At the foot of California Street in San Francisco stands a row of stately stone pillars, a 19th-century bank. Just a few steps away is Coinbase's office, the largest cryptocurrency exchange in the United States. A large number of software engineers and young marketing executives are gathered here. There, the world of banking in accordance with regulations and the world of crypto anarchy collided.
In terms of style and philosophy, Brian Armstrong, a 37-year-old billionaire and Coinbase co-founder and CEO, belongs to the financial anarchist camp. He squeezed together with his colleagues, sitting in a row of small tables, looking like the reading room of a library. He is wearing a black t-shirt, black pants and white sneakers. He spoke of a wonderful new world in which we are liberated from the yoke of huge banks and government-controlled money supply. In an in-depth interview, the entrepreneur, who was usually quiet and unwilling to face the media, explained why he entered the industry:
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"I want the world to have a global, open financial system that promotes innovation and freedom."
However, in maintaining a business model, Armstrong is consistent with financiers working on Wall Street. Eight years after his establishment, his company has opened 35 million accounts and managed $ 21 billion in assets. We estimate that this year's revenue is expected to exceed $ 800 million.
This success comes from acting like a bank. Coinbase withdraws customer funds via bank wire transfers. It stores its assets, a digital key for cryptocurrency, in a vault. It was insured by Lloyd's of London. It has 41 security personnel, including an Iraq war veteran assessing perimeter risks and a doctor of cryptographic deciphering engaged in mathematical attacks.
Their selling point is security-on some exchanges that Coinbase competes with, security is clearly lacking. In 2014, hackers stole $ 480 million worth of bitcoin, causing the Japanese Mt. Gox exchange to go bankrupt. Customers of QuadrigaCX, one of Canada's largest exchanges, were unable to retrieve $ 150 million worth of passwords because it was speculated that the company's founder died suddenly in December 2018, holding the only set of cryptographic keys to unlock cryptocurrencies key. Now some people even want to dig out the body.
However, in order to gain a unique advantage, Armstrong had to give up the "anti-institutional spirit" of pushing Bitcoin. For example, he works with government inspectors.
Coinbase has 55 compliant employees and is expected to increase to 70 by the end of the quarter. They double-checked transactions for money laundering. They will comply with a controversial new requirement that when customers transfer coins from one exchange to another, they must provide written records. Coinbase will dutifully send a 1099-K report to the Internal Revenue Service (IRS). The report is about traders who made 200 or more transactions within a year, and the total transaction amount reached or exceeded 20,000 USD.
Given this situation, how does Coinbase attract cryptocurrency diehards? One way is to create a menu with 26 new currencies, some of which are designed to explicitly provide more privacy than Bitcoin. The other is a service launched in August 2018 that allows customers to transfer bitcoins to their personal wallets, without the constraints of Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations.
Bitcoin first experience
Armstrong was born near San Jose, and his parents were engineers. Since elementary school, he has shown traces of entrepreneurs. He recalled being brought to the principal's office for reselling sweets on the playground. His business plan continues, but he just started selling second-hand computers, and after earning a master's degree from Rice University in 2006, he had a new business and started matching mentors for students. He later worked in education while living in Buenos Aires.
"I've never been to South America at the time. I want to travel for a year and try to take this as a risk. Figure out what I want to do in my life. Seeing another country's financial system experience hyperinflation, this It was an interesting experience. "
Later, as a programmer at Airbnb, Armstrong started to have some new insights. His employer is sending money to landlords in Latin America. He described the whole process like this:
"High fees … long delays … opaque. We tried to send money to someone in Uruguay, but we didn't know how much money they would receive.
In 2010, he read the Bitcoin white paper released by Satoshi Nakamoto. Bitcoin transactions are recorded on a ledger called a blockchain, maintained by a group of guardians who call themselves "nodes" in copied computer files. Disputes over transactions and ground rules are resolved by a majority of votes. By requiring participants in the network to perform some arithmetically busy work before authenticating a batch of transactions, the integrity of the nodes is guaranteed and trouble is avoided. Nodes that complete computing tasks will receive Bitcoin rewards.
The busy work, called "mining," didn't interest Armstrong. But he did see business opportunities in protecting keys and creating transactions. Anyone can do this with some off-the-shelf software, but if you mishandle the protocol, your coins will be stolen or lost.
Armstrong bet on Bitcoin, buying $ 1,000 worth of Bitcoin for $ 9 apiece. The price dropped to $ 2. He sticks to his faith.
It's all very interesting. But is it worth it to quit your day job for this? In 2012, Y Combinator injected $ 150,000 to answer this question. Y Combinator is a seed funding source for Airbnb and many other well-known startups. His Goldman Sachs alumnus, Fred Ehrsam, also joined the company and gave Coinbase a credibility in the banks that will inject it.
Venture capital led by A16z has invested $ 500 million in Coinbase.
"It's like Google did Gmail for Bitcoin," said Chris Dixon, a partner at A16z and a member of Coinbase's board. "That's what they describe."
Its last funding round valued Coinbase at $ 8.1 billion. Ehrsam, 31, has left Coinbase, but still holds some shares; he has been busy arranging investments for start-ups that intend to use cryptocurrencies and blockchain to establish trading networks for businesses.
The essence of Armstrong's thoughts can be expressed in the word DeFi, which stands for decentralized finance, or, if you like, a contempt for authority. DeFi should touch on all aspects of wealth; it is said that the blockchain will one day support transactions, P2P loans and loan collateral, without the usual financial institutions as intermediaries. Interestingly, Coinbase has a broker / dealer license. Will it end the stock exchange one day? Perhaps.
Coinbase's largest source of income
If Coinbase's grand vision is to become a gateway to all kinds of decentralized finance, the current revenue comes from more ordinary things like transaction commissions. Coinbase allows amateurs to enter and exit the crypto world, or exchange one cryptocurrency for another cryptocurrency, earning about 2% of fees and spreads. On the platform of its main rival Binance, these speculators can pay 90% less, but they are facing a company living in the shadowy world of offshore finance. Malta-based Binance has a small US presence.
Serious traders get better deals. They use Coinbase Pro, a platform that replicates stock exchange trading orders; here, commissions for buyers and sellers range from 1% of small transactions to 0.07% of $ 100 million.
Over half of Coinbase Pro's trading volume comes from algorithmic trading. Crazy trading does not seem to be good for society, but it is a lubricant for capital markets. The difference between Bitcoin's buying and selling prices is calculated at 10 cents. In terms of percentages, the cryptocurrency spreads compete with the very liquid SPDR S & P 500 ETF spreads.
Efforts to receive multi-channel revenue from a single camp
The problem with commission income is that it is extremely sensitive to cryptocurrency prices. When Bitcoin crashes, as in 2018, transaction volume will decrease, and its corresponding USD revenue will decline.
Therefore, Coinbase tries to create a stable income stream to balance commissions. The company's chief financial officer, Alesia Haas, said one of the big deals came from the hosting business of institutional clients. Coinbase acquired Xapo's institutional business last August, greatly expanding this digital warehouse with $ 8 billion in bitcoin and other cryptocurrencies.
Another new source of income is staking. Holders of certain coins, such as tezos and EOS, collect fees by confirming transactions on the network. You don't need to consume a lot of electricity for calculations like Bitcoin, but some tricks are necessary because improper behavior can lead to forfeiture of funds. Coinbase handles the details and distributes the proceeds of staking to customers. It's a bit like a stockbroker lends your margin securities to a short seller, except that you are unlikely to profit from it.
Another Coinbase product, USD Coin, developed in cooperation with Circle, allows customers to exchange US dollars for cryptocurrencies with the same value but faster transaction speeds. Coinbase and customers can share the resulting interest rates.
Coinbase said it processed $ 80 billion in transactions last year. (Binance's daily trading volume reaches $ 1 trillion.) Is that enough to make a profit? CFO Haas allows the monthly profit and loss situation to change rapidly. However, she added that Coinbase has achieved solid profits for several years without considering non-cash items such as goodwill amortization expenses and employee option value.
In a company focused on development, the outflow of funds is almost as fast as the inflow. Since hiring Chief Operating Officer Emilie Choi two years ago, Coinbase's number of employees has tripled to 1,000. At headquarters, the number of workstations has barely kept pace with new employees. With offices in New York, Dublin and Tokyo. Then there are bets on the future.
Choi, a Coinbase employee who previously led business development at LinkedIn, has increased his venture portfolio from zero to 60. These include Bison Trails in New York and Alchemy in San Francisco, both designed to help businesses use blockchain, and the Amber Group in Shenzhen, China, which is applying artificial intelligence to cryptocurrency transactions.
"A lot of the things we do in venture capital, as funders, we might not do it, but we think it's really interesting."
"These ventures can be huge, but we don't know if they will work. They should actually have a high failure rate. Otherwise, our pattern is not big enough."
Is the return of the crypto economy coming?
Warren Buffett condemns cryptography as rat poison, Jamie Dimon condemns it as a scam, and Doomsday economist Nouriel Roubini condemns it as the mother of all scams. So where is the economic return?
Coming soon, Armstrong said. He envisioned a future in which thousands of startups use encryption to raise money in a global market that is no longer controlled by Wall Street companies. He predicts that within a decade, the number of people participating in the blockchain economy will surge from 50 million to 1 billion. We are destined to enjoy a "more global, fairer, more free and more efficient" financial system.
The pursuit of financial freedom also involves emotional factors. Coinbase's newly hired chief product officer, Surojit Chatterjee, talked about India almost destroying its currency reserves in a sudden attack. His 80-year-old father queued for five hours to get the equivalent of $ 30.
Many countries, including Mexico, Argentina, Russia, and Cyprus, have adopted this practice of confiscation of property, which freezes or forcibly converts some value storage into something less valuable. The United States did the same thing. In 1933, Roosevelt seized gold and replaced it with a banknote that had depreciated by 95%.
Like gold, Bitcoin is too cumbersome to be used as an exchange tool. The complex mechanism of adding transactions to the ledger means that it takes 10 minutes to confirm a payment and only four transfers per second. You cannot use it to manage the global economy.
Armstrong says the solution is coming. One is to treat Bitcoin as a means of storing value and add a layer to it for transactions, just like checks and electronic payments. The other is to create new digital currencies and take transaction speed into account. Coinbase supports tools including Litecoin and Bitcoin Cash.
Last December, Coinbase was authorized by Visa for the first time to issue a debit card, allowing cardholders to make purchases at 46 million Visa-accepting locations, including ATMs, and to withdraw funds holding cryptocurrencies from Coinbase accounts. Initially, these debit cards will be provided to residents of 29 countries, excluding the United States. Coinbase may eventually develop its Visa authorization into another business: issuing credit cards on behalf of other crypto exchanges.
At the same time, banks have not missed the opportunity to redesign the payment network with traditional dollars. Zelle is a real-time payment system operated by a consortium of large banks. Last year's traffic reached US $ 187 billion, far exceeding PayPal's Venmo. Zelle's main target customers are retail customers, such as sharing dinner expenses, but they process up to $ 3.2 million in transactions.
There is no doubt that disruptive technology is entering the banking system and Coinbase will be part of it. It is the only institution that appears on the Forbes FinTech 50 and Blockchain 50 list at the same time. But Armstrong will face a lot of competition, first and foremost central banks, who are planning their own digital currencies. Facebook has not given up on Libra, and its goal is to become a global digital currency supported by assets such as the US dollar and the euro.
Armstrong said, let the flowers bloom.
"When I started using Coinbase, most people thought it was crazy. The government and established blue chip stocks are investing in this technology. So we can only say that this is a good thing."