Why Brian Armstrong Started Coinbase | Market Bubble Ep.12

Hey guys, how we doing? Thanks for having me on.

That is true. There's like, you ever read about that like the tyranny of the 1% thing? Like there's usually the people that are the most vocal. It's not, it feels like it's 50% of all the people, but it's usually a small group. Anyway, good to hear them out, learn something from it, but don't have to over rotate on it.

Yeah, sure. Well, thanks for starting there, a little warm-up on the background. But yeah, 2010 I first read the Bitcoin white paper. I was living in San Francisco. I was an early software engineer at Airbnb and I was trying to help them move money all over the world. I had studied computer science and economics and I remember in 2010 I read that Bitcoin white paper and I was like, 'Wow, this is really powerful.' It's kind of like the internet, global decentralized, but instead of for moving information around, it's for moving money. And I had been reading a lot of stuff like Milton Friedman and Ayn Rand, libertarian stuff in the prior couple of years. And so something about it captured my attention. I was like, this would be amazing if the world had this open financial system. So I started working on a prototype nights and weekends, applied to Y Combinator. I started going to these early Bitcoin meetups in San Francisco in 2010 which were TradeHill, if you remember that exchange was actually around at that time. Mt. Gox was there at that time. And I remember thinking actually I had this thought like, oh maybe I'm too late because TradeHill already existed and Mt. Gox already existed and I was like, ah man, maybe I missed my shot. But you know, applying to Y Combinator, they gave me the first 150k check as a seed investment that kind of convinced me, all right, I'm going to quit my job, really go for this. And was lucky enough to find Fred Ehrsam as the co-founder. Most of the early days was just trying to get anybody to care about the app whatsoever. And once we got a simple way to buy and sell Bitcoin, it really started to take off and then you're just trying to ride the tiger at that point. Super hypergrowth at times, rode through all the cycles of up and down. You know, there were periods where we had to lose 25, 30% of the personnel year-over-year in down markets. We had amazing fundraise rounds where everybody wanted to invest. We had terrible fundraise rounds where we could barely get one term sheet. And eventually went public in 2021, which was a cool 10-year journey, trying to really professionalize the company, get it to scale, build out a real executive team, getting into the S&P 500, that was a massive win. And you know, suing the SEC and Gary Gensler was another big one because I felt like he was trying to kill the whole industry and so we had to fight back.

Yeah. Well, as with everything, it's a mix of skill and luck, right? So there was some stuff that we got right, which was we were one of the first companies to get a US bank relationship, which was actually Silicon Valley Bank at that time in the early days. And so we were for a period of years the only place for someone in the US, at least, to come and connect a bank account and be able to easily buy Bitcoin. And that came from a lot of our work on compliance, security, and just being based in the United States, putting our name on it, taking a regulated approach. We were going out and trying to get money transmission licenses. We worked with lots of different law firms and had the right backers to allow us to get some of those bank partnerships that really allowed us to get off the ground. So that was some of it in the early days, but there was also some luck. I mean, there were definitely moments early on where we were like 10 people and the amount of deposits people were putting on the site was growing week over week and I was like all these hackers were trying to break into our systems. We didn't have a big sophisticated security team. And I remember there was this one vulnerability that somebody broke into one of our customer support agents' accounts and they were issuing themselves refunds at a rapid clip and we just happened to notice it while we were sitting there at lunch in San Francisco and we were able to shut it down. I think we lost $50,000. But if that attack had happened while we were sleeping on the west coast, we would have been woken up in the morning and the company might have been insolvent. There were a couple coin flips like that that could have gone either way. So yeah, mix of skill and luck.

Yeah. Well, it was a good wakeup call for me because I think I realized that I hadn't been clear enough with people just about this particular community that was following what I was saying on X and really looking for signals about, okay, he's signaling to us that this thing's time for it to run up or different trades that they wanted to make. You know, we built Base with this idea of how do we innovate on financial services, build a path towards decentralization that lots of people can build on top of it. And I'm very pro-economic freedom. That's the mission of Coinbase. So I want everyone to be able to build on it. That means there's going to be lots of different constituencies. In any given day, I might talk with folks like you who are more in that trader trenches as you call it, right? I might also be talking to some giant bank, some government that's trying to build on top of this, the latest fintech. There's a bunch of AI agents now transacting on Base. So we do have a large number of constituents. And it's my job to go understand each of those and empathize with them. And in this case, I kind of fucked it up to be honest, in the sense that I completely misread what one community was reading into my stuff. So yeah, I tried to make it clear going forward, whenever I miss something like that, all you can do is try to set expectations clearly going forward. And there are going to be lots of ways we can support people building on Base with investments and in some cases integrating into our products. But unfortunately, I'm not going to be in a position where I can guarantee somebody listing on Coinbase or pump a certain coin or anything like that. It's just not something I would personally do. So yeah, I'm 43 now too, so I don't know, maybe I'm a boomer. And I have to put a lot of my time into putting on a suit and tie, going to DC, trying to get the Clarity Act passed.

Yeah. Well, I mean, it's kind of the nature of the internet, right? It's been around a long time. I don't expect people to give me any free passes or anything like that. And what I've noticed is that when I do see people that are super upset about something, oftentimes I'll ping them and they'll be like, 'Holy fuck, he actually responded. He wants to know what's going on.' And then they're super nice to me, right? Because I think it's just people who are frustrated and I get it. They think when they're posting that they're not, if we met in person, they would never say that to my face. They're just kind of venting and shouting into the ether because they don't think it's like a human being on the other end. Whenever I've gotten on the phone with somebody who's super upset, they're like, 'Actually, I'm such a big fan of Coinbase and like 10 times out of 10.'

So, your question is a good one for all communication on the internet.

By the way, it happens inside companies, too. Like sometimes, you know, I'll be on Slack or something and these two people are super pissed at each other or whatever. I'm like, 'Hey, get on a phone call.' Suddenly, you can hear intonation in people's voice. You know, they always say communication is like 10% verbal. A lot of it is about the tone, about body language. So even just you guys, thank you for having me come on here. Hopefully, people can see a little bit more of my tone and body language and get a sense of what we're all about. I think that is one issue that plagues crypto is like people are usually confined to the tweets and stuff. And that's why I've pushed guys like Z and ThreadGuy to get in front of a camera and just speak, because I just feel like it reads so much more authentic, more genuine. It's less, it's more difficult to dehumanize a person. Because what you said is bang on the money 100% and consistent across every community on the internet. You're not really treated as a person, more so like a character in the fucking film.

Well, to me, it's like — I got into — by the way, I want to ask you guys a question after this too. But for me, I got into crypto because I'm super into freedom and economic freedom. I just think there are so many people around the world that get their wealth eroded from them by inflation like fiat currency where the value gets eroded, or they're getting nickeled and dimed on fees to just store their money securely, to move it around, basic property rights. And so, you know, I'm an investor but I'm not an active day trader or something like that. That's actually a weakness of mine when I co-founded Coinbase. I co-founded it with Fred Ehrsam and he actually was a trader coming from Goldman Sachs. So we had kind of both sides of it. You know, I initially got into crypto because I was thinking, oh, this is going to be a global payment system where everything is fast and cheap and cross-border. And we are seeing that now with stablecoins, which is really cool. But the trading stuff is just as important. And I'll tell you maybe a little bit about the intersection of those things, because trading can bring economic freedom as well. First of all, lots of people were storing all their money in cash in some local fiat currency, the value is being eroded. Now they can store it in Bitcoin, they can store it in USDC. But then also, most people are just living paycheck to paycheck, they don't have any ability to invest. And there's something like four billion people who don't have any access to a brokerage or US companies or anything like that. And so now with tokenization of equities which is coming to Base, I think people around the world will be able to own Nvidia or whatever company they want, Tesla, SpaceX, and Coinbase hopefully at some point too. And they can have real wealth that can grow in high quality investments. So yeah, that's economic freedom. That's the thing that keeps me, even if my day sucks and I got yelled at and the people in DC are telling me I'm an idiot or whatever it is, Jamie Dimon hates me, whatever it is, I'm like, we got to go create more economic freedom in the world and that's what keeps me getting out of bed in the morning. But yeah, if I can ask you guys, what do you think Coinbase should be doing better? I mean, I like to learn in these situations too. So if you were in my shoes, what's — and be totally honest — what's the thing you think we could be doing better going forward?

Yeah, I love it. Okay, that's good stuff. Yeah, I think you guys are spot on. In terms of listings, there definitely were some great Base projects that we should have listed sooner and we screwed that up. And yeah, there is a lot of stuff that goes on behind the scenes with these projects that we can't unfortunately out any of it publicly. We're trying to coach them a little bit on, okay, hey, it'd be nice if you checked X, Y, and Z box from an SEC securities point of view. We're not going to be able to do it unless you get there. We don't want to say any of that publicly. But sometimes our risk tolerance, I think, has been too low. Other exchanges went first and didn't see any issue with it and we were just caught up in our own internal bureaucracy. So, you guys are spot on with that. And I love the idea of getting closer to the trenches, the community. Jordan, Kobe has been helping with that quite a lot. And yeah, community support. So if there's any other podcast you think I should be doing, maybe I'll go ping ThreadGuy after this and we can see what happens.

Yeah, sure. So, it's been great. We've got the GENIUS Act passed, or not we, but the whole crypto community, the Senate, the Congress. Last year that was a big unlock for stablecoins. We saw hundreds of US large companies start to integrate stablecoins in the three months following that act. So I'm very optimistic that the Clarity Act is going to get passed here. I just spent the last two days earlier this week in DC again, meeting with senators on both sides of the aisle, trying to whip votes. You know, I don't know if you guys ever see House of Cards, but whipping votes was a term I learned there, but apparently it's a real thing in DC. So, it's interesting, everyone has got their fingers in this thing now. And the crypto community has an opinion, but so do the banks, so do the Indian tribes because they're worried about prediction markets, the law enforcement groups. All these groups have lobbyists and they're influencing things in DC. The good news is that there were just a couple remaining issues that were open and I think a bunch of the big pieces are falling into place. Even there was one that had nothing to do with us or crypto, but they were worried about an ethics provision for President Trump, and the White House and the president agreed to an ethics provision. So that's being debated now. Anyway, long way of saying I'm pretty optimistic this thing is going to get done at this point. 70% of Americans say they want clear rules for crypto. They're upset that it hasn't happened already. Something like four million Americans have raised their hand at standwithcrypto.org and said they want to elect pro-crypto candidates. So we've done our best to really try to help organize the community, because what I realized was the power of crypto is that it's decentralized, and that's great. Everyone can build on top of an open platform, but we also need to get organized sometimes. There were 50 million or so Americans who had used crypto, but we weren't electing pro-crypto candidates. It wasn't until just the last few years that started to happen. So hopefully we can get this legislation done and it will unlock a next wave of innovation in crypto.

Yeah, we've actually won a couple cases now against the SEC.

Yeah. So, okay. This was back a few years ago. When you go public as a company, you have to describe every single detail of your business to the SEC. And they turned over every stone and then they allowed us to become a public company. Okay. And then about a year later, Gensler and his SEC started coming to us and saying, 'Hey, we're really concerned about all the stuff you're doing. It looks like you're trading securities but you don't have a license to do that.' And we said, 'Well, we've told you everything about our company. You seemed okay with it in the past, but let us know why you think that. Where in the law does it say some definition of this?' Because there is a legal test of whether something is a security or a commodity. And we had been very conservative about that and made sure we were only trading things that were commodities, like Bitcoin and Ethereum. And they refused to really tell us any specific reason. In fact, I remember meeting with them sometimes and I was like, 'Well, we're open. You're the regulator, so just tell us what the rules are and we're happy to comply.' And I remember Gensler told me one time, he said, 'I'm not going to give you legal advice. You need to talk to your lawyers.' Like, what? And we said, 'Okay, well, it's not very helpful. I wish you would just publish the rules so we could all follow it.' But he basically was telling us, 'I want you to delist all these assets.' And we're like, 'Well, there's nowhere in the law does it say that that's the case, and you won't even tell us your legal theory. And if we comply with this, it's just voluntarily shutting down our business in the United States, which would arguably kill the industry in the United States at large.' And what I realized is that he didn't really care if it was legal or not. I think what he was doing was — this is all DC insider stuff that was told to me later — but basically Gary Gensler wanted to be the Treasury Secretary. And Elizabeth Warren, who was choosing the different regulators, told him, 'I'm not going to give you the Treasury Secretary job yet, but this is under the Biden admin. I want you to be the SEC chair, but I want you to go after this crypto stuff and really curtail it. And if you do a good job, I'll put you up for Treasury Secretary in Biden's second term.' Because if you go look at Gary Gensler, he taught this class at MIT where he actually is very smart. He was talking about all the benefits of crypto and blockchain and he clearly gets it. And then suddenly he becomes the SEC chair and he's trying to kill it all unlawfully. So anyway, I started asking some people, 'Should we push back and go to court with them over this?' And a lot of people would say as a public company CEO, you should never sue the SEC. It's going to put a cloud over your company for years while you're in this litigation. And a lot of public market investors, if they know that a company is suing the SEC, they're just like, 'This is too complicated. I'm not going to invest in that stock.' So I knew that would happen. But our alternative was basically to shut down the whole industry in the United States unlawfully. So at some point I was like, 'Screw it, we got to push back on this.' So we got some good lawyers. They engaged in an enforcement action against us. We sued them under what's called the Administrative Procedures Act, which is a law that Congress put together which requires the SEC to engage with industry and publish clear rules. And they had very clearly failed to do that. So they had violated the law. Later, we actually sent them a FOIA request, if you know what that is — a Freedom of Information Act request. As a US citizen, you can ask your government to turn over any document that is not classified. Because they work for us in a democracy, right? It's government for the people, by the people. So we sent a FOIA request to the SEC and we asked them to send over all their documents and Gary Gensler's text messages about what he was saying about crypto in private. Because I'm pretty sure what he was saying was things like, 'This may or may not be a security, we're not really sure.' That kind of thing. After many rounds of negotiation with them, he came back and the SEC said, 'Actually, Gary Gensler has accidentally deleted his text messages. We can't find them.' That's crazy. What? There's no — not on a podcast or anything. There have been some documents. But anyway, in this case, the court actually ruled in our favor and censured them and told them that they had violated their obligations and actually awarded us damages.