Coinbase Conundrums

even trickier. Federal prosecutors charged a former coin based product manager, as well as his brother and a friend with allegations of insider trading. The cherry on top the security is an exchange commission, followed with its own allegation the coin Base has been running and illegal securities exchange. Here's to help us understand what's at stake for coin Base. One of the leading crypto exchanges in the world and for

all digital currency uses is Bloomberg Business Week columnist Max Chafkin. Max, go to have you on the podcast. Great to be here. You are one of those folks who I've said this to other other folks on the podcast, Like, when you're on to talk about a company, it's probably not good news for the company that we're going to talk about. So today we're gonna talk about coin Base. What's been happening with coin Base? Okay, so a handful of things.

I mean, one is and and maybe important context of course, is the crypto markets have not been great, you know, as a result, they're going through a lot of the same issues that pretty much everyone in this space is

going through. But then there's this other thing that's going on, which is that July one or thereabouts the d o J arrest the Department of Justice one of yeah, the Parlament of Justice, excuse me, arrested a former product manager somebody who had been working on new token listings and accused him of basically insider trading, of of taking information about listings that we're going to go on coin base and passing them to his brother and another investor and

profiting from that. And at the same time, and this is where it starts to gett even worse for coin base. Y SEC comes out and issues its own insider trading complaint and says, oh, by the way, some of these tokens that were being insider traded are not assets, they are securities. And the implication, of course, is that coin base would be operating an illegal securities exchange, which would be bad and which would put aspects of their overall

business at risk. And you know, it's important to say so. So this is a really this this indictment, it makes for really good reading. It's very colorful. This guy who was busted was busted because of a crypto influencer named Kobe who basically spotted these transactions tweeted about them, and then that tweet found its way first to coin base and ultimately to the Department of Justice. So that's sort of a bad look for coin base. Um, but but it's important to say, you know, no one's accused them

of wrongdoing. But then, at the same time, as Bloomberg reported just a few days later, the SEC is also looking into basically this very question. Was coin based operating or is it operating an illegal securities exchange? Is it's selling securities that have not been vetted by the SEC in the proper way? And that's something that coin Base, you know, really cares about because it could imperil their business create all sorts of regular problems for them down

the road. Last year, remember this is when it really started to get very contentious between the industry and the agencies. And you know what Brian Armstrong said at that time is they refused to tell us why they think it's a security and instead subpoena a bunch of records from us. We comply, demand testimony from employees. We comply, and then tell us that we they'll sue us if we launched certain products. A lot of this is being done through

enforcement rather than rulemaking itself. So until the agencies decide what's a currency, what's a commodity, and what's the security, it's going to be very difficult for the industry to to work around that. That was about Brian Armstrong, who's the CEO of coin base. Clearly there's a lot of stuff going on here, So I want to kind of tease apart a few different things that you said, and I sort of want to start with the you know,

the how all of this came to light. In April of this year, coin Based, seemingly out of nowhere, published a blog post that was like, here are some changes that we have made that would make it more difficult for people to inCider trade in tokens. We're not saying that that has happened, but if it were to happen,

it's now harder to do. And at the time, you know, various of us were like interesting, and now we know that the reason that that post went out on the coin based medium blog in April was related to them finding out that this former employee had been engaging in this kind of behavior and the you know, the company

has confirmed as much. My question back to you about this is when we are reporting on these kinds of companies, on these kinds of investigations, who in a lot of other senses and crypto like to say like we're super transparence.

We always tell everyone what's going on. But when it has come down to here are weird things that are happening, they get a little bit kg, they get a little bit traditional, and it's really contrasted to you know, Brian Armstrong, the CEO of coin Based, willing to go on twister and just like yell at the SEC but they weren't necessarily forthcoming about the fact that this thing has happened.

What do you think explains that tension? Well, I mean, this probably just gets to my own being a cynical journalist and having followed, you know, tech companies for a long time. I mean, I just think, you know, we shouldn't take the ideology that seriously, at least the ideology of transparency. Yeah, exactly, at least insofar as we're like trying to understand the actions of a very large public company, which is what coin Base is. They've done a lot

of stuff over the past couple of years. It's funny because I've been familiar with this company a long time. I met with the founders, you know, back in you know, kind of like the mid s when they were this sort of hot shot Silicon Valley company, and their whole thing back then was that they were like the most conservative crypto company. They were the one that like followed all the rules. They had like much stronger k y C.

That's know, your customer rules. You know, you needed basically need a bank account, you need to show a driver's license if you wanted to buy tokens. And really they only sold bitcoin, I mean for the for the really long time, Bitcoin ether, I think light Coin, maybe one other.

But of course something flipped, and and the thing that flipped was that the market for tokens boomed, and you had a couple of other exchanges, I think most importantly Binance, you know, really move aggressively into listing all these other tokens um taking their market share, and there was like a clear choice that was made I think starting probably around eighteen, but that became even more pronounced when they went public, which was best year in May of or

April of one, where basically they just went way more aggressive. And when you do that, that puts you at odds with the SEC and and in the US government, and at the same time they were sort of adopting this kind of edgier regulatory pose. Brian Armstrong, the CEO, kind of comes with this new sort of positioning for the company, which is this like bad boy in a couple of

different ways. One is that in September of you know, as protests around George Floyd's murder we're going on, there's a lot of activism inside of coin Base, he comes out and basically declares that, you know, when we're gonna be a no politics company, we're gonna be anti woke, and that is a way to like that that generates a lot of attention, and then we see, you know, kind of throughout the last couple of years him taking as you said, this kind of very muscular communications approach

where he's like trash talking the SEC and things like that, and at the same time spending huge sums of money on lobbying, you know, working really hard to kind of

work the things you know in Washington. And I think this is all related because they see this fight coming and now it's here, and they've been sort of preparing for it, and that preparation includes, you know, lobbying, it includes all this legal work and sort of messaging around their process, and of course it includes a cultural component.

We have sometimes received cranky emails from listeners of this show about the idea that there could be a cultural component to crypto, that crypto is like politics neutral, value neutral, and it's about the purity and sanctity of the blockchain, etcetera, etcetera. Um, and folks listening cannot see this. Max's giggling, and Max, you know what you're saying is that no, there is there are some explicitly politicized elements to the way this fight is shaping up. Yeah. Absolutely, And I mean you

can look at their their spending. I mean, you know, they're their lobbying spending is open. I mean the last time I looked, I think it's like a couple of million bucks over the last I think I can't remember last year or last two years, but you know, they're spending significant sums of money in Washington, and you can see it in the way that Armstrong is communicating, you know, he you know, there was a Republican SEC commissioner published a sort of like counterpoint yeah to this, and so anyway,

they're like they have allies, they have conservative allies, they have you know, politicians that they're trying to work and and and of course it's political because yes, like coin base is promoting many of these values, as you said, transparency and so on, but it's also a public company, you know, with the headquarters in the United States, and it's under the jurisdiction you know, the US government, and it has tried to use those things to help it.

Like I said along the way, like coin Base, one of the ways it got customers early on is that it was seen and I think maybe still is seen as safer, more reliable and so on, compared to some of these more aggressive exchanges. We'll be right back with more from Bloomberg Business we call umnist Max Chafkin on the future of coin base. Bloomberg has learned that coin base is facing a US investigation on cryptocurrency listings. This move comes as a chorus of US regulators to do

work to oversee the crypto industry has grown louder. One of the things that hurts them earlier this year is Brian Armstrong on Twitter kind of coming out and saying, you know, hey, and he in this thread that was about an otherwise very unremarkable like SEC required filing, use the B word like invoked bankruptcy, and he's like, in the in the unlikely event that anything were to happen, etcetera, etcetera.

But of course people on Twitter don't read. They just they just saw a coin based plus bankruptcy and there was just a lot of freaking out about that. So in the grand scheme of if you were a coin basis PR company, or you know, you were somebody like helping them with image management, what would be some of the things you might expect to see them change, if anything, over the next couple of months as they get much more into this fight with regulators. Well, I think and

maybe we're already seeing it. I think they're gonna be again less aggressive in terms of marketing, in terms of like anything you do to say, you know, your crypto investment is gonna is gonna make you rich or whatever is going to create some potential exposure with the SEC. And I mean I think the SEC is like very attuned to the prospect that like regular people could get

hurt by buying you know, dumb stuff. And coin Base has been selling a lot of stuff, you know, I don't want to say it's dumb, but of maybe a questionable that when you look at yes, sire risk assets, and they've done some things to try to kind of you know, walk a line where I think certain tokens are labeled differently. But again when you when you look at where they were, you know, a few years ago, and you look at where they are today, Like some

of these tokens are very lightly traded. They're not companies that you would have heard of. It's definitely closer to to to a penny stock. And and of course there's those are those are very volatile assets, and so I think we're going to see them backing off, you know, in terms of the sort of messaging. A couple of weeks ago, they ended their affiliate affiliate marketing program, which was kind of interpreted as some kind of oh no,

like that maybe the company's in jeopardy. But I do wonder if if that may be part of an effort to be like a little bit less aggressive in how they message to prospective customers and how did their affiliate marketing program work. So I believe that you were basically if you signed up a new investor as an a crypto influencer, you would get yeah, there's a link, and then every trade they make for a certain period of time,

you're getting a cut of their commission. That's this is something that finance has used really aggressively and very effectively. It does have some sort of multi level marketing vibes, it does. It kind of creates, you know, this this sort of sort of third party that you know is kind of acting on behalf of the company. But to me, that feels like it could be something that was done less as a cost cutting measure and more as a let's try to you know, kind of back off some

of the more aggressive marketing practices. The biggest question that a lot of people have right now in this environment where you know, lenders have frozen withdrawals, other types of crypto companies have been largely in distress. Is okay, Well, I have large deposits of coin base, or I'm one of the people who has allowed like my paycheck to be paid into my coin based account. Like what's next for me if all of this regulatory stuff happens, Like how do you see any of the shifting to me?

Like if you were had a lot of coin bax exposure, should be more worried about your crypto exposure rather than the particular risk of like coin Base getting hit by the you know, SEC because you know, I don't think like customer deposits and that sort of thing are going to be at risk, and I don't think people should

be thinking about it that way. It's more, you know, what is the to coin base stockholders, people who our own equity in the company itself and who right yeah, positioned itself as like this is the future of finance. Like maybe it's not the future of finance. Maybe it was just this kind of flash in the pan thing that took advantage of a of a boom that is

not going to exist for a long time. It could also get muscled out by, like I said, some of these other competitors finance for instance, So I think it's more about that. I think there you know, questions about you know, exactly what tokens are able to be marketed in the future. So that's going to have you know, implications for entrepreneurs and and so on who are building

businesses on this platform. I think it also has implications for some of the big venture capital firms, some of these like institutional crypto investors, who were you know, using the tokens as a way to to make their investments alongside equity. I mean, there are a lot of questions about, you know, exactly what happens to that if there is

greater regulation in the US. So so definitely don't think there's a lot of risk for just like regular people beyond like assets going down or going to zero, which I think is the thing people should be most worried about. It's definitely think a lot of people are worried about right now. So amazing. Well, Max, thank you so much for joining us. Thanks for having me. You can find more of Max Chafkins columns and reporting on the Bloomberg

terminal on Bloomberger dot com and on Twitter. He's at Chafkin that c H A F K I N On the next episode of Bloomberg Crypto. Digital by Now pay later options skyrocketed over the last several years, and they were definitely everywhere in the early days of the pandemic. And now the NPL has come for crypto through a decentralized finance lender called Teller. Is this really a good idea? Bloomberg proportsa Mr Lena Gulf of Polo will join me for a discussion on how by now pay later fits

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