Speaker 1: I'm Stacy Marie Ishmael, Managing editor of Crypto for Bloomberg Views,
Speaker 1: and this is Bloomberg Crypto at Daily Bloomberg. I heard podcast.
Speaker 1: It's Wednesday, August three. It's safe to say that coin
Speaker 1: Base has had a rough couple of months. The company
Speaker 1: has had to manage an internal employee position about its management,
Speaker 1: response to speculation about bankruptcy, and even been the subject
Speaker 1: of intense regulatory scrutiny. And that's before we get to
Speaker 1: its share price. And then in late July, things got
Speaker 1: even trickier. Federal prosecutors charged a former coin based product manager,
Speaker 1: as well as his brother and a friend with allegations
Speaker 1: of insider trading. The cherry on top the security is
Speaker 1: an exchange commission, followed with its own allegation the coin
Speaker 1: Base has been running and illegal securities exchange. Here's to
Speaker 1: help us understand what's at stake for coin Base. One
Speaker 1: of the leading crypto exchanges in the world and for
Speaker 1: all digital currency uses is Bloomberg Business Week columnist Max Chafkin. Max,
Speaker 1: go to have you on the podcast. Great to be here.
Speaker 1: You are one of those folks who I've said this
Speaker 1: to other other folks on the podcast, Like, when you're
Speaker 1: on to talk about a company, it's probably not good
Speaker 1: news for the company that we're going to talk about.
Speaker 1: So today we're gonna talk about coin Base. What's been
Speaker 1: happening with coin Base? Okay, so a handful of things.
Speaker 1: I mean, one is and and maybe important context of course,
Speaker 1: is the crypto markets have not been great, you know,
Speaker 1: as a result, they're going through a lot of the
Speaker 1: same issues that pretty much everyone in this space is
Speaker 1: going through. But then there's this other thing that's going on,
Speaker 1: which is that July one or thereabouts the d o
Speaker 1: J arrest the Department of Justice one of yeah, the
Speaker 1: Parlament of Justice, excuse me, arrested a former product manager
Speaker 1: somebody who had been working on new token listings and
Speaker 1: accused him of basically insider trading, of of taking information
Speaker 1: about listings that we're going to go on coin base
Speaker 1: and passing them to his brother and another investor and
Speaker 1: profiting from that. And at the same time, and this
Speaker 1: is where it starts to gett even worse for coin base.
Speaker 1: Y SEC comes out and issues its own insider trading
Speaker 1: complaint and says, oh, by the way, some of these
Speaker 1: tokens that were being insider traded are not assets, they
Speaker 1: are securities. And the implication, of course, is that coin
Speaker 1: base would be operating an illegal securities exchange, which would
Speaker 1: be bad and which would put aspects of their overall
Speaker 1: business at risk. And you know, it's important to say so.
Speaker 1: So this is a really this this indictment, it makes
Speaker 1: for really good reading. It's very colorful. This guy who
Speaker 1: was busted was busted because of a crypto influencer named
Speaker 1: Kobe who basically spotted these transactions tweeted about them, and
Speaker 1: then that tweet found its way first to coin base
Speaker 1: and ultimately to the Department of Justice. So that's sort
Speaker 1: of a bad look for coin base. Um, but but
Speaker 1: it's important to say, you know, no one's accused them
Speaker 1: of wrongdoing. But then, at the same time, as Bloomberg
Speaker 1: reported just a few days later, the SEC is also
Speaker 1: looking into basically this very question. Was coin based operating
Speaker 1: or is it operating an illegal securities exchange? Is it's
Speaker 1: selling securities that have not been vetted by the SEC
Speaker 1: in the proper way? And that's something that coin Base,
Speaker 1: you know, really cares about because it could imperil their
Speaker 1: business create all sorts of regular problems for them down
Speaker 1: the road. Last year, remember this is when it really
Speaker 1: started to get very contentious between the industry and the agencies.
Speaker 1: And you know what Brian Armstrong said at that time
Speaker 1: is they refused to tell us why they think it's
Speaker 1: a security and instead subpoena a bunch of records from us.
Speaker 1: We comply, demand testimony from employees. We comply, and then
Speaker 1: tell us that we they'll sue us if we launched
Speaker 1: certain products. A lot of this is being done through
Speaker 1: enforcement rather than rulemaking itself. So until the agencies decide
Speaker 1: what's a currency, what's a commodity, and what's the security,
Speaker 1: it's going to be very difficult for the industry to
Speaker 1: to work around that. That was about Brian Armstrong, who's
Speaker 1: the CEO of coin base. Clearly there's a lot of
Speaker 1: stuff going on here, So I want to kind of
Speaker 1: tease apart a few different things that you said, and
Speaker 1: I sort of want to start with the you know,
Speaker 1: the how all of this came to light. In April
Speaker 1: of this year, coin Based, seemingly out of nowhere, published
Speaker 1: a blog post that was like, here are some changes
Speaker 1: that we have made that would make it more difficult
Speaker 1: for people to inCider trade in tokens. We're not saying
Speaker 1: that that has happened, but if it were to happen,
Speaker 1: it's now harder to do. And at the time, you know,
Speaker 1: various of us were like interesting, and now we know
Speaker 1: that the reason that that post went out on the
Speaker 1: coin based medium blog in April was related to them
Speaker 1: finding out that this former employee had been engaging in
Speaker 1: this kind of behavior and the you know, the company
Speaker 1: has confirmed as much. My question back to you about
Speaker 1: this is when we are reporting on these kinds of companies,
Speaker 1: on these kinds of investigations, who in a lot of
Speaker 1: other senses and crypto like to say like we're super transparence.
Speaker 1: We always tell everyone what's going on. But when it
Speaker 1: has come down to here are weird things that are happening,
Speaker 1: they get a little bit kg, they get a little
Speaker 1: bit traditional, and it's really contrasted to you know, Brian Armstrong,
Speaker 1: the CEO of coin Based, willing to go on twister
Speaker 1: and just like yell at the SEC but they weren't
Speaker 1: necessarily forthcoming about the fact that this thing has happened.
Speaker 1: What do you think explains that tension? Well, I mean,
Speaker 1: this probably just gets to my own being a cynical
Speaker 1: journalist and having followed, you know, tech companies for a
Speaker 1: long time. I mean, I just think, you know, we
Speaker 1: shouldn't take the ideology that seriously, at least the ideology
Speaker 1: of transparency. Yeah, exactly, at least insofar as we're like
Speaker 1: trying to understand the actions of a very large public company,
Speaker 1: which is what coin Base is. They've done a lot
Speaker 1: of stuff over the past couple of years. It's funny
Speaker 1: because I've been familiar with this company a long time.
Speaker 1: I met with the founders, you know, back in you know,
Speaker 1: kind of like the mid s when they were this
Speaker 1: sort of hot shot Silicon Valley company, and their whole
Speaker 1: thing back then was that they were like the most
Speaker 1: conservative crypto company. They were the one that like followed
Speaker 1: all the rules. They had like much stronger k y C.
Speaker 1: That's know, your customer rules. You know, you needed basically
Speaker 1: need a bank account, you need to show a driver's
Speaker 1: license if you wanted to buy tokens. And really they
Speaker 1: only sold bitcoin, I mean for the for the really
Speaker 1: long time, Bitcoin ether, I think light Coin, maybe one other.
Speaker 1: But of course something flipped, and and the thing that
Speaker 1: flipped was that the market for tokens boomed, and you
Speaker 1: had a couple of other exchanges, I think most importantly Binance,
Speaker 1: you know, really move aggressively into listing all these other
Speaker 1: tokens um taking their market share, and there was like
Speaker 1: a clear choice that was made I think starting probably
Speaker 1: around eighteen, but that became even more pronounced when they
Speaker 1: went public, which was best year in May of or
Speaker 1: April of one, where basically they just went way more aggressive.
Speaker 1: And when you do that, that puts you at odds
Speaker 1: with the SEC and and in the US government, and
Speaker 1: at the same time they were sort of adopting this
Speaker 1: kind of edgier regulatory pose. Brian Armstrong, the CEO, kind
Speaker 1: of comes with this new sort of positioning for the company,
Speaker 1: which is this like bad boy in a couple of
Speaker 1: different ways. One is that in September of you know,
Speaker 1: as protests around George Floyd's murder we're going on, there's
Speaker 1: a lot of activism inside of coin Base, he comes
Speaker 1: out and basically declares that, you know, when we're gonna
Speaker 1: be a no politics company, we're gonna be anti woke,
Speaker 1: and that is a way to like that that generates
Speaker 1: a lot of attention, and then we see, you know,
Speaker 1: kind of throughout the last couple of years him taking
Speaker 1: as you said, this kind of very muscular communications approach
Speaker 1: where he's like trash talking the SEC and things like that,
Speaker 1: and at the same time spending huge sums of money
Speaker 1: on lobbying, you know, working really hard to kind of
Speaker 1: work the things you know in Washington. And I think
Speaker 1: this is all related because they see this fight coming
Speaker 1: and now it's here, and they've been sort of preparing
Speaker 1: for it, and that preparation includes, you know, lobbying, it
Speaker 1: includes all this legal work and sort of messaging around
Speaker 1: their process, and of course it includes a cultural component.
Speaker 1: We have sometimes received cranky emails from listeners of this
Speaker 1: show about the idea that there could be a cultural
Speaker 1: component to crypto, that crypto is like politics neutral, value neutral,
Speaker 1: and it's about the purity and sanctity of the blockchain, etcetera, etcetera. Um,
Speaker 1: and folks listening cannot see this. Max's giggling, and Max,
Speaker 1: you know what you're saying is that no, there is
Speaker 1: there are some explicitly politicized elements to the way this
Speaker 1: fight is shaping up. Yeah. Absolutely, And I mean you
Speaker 1: can look at their their spending. I mean, you know,
Speaker 1: they're their lobbying spending is open. I mean the last
Speaker 1: time I looked, I think it's like a couple of
Speaker 1: million bucks over the last I think I can't remember
Speaker 1: last year or last two years, but you know, they're
Speaker 1: spending significant sums of money in Washington, and you can
Speaker 1: see it in the way that Armstrong is communicating, you know,
Speaker 1: he you know, there was a Republican SEC commissioner published
Speaker 1: a sort of like counterpoint yeah to this, and so anyway,
Speaker 1: they're like they have allies, they have conservative allies, they
Speaker 1: have you know, politicians that they're trying to work and
Speaker 1: and and of course it's political because yes, like coin
Speaker 1: base is promoting many of these values, as you said,
Speaker 1: transparency and so on, but it's also a public company,
Speaker 1: you know, with the headquarters in the United States, and
Speaker 1: it's under the jurisdiction you know, the US government, and
Speaker 1: it has tried to use those things to help it.
Speaker 1: Like I said along the way, like coin Base, one
Speaker 1: of the ways it got customers early on is that
Speaker 1: it was seen and I think maybe still is seen
Speaker 1: as safer, more reliable and so on, compared to some
Speaker 1: of these more aggressive exchanges. We'll be right back with
Speaker 1: more from Bloomberg Business we call umnist Max Chafkin on
Speaker 1: the future of coin base. Bloomberg has learned that coin
Speaker 1: base is facing a US investigation on cryptocurrency listings. This
Speaker 1: move comes as a chorus of US regulators to do
Speaker 1: work to oversee the crypto industry has grown louder. One
Speaker 1: of the things that hurts them earlier this year is
Speaker 1: Brian Armstrong on Twitter kind of coming out and saying,
Speaker 1: you know, hey, and he in this thread that was
Speaker 1: about an otherwise very unremarkable like SEC required filing, use
Speaker 1: the B word like invoked bankruptcy, and he's like, in
Speaker 1: the in the unlikely event that anything were to happen, etcetera, etcetera.
Speaker 1: But of course people on Twitter don't read. They just
Speaker 1: they just saw a coin based plus bankruptcy and there
Speaker 1: was just a lot of freaking out about that. So
Speaker 1: in the grand scheme of if you were a coin
Speaker 1: basis PR company, or you know, you were somebody like
Speaker 1: helping them with image management, what would be some of
Speaker 1: the things you might expect to see them change, if anything,
Speaker 1: over the next couple of months as they get much
Speaker 1: more into this fight with regulators. Well, I think and
Speaker 1: maybe we're already seeing it. I think they're gonna be
Speaker 1: again less aggressive in terms of marketing, in terms of
Speaker 1: like anything you do to say, you know, your crypto
Speaker 1: investment is gonna is gonna make you rich or whatever
Speaker 1: is going to create some potential exposure with the SEC.
Speaker 1: And I mean I think the SEC is like very
Speaker 1: attuned to the prospect that like regular people could get
Speaker 1: hurt by buying you know, dumb stuff. And coin Base
Speaker 1: has been selling a lot of stuff, you know, I
Speaker 1: don't want to say it's dumb, but of maybe a
Speaker 1: questionable that when you look at yes, sire risk assets,
Speaker 1: and they've done some things to try to kind of
Speaker 1: you know, walk a line where I think certain tokens
Speaker 1: are labeled differently. But again when you when you look
Speaker 1: at where they were, you know, a few years ago,
Speaker 1: and you look at where they are today, Like some
Speaker 1: of these tokens are very lightly traded. They're not companies
Speaker 1: that you would have heard of. It's definitely closer to
Speaker 1: to to a penny stock. And and of course there's
Speaker 1: those are those are very volatile assets, and so I
Speaker 1: think we're going to see them backing off, you know,
Speaker 1: in terms of the sort of messaging. A couple of
Speaker 1: weeks ago, they ended their affiliate affiliate marketing program, which
Speaker 1: was kind of interpreted as some kind of oh no,
Speaker 1: like that maybe the company's in jeopardy. But I do
Speaker 1: wonder if if that may be part of an effort
Speaker 1: to be like a little bit less aggressive in how
Speaker 1: they message to prospective customers and how did their affiliate
Speaker 1: marketing program work. So I believe that you were basically
Speaker 1: if you signed up a new investor as an a
Speaker 1: crypto influencer, you would get yeah, there's a link, and
Speaker 1: then every trade they make for a certain period of time,
Speaker 1: you're getting a cut of their commission. That's this is
Speaker 1: something that finance has used really aggressively and very effectively.
Speaker 1: It does have some sort of multi level marketing vibes,
Speaker 1: it does. It kind of creates, you know, this this
Speaker 1: sort of sort of third party that you know is
Speaker 1: kind of acting on behalf of the company. But to me,
Speaker 1: that feels like it could be something that was done
Speaker 1: less as a cost cutting measure and more as a
Speaker 1: let's try to you know, kind of back off some
Speaker 1: of the more aggressive marketing practices. The biggest question that
Speaker 1: a lot of people have right now in this environment
Speaker 1: where you know, lenders have frozen withdrawals, other types of
Speaker 1: crypto companies have been largely in distress. Is okay, Well,
Speaker 1: I have large deposits of coin base, or I'm one
Speaker 1: of the people who has allowed like my paycheck to
Speaker 1: be paid into my coin based account. Like what's next
Speaker 1: for me if all of this regulatory stuff happens, Like
Speaker 1: how do you see any of the shifting to me?
Speaker 1: Like if you were had a lot of coin bax exposure,
Speaker 1: should be more worried about your crypto exposure rather than
Speaker 1: the particular risk of like coin Base getting hit by
Speaker 1: the you know, SEC because you know, I don't think
Speaker 1: like customer deposits and that sort of thing are going
Speaker 1: to be at risk, and I don't think people should
Speaker 1: be thinking about it that way. It's more, you know,
Speaker 1: what is the to coin base stockholders, people who our
Speaker 1: own equity in the company itself and who right yeah,
Speaker 1: positioned itself as like this is the future of finance.
Speaker 1: Like maybe it's not the future of finance. Maybe it
Speaker 1: was just this kind of flash in the pan thing
Speaker 1: that took advantage of a of a boom that is
Speaker 1: not going to exist for a long time. It could
Speaker 1: also get muscled out by, like I said, some of
Speaker 1: these other competitors finance for instance, So I think it's
Speaker 1: more about that. I think there you know, questions about
Speaker 1: you know, exactly what tokens are able to be marketed
Speaker 1: in the future. So that's going to have you know,
Speaker 1: implications for entrepreneurs and and so on who are building
Speaker 1: businesses on this platform. I think it also has implications
Speaker 1: for some of the big venture capital firms, some of
Speaker 1: these like institutional crypto investors, who were you know, using
Speaker 1: the tokens as a way to to make their investments
Speaker 1: alongside equity. I mean, there are a lot of questions about,
Speaker 1: you know, exactly what happens to that if there is
Speaker 1: greater regulation in the US. So so definitely don't think
Speaker 1: there's a lot of risk for just like regular people
Speaker 1: beyond like assets going down or going to zero, which
Speaker 1: I think is the thing people should be most worried about.
Speaker 1: It's definitely think a lot of people are worried about
Speaker 1: right now. So amazing. Well, Max, thank you so much
Speaker 1: for joining us. Thanks for having me. You can find
Speaker 1: more of Max Chafkins columns and reporting on the Bloomberg
Speaker 1: terminal on Bloomberger dot com and on Twitter. He's at
Speaker 1: Chafkin that c H A F K I N On
Speaker 1: the next episode of Bloomberg Crypto. Digital by Now pay
Speaker 1: later options skyrocketed over the last several years, and they
Speaker 1: were definitely everywhere in the early days of the pandemic.
Speaker 1: And now the NPL has come for crypto through a
Speaker 1: decentralized finance lender called Teller. Is this really a good idea?
Speaker 1: Bloomberg proportsa Mr Lena Gulf of Polo will join me
Speaker 1: for a discussion on how by now pay later fits
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