Brian Armstrong - CEO of Coinbase | Podcast | In Good Company | Norges Bank Investment Management

Thank you for having me.

Well, you know, I first read about Bitcoin in December of 2010, and it was describing how there could be a decentralized network to move value around the world. Kind of like the internet was for moving information, but this was for moving value. And, you know, it initially didn't get much attention. Only people that were computer science PhDs or, you know, libertarians or anarchists were excited by it in these small forums on the internet. And it slowly grew over time. And of course, Bitcoin was the first asset that got created, kind of like this digital gold standard, but quickly the technology evolved to be, you know, blockchain as a broader concept. And so, people made all kinds of things. They made ways to trade other asset classes like commodities and equities. They made stable coins for better payment rails. They made prediction markets. And so now, I think we're in a world where crypto is actually updating all aspects of the financial system. It's not really just about Bitcoin. It's about payments. It's about borrowing and lending. It's about capital formation. And how can this technology actually make financial services more efficient and more global, more fair, and more free all over the world. And so it has increased in trust quite a bit. I think the things that have helped that have been number one regulatory clarity, which we're seeing emerge now in Europe and in the United States. We got legislation recently passed for stable coins. We're also seeing adoption by the largest institutions in the world. So, you know, there's lots of Bitcoin ETFs now and firms like BlackRock and Apollo have come out and said they want to tokenize all of their funds. Companies like Visa and JP Morgan are running experiments with how to do stablecoin payments. And so, I think these trusted institutions coming in has also been another factor in addition to the regulatory clarity.

Yeah, that did give me a front row seat into how broken the global financial system was in certain situations. At Airbnb, we were trying to move money to 190 countries around the world, both collecting payments from guests but also paying out to the hosts, people who were listing their homes. And in many countries, it was very difficult for Airbnb to route money like to do payouts to Uruguay or somewhere like that. It might cost seven to 10% in fees, take three to five business days to arrive on the other side. And so working as an early engineer at Airbnb certainly gave me a front row seat to that. I had also spent a year living in Buenos Aires, Argentina and I had seen that country go through hyperinflation a little bit at least and it gave me a profound sense of how much that changed the culture of a country and really held back progress. You know, high inflation can really hurt the poorest people in society. So there was a few pieces like that that helped me see the potential of crypto.

You know, it really captivated my attention. I remember having this thought like this might be one of the most important things I've read in a long time. And I didn't fully understand it the first time I read it. It's only about 10 pages long. You know, anybody can go read it. It's actually I think it's worth people going to read it. It has some math. It has some computer science, so it's not the easiest thing to digest. It took me a number of times to reread it and really go try to implement the protocol myself to fully understand it, but it was a true computer science breakthrough. And it showed how, you know, you could have provable scarcity in a digital world. And previously that was not possible. So, you know, if you have like a photo on your phone, you can send a copy of it to someone else. And like in the digital world, infinite copies are kind of the norm. And this algorithm really showed how you could have provable scarcity. So, if there was a unique digital item, it was provably unique mathematically and you couldn't have people just make more copies of it willy-nilly around the world. So that allowed the initial use case was bitcoin this kind of digital gold but then people applied that same technology to tokenizing the dollar, tokenizing stocks, tokenizing, you know, memecoins, NFTs and all the kind of crazy stuff that happened in crypto too. I mean just to say it I think crypto attracted a lot of kind of bad actors as well and that created reputational issues early on.

Well, I think that's the nature of entrepreneurship. You have to see something early and be right. But it can't be a consensus view at that time. Otherwise, you're too late, right? Like now everybody is very excited about cloud computing or even like I would say AI or whatever. These are just very mainstream views at this point. It's probably too late to start one of the foundational AI companies. It's too late to start one of the foundational cloud companies. So as an entrepreneur, you're always kind of looking to things that are early that are not well liked and not well appreciated and sort of seeing is there actually much more here than most people are recognizing and if you see that gap between consensus view then you have an opportunity to go commercialize it. So for me, you know, I've always I guess this is partly why I think, you know, some entrepreneurs are like a little on the spectrum, you know, they just they don't care as much about social cohesion.

I would say so. Yes. I've never been formally diagnosed, but I've taken various tests and things like that just myself and I score somewhere on the spectrum for autism. Yes. And I think that is over represented in entrepreneurs.

Well, autism can present itself in many different ways, but, you know, I think one of the ways it presents is that you care a little bit less about social cohesion. You know, sometimes I'll be in a meeting and I ask a question and I know people might think it's a dumb question, right? But I genuinely don't understand it and so I'll ask, I'll say well actually why do people buy that product, you know, and everyone, oh it's obvious like you know this brand is loved and whatever. I'm like but is that really, you know, so I'm okay asking dumb questions looking a little silly. I'm just more interested in finding unique insights and advancing civilizational progress by trying to build cool things in the world. Like that's what really motivates me and I just find it fun. And so anyway, yeah, if you look at some of the not all entrepreneurs obviously are on the spectrum, but I think it is over represented.

I feel that way about him, too. So, thanks, a good compliment.

No, I think it's an evolution of traditional finance. So we are building the everything exchange which is bringing every asset class into one tradable platform. So you have not only crypto assets which of which there are millions now but you have stocks, commodities, FX. You know, I think prediction markets is another big category that's taken off and I think you'll actually see all capital formation get changed in crypto here relatively soon where it's easier to raise money and then go through the process of being a private company eventually being able to go public totally on chain. And then of course it's not just trading like crypto is actually updating these other categories of finance as well, right? Payments and borrowing and lending and everything. So yeah, it's a pretty broad technology.

Yeah. Well, we've tried to differentiate really by being the most trusted brand in crypto and that's allowed us to then custody more crypto than any other company in the world. And you know by custodians more crypto we then try to connect more products into those that custody and it makes the product sticky. It gives us a certain amount of margin pricing power. We can use that to go build new products. So it really comes from that trust. That comes from taking a compliance approach, following the law, being good at design, customer support. You know there's lots of areas that trust can come from being based in the United States, being a public company with audited financials. You know, we've benefited from all these things to build the most trusted brand, the largest, we're the largest provider to institutions as well for crypto services. And then, yeah, that trust has allowed us to now store about more than 12% of all the crypto in the world, which is more than any other company we're aware of. That's been growing over time. And is again connecting more products into those deposits and then we can actually generate more revenue from that and reinvest it. So, that's been our expertise and strategy so far.

Well, Bitcoin is volatile. You know, not all but of course like stable coins are very stable, right? So, you know, Bitcoin was especially volatile early on because it was so new and there were relatively small number of people in the world holding it. Now, it's gotten a lot less volatile over the last 10 years as the market cap has grown and I would say it was probably the best performing asset of the last 10 years by most measures. And so it went through like it's a little bit like the internet right the internet went through these bubbles and crashes as well because people oscillated between this is the future of everything to despair and every cycle that crypto or specifically Bitcoin has gone through it's gotten a little bit less volatile like the peak to trough has been a smaller percentage because more people in the world are holding it now. You know there's large ETFs, there's a lot of institutional holders, there's now a strategic Bitcoin reserve for the United States government, other sovereign wealth funds are holding it. So as that regulatory clarity has emerged, it's created a larger base of holders and I think that's decreased the volatility.

Well, I think a digital dollar is very still underappreciated and could grow 100 or thousandx from here. The reason is that payments are still relatively high friction around the world right now. You know, in certain countries, like I'd say in Brazil with Pix or in India with UPI, like they've managed to get payments to be quite fast and cheap, but they work only within that one country. Other countries like in Europe, they have instant bank transfers that are very that are free essentially, and that's a really good feature. But if you look at most payment methods whether it's credit card or Swift or anything and you kind of look at these three dimensions like the cost, the speed and then the global reach. So they're, you know, let's take credit cards for example, like they have pretty good global reach, but they have high cost, two to three percent on every transaction, and they're quite fast, right? If you look at Swift, it has good global reach, but it's expensive. And it takes like I think what two to three business days or something like that. And so if you cry, stable coins are the only payment rail that checks all three boxes. It's fast, cheap, and global. So you can now send stable coins instantly in less than 1 second anywhere in the world for less than a tenth of a cent US. And so payments are like water. They kind of flow to the path of least resistance. And I think that's why we're seeing such enormous growth in stable coins. I think it grew about maybe 100% year-over-year last year. And more and more of global GDP I think will run on stable coin rails.

Well, some of the early adopters of it were for B2B cross-border payments. That seemed to be an early use case that was least well served by the traditional financial system. You can imagine many companies out there, they're sourcing goods from you know Asia or Europe and these wire transfers and you know there's FX risk, there's settlement counterparty risk and they take sometimes five days like if you're moving cross-border payments between for your company. So that's been a huge emerging use case for stable coins. We're also starting to see it be used in e-commerce and peer-to-peer payments like people sending money home to their family in other countries as an example with remittance. And yeah, I think that eventually it should eat more and more of every payment category right payments, e-commerce, but the B2B cross-border payments have been the largest driver so far.

Well, this is a big debate. So, when I go meet with other central bankers, they often tell me they would like to create a central bank digital currency. And I tell them, okay, that's great. You know, we want crypto to be adopted by everyone. What I've noticed is that they often don't end up launching it though. You know, governments are really good at setting policy and they are not as good at building software, right? And so they can sometimes work with an outsourced vendor, you know, the government can hire a technology vendor to come in and build that. But what typically works best I've seen is that if the government sets the policy, the private market can go provide those solutions. And so that's what we've seen happen with the stable coins. So far, the largest have been privately issued, but, you know, in the US at least following a regulated standard. There's one other aspect of central bank digital currencies which is that I'd say they're somewhat polarizing because some people really have concerns about the privacy aspects of that that if the government is issuing a central bank digital currency that it could end up with some kind of social credit score where you get your money turned off by the government. And, you know, so China for instance has created a central bank digital currency their digital RMB or digital yuan and they see it as a tool for control. In my view, the Chinese people are very excited about decentralized cryptocurrencies. But the Chinese government fears it as a way of losing control. So they've been much more advocating for a central bank digital currency that they control, the digital yuan. I think the rest of the world needs to figure out which side they're going to be on. I can tell in the US right now it's leaning very much more to like privately issued stable coins that follow a regulated standard.

Yeah, I don't see any reason why they couldn't coexist. And I think there's going to be certain segments of the market that will only trust a central bank digital currency. There's going to be other ones that lean into the private ones and they just the private ones will just move faster, I think, and innovate faster.

Well, stable coins are going to create a lot of demand for government bonds, T-bills. And today, I think stable coins, the total stable coin market cap is about 300 billion or so. I think last time I looked maybe stable coins writ large are about the 16th largest holder of US government debt. And so if you're the Treasury Secretary that's probably a good thing. You want more demand for US treasuries. And then what's interesting is that because those short-term treasuries like under the US regulation you can only hold short-term US treasuries that underlying stable coins that are 90, 93 days or less. So it's very short-term treasuries. That's low risk, designed to be very low risk. And what we're seeing is that a lot of stable coins now, they can pass along some of the rewards from holding those short-term US treasuries to the actual customer, which is a nice benefit for them. So, I think overall, you know, I'd say stable coin, US backed stable coins are very good for the dollar. Like if there's a euro backed one or any country, most countries are racing to have one of these now. They all see it as a good way to get their currency to create more demand for their treasuries but also export their currency around the world so it has more use cases.

Yeah. So actually Europe has one. It's there's one called EURC that we work with and support and it, you know, 97% of all the stable coins are backed by the dollar right now. So I think that the race is on where most of these other countries really need to start to create clear regulatory environments and then push the adoption of it to compete with. From a US lens they like the fact that it's dollar-backed mostly. They view it as a key tool to preserve the reserve currency of the dollar. But, you know, I wear many hats because we operate in many countries. So when I talk to different folks I encourage the folks in Europe for instance to continue to promulgate good rules around that and accelerate adoption.

Yeah. I think the key thing that would drive adoption of one versus another right now is the payment of rewards. Like basically can the customer earn the rewards from the holding those short-term government debt underneath.

Yeah. We don't use the word interest because that legally is associated with having bank deposits that do fractional reserve. And in this case there's no fractional reserve happening. It's 100% reserved by short-term debt. But that's a legal debate that's happening right now. So we call them

Exactly. Yes. We want to work with the banks to integrate this technology and Coinbase is actually powering integrations for five of the G10 banks right now. So we want to help. The smartest banks are all leaning into this as an opportunity. We hope that continues.

They're our partners. Yeah. I mean, first of all, we work with them today for on and off ramps and we do lots of our own corporate work with them. But I think all of the smartest bank CEOs right now, the large banks, etc. are leaning into stable coins and crypto generally. Like they're integrating stable coin rails because they're faster, cheaper, they can save them money with Swift fees and move their client funds around faster. They're also using crypto to tokenize their various funds and assets. And then they're providing crypto trading to their clients like in their high net worth clients and things like that who want access to these assets. So we have a product called Coinbase Prime and Coinbase developer platform that helps any institution integrate crypto services whether that's wallets, trading, payments, etc. And we are the leading provider of that for institutions.