The David Rubenstein Show: Coinbase's Brian Armstrong

This is my kitchen table and also my filing system. Over much of the past three decades, I've been an investor. The highest calling of mankind I've often thought was private equity. And then I started interviewing. Well, I watch your interviews because I know how to do some. I've learned in doing my interviews how leaders make it to the top. I asked him how much he wanted. He said 250. I said, fine. I didn't negotiate with him. I did no due diligence to have something I'd like to sell and how they stay there. You don't feel inadequate now because being only the second wealthiest man in the world. Is that right? About a decade ago, a young entrepreneur, Brian Armstrong, who is working at Airbnb, left that company to start a company to trade cryptocurrencies. The company he started, Coinbase, became one of the hottest IPOs on Wall Street. This year, because of the FTX meltdown, Coinbase has had some challenges. I sat down with Brian Armstrong to talk about the future of his company. So for those who don't know much about cryptocurrencies, what exactly is Coinbase and what does it do? So Coinbase is the primary financial account for many people participating in the crypto economy. So we help people buy and sell crypto. We also help them use it in a variety of ways. They can use it to send money, do commerce, borrow and lend or yield on their assets. So we think of ourselves as the primary financial account for people in that crypto economy. Okay, so I know you're different than another company I'll mention, but is this what FTX more or less did as well, theoretically for its clients, was to enable them to trade? So FTX did one piece of what I just mentioned, which is the trading aspect. That's correct. What do you think actually happened to FTX? You've been quoted as saying you think there was more than just occasional bad bookkeeping. You think there was more to it than that. Is that right? That's right. And, you know, obviously I'm sitting here as an outsider, but it seems pretty clear to me that it's not just a run on the bank or, you know, poor management of funds. It appears that they took customer funds from their exchange and actually commingled them or moved them into their hedge fund and then ended up in a very underwater position. And that was, I believe, against their terms of service and against the law. And so from my point of view, it looks like a massive fraud. And we know that because they turned off withdrawals and the customer funds, which should have been held there one to one, were not able to be withdrawn. So that appears to be a fraud from my point of view. So in your view, will the FTX bankruptcy hurt the industry and maybe produce enormous amount of regulation that you may not want? Well, I do think the FTX downfall is a bit of a black mark for the industry, and it's not representative of the whole industry, of course, though. And, you know, in traditional financial services, occasionally you see bad actors as well, like Bernie Madoff or what happened at Enron. Now, in terms of regulation, you know, I do think that it won't be a bad thing. We've actually, Coinbase has been calling for clear regulation and trying to work with policymakers for quite a while. We've made some progress on that across various G20 countries. But I think it will serve as a wake up call and sort of a moment of catalyst where we'll get more clear regulation in the United States. And I think that'll actually be a really good thing for both Coinbase and the whole industry. So for your company and people who are clients of Coinbase, you reassure them, I assume, regularly or they can find out for sure if their account is managed the way it's supposed to. It's not being used for some additional purpose. Is that right? That's right. So, I mean, we actually are very different than what happened with FTX. So for one thing, Coinbase is based right here in the United States. We didn't incorporate in an offshore jurisdiction like the Bahamas. We're also a public company, which means we need to meet all of the audit requirements of a public company. And so we show in our publicly audited financial statements that, you know, corporate cash is separate from customer funds. And you don't have to take our word for it. You know, you know, a big four accounting firm has come in and proven that in these cases. So there's other differences as well. You know, we operate in exchange, but we've never created an exchange token like the way FTX did. We never operated our own market maker or hedge fund in the way that FTX did, because we believe that that would be a conflict of interest. So the difference between the two firms, I think, cannot be overstated. And it's really a validation of the approach that we've taken at Coinbase over the last 10 years to sort of build this business in a trusted and compliant way, as opposed to what happened with FTX. So for people who may not be that familiar with what your service is, let's suppose I wanted to buy a stock. I would call a stockbroker or somebody who's a market maker, say I want to buy a certain share. They would say, OK, you pay a commission. If somebody wants to trade a cryptocurrency, they they in effect have an account with you, I assume, and they pay some kind of fee for the exchange. Is that right? That's right. Trading fees is one of our major sources of revenue. And yeah, we've begun to diversify that as well. So we have a different category of revenue we call subscription and services, which is has started to grow. So that's about 36 percent of our revenue in our last in Q3 of this year. But today, people have accounts with you. They have it clear that you if they want to pull their account out, they can get the money, I guess, because you are not subject to a run of the bank. And in fact. That's correct. All customer funds are clearly segregated and health assets are held one to one for customers. So there's really no such thing as a run on the bank in Coinbase's world because, well, number one, we're not regulated as a bank, so we don't do fractional reserve lending. But also, you know, 100 percent of customer funds are stored one to one. So if 100 percent of people want to come withdraw, they can do that and we'll have their funds for them. So you started the company in 2012 and you took a public, I think, in April of 2021. The IPO was an enormous success. And I think at the end of that day, your company was worth maybe 75 billion or more. And you were personally worth, I think, about 10 billion dollars or more. The company's stock has come down about 80 percent in recent times, in part because the FTX and other things have happened in the crypto world. So how does it feel to be worth 10 billion dollars one day and not too long after a lot less? Well, you know, it's obviously been a difficult market for not just crypto, but also really all growth tech and biotech, I would say, too. So, you know, we're in good company. Netflix and Spotify and all these these companies have also come down similar amounts. We knew that going public would not be an easy path, especially with as in a new industry, being a leader. We wanted to be the first crypto company to go out there. And we kind of assumed that it would take, you know, three, four years to go through a cycle, begin to educate, build trust in the public markets. And so that's the process we're going through now. And, you know, my own personal net worth is not something that is particularly motivating to me in the sense of like driving personal consumption or something like that. I'm I'm excited about building things with technology. And cryptocurrency is one of the most exciting areas out there right now. So, you know, I'm going to I'm going to keep working on this company for the next hopefully decade or two. And I think it's an exciting road ahead. So you told your parents you're going to start a cryptocurrency exchange. What did they say? Well, I don't think they quite understood what it was at that moment. And my mom, you know, asked me if I was going to have health insurance, which, you know, I learned, you know, even if you're creating a new company, you can you can pay for your own health insurance. All right, let's go to talking about the time that you started the company and what you were doing about about the time you just started. So you started in 2012, as I mentioned. What were you doing before you started? Did you know a lot about cryptocurrencies? What were where were you working? Yeah, so before this, I was a software engineer and product manager at Airbnb, which, you know, the travel home rental company. And, you know, I'd studied computer science and economics in school. I had tried creating a couple other startups that were not very successful. I wanted one of them in the education space. And so while I was working at Airbnb, you know, I kind of got to see they had they were trying to move money to 190 different countries all over the world, both collecting payments and then paying out the people renting their homes. And I was one of the engineers kind of working on that, seeing how difficult it was to move money globally, both, you know, how opaque the fees were, how long the delays were, the chargebacks, all kinds of things like that. So, you know, at that time, I this was around December of 2010. I believe I read the Bitcoin white paper, which came out and I really it captured my attention in a really profound way. I remember reading it and thinking this might be one of the most important things I've ever read. And it was saying something. It was describing something kind of like the Internet, which was global and decentralized, a new protocol. But instead of removing information around, this was for moving value around in different forms. And I basically just couldn't stop thinking about this paper for the last for the next six months. After that, I attended some meetups in San Francisco, some early Bitcoin meetups and met some of the early people working on it. And eventually I just couldn't get this idea out of my head. And I decided I had to go try to build a prototype that would make this this technology easier to use and trusted for the average person. So what was the valuation of your company for the first round from the first investors? Oh, well, you know, I think Y Combinator probably got seven percent of the company for that one hundred fifty thousand. So, you know, not a not a very high valuation. And then I think the series A was I think we raised five million at twenty five million post. So, you know, obviously those investors did well. So when their company went public, the return on the initial investments were staggering. I remember reading about it at the time. So I guess they were very happy with with you at the time. I don't know whether they've sold their shares or they still hold them, but still it's very profitable even at today's valuation, I assume. Yeah, that's correct. I mean, and they earned it, right? So that's that's the nature of these bets, is that if you can see something early on that most people are skeptical of in your contrarian, but right. You know, occasionally you get these massive wins that come out of it. And I think, you know, when Coinbase went public, a thousand people, employees, I believe, became millionaires. And, you know, a lot of the early people wrote me incredible letters telling us how they you know, we had changed their life and all these things. So that was a really powerful moment. And as being a publicly traded company CEO, a pleasurable experience or not? You know, I actually when I before we went public, I didn't really know much about what it would be like. And I went and did a bunch of research. But my research played out roughly how I expected. And I actually kind of enjoy being a public company CEO. It's a good forcing function for us to get feedback from the market, to get input from analysts and investors. I found their their thoughts to be actually quite helpful in terms of operating our business periodically. And then, of course, you know, we I spend the vast majority of my time really just working with the team on how do we build better products for our customers? I don't want to lose sight of that as the primary objective. So let's talk about yourself for a moment. Earlier in your life, where were you born? I was born in San Jose, California, in Silicon Valley. Yeah. And were your parents technology people working at tech companies or something like that? Something like that. Yeah. So my mom was a programmer and a manager at IBM. So we had a lot of the early IBM computers in our home and things like that. My dad is a civil engineer and an environmental engineer. So, yeah, we definitely had to focus on, you know, STEM and math and science and education in my my household growing up, I would say. And when you were growing up, what did you want to be when you were in high school? Did you want to be an athlete or a private equity investor, something important like that or what? You know, I don't think I knew exactly what I wanted to be in high school. I remember even in high school, I was learning programming and I was learning computers. I was fascinated with that. I built some early websites. I even started a little business with a friend of mine in high school. We were kind of reselling computer hardware. So I don't think I knew that I wanted to definitely be a tech entrepreneur. But looking back in hindsight, that's certainly where my energy and enthusiasm was. And I was I was often staying up till 2 a.m., you know, learning Linux and computers in my bedroom. Whereas and I'd be sleep deprived and too tired to pay attention in history class the next day at school. But, yeah, those were my early interests. For sure. Where did you go to college? I went to Rice University in Houston, Texas. And how long were you at Airbnb and how did you get that job? I was at Airbnb for about a year and a half or so. And I was employee number 40, I think, when they joined when I joined. And when I left, there was maybe 600 people. So it had gone through this incredible period of growth. I learned a lot from them, actually, just about how to run a great, you know, product building process with engineers, how to raise money, how to operate in Silicon Valley, how to how to meet with people like at Y Combinator. So I learned quite a lot from that process. When you left to start your own company, did Brian Chesky, one of the CEOs and founders there, tell you that you were making a mistake? You should stay at a stable company like Airbnb? Well, my boss at that time was Nate Blacharczyk, who was one of the other co-founders at Airbnb and the CTO. And I remember he was very supportive. And obviously, they tried to get me to stay a little bit. But, you know, generally, there's a really incredible culture in Silicon Valley of, you know, employees who are joining these early startups that sometimes they go on to do their own startups. And it's very much a positive some environment. You know, one of the things I'm most proud of is actually a lot of early Coinbase employees have gone on to found other companies in crypto. And that's been really positive and rewarding for us to see as well. So you told your parents you're going to start a cryptocurrency exchange. What did they say? Well, I don't think they quite understood what it was at that moment. And my mom, you know, asked me if I was going to have health insurance, which, you know, I learned, you know, even if you're creating a new company, you can you can pay for your own health insurance. And there's little things like that that made her sleep better at night. But I think ultimately, they they trusted me and they supported me, even if they didn't quite understand what it was. And they said, well, you know, if this doesn't work out, hopefully you can go get another job and he'll be fine. But they sort of knew I was always going to try new things like this. And it wasn't worth trying to talk me out of it at a certain point. So what do you say to some of the old line investors, old line, mean people my age or older or maybe slightly younger than me who say that cryptocurrency really serves no useful social purpose and ultimately all cryptocurrencies will go to zero? How do you respond to them? Yeah, well, look, I think there's a long history in technology of bubbles being created and then corrections and, you know, there's hype cycles and doom cycles. And this has been true, obviously, with the Internet in recent memory. But even if you go back to the railroads and, you know, the telephone and all these things, studying the history of this, you see that when a big technology innovation happens, early adopters come in, you see a bubble form. There's oftentimes a rational exuberance and then a correction happens. But ultimately, there is a breakthrough there. And it takes sometimes, you know, a decade or more for these these benefits to come to fruition. So that's exactly what's happening here with cryptocurrency. You know, one in four U.S. households have now used cryptocurrency. It's not a niche thing. It does tend to skew towards a younger audience. And so sometimes people who grew up in their whole their whole career was in traditional financial services. It's hard for them to you know, this is the innovators dilemma, right? If you if you can, if people are familiar with the Clay Christensen book, it's hard for them to see this new thing coming along and seeing what the disruptive potential of it would be. And there's sometimes a little bit of blindness that happens with that. But nevertheless, the change is happening and more people are using crypto through every cycle that happens. Well, before you started the company or while you were starting your company Coinbase, did you buy some cryptocurrency yourself just to show that you were a believer in it? Or do you not want to have a conflict by owning some of these cryptocurrencies? I mean, I really didn't have much money when I started Coinbase. You know, I had just left Airbnb. I had a little bit of money saved, but I had to I wanted to exercise my options in Airbnb when I left. And that actually almost cleaned out my bank account. So I think I had maybe like like three or four thousand dollars or something like that when I left over when I started Coinbase. So, you know, I certainly bought a little bit of Bitcoin early on. But we're talking about like a thousand dollars or something in that range for the first, you know, five years or actually, I mean, still to a large degree to this day. I mean, myself and other employees, early employees at Coinbase, we took our salary actually in Bitcoin. So you can imagine that had some interesting appreciation value. You know, we had to sell a lot of it to sort of pay rent and things like that. So it wasn't like we were able to hold all of it. But yeah, that there was definitely some appreciation there. But I wish I'd had more money in the early days for sure. So how do you respond to the idea that many people don't know what they're doing when they're buying cryptocurrencies? They're not that well informed. They're very young and they're going to wind up losing their money because they're just not experienced. How do you respond to that concern? Right, well, I think that's a very valid concern across really any type of investment that people might make, not just in crypto, but in stocks and in everything. So my perception is that we actually do need more clear regulation that's crypto specific. I mean, crypto businesses like Coinbase were already regulated like a traditional financial service business. And, you know, we have a CFTC license and we have been registered with FinCEN. We have a New York Bit license and various money transmission licenses. That's that's just in the US. But I think we need more crypto specific regulation in the US, both around stable coins, how centralized exchanges and custodians are, you know, the best practices they should have in place around audits and, you know, not commingling funds. Many of those things we're already doing. And then the big piece will be actually getting clarity around what's a commodity, what is a security, what's a stable coin. And we need sort of an updated version of the Howey test, which is something that the SEC uses to that applies more to cryptocurrency. So there's a lot of legislation being put through Congress now, and Coinbase has been very active in D.C. working with policymakers there. There's strong bipartisan support in the US to actually get clear crypto regulation. The FTX situation created a little bit of a delay in the legislation that I was hoping was going to be coming, getting passed in the next quarter or so. But I think within the next year, we can hopefully get something there in the US and then go for the rest of the G20 as well. So Sam Bankman-Fried was well known for giving money to politicians as campaign contributions and for lobbying members directly in Capitol Hill. Do you go to Capitol Hill very much to lobby directly for legislation of one type or another? Are you very involved in political contributions? So I go to D.C. Historically, I've gone to D.C. and maybe two or three times a year, and I imagine that may even be more frequent now in the next year or two. We've made small donations to certain candidates that are pro-crypto and we, you know, but just standard stuff like, you know, $5,800 or these kind of basic minimums. We don't actually we've never made any kind of donations on the scale that Sam Bankman-Fried was doing through through these large packs and things like that. And, you know, part of it is like it's how the game is played. You need to sort of make relevant donations. That's what all companies do. Public companies do around policy issues. But it does seem like the way that Sam was doing it, where he was so visible in D.C., there was such a large amount of money. I think I think he was the second largest donor to the Democratic Party or something like that. It does seem like it was happening at a different scale. And, you know, I think there's some really serious questions to be asked now about should should some of that money be clawed back because it appears that it was stolen from customers. So when you come to Washington, you meet with members of Congress. Do they really understand cryptocurrencies or you have to educate them a fair bit? You know, when I first started going to D.C., maybe eight or nine years ago, I think many of them didn't understand crypto at all. And there was a lot of very basic conversations. I think today probably 80 percent of Congress, maybe 70, 80 percent understands the basics and they understand the potential of this technology that it has. It has a lot of innovation potential, which we want to preserve. But it also has some risks, and unfortunately, it's attracted some some bad actors to try to come into this industry to try to profit from it. And so they recognize the balance, the need for both clear regulation and preserving that innovation potential. There's still probably 20 percent, I would say, of Congress where they're either just very hostile to it. Or or just ignorant of it, but it's not the majority view at this point. citizens who may be attracted to those kinds of products. Suppose I say I listen to your interview and I like to buy some crypto currencies. What would you recommend to somebody who doesn't know much about crypto, about what they do to get educated? And would you recommend to suppose somebody is a young professional? He or she has a modest amount of money in the bank. Would you recommend they put 100 percent in crypto, 5 percent? What do you recommend to people that they do if they want to experiment investing in crypto? Right. So we're not a registered investment advisor. I have to be a little careful. I mean, we're not giving any investment advice to people. But what I would what I do personally and what I would you know, what I would tell people, I should say personally, is that if this is something new, don't invest in anything that you don't understand. And if you want to learn about it, you know, you can put one percent of your net worth into it or something like that, that you would be OK if it all went to zero. But if it's not, then that's a way for you to dip your toe in the water and hopefully, you know, own a little piece of this crypto economy that's happening more and more on the Internet for the next five or 10 years. So I'm more in the mindset of personally, I don't actively trade crypto or anything like that. I'm more of like a long term buy and holder. And then I just try to help the company build good products and services. So I'm not like an active trader of crypto personally. So for somebody that is a young person watching, he would say, I want to be Brian Armstrong. I want to be able to be a person who starts a company, very successful, a leader in his industry. What would you recommend as the skill set or the kind of things that somebody should do to become you? Well, it's an odd question, I'm sure some people want to do that, not everybody wants to do that, but for people who do, I think number one is study engineering, science, math. STEM, I think that's that's the language of our future that you can have the most impact. And then I would say, try building companies. I think that building technology companies is probably one of the best levers we have to improve the world, regardless of what problem we're talking about, whether that's climate change or fixing education, health care, anything like that. So, and, you know, starting companies is hard, I started a number of companies that didn't work, or they were fairly successful in some small way. And it was, you know, Coinbase is probably the 10th idea that I had that I tried, and that one ended up working really, really well. But there's more, there's others that I hope to create in the future. And maybe some will work, some won't. And so you have to be okay with resilience and failures and setbacks along the way.