this through a unique innovation, you know, we’ve worked on MPC technology for a long time.
I’m sorry, MPC, what’s that?
Multi-Party Computation. So, let me explain. So, basically, we integrated this wallet called DApp Wallet into our main app. The way it works is we keep a shot of your key, you keep a shot of the key on your device, so you can actually use that wallet to access any DeFi app, any Web3 app right from within Coinbase main application.
If you lose your device, we can actually restore your key because we have a shot with us, we can call our customer service, and we can help you, so it, basically, allows mainstream users, right, we have 100 million users today, verified users, to access Web3 and DeFi without worrying about managing their keys or you know losing devices, as often happens, like losing their device, losing their seed phrase, and so on, so that’s how we are building the bridge to Web3 through all our applications, so it’s not just the self-custodial dApp on this wallet, but through this, what I call, semi-custodial wallet in our main app, as well, and even on the institutional side, actually, we are working on ways to give institutions access to DeFi because I think that’s going to be the future of the innovation that will be on unleashed. We’ve already seen it during the DeFi summer and NFT summer, and so on. We are already seeing all the innovation, and we are making sure our users can access that innovation through every product we have, so it’s not just custodial.
In fact, one of the mantras we have internally is build DeFi first, so we are always thinking, okay, how can we give users access to not just first party services that we are building but also third-party services, so today, in Coinbase main app, you can buy tokens through our exchange directly, you can also buy tokens on a DEX because we have done a native DEX integration. We have worked with DEX aggregators, so you can buy very large number of tokens directly through DEX’s. Again, powered by this dApp wallet, that I just described.
And so, since crypto is constantly evolving, and as you just described, you’re building out this whole suite of products that service different communities within crypto, you know, those who would prefer a custodial experience, those who would prefer self-custodial, and yet, not be fully dependent on themselves for their own security, you know, in like maybe 2 or 3 years, what products do you think will become a bigger part of the Coinbase experience compared to right now?
You always need your tokens to participate in the crypto economy, so our brokerage, our custody and exchange, I think they will continue to be important because that’s the gateway. Every time we have some section of users, who are doing more advanced stuff, there is like next 10 million, 100 million users, who are just getting introduced, so it’s like a spectrum, right, there are more users coming in, who are doing basic kind of just getting introduced to crypto, buying their first bitcoin, and maybe they will do that on a centralized exchange, they don’t know how to use a DEX and so on, but a segment of users will start using DeFi apps, a segment of users, who will be even more advanced, will use things like decentralized social applications or Web3 gaming will use NFTs, and so on, so if you ask me, we’ll see increasingly, and that’s the hope for the whole, I would say, the industry, right, increasingly crypto become a utility beyond just a speculative asset or just an investment asset, so you know you buy/sell crypto, but when it becomes a utility, it means can you use crypto every day.
You know, one of the things I talk about sometimes is a toothbrush test, which is like, you know, you use a toothbrush in the morning and in the evening, so twice a day, so can it find those toothbrush use cases for crypto, right, and our crypto enabled applications, right, that will be bigger and bigger for the whole industry, and I think that’s good for the industry because for this industry to really succeed, really go mainstream, we have to figure out those use cases, and I think NFT was a good example. We have seen it brought in a new set of users to crypto, who are not really like traders in a traditional sense, they’re collectors, right. We’ll see other different types of communities, different types of users come to crypto as the whole industry and the community invents new types of applications and services.
Yeah, I don’t know if I would want to rescind and agree with that because I think a lot of them are speculators, too, flipping their jpegs.
Well, you know, it’s always starts with that. I don’t think there is anything bad with that, it starts with that, but I think, you know, over time, we are already seeing there are real applications, there are communities, for example, getting created, and they’re talking gated communities, so you get special access. Brands are doing that, social access to events or special social kind of gatherings, and so on based on the tokens you hold. Now, that’s not really speculation, that’s like a human behavior of forming kind of tribes and communities, and social interaction.
So, at this point, you are trying to service kind of a range of clients, but where do you prioritize when it comes to institutional versus retail? How do you kind of think about these different segments?
So, we started with a retail-focused offering, right, when it’s still the strongest part, our biggest part of our business, at this point, because we started early. We are, of course, seeing a huge momentum in our institutional business, you know, we just announced the BlackRock deal. It’s a landmark deal, not just for Coinbase but for the whole industry, and I would say it’s not just the retail users and institutions, it’s also the developers. That’s the tied segment that we cater too. I talked a little bit about Coinbase Cloud. We want to help grow this ecosystem. That’s the other part, you know, again, when you grow the ecosystem, we also grow, so building tools to help developers build their applications faster, more securely in a scalable way. We are building a…allowing them to access like blockchain nodes around their own nodes, around their own validators, on rewards, you know, do staking, plug in fiat rail with Coinbase Pay, and so on, so it’s the three customer segments that we think about, and I would say it’s a flywheel, it’s not one versus others. For example, with our institutional customers and retail customers, we are creating more liquidity when both of these flows come together in our exchange, right. Institutions would love to trade against retail flow, sometimes, and more liquidity means it’s better for everyone, better pricing, better execution for everyone, so that’s one example. When you work with developers and help make the dApps better, for example, we actually help the users, who are coming through Coinbase Wallet or our main app, who are accessing these dApps have better experience, so it’s a flywheel, and that’s how I think about it. It’s not like one versus other, we have to do all of these three things to make sure the flywheel keeps spinning.
I know one other group is sort of the more crypto native people, who are kind of their own special segment within retail, I would bet many of them are pretty unlikely or unwilling to use a centralized exchange, so how do you think about attracting them as a customer or do you feel that’s just a different segment?
Yeah. So, what is interesting about that segment is…by the way, we love that segment. We listen to them all the time. They’re vocal on Twitter. I get a lot of product feedback from them, and I think it’s super helpful. I always think when you are building a product, you’ve got to think about the power user because eventually what will happen is your regular users…well, kind of it’s a graduation, they’ll graduate to become more and more sophisticated, and you don’t want to lose that user, you want to make your product in such a way that the power users can also use it.
It’s not exactly this segment, but one example here is how we are combining retail advanced trading within our main app. You know, previously or even now, we have a separate app called Coinbase Pro where advance traders go, and we thought, okay, you know, a lot of regular users actually become advanced traders, and how do we bring that functionality in the main app.
Now, for the crypto native, crypto forward folks, you know, some of the things that they will tell us is, hey, can you make it easy for me to onramp…create a fiat onramp from your bank or whatever to directly to an L2, directly to another chain, like Solana, and so on because how do they get their crypto and play into this new blockchains. They have to come to some centralized exchange and first move their fiat money into crypto, so we did that.
We actually integrated and L2 direct onramp to L2 and turn the app also into Coinbase wallet. For this segment, in particular, in a Coinbase wallet, they are already using Coinbase wallet, they’re allowing Coinbase wallet, it’s the most sophisticated wallet out there, a multichain wallet we actually support more than seven L2s and blockchains, today. It’s also a wallet that allows you to use Coinbase wallet. You get visibility into all your tokens across all chains. You can get visibility into all your investments in any DeFi app out there right on the homepage of our Coinbase wallet, and you know you don’t need to switch wallets to play into another chain, and we are making it super easy for you to move assets between chains without needed a temporary bridge, so they’re loving it. We are getting a lot of good feedback. So, the idea is, yes, we want to build products for the crypto forward, crypto native folks, and I think we have made a lot of progress in the last year-and-a-half in that direction, and it shows in our products.
I’m sure you have seen the press coverage of this, and there, unfortunately, is one area that I think Coinbase is seen to have failed when it comes to products for crypto natives, after initially getting 8.4 million emails waiting for that NFT product, the day of Coinbase’s launch had only 150 transactions, and since then, trading volume has stayed relatively low. This week, the marketplace has been doing below 10 thousand dollars in volume per day versus millions of dollars’ worth of transactions on OpenSea and LooksRare, so what went wrong there?
Let me first take a step back and kind of say what happened and describe kind of our perspective a little bit. So, first, there was probably very high expectations set on a product that is very early. You know, NFT is still in beta. It’s been just a few weeks, and you know we are seeing engagement, customer engagement in the service.
I think it’s been like five months, right?
It just came out of beta very recently, Laura. It’s still very early. It’s not out of beta, actually, it’s still beta. I think, for five months, we have made a lot of noise early on, but actually, it was in front of the user a couple of months back. You know, I always think about technological products often take a longer time and high durations, like we don’t expect…we try a lot of new products, we don’t expect them to succeed on day one.
I’ll tell you one example, I was at Google, and Google came up with Android, and the flip phone, when iPhone was already there and very popular, and it was like a throwback from the ‘80s or ‘90s, nobody wanted to use it, everybody said it was terrible, and we all know what happened, like where Android is today because Google kept investing in it and was committed in it for the long term. That’s we are going to do, we think NFT actually is an area that we want to commit to for the longer term and not just through Coinbase marketplace.
So, let me kind of give you a little bit more perspective on our overall NFT strategy, and that might be helpful. So, you know, as I said before, we think NFT will be a huge driver for the industry as a whole, right, it represents not just art, video, music, but it’s also in objects and gaming on metaverse membership access to token-enabled social networks and many other use cases, so it’s going to be huge, and it’s going to bring in a lot of users.
To that affect, what we are focused on is helping creators and bringing more users to creators, whether the creator of that creation is on Coinbase NFT or on OpenSea or Rarible or anywhere else, and that’s what we are doing, so you know if you look at Coinbase wallet, today, I would claim it’s the best NFT wallet out there. Users can now view NFT bits on multiple marketplaces including OpenSea and everywhere else directly from within wallet. They can access both first-party and third-party marketplaces through the Web3 browser that we have embedded in a wallet. They can store their NFTs. Again, we have done, we have written our own indexers, so it’s very simple. When you go and buy NFT requiring this wallet, you are going to see it within seconds rather than a half-an-hour or longer for other wallets, and we have done the same for our main Coinbase apps.
We have integrated a Web3 browser and MPC, there’s dApp wallet, so you can access all the NFT marketplaces in a unique way from the main app, as well, so the idea is how do you bring all our users, 100 million plus users, into NFT not just into an NFT marketplace but into any marketplace out there.
Then, on the creator side…by the way, one more thing I want to mention, it’s also not just on Coinbase, on some third parties, so we just announced this partnership with Meta, so we are enabling all Instagram customers to store their NFTs using Coinbase wallet. I mean, this is a huge deal because, you know, hundreds of millions of Web2 users will get the taste of NFT for the first time, and we’re happy with that. Now, that’s on the user side.
On the creator side, we will help the creators to bring their collection to markets easily, and enable them to interact with the community, and that’s a feature actually we added from day one on NFT marketplace. They can and we are seeing that creators are interacting directly with the users on our interface rather than on Discord or somewhere else, and recently, we did this experiment…I would not say experiment, a new feature, actually, introduced this concept called drops on NFT marketplace, so drops are like primary sales of exclusive NFT collection, and we have partnered with like top media houses, bands, prominent creators, and names like Bill Murray, Chive Media Group, Project Pink and People Pleaser, and this is what happened, Laura, so this was a new thing. We said, okay, let’s try it, let’s see what happens. Every drop so far has sold out within minutes, and that just shows the latent demand that is there on our platform, and we are working on how to unleash that demand, how to bring the best collection, how to enable the creators to bring their best collection to our platform, but that’s kind of our overarching strategy. We’re going to continue to invest in NFT as a category and continue to grow the ecosystem through our tools, and it’s not just NFT marketplace, through all our tools, and that’s kind of important to realize it’s not a single bit NFT for us.
So, essentially, it sounds like the marketplace is not really the main focus in your NFT strategy, but I’m sure you probably saw that Nick Tomaino, an early Coinbase employee, tweeted that he felt this kind of social strategy for your NFT marketplace was not the right one and that really it should just be a simple fiat to NFT onramp, so why is it that you’re not focused on something as simple as that, especially since it would play to Coinbase’s strength?
These two are not mutually exclusive to each other, right, we have added…since we launched, for example, we integrated Coinbase Pay with Coinbase NFT. Now, Coinbase Pay actually externalizes all our fiat to crypto onramps, so if you are a Coinbase user, Coinbase customer, you can just log in and you can pull your crypto very easily or you can directly pull from fiat to crypto on a third-party app or including Coinbase NFT, so we have done that. We are making it easier and easier to bring Coinbase users to Coinbase NFT, but as I explained, that’s not the only thing, we’re going to bring users to NFT period, and you know Coinbase NFT is one of the marketplaces.
On the issue of social, I think it’s still very early days. We are seeing very interesting engagement. We are learning a lot. For example, we are learning that, you know, sometimes, the comments on individual NFTs are probably not the most useful thing, but comments on like a collection is very useful, so users are commenting on overall collection. We are seeing there is interaction between the creator and the user, so users are giving feedback to the creator or having a conversation with the creator. We are also seeing interaction between multiple creators. They themselves are commenting on each other’s collections, but these are all new kind of behavior that is forming. It’s a brand-new concept, right, so it will, like anything else, in technology, you know, people will always say, oh, that didn’t work, and after a few years, it becomes the biggest thing.
I’ll say even to look at something like podcasts, that 10, 12 years back, people were confused, is this going to be media or is it just one-off thing that will die down, and today, you can see, and now, we are talking in this podcast, it’s a real force in the composition of our media today. In fact, I consume almost all my news from podcasts rather than from mainstream channels or mainstream media, so we’ll see behaviors in large. We are not afraid to experiment. That’s another thing I’ll say. Look, NFTs came out of a concept called Project 10% where we actually find bottom-up ideas innovation from our employees, and we fund them, very small funding, it’s like seed funding, 2 or 3 engineers, maybe 1 designer, 1 product manager, and we see if there are green shoots, and then after a while, we either pause the project or we find, again. It’s very kind of venture kind of model internally, and that’s how NFTs came out, and they had a unique concept, a new concept the team, and we said, great, let’s take some risks, let’s try a few things out, so we’re not afraid of trying things out, and that’s how innovation happens. I always think if I try out like 10 things and all 10 are successful, maybe I’m not taking enough risks, right, that’s almost impossible.
Yeah, although I do think it was surprising to find out that only 30 people were working on the NFT project considering what a large staff you had, at that time.
It was not only 30 people. Until December, we had like 6 or 7 people, actually.
Right, which given your headcount was a little surprising because NFTs, obviously, had been huge for quite a while.
One other area that I wanted to ask about, which was also perceived as a miss by Coinbase was The Degen Trilogy when you released part one of it, people were responding things like, the SEC should be investigating this for illegally inducing cringe, and you know Nick Tormaino also mentioned this in his tweet, there’s a perception that Coinbase has lost its touch with the crypto native part of the community or frankly, doesn’t even really have people like that on its staff anymore. Whereas, obviously, in its earlier years, it was more kind of on the cutting edge. So, how do you get that back or you know even if you’re going to say to me, you haven’t lost it, then how do you change that perception?
Again, I’ll say, we try lots of different things, so this is something our marketing team tried. Some things are more successful than others, you know, when we tried our Super Bowl ad, for example, I think degens loved it, crypto forward folks really loved it, and it was a unique concept. This was probably…didn’t hit the mark quite for some people. We understand that. We take the feedback, and we’ll go and try other things, but I think it’s not true that we don’t have crypto forward folks in Coinbase, today.
I think, if you look at the innovation we are turning out, it would not be possible without crypto-forward folks. You know, we are the first company, I just talked about, building this very unique MPC-based wallet, right, a semi-custodial wallet. I don’t know if you follow Pete Kim or others, I know he has talked about it, he’s one of the engineers I respect a lot. There are many other people like that.
No, we are building these interoperability bridges between multiple blockchains. That would not be possible without people going crypto very deeply and being embedded into the whole system, so I don’t think that is right.
Of course, many people will have many opinions. We expect that. We take that feedback. Everything will not hit 100% because we try a lot of different things. We are a more diversified company, now, not just building one product, and that’s a very deliberate choice. We’re a multiproduct company. I talked about, you know, how we are creating this flywheel within multiple customer segments, how we are building products for each one of them, but overall, I think we are doing that very well. We are seeing our customers love us, and even a lot of degens love us.
Today, some of the feedback on Coinbase Wallet is great. Feedback on Coinbase Pay has been great, you know, some of the top wallets like MetaMask and Phantom, actually, has integrated Coinbase pay, and people who have used it have said it’s great. Feedback on our L2 onramps has been great. I can give you more examples, but you know it will always be true that when you are a slightly larger company and you have a diversified portfolio, there are things that we will try that may not succeed, but overall, you know, we try many things, and many will succeed, as well.
All right, so in a moment, we’re going to talk about some products that people are eagerly anticipating, but first, a quick word from the sponsors who make this show possible.
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Back to my conversation with Surojit.
The deal that Coinbase recently signed with BlackRock is something that had a lot of people discussing. BlackRock is the largest asset manager in the world with 10 trillion dollars in assets under management. It’s also the parent company for iShares, which is the largest ETF provider globally. What is the vision for the types of products and services that you think will result from this partnership?
Absolutely. Let me probably first give a little bit of context on the partnership itself. First, I think, for this partnership to come together, during the darkest kind of time of crypto Winter, is a testament of how far we have come as an industry and as a company, so you know institutions are really thinking of crypto as an asset, a new asset class, and they are looking at Coinbase as the gold standard in the industry, so what does this entail?
As you know, BlackRock was the largest asset manager, they have over 8-1/2 trillion dollars under management, and they have this platform called Aladdin, which is their portfolio management software. It provides their investment professionals a way to view and manage their investments on a daily basis. Now, Aladdin also has over 300 other large asset managers that use Aladdin, so they are bringing in another 22 trillion dollars in management, so that’s the access we create.
Now, what’s going to happen is Coinbase Prime is going to be integrated directly within Aladdin, so these asset managers now will have access to crypto trading, custody, prime brokerage, all the reporting that Prime provides right inside the level of workflow that they use day-to-day to manage all their other assets, so this is an incredible opportunity, I think, for the industry as a whole because this unlocks and it enables these trillions of dollars of assets to eventually enter crypto and Web3, so that’s what is exciting about this partnership, and you know we’ve started working with BlackRock by first half of 2023, we are going to start rollout, the first phase of this partnership, so we’ll start giving access to a lot of this functionality within Aladdin, and then, you know, we keep adding more and more functionality. We are going to start with bitcoin first, but then, also, move to make all this functionality available for other assets.
What’s your sense of how much demand is fueling this because last year BlackRock CEO Larry Fink said he didn’t see much institutional demand for crypto, and we’ve seen, in the past, there have times when there were these seemingly big partnerships that were announced with, for instance, retailers accepting crypto as payment, and eventually, they didn’t amount to anything meaningful, so you know what’s your sense of just how much actual demand for institutions is driving this and will actually result in real money coming in?
Absolutely. I mean, BlackRock will tell us, and a lot of our other institutional customers will tell us that their customers are asking them about crypto. That’s why they’re interested in talking to us. So, we are seeing this demand, right, as crypto as an asset for us, keep growing amongst institutional investors, and this deal has fueled even more, I would say, interest, so we are getting a lot of calls from other institutions who are interested, who are curious, and they want to understand more, so I think this is a great time for crypto to invite and welcome more institutional investors, so I’m very bullish on our institutional business, very bullish on what we can do to help these institutions get into crypto, and not just buying…you know, I talked about this a little bit earlier, not just buying bitcoin, that’s how many of them will start, but then, you know, get into lots of different types of coins, Alt coins, and so on, but also get into DeFi and Web3 and participate. We’ll see that also happen in the future.
I’ll mention one more thing here, a few months back, we announced this with some of our actually industry partners, you know, other staking providers, a new protocol called Alluvial finance, so this, basically, Alluvial Finance provides liquid staking for enterprise grade liquid staking meant for institutions, so I think we’ll see more and more of those infrastructures get built by us, by other players in the industry, as well.
Like a version of Stake to eth but for institutional client?
Okay. So, speaking of staking, you recently announced that Coinbase would be adding Ethereum to its list of staking options for US clients and US institutional clients, and obviously, at the moment, the market is expressing a lot of interest in trading Ether due to the upcoming merge. However, after the merge, if a majority of institutions decide to stake with Coinbase Prime, how do you prevent Coinbase from having the keys to the largest percentage of stake to ETH and sort of centralizing it that way?
Yeah, we are careful about that, you know, we work with, of course, we have with our Bison Trails acquisition with Coinbase Cloud. We have our interest on validated infrastructure with Coinbase Cloud maintenance, but we always make sure we are diversifying with other partners, as well, and that’s been…we have been very thoughtful about the risks customers have and staking the risks that we carry for them, and that’s kind of what has been a principal in how we offer this product, you know, you will see some of our competitors offer a very high API in staking and so on.
We deliberately don’t do that because we want to make sure we can stick to our commitments when the asset prices swing, like wildly, right, same thing, so we are going to just be very diligent and make sure it’s sufficiently decentralized, you know, it’s always thinking about what the customer likes, how much risk we are taking for the customer.
Okay. Yeah, I mean, it just almost goes against your own self-interest. It’s like you’re, you know, I mean, if you’re following what’s happening with the other…like liquid staking derivative for providers then, there is sort of a tendency towards centralization.
I wanted to ask you a little bit more about Coinbase Wallet because you’ve, you know, talked about it a lot, and I was wondering are you monetizing that already, and you know, whether or not you are, if a lot of trading volume were to move from the exchange to Coinbase Wallet, then how would that change your revenue and by how much?
Yeah, so let me kind of talk about how we are monetizing Coinbase Wallet since it’s a question.
So, we charge a fee for a DEX trading, today, to Coinbase Wallet. We have connected with DEX aggregators, similar to actually MetaMask and other wallets, as well, they also charge a fee, we charge a fee, so that’s how we are monetizing Coinbase Wallet, today, right, it’s, basically, an access fee.
And what would happen to your revenue if all the trading volume were to move from the centralized exchange over to Coinbase Wallet?
Yeah, I will not speculate on eventualities and kind of specific numbers. So, let me kind of explain the user flow, right, a little bit. So, today, if you go to Coinbase main app, for many tokens, if you click on them, you’ll already see that we are telling the user, hey, this token is not available for trade on our main app because it’s not listed in our centralized exchange or we can’t list it for other reasons, but you can trade it in Coinbase Wallet, so we already have a connection from the main app to, so we see some users, they will come to the main app then jump to the Coinbase Wallet and do trading.
They also like the convenience of trading in the main app, so I don’t think it’s one or the other. Again, many users find the convenience of like a custodial experience, and also a low fee experience, in some ways. See, when you go a DEX scenario, it’s not just the access fee, there’s gas fees involved and so on. On Coinbase, you know, you’re not paying those expensive gas fees because it’s a centralized exchange, and we are, in every gate, writing the transactions onto on chain and so on.
So, there are use cases for both, and I think what we are going to see is some users will choose, so some users like the convenience of a custodial experience, like the usability. Some users prefer the privacy or the freedom to manage their own keys, manage their own assets, the security it gives in their mind, you know, so they’re going to go to self-custodial wallet or Coinbase Wallet, so we are building choices for our users, that’s how I think about it, and we’ll see how user behavior changes over time.
The last several months, Coinbase has been losing market share. In May, FTX surpassed Coinbase to become the second highest volume exchange worldwide, how does Coinbase compete with the likes of FTX, which is younger, nimbler, and perhaps perceived to be hipper?
So, first thing on market share, we are still the biggest US exchange, right now. We have the majority market share in the US. There are really three reasons for the market share.
One, you know, a lot of our retail traders in a declining market, they actually are HODLers, they don’t trade as much.
I think second, we have seen a lot of activity in the offshore exchanges mostly in coins or tokens that we don’t support. Again, for various reasons we don’t support many tokens because we don’t think they are safe or they pass our kind of scrutiny on which tokens we should list.
Number three is we haven’t had the exposure to a lot of liquidity events that have happened in the industry that other exchanges had exposure to, you know, 3AC, Celsius, Voyager, Luna, Terra LUNA episode, and all that, so in some interesting way, that showed up as more trading volume in other places.
Now, to your question on how we think about competition and how do we think. Well, why do we think we will still win. First, I think competition is good. I talked about this. I think there’s space for more competitors. It just makes the industry better. It’s healthy, more innovation, and so on.
In terms of why we think we are in a good place, first, our focus on trust, right, we want to be the most trusted option for customers, period, and that comes from our investment in security, preventing hacks, compliance, and this is a lot of investment for many years, you know, some of our competitors may not focus on it, and also robust risk management, good customer support. Basically, like not being sketchy. That’s how I put it.
The second point here is, look, we are really obsessed with how to make things simple for the customer, and we want to eventually have a billion users accessing this new economy through our products, and that means actually investing deep in technology. It’s not just about UI flow. I talked a little bit about MPC Wallet, how it makes things simple, it’s a long, sustained investment in technology, deep technology.
You know, when we did the direct onramp to L2, it may seem simple, but it’s very complicated, right, and it takes a lot of effort. So, to the user it seems super simple, oh, I can just move directly to polygon, right, I don’t need to go through bridges and so on, so that’s how we are thinking, how do you invest in technology to make things super simple, and the last thing I’ll say on this, again, we talked about it a little bit earlier, our integrated product suite.
So, if you’re a Coinbase customer, you fill a Coinbase account, we try to make it simple and easy for you to access all of our products and services, so it’s not just buying and selling crypto, but you know if you want to stake your crypto, if you want to send your crypto and receive crypto, if you want to use a debit card to pay someone, if you want to buy an NFT, if you want to participate in a Web3 game or any other sort of interesting application, all of them, you can do without leaving our platform with a single account. You know, we think providing customers this one-stop shop is going to be a powerful differentiator.
Do you feel that because we’re sort of in this crypto winter that, who knows how long it will last, do you feel that you’re having to focus on certain areas or do you still feel that you can kind of pursue all these directions, at once?
It’s very important for us, for the industry, as a whole, I think, to keep investing during crypto winter. If we just focus on let’s say, exchange or let’s say crypto like buying and selling, I think we’ll miss the mark of the next phase of innovation in this market, so we are focused on building the tools, building through this winter, and be ready for the next upcycle, next price cycle in crypto, while new use cases will come, new builders will come, and so on, so I think our strategy is sound.
Of course, our core business, you know, trading, we have invested heavily into making our exchange the best execution venue, our prime broker, you know, the best prime brokerage out there, our retail trading the simplest and most trusted trading venue, and we are adding more and more features to our core, but we also think we need to have one foot forward into the future and build for the future, as well, and that’s why we’re investing in things like Coinbase Wallet, right, self-custodial wallet, that will be the gateway to Web3 in the future. We’re investing in Coinbase Cloud that will help build the Web3 economy, build the Web3 ecosystem and help power, you know, picks…it’s like the traditional picks and shovels strategy, right, we want to build picks and shovels to help developers build their next billion-dollar applications, and I think is a sound strategy going through the crypto winter because this is the time to build.
Okay. So, a former Coinbase product manager was recently charged with insider trading of assets on Coinbase before they were listed, and CEO Brian Armstrong took credit for the investigation that led to identifying the suspects, but Jordan Fish, who’s most widely known as Cobie on crypto Twitter tweeted that actually he had been tweeting about the frontrunning of coins about to be listed on Coinbase for months, and as he put it, I doubt Brian’s claim that Coinbase actively monitors with any degree of competence. The frontrunning lasted for over a year. Surely, Coinbase should’ve found this before randoms on Twitter did. What’s your response to that?
We want to, of course, thank our friends on Twitter, who are always monitoring and so on, but I think, you know, we cannot a priori disclose, but you know any investigation we have been doing, like we take this kind of behavior very seriously, any type of illicit activity very seriously, so we have lots of monitoring, and in fact, we investigated this individual, and we cooperated with DOJ. In fact, DOJ actually thanked us for all the information that we gave them, so you know this is speculation that I would say, at its best, but we take this seriously. We are focused on it. We are monitoring. We have safeguards. We are monitoring any internal threats always. We are continuously improving our processes, but we cannot, for example, disclose a priori any investigation that we may be doing, right, you know, that’s damaging for an individual or sometimes it may compromise the investigation itself. That’s all I have to say here, but I want to assure everyone, look, your assets are safe, we do not allow frontrunning, and we are going to take serious action if we find any hint of it anywhere.
And in the same case, the SEC charged this product manager and his two accomplices with insider trading, but in the charges, the SEC mentioned that nine of the assets on Coinbase were securities, but it didn’t really give the reasoning for that, and since the case is against this former employee and his brother and his friend, is there any way for Coinbase to get involved or is there some other way that Coinbase can, basically, get the SEC to provide its reasoning as to why those coins are securities?
Yeah, it’s a great question, Laura. In fact, we think the current regulation, you know, the Howey rule that everybody uses, the Howey Test, to understand whether something is a utility or security, it’s outdated. It was not written at a time when there was any semblance of blockchain technology or even computers almost 100 years ago now, so we would love to get more clarification, and we think this is good for the industry, as a whole, so we are working with SEC trying to get more clarity on any asset.
On our side, every asset we list goes through a very vigorous process, digital asset listing framework where, you know, our legal team, compliance team, security team, they evaluate the asset, they apply to how it tests, and we reject a lot of assets, by the way, it’s not like we list every asset that comes our way. We do not publish the assets we rejected because, you know, for other confidentiality reasons, but we reject many, many assets, and we are confident that the assets we have listed passes that test.
In fact, the digital assets review framework that we have was actually reviewed by SEC. So, we would love to get this clarification for the whole industry, and we’ll work with SEC or any other regulator, for that matter, to get more clarity.
So, after this incident, Chief Legal Officer Paul Grewal published a blogpost titled Coinbase Does Not List Securities. End of Story. I feel like that headline implies that Coinbase has the final say on whether any particular token is a security. Obviously, it doesn’t, so why was this written in this way?
Again, we maintain that, to our knowledge, when we apply the laws, as we understand them, the regulation, as we understand them, we do not list any securities. All our tokens are utility tokens, and that’s the spirit in which this blog was written, but you know I don’t want to speculate specific wording in a blog and why the wording was there, but this captures our feelings, our message that, look, we follow the process, a process that was reviewed by SEC to determine whether a token is a security or utility, and we do not list securities, so if there are clarifications and clearer regulations, we’ll, of course, welcome it. We have always welcomed clarity in regulations, so if this helps pave the way to get more clarity, I think that will be great for the whole industry probably.
Yeah, well, Coinbase is, obviously, you’ve been doing a lot of work in this direction, but it hasn’t yielded much result, not to blame you, but after this case, why is it that Coinbase did not delist the nine coins named in the insider trading case considering that Coinbase did delist Ripple’s token after the SEC sued Ripple for XRP being an unregistered security?
Yeah, it’s…you know, I kind of stated before, we believe these are not securities, and that’s why we did not see any of these and to delist them, at this time. If there are security tokens and we don’t believe there are any security tokens platforms, we delist tokens time-to-time on our platform when we see safety issues for our customer, for example, and other challenges, so there are, you know, decisions are taken very thoughtfully. We have this digital asset listing group that convenes and looks at all aspects of a token to figure out whether to list or delist, so I can’t comment on specific decisions because it’s also been a while back, but for the nine tokens, we don’t believe they are security tokens. That’s why we have listed them.
So, to go back to some of the questions I was asking you about competition, whether there were exchanges, here we are talking about regulation, one of your other major competitors is Binance, which at least in the short term, appears to be playing some kind of regulatory arbitrage game, and Coinbase, obviously, has a very different image, but in that situation, how does Coinbase compete with the likes of Binance when it may be playing faster and looser with the rules?
Look, everyone has their kind of own principles, their own strategy, right, we believe our strategy is sound. We lean into regulation. We want to be the most trusted crypto platform in the world, and we are seeing it paying off. For example, if you talk to institutional customers, they will tell us, they will not even talk to many of our competitors. They will only work with us, and that’s because of our commitment to trust, compliance, and security over the years, and how we lean into regulation, right, so I will say there are advantages and disadvantages. We have chosen this path, and we strongly believe that, for the longer term, this is the right thing to do for the users, and our users also expect Coinbase to act in a trusted manner. We have a different user base, as you can imagine, right, and this is why we have been able to attract a lot of mainstream users. We have over 100 million users. In fact, our verified users actually tripled in the last two years, and we think we can onboard even more users to crypto and Web3 because of our stance on trust and security and compliance.
So, on another front, Coinbase also faces competition from decentralized exchanges such as Uniswap. I’ve noticed that since the beginning of the year, trading volume on Uniswap has only been slightly below the volume on Coinbase, how do you compete against a site where developers can list tokens themselves and there’s bound to be this longer tail of assets available?
Yeah, great question. We love decentralized exchanges. We love the innovation that’s happening in the DeFi world. I talked about this a little bit, but the way we think about it is how we give our users more choice, and this is manifesting in the product, right, it’s not just lip service, so if you go to our Coinbase main app, we can buy all our listed tokens on our exchange that goes through our process, you can also find tokens that you can buy through Coinbase Wallet or you can buy it through a DEX directly with the new dApp wallet that we integrated into our main app, so as you can see, we think of this as not a zero-sum game, we think this just helps grow the entire pie, brings more users, gives them more choice, so you can in Coinbase Wallet, we have integrated with DEX, so we have very good relationship with all the DEXs out there, and we think it’s good for our users to have more access and more choice, so that’s how we think about it. Where we play is how we make it simple and easy for our users to access all this innovation that’s happening, and that’s where the focus has been.
So, your earnings report just came out, and Coinbase’s average transaction revenue per user is down, and it’s projected to be in the low 20 dollar range this year, down from 64 dollars per user last year, what are your plans for boosting this number?
Yeah, so as I said before, look, in a crypto winter, typically, retail users, they reduce their trading activity, they become more HODLers, but they participate in other activities, so they are participating in, for example, staking and a lot of other features. In fact, two-thirds of our users are doing something other than trading, today, right, and staking being the big part of that. One idea or a strategic direction that we have been following for some time is how do we keep growing our subscription, what we call subscriptions, which is revenue or non-trading revenue, and if you look at last two years, it has grown from being 4% of our total revenue to 18%, today, right, and it continues to grow, so that’s one, continue to grow these other sources of revenue beyond trading.
We are also experimenting with a new product called Coinbase One. We talked about that in our shareholder letter, if you have been watching us. So, it’s a subscription product, monthly flat fee. It allows you to get unlimited trading without a fee. The spread is still charged. We give you 24/7 customer service, so you know someone will pick up the phone when you call, if you are a subscriber, immediately. It gives you many other additional benefits across our platform, and then we keep adding more sources of that. We are seeing a lot of traction for Coinbase One. We are very early days, so we have not made a lot of hype about the product. We have not done any marketing or any PR, but organically, the product has grown and it’s doing large growth, strong growth, and we are seeing incrementality from the product, so as users come in, as they move into Coinbase One, we are seeing they’re more engaged with our platform not just with trading but all the other features that we have embedded in our platform.
We talked about the integrated product suite strategy, so that’s another way we are seeing how we grow our revenue irrespective kind of decouple it from the volatility in the market, in the long run.
All right, final question. What do you worry about at night?
What do I worry about? There are a lot of things to worry about. I think high level, for the industry, I think regulatory clarity would be great, so that’s the first worry and the over like macro worry I have, and I think that, you know, today, we don’t even know who is the right authority with oversight. Is it SEC, the CFTC, so there’s some confusion? Of course, CFTC regulates a lot of what we do, but SEC has questions and so on, so that would be good for the industry.
I think it’s also harmonization of regulation internationally would be useful in a lot of countries are thinking about, you know, how to do KYC for send/receive or how to do KYC for self-hosted wallets, so a lot of ideas are coming up from regulators. Some of those ideas are probably not even actionable in some ways, so getting some clarity and some harmony globally would be useful. I think stablecoins is another one. I think, and I know not all stable coins are made the same, so regulators need to probably understand how the mechanics with stablecoin is made, how…
Actually, I do have a question for you about that. There is this lawsuit against Coinbase for failing to educate customers on the differences of Terra versus other stablecoins. In the lawsuit, they allege that Coinbase did not disclose that it was this algorithmic stablecoin, that it was not backed by reserves, so can you talk a little bit about what happened there?
Unfortunately, Laura, I cannot comment on an ongoing lawsuit.
Okay. Okay. Yeah, I just wanted to ask because you mentioned this.
Absolutely, but I cannot offer comment. You know, those are high level, kind of just the regulatory clarity would be useful. Going back to your question, what I worry about. I think, you know, bankruptcies and security hacks that we have been seeing in the industry, it just does not bode well for the reproduction of the industry, as a whole, right. We have never been hacked. We really focus on security, and we invest in it, but I worry about like overall the industry kind of when a little fast and loose, a lot of people tried a lot of different things, and probably not enough time was spent in thinking about security, and that gives a bad reputation to the whole industry. I’m hopeful that we will get through this and there are no other bad incidents out there, but every morning, I’m like, I’m almost like scared, okay, I hope there’s no bad news about the industry, no new Nomad or no new Celsius. Those are a couple of big worries.
Yes, somebody tweeted that my newsletter had the word hack or something in it, like hundreds of times, so you know it was definitely something other people have noticed not just you.
Where can people learn more about you and your work?
Twitter. I tweet out a little bit. I tweet out monthly, product launch tweets, so if you follow me, you’ll see every month, like first of every month, I kind of tweet out all the highlights from what we launch.
And the handle is?
Surchatt.eth, or Surojit will work, Surojit at Twitter. What else? Learning about me, I think, you know, if you learn about my products that’s probably good. People can reach out to me, and I talk to a lot of folks in the community. I’m actually learning from others all the time, so I know this was a great conversation. I think there’s so much more to learn in this crypto industry, and we’re still very, very early, and we have a lot of stuff to build, right, let us all work together, not kind of…sometimes, I see a little bit fighting with each other and pulling each other down, let’s…
Or a lot.
Some. Some, right, but you know we are still a small community, so I think the community needs to come together and need to make crypto a safer place for all users. I think we have a responsibility to innovate the next big use cases. That’s kind of my dream.
You didn’t ask me that, but my dream is how can we create utility use cases for crypto, like where people come on a daily basis and talk about the toothbrush test and use something that is followed by crypto. I think that’s when we will, basically, arrive in the industry.
all right, well, we’ll see how that plays out over the next few years. Thanks so much for coming on Unchained.
Thank you so much, Laura, really enjoyed the conversation.
Thanks so much for joining us today. To learn more about Surojit and Coinbase, check out the show notes for this episode. Unchained is produced by me, Laura Shin, with help from Anthony Yoon, Matt Pilchard, Juan Aranovich, Pam Majumdar, Shashank, and CLK Transcription. Thanks for listening.