Speaker 1: This is Bloomberg Crypto Daily, Bloomberg ID Podcast, and I'm
Speaker 1: Philip lagger Crantzler, Senior crypto editor for Bloomberg News. In
Speaker 1: today for Stacy Marie Ishmael, it is Wednesday, January. All right, folks,
Speaker 1: let me state the obvious here. Two was not a
Speaker 1: good year for crypto, from the Terra Lunar collapse to
Speaker 1: the Celsius and three a C bankruptcies to the ft
Speaker 1: X implosion last November. The end of Sam Bank Manfred's
Speaker 1: Empire created a contagious effect that was especially felt by
Speaker 1: crypto exchanges like publicly traded coin Base. In early January,
Speaker 1: the exchange settled with New York regulators who accused it
Speaker 1: of significant compliance program failing, and that wasn't the end
Speaker 1: of coin Bass troubles. Later in January, coin Base also
Speaker 1: said it's laying off its workforce and closing the bulk
Speaker 1: of its Japan operations. And the picture may be equally
Speaker 1: dim for other global exchanges. Users are nervous and in
Speaker 1: many cases they're pulling funds from the exchanges. And joining
Speaker 1: me today to talk about this are Bloomberg Senior editor
Speaker 1: Anna Era. If volumes are down and you have this
Speaker 1: customers and people are just holding, are scared or withdrawing
Speaker 1: even worse, with drawing the crypto they have on your platform.
Speaker 1: You cannot go on survival mode. And one thing we
Speaker 1: know of coin bas is that they're pretty good at
Speaker 1: survival mode, right, and Bloomberg reporter Uhan Moving forward the exchanges,
Speaker 1: they really have to be more transparent. They have to
Speaker 1: prove that they're not misusing customer funds. That's no longer
Speaker 1: taken as granted. Coin Base is having a bad month.
Speaker 1: Coin Base has reached a one hundred million dollars settlement
Speaker 1: with New York regulators. Half of the money is a fine.
Speaker 1: Regulators found that the crypto exchange violated anti money launching
Speaker 1: laws and letting customers basically open accounts from insufficient background checks.
Speaker 1: The other fifty million, but what it's going to be
Speaker 1: used to improve compliance? She has climbed up with It
Speaker 1: started in early January with a settlement worth about a
Speaker 1: hundred million dollars with New York. You can you tell
Speaker 1: us a little bit about what happened there and what
Speaker 1: were the allegations against coin base. The acquisitions from the
Speaker 1: regulator is that coin bas treated customer onboarding process as
Speaker 1: a simple check the box exercise and failed to conduct
Speaker 1: due diligent and in the the order dimensioned examples of
Speaker 1: for example, coin base Latin individuals who are faking to
Speaker 1: be employee of a company to open an account on
Speaker 1: behalf of that company in an effort to steal funds
Speaker 1: from the company, and coin bas Um said that they're
Speaker 1: taking substantial measures to correct these short shortcomings. They highlighted
Speaker 1: that these were all historical issues and they're ready to
Speaker 1: move forward. This was one of the events that coin
Speaker 1: base has been grappling with, as well as other major
Speaker 1: exchanges including Finite and um ftx before it's collapsed. Yeah,
Speaker 1: I want to touch on that because um in no
Speaker 1: way it is coin based alone and being a crypto
Speaker 1: exchange that has fallen a foul of regulators and you know,
Speaker 1: gotten in trouble over limits or shortcomings in KYC. I mean, Anna,
Speaker 1: you've covered this for years. How has it been over
Speaker 1: the years when it comes to crypto exchanges and you
Speaker 1: know the various blow ups and shortcomings in that regard. Yeah,
Speaker 1: So KYC has always been a big issue for crypto
Speaker 1: in general and for crypto exchanges. At the beginning there
Speaker 1: were you know, exchanges that famously never actually asked for
Speaker 1: any documentation for you to trade on them. I remember
Speaker 1: there was a famous testimony I think it was by
Speaker 1: someone who's now a vc UM who said, and it
Speaker 1: was a sort of prosecutor before and said that they
Speaker 1: asked some exchange to provide documents and because they didn't
Speaker 1: never check them. They had clients with names Mickey Mouse
Speaker 1: who lived in Main Street. So it's an issue, and
Speaker 1: you know some of them have opped obviously their game
Speaker 1: for because you know, regulators are breathing down their neck.
Speaker 1: But you know, it's it's always been a challenge and
Speaker 1: it may may remain a challenge for a while, in
Speaker 1: part because you know, you can ask for documents, it
Speaker 1: depends how much you're checking right. And you know, ky
Speaker 1: C and a m L, to be fair a big
Speaker 1: problem in finance in general as well. You know we've
Speaker 1: had banks that got in trouble for it too, But
Speaker 1: in crypto has always been like a recurring issue. You
Speaker 1: make a good point there. I mean, if you if
Speaker 1: you look at the banking industry, it wasn't many years
Speaker 1: ago that some of the private banks got into major
Speaker 1: troubles over ky c or you know, even looking the
Speaker 1: other way. So should be fair crypto to point out
Speaker 1: that it has happened in other corners of the financial
Speaker 1: universe as well. I want to come back to coin
Speaker 1: based because they, as we alluded to at the very start,
Speaker 1: that the bad January didn't really end there UM. And
Speaker 1: this last week we got another bombshell UM and this
Speaker 1: time it was job cuts. You as she you cover
Speaker 1: that what and how significant were the cuts that they announced?
Speaker 1: So Queinbays announced that they're doing another round of layoff,
Speaker 1: this time affecting about nine hundred and fifty employees, or
Speaker 1: about of his workforce. And we know that Quein based
Speaker 1: UM even last year they've they've done layoff already. In
Speaker 1: June they laid off eighteen percent of his workforce, roughly
Speaker 1: UM twelve hundred people were affected, and then they did
Speaker 1: a smaller round UM in November affecting sixty positions UM.
Speaker 1: So Brian Armstrong in his letter to employees he said
Speaker 1: that this is really the first time coin base has
Speaker 1: seen a crypto cycle, coinside was a broader economic downturn,
Speaker 1: and then he admitted that when he did the head
Speaker 1: on layoff UM last year in hindsight, he should have
Speaker 1: cut even further at that time. So UM so because
Speaker 1: quin Bass is the publicly treated company UM, I think
Speaker 1: that the layoff and the general UM cost cutting measures
Speaker 1: were not a total surprise to analysts and investors. The
Speaker 1: company UM do have to cut off, cut off more
Speaker 1: expenses to to really survive to this UM prolonged crypto downturn.
Speaker 1: And then obviously coin bas was not the only one
Speaker 1: doing UM layoff in the in the industry. Remember coin
Speaker 1: basis just the latest company to announce another round of
Speaker 1: job cuts this month. Genesis, the troubled crypto brokerage under
Speaker 1: Berrysober Digital Currency Group, cut about thirty percent of its
Speaker 1: workforce who will be is cutting jobs, while silver Gate
Speaker 1: laid off forty percent of its staff. There is one
Speaker 1: thing that that and this is something that Armstrong pointed out. UM.
Speaker 1: They are cutting also some of these projects that maybe
Speaker 1: aren't close to generating revenues or profits. But I mean,
Speaker 1: in your views and also Anna by all means, you know,
Speaker 1: when you cut like this, and you cut this deeply,
Speaker 1: aren't you risking a little bit that you do away
Speaker 1: with things that might generate a lot of future potential. Yes,
Speaker 1: UM during the Bowl market coin Bass was really trying
Speaker 1: to position itself as this bridge to the broader website
Speaker 1: economy and instead of just focusing on providing a trading
Speaker 1: platform for clients. But we know that since the Market
Speaker 1: Downtown started last year, Point Based has been course correcting.
Speaker 1: They're returning back to focus on their core revenue generating
Speaker 1: services UM trading and staking namely, and then they're cutting
Speaker 1: back on some of these other projects that don't immediately
Speaker 1: seem to benefit and financially and this is something that
Speaker 1: they have to do to cut costs, but then it
Speaker 1: also will jeopatize their their future potential when it comes
Speaker 1: to diversifying their business beyond just trading. I think there's
Speaker 1: also an issue of like, you might not have a choice.
Speaker 1: Things are going really badly for exchanges in general because
Speaker 1: you know, trading volumes are low, and in the end,
Speaker 1: exchanges in crypto have been relying on trading fees because
Speaker 1: I'm like, I mean, it's been changing a bit, but
Speaker 1: unlike something like equities, where fees have have been shrinking
Speaker 1: for years and they've had to become more data businesses
Speaker 1: or technology businesses, crypto exchange groups have been able to
Speaker 1: rely on like trading fees via trading fees on equities
Speaker 1: or um derivatives or whatever it is, and so you know,
Speaker 1: that's the way their business models were built. So if
Speaker 1: volumes are down and you have as customers and people
Speaker 1: are just holding, are scared or withdrawing even worse, withdrawing
Speaker 1: the crypto they have on your platform, you cannot go
Speaker 1: on survival mode. And one thing we know of coin
Speaker 1: bas is that they're pretty good at survival mode. Right,
Speaker 1: they've been around longer than many other platforms. Perhaps they
Speaker 1: haven't made any big splashy like moments like we could
Speaker 1: have thought of like FTX, or they're not, but they
Speaker 1: kind of have been in crypto somewhat reliably steady, and
Speaker 1: this is not their first winter. But as so sort
Speaker 1: of Armstrong was saying himself, the difference and fundamental difference here,
Speaker 1: I think is that you know, it's a crypto winter
Speaker 1: coupled with like a bad macro environment, and so maybe
Speaker 1: they're starting to think it's not gonna you know, it's
Speaker 1: not gonna end this year, and we have to preserve
Speaker 1: you know, resources even more. Up next, more with Bloomberg
Speaker 1: Senior crypto editor Anna Airera and Bloomberg reporter Ushang on
Speaker 1: the future of crypto exchanges will be right back. Obviously,
Speaker 1: that was the sort of cataclismic event for the market
Speaker 1: back in November when ft X filed for bankruptcy, and
Speaker 1: then it was, you know, the charges of fraud against
Speaker 1: the founder of Sam bankman Freed and two of his
Speaker 1: top of lieutenants. And we're now learning crossing the Bloomberg
Speaker 1: terminal that a judges at a trial date of October
Speaker 1: two of this year, So Sam bankman Fried's trial on
Speaker 1: those fraud charges are set to begin in October two.
Speaker 1: What did that mean for the crypto exchange sector as such,
Speaker 1: the sort of loss of confidence that followed ft ex's implotion.
Speaker 1: I think you made the exact right point with um.
Speaker 1: This is really a crisis of confidence for the entire industry.
Speaker 1: We've seen that following the FTX collapse. There's been concerned
Speaker 1: for other major exchanges as well, and in fact, all
Speaker 1: of these big exchanges, Finites included, they have to come
Speaker 1: out and say that they're different from FDx, and they
Speaker 1: try to use various ways to prove that they have
Speaker 1: the reserves that clients deposit their coins on ways on
Speaker 1: the on their platform. So I think moving forward the exchanges,
Speaker 1: they really have to be more transparent. They have to
Speaker 1: prove that UM they're not misusing customer funds. That's no
Speaker 1: longer taken as granted. UM. People have this distrust about
Speaker 1: putting their their tokens on the exchange, and we've seen
Speaker 1: deposits level falling from the exchanges as users take out
Speaker 1: their tokens and move into code storage, which they think
Speaker 1: UM would be safer and give themselves more control over
Speaker 1: their assets. So if you turn the f t X
Speaker 1: question on its head, it's also kind of an opportunity
Speaker 1: for a company like coin base to take the market share.
Speaker 1: Coin Base has been trying to distinguish itself as a
Speaker 1: trusted and compliant company amid all the recent crypto chaos.
Speaker 1: The CEO, Brian Armstrong, spoke with David Rubinstein in December.
Speaker 1: We show in our publicly audited financial statements that you know,
Speaker 1: corporate cash is separate from customer funds, and you don't
Speaker 1: have to take our word for it. You know, UM,
Speaker 1: you know a Big four accounting so far, and obviously
Speaker 1: it's early days, it looks like it's financed mostly that's
Speaker 1: kind of putting a strangle hole on the market. What
Speaker 1: is the Are there any indications where their indications from
Speaker 1: Armstrong about whether or not there is a void for
Speaker 1: coin based to be stepping into here, we have to
Speaker 1: look at it from two perspectives. On one hand, ftx
Speaker 1: was an up and coming strong composer into space, and
Speaker 1: the fact that FTS is gone that UM just left
Speaker 1: their customers migrating to other platforms. If they still choose
Speaker 1: stay in the space, finance will benefit from that. UM
Speaker 1: coin Based, being a US focused platform, will also benefit
Speaker 1: from that. But then at the same time, coin base
Speaker 1: is scaling back some of its overseas ambitions. We know
Speaker 1: that as part of the job cuts that's recently announced,
Speaker 1: they're winding down most of their operation in Japan for example.
Speaker 1: UM they are UM as an a mension. They don't
Speaker 1: have choice. They have to focus on their core market
Speaker 1: and core services. So finance is very good in the
Speaker 1: international market, and that's not something that coin base can
Speaker 1: entirely compete with. I think it's wiped out a competitor
Speaker 1: for sure. Like FTX, US was slowly gaining ground and
Speaker 1: they were spending a lot of money to get US
Speaker 1: customers and retail customers, as we've written before, So you know,
Speaker 1: definitely like there's more there's more space now there's one
Speaker 1: less player, but at the same time, like the pie
Speaker 1: sort of shrunk for everyone. So it makes it, you know,
Speaker 1: quite hard. And I just want to finish off by
Speaker 1: talking about I mean, as we we talked a little
Speaker 1: bit about earlier, it's not just going based. Pretty much
Speaker 1: everybody is cutting jobs. You've watched this industry on for
Speaker 1: a good couple of years now, and this is obviously
Speaker 1: like just very significant retrenchment across the board. Yeah, I
Speaker 1: think it's it's becoming quite protracted, and you know, I'm wondering,
Speaker 1: like where many of these people are going. We had
Speaker 1: a story earlier this year about how banks were hiring
Speaker 1: some of the staff, but now I'm thinking, you know,
Speaker 1: some banks are also letting off people. Tech firms I've
Speaker 1: had hiring freezes. It's quite interesting to see where where
Speaker 1: some of the talent will be. There are firms that
Speaker 1: are still hiring, we're hearing, but you know, clearly, like
Speaker 1: if fifty people get fired from one firm, only you
Speaker 1: know who has this support now to hire? And you know,
Speaker 1: one big thing is that I imagine some of the
Speaker 1: companies are still waiting for the situation to like finish unraveling,
Speaker 1: Like maybe you are waiting to see who have the
Speaker 1: excess creditors are to know if any of them are
Speaker 1: your counterparties, and then if more dominoes will fall, and
Speaker 1: if you'll be exposed more so maybe you're not inclined
Speaker 1: to make any big investments now. It is quite quite stark,
Speaker 1: Like the situation has changed a little bit. The easy
Speaker 1: money has has stopped, and so you know, it'll be
Speaker 1: interesting to see where people end up. And you know,
Speaker 1: like if some of them go back to traditional finance
Speaker 1: and do like finance jobs. If it's it's it's very interesting,
Speaker 1: all right, Thank you, Anna and you ah That was
Speaker 1: Bloomberg Senior Crypto editor Anna Arera and Bloomberg reporter you
Speaker 1: Ah Yang. You can find more of their reporting on
Speaker 1: the Bloomberg Terminal and on Bloomberg dot com. For more,
Speaker 1: be sure to check out our viice weekly newsletter, Bloomberg Crypto.
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