In Crypto He Trusts


- PLUS: THE FINTECH 50 By William Baldwin and Michael del Castillo

For now, Coinbase looks like a casino, but its billionair­e founder, Brian Armstrong, sees it as just the beginning of the financial liberation of the planet.

A few paces away sit the offices of Coinbase, the largest American exchange for cryptocurr­encies like bitcoin. It’s a beehive of software engineers and young marketing executives. There, the worlds of by-the-books banking and cryptoanar­chism collide.

In style and philosophy, Brian Armstrong, the 37-year-old billionair­e cofounder and CEO of Coinbase, is in the camp of the financial anarchists. He sits, jammed alongside lieutenant­s, in a row of tiny desks resembling library carrels. He wears a black T-shirt, black pants and shiny white sneakers. He talks about a brave new world in which we are liberated from the shackles of giant banks and government-controlled money supplies. During an expansive interview, this usually reserved and press-shy entreprene­ur declares why he got into this business: “I wanted the world to have a global, open financial system that drove innovation and freedom.”

In following a business model, though, Armstrong fits in with the pinstriped financiers working down the block. Eight years after its start, his firm has opened 35 million accounts, presides over $21 billion of assets and is on target, we estimate, to top $800 million in revenue this year.

That success comes from acting like a bank. Coinbase draws in customer funds via bank wires. It stores its assets—numerical keys that unlock coins—in vaults. It boasts of insurance coverage from Lloyd’s of London. It has a security staff of 41, including an Iraq War veteran assessing perimeter risks and a Ph.D. cryptograp­her doing the same for mathematic­al assaults.

The selling propositio­n here is security—security conspicuou­sly lacking at some of the exchanges with which Coinbase has competed. The Mt. Gox exchange in Japan went bust in 2014 after hackers spirited away coins worth $480 million. Customers of QuadrigaCX, which was one of Canada’s largest exchanges, have been unable to retrieve $150 million in crypto since the founder supposedly died suddenly in December 2018, holding the only set of keys to unlock their money. They now want the body exhumed.

In order to capture a gilt edge, though, Armstrong has had to veer away from the antiestabl­ishment ethos that got

bitcoin going. He plays ball with government inspectors, for example.

The Coinbase compliance staff, already numbering 55, is expected to grow to 70 by quarter’s end. They comb through transactio­ns looking for money laundering. They will conform to a controvers­ial new rule that mandates a paper trail when customers move coins from one exchange to another. Coinbase dutifully sends 1099-K reports to the IRS on traders who in one year do 200 or more trades involving a combined $20,000 or more in proceeds.

Given all this snitching, how does Coinbase appeal to diehard crypto fans? One way is by having a menu that includes 26 newer currencies, some of which are explicitly designed to offer more privacy than bitcoin does. The other is a service, introduced in August 2018, that enables a customer to move bitcoin into a personal wallet exempt from know-your-customer and antimoney-laundering regulation­s.

“If you are an individual and you want to store your own cryptocurr­ency, you’re not a financial service business,” says Armstrong, mindful of any U.S. Financial Crimes Enforcemen­t Network cops who might be listening. “And there are companies, including us, who provide tools for people to store their own cryptocurr­ency and use it.” B

orn near San Jose to engineer parents, Armstrong displayed an entreprene­urial streak as early as grade school. He recalls being hauled into the principal’s office on charges of operating a candy-reselling venture on the playground. The business flings continued with a scheme to resell used computers and, after he earned a master’s degree in 2006 from Rice University, a startup that matched tutors to students. He worked on the education venture while living in Buenos Aires. “I had just decided, I’ve

never been to South America. I want to travel for a year and try to work on this remotely as an adventure. Figure out what I want to do with my life,” he says. “[It] was an interestin­g experience to see the financial system in another country like that, that had gone through hyperinfla­tion.”

Later, as a coder at Airbnb, Armstrong had his crypto epiphany. His employer was sending money to landlords in Latin America. He describes the process this way: “High fees . . . long delays . . . opaque. We’d try sending money to somebody in Uruguay and didn’t know how much would show up on the other side.”

In 2010 he read the manifesto, published by a person (or persons) under the alias Satoshi Nakamoto, that proposed bitcoin as an undergroun­d currency. Its transactio­ns are recorded on a ledger called the blockchain, maintained in duplicated computer files by a band of self-appointed guardians called nodes. Disputes about transactio­ns and ground rules are resolved by majority vote. The nodes are kept honest, and troublemak­ers at bay, by requiring a participan­t in the network to engage in some arithmetic busywork before certifying a batch of transactio­ns. A node who completes the arithmetic task is awarded a few new coins.

The busywork, called mining, did not interest Armstrong. But he did see an opportunit­y in the business of safeguardi­ng the keys to the coins and setting up transactio­ns. Anybody can do that with some readily available software, but if you mishandle the protocol your coins will be stolen or lost.

Armstrong took a flyer on bitcoins, buying $1,000 worth at $9 a coin. The price sank to $2. He kept the faith.

Working weekends and late nights, Armstrong wrote code in Ruby and JavaScript to buy and store coins. He was doing for the bitcoin network what an earlier generation of programmer­s had done for the internet by creating browsers.

It was fun. Was it worth quitting his day job?

A $150,000 capital infusion from Y Combinator, source of seed funding to Airbnb and many other illustriou­s startups, answered that question in 2012. Fred Ehrsam, a Goldman Sachs alum, joined the venture and gave Coinbase credibilit­y with the banks that would be wiring money to it.

Venture capitalist­s, led by Andreessen Horowitz, have showered half a billion dollars on Coinbase. “It’s like if Google made Gmail for bitcoin,” says Chris Dixon, an Andreessen partner who serves on the Coinbase board. “And that’s literally the way they described it.”

Its last round of funding valued Coinbase at $8.1 billion. Ehrsam, 31, has since left Coinbase but retains a stake; he keeps busy arranging venture capital for startups that aim to use cryptocurr­encies and blockchain­s to build transactio­n networks for corporatio­ns. T

he essence of what Armstrong has in mind can be captured in the word defi, which stands for decentrali­zed finance or, if you prefer, defiance of authority. Defi is supposed to reach into all aspects of wealth; someday, supposedly, blockchain­s will support trading, peer-to-peer lending and loan collateral­ization without the usual financial institutio­ns as intermedia­ries. Intriguing­ly, Coinbase has a broker/dealer license. Could it someday end-run stock exchanges? Maybe.

If the grand vision for Coinbase is to be a gateway to decentrali­zed finance of all sorts, the revenue for now is coming from more mundane things like trading commission­s. Coinbase allows amateurs to go in and out of crypto, or swap one crypto for another, for fees and spreads that come to 2% or so. At archrival Binance, these small

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