What Will Coinbase’s Earnings Call Reveal?

crypto exchanges like publicly traded coin Base. In early January, the exchange settled with New York regulators who accused it of significant compliance program failing, and that wasn't the end of coin Bass troubles. Later in January, coin Base also said it's laying off its workforce and closing the bulk of its Japan operations. And the picture may be equally dim for other global exchanges. Users are nervous and in

many cases they're pulling funds from the exchanges. And joining me today to talk about this are Bloomberg Senior editor Anna Era. If volumes are down and you have this customers and people are just holding, are scared or withdrawing even worse, with drawing the crypto they have on your platform. You cannot go on survival mode. And one thing we know of coin bas is that they're pretty good at survival mode, right, and Bloomberg reporter Uhan Moving forward the exchanges,

they really have to be more transparent. They have to prove that they're not misusing customer funds. That's no longer taken as granted. Coin Base is having a bad month. Coin Base has reached a one hundred million dollars settlement with New York regulators. Half of the money is a fine. Regulators found that the crypto exchange violated anti money launching laws and letting customers basically open accounts from insufficient background checks. The other fifty million, but what it's going to be

used to improve compliance? She has climbed up with It started in early January with a settlement worth about a hundred million dollars with New York. You can you tell us a little bit about what happened there and what

were the allegations against coin base. The acquisitions from the regulator is that coin bas treated customer onboarding process as a simple check the box exercise and failed to conduct due diligent and in the the order dimensioned examples of for example, coin base Latin individuals who are faking to be employee of a company to open an account on behalf of that company in an effort to steal funds from the company, and coin bas Um said that they're

taking substantial measures to correct these short shortcomings. They highlighted that these were all historical issues and they're ready to move forward. This was one of the events that coin base has been grappling with, as well as other major exchanges including Finite and um ftx before it's collapsed. Yeah, I want to touch on that because um in no way it is coin based alone and being a crypto exchange that has fallen a foul of regulators and you know,

gotten in trouble over limits or shortcomings in KYC. I mean, Anna, you've covered this for years. How has it been over the years when it comes to crypto exchanges and you know the various blow ups and shortcomings in that regard. Yeah, So KYC has always been a big issue for crypto in general and for crypto exchanges. At the beginning there were you know, exchanges that famously never actually asked for

any documentation for you to trade on them. I remember there was a famous testimony I think it was by someone who's now a vc UM who said, and it was a sort of prosecutor before and said that they asked some exchange to provide documents and because they didn't never check them. They had clients with names Mickey Mouse who lived in Main Street. So it's an issue, and you know some of them have opped obviously their game for because you know, regulators are breathing down their neck.

But you know, it's it's always been a challenge and it may may remain a challenge for a while, in part because you know, you can ask for documents, it depends how much you're checking right. And you know, ky C and a m L, to be fair a big problem in finance in general as well. You know we've had banks that got in trouble for it too, But in crypto has always been like a recurring issue. You

make a good point there. I mean, if you if you look at the banking industry, it wasn't many years ago that some of the private banks got into major troubles over ky c or you know, even looking the other way. So should be fair crypto to point out that it has happened in other corners of the financial universe as well. I want to come back to coin based because they, as we alluded to at the very start,

that the bad January didn't really end there UM. And this last week we got another bombshell UM and this time it was job cuts. You as she you cover that what and how significant were the cuts that they announced? So Queinbays announced that they're doing another round of layoff, this time affecting about nine hundred and fifty employees, or about of his workforce. And we know that Quein based

UM even last year they've they've done layoff already. In June they laid off eighteen percent of his workforce, roughly UM twelve hundred people were affected, and then they did a smaller round UM in November affecting sixty positions UM.

So Brian Armstrong in his letter to employees he said that this is really the first time coin base has seen a crypto cycle, coinside was a broader economic downturn, and then he admitted that when he did the head on layoff UM last year in hindsight, he should have cut even further at that time. So UM so because quin Bass is the publicly treated company UM, I think that the layoff and the general UM cost cutting measures

were not a total surprise to analysts and investors. The company UM do have to cut off, cut off more expenses to to really survive to this UM prolonged crypto downturn. And then obviously coin bas was not the only one doing UM layoff in the in the industry. Remember coin basis just the latest company to announce another round of

job cuts this month. Genesis, the troubled crypto brokerage under Berrysober Digital Currency Group, cut about thirty percent of its workforce who will be is cutting jobs, while silver Gate laid off forty percent of its staff. There is one thing that that and this is something that Armstrong pointed out. UM. They are cutting also some of these projects that maybe

aren't close to generating revenues or profits. But I mean, in your views and also Anna by all means, you know, when you cut like this, and you cut this deeply, aren't you risking a little bit that you do away with things that might generate a lot of future potential. Yes, UM during the Bowl market coin Bass was really trying to position itself as this bridge to the broader website economy and instead of just focusing on providing a trading

platform for clients. But we know that since the Market Downtown started last year, Point Based has been course correcting. They're returning back to focus on their core revenue generating services UM trading and staking namely, and then they're cutting back on some of these other projects that don't immediately seem to benefit and financially and this is something that they have to do to cut costs, but then it also will jeopatize their their future potential when it comes

to diversifying their business beyond just trading. I think there's also an issue of like, you might not have a choice.

Things are going really badly for exchanges in general because you know, trading volumes are low, and in the end, exchanges in crypto have been relying on trading fees because I'm like, I mean, it's been changing a bit, but unlike something like equities, where fees have have been shrinking for years and they've had to become more data businesses or technology businesses, crypto exchange groups have been able to rely on like trading fees via trading fees on equities

or um derivatives or whatever it is, and so you know, that's the way their business models were built. So if volumes are down and you have as customers and people are just holding, are scared or withdrawing even worse, withdrawing the crypto they have on your platform, you cannot go on survival mode. And one thing we know of coin bas is that they're pretty good at survival mode. Right,

they've been around longer than many other platforms. Perhaps they haven't made any big splashy like moments like we could have thought of like FTX, or they're not, but they kind of have been in crypto somewhat reliably steady, and

this is not their first winter. But as so sort of Armstrong was saying himself, the difference and fundamental difference here, I think is that you know, it's a crypto winter coupled with like a bad macro environment, and so maybe they're starting to think it's not gonna you know, it's not gonna end this year, and we have to preserve you know, resources even more. Up next, more with Bloomberg Senior crypto editor Anna Airera and Bloomberg reporter Ushang on

the future of crypto exchanges will be right back. Obviously, that was the sort of cataclismic event for the market back in November when ft X filed for bankruptcy, and then it was, you know, the charges of fraud against the founder of Sam bankman Freed and two of his top of lieutenants. And we're now learning crossing the Bloomberg terminal that a judges at a trial date of October two of this year, So Sam bankman Fried's trial on those fraud charges are set to begin in October two.

What did that mean for the crypto exchange sector as such, the sort of loss of confidence that followed ft ex's implotion. I think you made the exact right point with um. This is really a crisis of confidence for the entire industry.

We've seen that following the FTX collapse. There's been concerned for other major exchanges as well, and in fact, all of these big exchanges, Finites included, they have to come out and say that they're different from FDx, and they try to use various ways to prove that they have the reserves that clients deposit their coins on ways on the on their platform. So I think moving forward the exchanges, they really have to be more transparent. They have to

prove that UM they're not misusing customer funds. That's no longer taken as granted. UM. People have this distrust about putting their their tokens on the exchange, and we've seen deposits level falling from the exchanges as users take out their tokens and move into code storage, which they think UM would be safer and give themselves more control over

their assets. So if you turn the f t X question on its head, it's also kind of an opportunity for a company like coin base to take the market share. Coin Base has been trying to distinguish itself as a trusted and compliant company amid all the recent crypto chaos. The CEO, Brian Armstrong, spoke with David Rubinstein in December. 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, UM, you know a Big four accounting so far, and obviously it's early days, it looks like it's financed mostly that's kind of putting a strangle hole on the market. What is the Are there any indications where their indications from Armstrong about whether or not there is a void for coin based to be stepping into here, we have to

look at it from two perspectives. On one hand, ftx was an up and coming strong composer into space, and the fact that FTS is gone that UM just left their customers migrating to other platforms. If they still choose stay in the space, finance will benefit from that. UM coin Based, being a US focused platform, will also benefit from that. But then at the same time, coin base

is scaling back some of its overseas ambitions. We know that as part of the job cuts that's recently announced, they're winding down most of their operation in Japan for example. UM they are UM as an a mension. They don't have choice. They have to focus on their core market and core services. So finance is very good in the international market, and that's not something that coin base can entirely compete with. I think it's wiped out a competitor

for sure. Like FTX, US was slowly gaining ground and they were spending a lot of money to get US customers and retail customers, as we've written before, So you know, definitely like there's more there's more space now there's one less player, but at the same time, like the pie sort of shrunk for everyone. So it makes it, you know, quite hard. And I just want to finish off by talking about I mean, as we we talked a little bit about earlier, it's not just going based. Pretty much

everybody is cutting jobs. You've watched this industry on for a good couple of years now, and this is obviously like just very significant retrenchment across the board. Yeah, I think it's it's becoming quite protracted, and you know, I'm wondering, like where many of these people are going. We had a story earlier this year about how banks were hiring some of the staff, but now I'm thinking, you know, some banks are also letting off people. Tech firms I've

had hiring freezes. It's quite interesting to see where where some of the talent will be. There are firms that are still hiring, we're hearing, but you know, clearly, like if fifty people get fired from one firm, only you

know who has this support now to hire? And you know, one big thing is that I imagine some of the companies are still waiting for the situation to like finish unraveling, Like maybe you are waiting to see who have the excess creditors are to know if any of them are your counterparties, and then if more dominoes will fall, and if you'll be exposed more so maybe you're not inclined to make any big investments now. It is quite quite stark,

Like the situation has changed a little bit. The easy money has has stopped, and so you know, it'll be interesting to see where people end up. And you know, like if some of them go back to traditional finance and do like finance jobs. If it's it's it's very interesting, all right, Thank you, Anna and you ah That was Bloomberg Senior Crypto editor Anna Arera and Bloomberg reporter you Ah Yang. You can find more of their reporting on

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