Coinbase CEO Armstrong on the Future of Crypto

Yeah, well, let me just zoom out for a minute to put you in the mindset I was in at that time. So I had studied computer science and economics in school, and I had taken a year to live abroad in Argentina, which is a country that had gone through hyperinflation. And then, as you pointed out, I joined Airbnb, and they were a company that was moving money to 190 countries all over the world. And so I sort of had a front row seat into the difficulty of integrating with the global financial system. Every country has their own systems, you have to integrate with different fees and delays. And so in December of 2010, I happened to read the Bitcoin white paper, which was written by this mysterious person who nobody knows, Satoshi Nakamoto. And it immediately... I have no idea who he, she, or they are, unfortunately, but it definitely captured my imagination when I read it because it talked about how the whole world could have this universal currency that ran on the internet. And I felt like it just kind of grabbed me, and I felt like this is the most important thing I've read in like five years. So I started going around to different meetups in San Francisco. They had these very early Bitcoin meetups, and you might laugh at this, but I remember thinking, "Oh my gosh, I'm too late to the game," because there were already Bitcoin exchanges that were there, and this was like the 2011 timeframe. And I'd go to these meetups, and the room was half brilliant computer scientists and half just completely crazy people. So, kind of like online dating, probably. So in that environment, I kind of started to tinker with a prototype on nights and weekends, which eventually would become Coinbase. And so that was a little bit of the origin story.

Right. Well, cryptocurrency is just digital money. It's like money that you can send around the internet. And Bitcoin was fundamentally a computer science breakthrough. It solved this problem that had never been solved before: if I'm going to send you a digital dollar, how do I prove to you that I didn't also send a copy of the same thing to somebody else? Because in the digital world, it's really easy to make copies of things like photos or any kind of digital content. And so the only way people had solved it to date was they had trusted intermediaries like banks that sit between us, and they atomically debit and credit an account to make sure I didn't double spend it. And Bitcoin came up with this brilliant solution: it allowed me to send you a dollar and prove that I didn't send it to anybody else, but we didn't have any intermediaries in the middle taking a fee or slowing things down. And so it basically created this global version of cash or gold, if you want to call it that, that allowed anybody to transfer value to anybody else in the world trustlessly over this global network.

Yeah, well, it's brand new. And so, just like cash that you have in your wallet, people can come take your wallet and steal your crypto money as well. But it does have some nice properties that are even better than traditional cash. For instance, sending it over the internet allows me to send it instantly anywhere in the world, whereas you can't do that with cash in the physical world. So there are a number of advantages, but there are also, as you pointed out, a number of challenges to it becoming a global currency.

Yeah, it depends on the day. The prices have been changing a lot, but ten to twenty billion-ish of customer crypto. I think we're the largest custodian of crypto out there right now that we know of.

Sure. Well, actually, the very first product was I just thought there should be a hosted Bitcoin wallet, kind of like my inspiration was something like email with Gmail. Nobody wants to run their own email server, and if you lose your computer, you don't lose all your email; it's stored in the cloud. So I just made a hosted Bitcoin wallet, something similar to that. But a funny thing happened: all these people were signing up for the product, and they were like, "I like the product, but I don't have any Bitcoin to keep in the wallet, so it would be nice if I could buy some." And that was the next feature we launched: an easy way to buy and sell it. And that became the first product that got mainstream adoption. We've got about 25 million customers of that product now. Going on from that, we now have a number of products. Another one we launched is an exchange. So it's kind of like if Coinbase is like the Charles Schwab or Fidelity of crypto, our exchange is kind of like the New York Stock Exchange or the Nasdaq of crypto. So we did about 150 billion of crypto trading on that exchange in the last year. And now we have other products coming out as well. We have a custodian for institutions, we have an asset management firm that creates these index funds or ETFs, kind of like the S&P 500 of crypto. So our mission as a company is to create an open financial system for the world. And one of the first things we need to do to make that happen is enable people all over the world to get their fiat money—this is what we call it—into and out of crypto money, and sort of be that bridge all over the world for people to get money into crypto. And then once we do that, we need to shift crypto into what I call the utility phase, meaning let's have people actually start to use it in their daily lives for various goods and services. And that's the next big challenge that we have, which we can talk about if you want.

Thousands.

So we only list five today because a lot of those things are brand new and higher risk. Some of them, frankly, are scams. And so what we've done is we've taken a very curated approach. One of our goals is to build the product out there in the crypto space that's the most trusted—meaning it's secure and compliant—and the easiest to use. So that means that we're not trying to list everything under the sun, especially as new consumers are coming into this space and trying to understand what they should and shouldn't buy. It's kind of like not every company can get listed on the New York Stock Exchange; there are some minimum requirements before you can go public there.

Yeah, I mean, it's organized chaos, right? Certainly for me as an entrepreneur, it's been a crazy journey. We now have about a thousand people at the company. It's about six years old. Every year there's just another thing to learn, a new skill set, whether it's fundraising or learning how to manage teams more effectively, or even now we have a number of offices around the world—six or seven—and so just communication across a global workforce. All these things, I'm definitely learning on the fly.

Well, the way I think about it is that this technology is going through a series of bubbles and corrections. We've actually been through about four or five of them now, where Bitcoin made this big run-up in price and there was kind of irrational exuberance, and then it corrected back 60-70%. And each time it does that, it's at a new plateau, and it's kind of matched the growth of the company. If you go back to 2012-13 when we started, we had maybe 500 people a day signing up. Then after the next bubble and correction, we had like 5,000 people a day signing up. And now it's more like 50,000 a day signing up. So this technology, just like the internet—remember that in 2001 the internet went through this crazy bubble where everybody's expectations were way ahead of the actual value, and it crashed down. But a lot of good companies got started in the trough as well, which later turned out to be very big companies like Facebook. So the same thing is happening. People's expectations are all over the map, but I think the real-world adoption and usage is pretty steadily increasing each year.

Yeah, I mean, certainly the easiest way to get started in crypto is just to own a little piece of it. Your friends can send it to you, you can go online and ask for people to send you crypto. There are so many crypto evangelists out there that they'll love it if you do that. But once you own a little piece of the technology, it helps you to understand it. You can start to talk to people about it and then look for ways to use it in the future.

From my point of view, actually, the SEC has been pretty positive on it. I don't expect them to take some brand new technology and instantly bless it. Their job is to ensure there's a safe market out there, that consumers aren't going to get defrauded. So I think rightfully so, they're looking at it with a lot of scrutiny, especially as there are so many new coins coming out that are of questionable value. So from my point of view, they've been very good to work with, just helping the ones that are more established come out. And the next big challenge we have working with them is we need to jointly define a standard for what is an acceptable cryptocurrency, how would you classify one as a security versus a commodity, all those kind of questions.

Yes, they're wrong. I think, and of course Jamie Dimon came back and corrected himself after that. Look, I think if you go back six years, it was actually nine out of ten people who I talked to were crypto skeptics. Now it's getting harder and harder to find crypto skeptics. There probably are still some out there, but it's becoming contrarian to be a skeptic instead of the other way around. So I think just like all new technologies, when they first come out, people are skeptical, and then they start to see real-world use cases and they get a little bit more excited.

Yeah, I mean, with my Coinbase hat on, our job is just to be the most trusted and easiest to use products out there in the market. And so we've taken a more cautious approach to looking at ICOs; we haven't really participated in anything in that area yet. But with that being said, I do think ICOs are an important innovation in the world. The reason is that it's really difficult for people out there in the whole world to raise money for new ventures. Here in Silicon Valley, entrepreneurs like myself are lucky enough to have a network of people, and we've been able to raise capital. But if I didn't—I went to school in Houston, Texas, and I didn't know any angel investors; the ones that were there were from oil and gas, and if you went in there and pitched them a new software product like cryptocurrency, I think they might be very unlikely to invest. And there are people all over the world with even less opportunity, in many foreign countries. So for them, ICOs—the ability to raise money from people all over the world who might send a little bit of crypto into this address on your computer as part of a crowdfunding project—is a huge breakthrough. And yes, there are a lot of legal questions to work through, there are questions about quality on some of them, but I expect the ICO trend to continue. In fact, this year in 2018, I think it's on track already to be 4x the size it was in 2017, and ICOs have broken all the previous crowdfunding records out there.

Well, the first thing is that we proactively work with regulators. Not only in the US, but we're operational in 33 countries. And so we've always tried to be an educational resource, proactively reach out to them, whereas I think others in the industry have kind of tried to fly under the radar, which is a totally different approach. The second thing is around security, like cybersecurity. Storing this cryptocurrency is a really hard problem, and there are all these hackers out there in the world who are trying to break into exchanges and steal crypto. And so we've built a track record and reputation so far of being the most trusted at that, which is why we have the deposits that I mentioned earlier. Some of the things that we do, we talk about publicly: 99% of all those funds are stored entirely offline, they're not connected to the internet. We have a series of key holders that are geographically distributed around the world that need to come together in some kind of consensus to move any of those funds. And there's redundancy, so pieces of it can be lost or forgotten. If you just take me away, you can't actually get access to the funds; there's a group of people around the world that need to come to consensus. So there are many things I can talk about. We have insurance on it all. But I think compliance and cybersecurity have been two of the biggest pieces that have helped us get that most trusted reputation.

Yeah, so the reason why is that we're trying to build—we have an ambitious mission—and we're trying to build the best products. And to do that, we need to get the best people into the company. Talent is everywhere, but opportunity is not. And so that's part of why it's important for me to make a company that has this kind of inclusion. Some of the things we've been doing on that front: one of them is I created a top-level company objective which we review every month in front of the company around diversity and inclusion. And we have an OKR—they call it objectives and key results in the valley lingo. So that's one thing. Another thing: I've set targets for the company. Another thing that I've done is there's something called the Rooney Rule, which is part of the sourcing process. For us, we set a goal of sourcing at least three people for all VP and above positions from underrepresented backgrounds. And the reason I did that was that I felt like bringing in leadership that was diverse would be a way to automatically attract talent under them to come into the organization. So that was an important one. The last thing that I started doing that I'll just mention is we worked really hard to eliminate, or at least try to reduce, the amount of bias in hiring processes, because there's always going to be some. One way we did that was we started interviewing people based on not "culture fit" or whatever that ambiguously means—I prefer "culture addition." And so we started interviewing people based on our values and our skills, and we're working to create a standardized set of questions so that each candidate will get asked ideally the same set of questions, and there's a standard rubric of answers and things like that. Working with people like Joelle Emerson and Ellen Powell has been really helpful to bring in some of those ideas.

Yeah, so we've seen some positive results, and obviously we have a long ways to go still as well. But one thing is that actually a third of our leadership team is women now, so that feels like a good start. And actually a third of the company is women, which is still not where we'd ideally be at 50-50, but in fintech that's above average, so we're happy about that. We did hire a head of diversity and inclusion, which I think is somewhat rare at our size company. We're starting early on that. And we've created some employee resource groups as well, which are groups of employees who can come together, and I think that's contributed positively to a culture where people feel included, they can just do their best work. And we have this kind of rule: if somebody is brilliant and they're a jerk, it's an easy decision—they don't get hired at Coinbase. So I think that's been a good outcome so far.

Right. So I think there are certainly countries going through economic crisis, and I think there are pockets of people in those areas that are getting interested in cryptocurrency. I don't want to say that it saved those countries—that might be an exaggeration at this stage—but I think there is certainly interest amongst those people in having a stable currency where they have the highest pain point. And it's really terrible to see what's happening in places like Venezuela. So one effort that I've started on the side is a nonprofit called GiveCrypto.org. And what we're doing is trying to make small payments out to people in the world who are going through economic crisis. Crypto is a very good way to get real-time small amounts of payments to people directly into their hands, so there's not an intermediary. And then helping them exchange it to the local currency if they need to, or do crypto transactions to buy whatever they need, I think is a really important use case. So I'm bullish on that. In the next say three to five years, I think you will see countries going through economic crisis where everybody has a smartphone and the internet now, and you could see people organically adopting crypto as an alternative.

Yeah, so you're absolutely right that the vast majority of usage today of crypto is in the investment phase. It's people buying, selling, trading, speculating. In the US, I would say that's probably 90% of activity—let's call it investment—and roughly 10% of it is real-world usage. And people are not necessarily using it in brick-and-mortar stores or at Starbucks or something like that. They're using it more online. So the early use cases are things like online crowdfunding. There are people creating a bunch of games, there are people creating new user-generated content sites, kind of like Reddit, Twitter, Facebook equivalents, where instead of an upvote or like button, you actually transmit a small amount of value. So people who are creating content that's useful to others are actually earning money on this universal currency of the internet. So those are the kinds of use cases, along with the emerging market things that I talked about, that I think will take off first. And it's going to be people who have the highest pain point. And I think it'll be quite some time before you cross the street and go to Starbucks in the US and pay with crypto, just because the financial system in the US works pretty well for most consumers. There's a higher pain point in other areas.

No, that's actually something we've been working with the IRS on. We'd like to just issue 1099 statements, just like any brokerage would, to all of our customers. And hopefully we'll have a solution with them shortly about the exact format that they will accept. So that's what we're working on with them.

Yeah, so I never want to give investment advice; I always have to be careful here just from a regulatory point of view. But there are a number of new tokens that we've announced that we're exploring at Coinbase. You can go read about those on our blog; we mentioned a couple of them there. So I'll restrict my comments to that, just because I don't want to get in any trouble.

Okay, so first of all, more of a 101 answer for anybody who doesn't know: cryptocurrency is digital money, people transfer it around to transfer value. Blockchain is a broader concept than that; it's the technology underpinning cryptocurrencies like Bitcoin, but it could also be used for other things like private blockchains—a consortium of banks might come together as an alternative to SWIFT, which is a global settlement network between banks. People are using blockchain for other more theoretical things right now like governance or identity. But my rough assessment is that cryptocurrencies—meaning the public blockchains—are where we're going to see a lot of the innovation, or more of the innovation. Just like when the internet came, there was the public internet, which is where most of the innovation happened, and then there were private internets or intranets, and some companies use those, but most of the innovation was in the public internet. So I think the same thing will happen with crypto.

It is going to change the internet. The internet, when it was created, had a couple of original sins, if you will. If you talked to Marc Andreessen, who created the first web browser, what he says is that they made a few mistakes. One was they didn't build privacy into the internet as a base level thing. The other one was they didn't make payments native to the internet. And now, years later, this got invented. So the internet, which is inherently global and decentralized and no country or company owns it, now has a currency that is also global, decentralized, and no country or company owns it. That's hugely powerful because previously the internet was mostly about transferring information. Now you can do information and value.