Coinbase is building a cryptocurrency empire
Photo: Photo For The Washington Post By Christie Hemm Klok
SAN FRANCISCO – From its office tower perch overlooking San Francisco’s financial district, Coinbase handles thousands of requests a day from investors who want to buy, sell or store bitcoin, or perhaps other cryptocurrencies supported on the nearly six-year-old exchange.
As bitcoin’s value surged over the past year, peaking at more than $19,000 in December, mainstream investors flocked to Coinbase to buy and hold cryptocurrency – hoping to get in early on what even Wall Street now widely acknowledges is a potentially transformative financial technology. Even though bitcoin’s value has dropped by half, entrepreneurs, venture capitalists and others maintain their enthusiasm for its prospects.
There are few hints that Coinbase is any different from other Silicon Valley start-ups. It has all the trappings: Catered steak salads for lunch. Fridges stocked with coconut water and Soylent. Glass-walled conference rooms named after historic space missions such as Voyager and Apollo, a nod to the universal rallying cry among investors who obsessively monitor bitcoin’s price: “To the moon!”
But in many ways, Coinbase styles itself the anti-start-up. Its attitude, both hungry and calculating, may be the key to its survival as it seeks to sell the world – from mom-and-pop investors to massive hedge funds – on the idea that it has become to cryptocurrency what Google is to web searches.
Since its founding by a former Airbnb engineer in 2012, Coinbase has been growing at a rate rivaling much better-known start-ups. It manages more than 20 million accounts, almost as many as Fidelity Investments, twice as many as Charles Schwab and about as many accounts as Vanguard has investors. Coinbase is, however, a much smaller player in terms of assets under management; it stores $20 billion worth of virtual currencies, compared with the nearly $7 trillion in assets held by Fidelity.
As Coinbase has expanded its services, so, too, has the company’s appetite for talent grown. It has hired former executives from Twitter and TD Ameritrade. It announced two splashy corporate acquisitions in April. And what was a staff of 100 people a year ago has ballooned to 300, with plans to add 450 in the next year. That’s not counting support contractors, who number more than 1,000. On top of existing satellite offices in New York and London, Coinbase is looking to open others this year in North America, Europe and Asia.
Coinbase’s secret sauce isn’t a fancy algorithm or a data-driven advertising business. It’s a calculated bet that as the rest of the financial system begins to catch on to cryptocurrency, investors and regulators alike will want a fully licensed partner that undergoes routine audits and complies with all the policies that a typical brokerage does. Its brand, carefully cultivated, is one of trust and legitimacy, in contrast to what it says are “fly-by-night” exchanges that freely operate in a legal gray zone in other parts of the world.
“We are not a run fast, break things culture,” said Asiff Hirji, Coinbase’s chief operating officer. “That doesn’t work when you’re dealing with people’s money.”
That’s perhaps doubly important for a novel type of asset that experiences wild price swings nearly daily and that has a reputation as a currency favored by black market drug dealers and criminals.
Consumers who sign up with Coinbase must feel sure that their online wallets will not be hacked, its executives say. To minimize the risk of a catastrophic data breach, Coinbase stores roughly 99 percent of its customers’ funds in formats that are not connected to the Internet. The remaining 1 percent – the liquid funds that Coinbase uses to carry out trades – comes from the company’s reserves, so that customer funds are never directly connected to the marketplace. That 1 percent is privately insured by Lloyds of London, Hirji said, offering another layer of protection.
Meanwhile, Coinbase must overcome the widely held perception that cryptocurrency itself is a scam.
Legendary investor Warren Buffett has called bitcoin “probably rat poison squared,” and Bill Gates has said he would probably bet against the currency if he could. JPMorgan Chase chief executive Jamie Dimon has been among the most outspoken bitcoin skeptics. He called it a “fraud” last year before softening his tone on the subject some months later.
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Yet even Dimon concedes that the technology underlying bitcoin has substantial promise.
“The blockchain is real,” he told Fox Business in January. JPMorgan is so confident in blockchain’s potential that it is quietly developingproducts making use of the technology.
Blockchain is technology that allows people or companies, without necessarily trusting one another, to instantly and irrevocably record their transactions on a public ledger. Faith in the ledger is maintained by thousands of computers worldwide that collectively police the system for forgeries and other types of fraud.
Real-world applications of blockchain are still limited, but the technology has been proposed as a way to automate and streamline activities ranging from home buying to intellectual property protection. Individual cryptocurrencies operate on top of blockchains, often as a way to transfer information or to represent items of value.
In its own way, Coinbase plays an outsize role in accelerating blockchain’s acceptance as a mainstream technology. Its dominant position among exchanges, for example, has effectively made it the kingmaker of cryptocurrencies. Only four coins – bitcoin, bitcoin cash, ethereum and litecoin – are traded on its platform, although hundreds exist.
Getting listed on Coinbase is like being accepted into a top university, said Zavain Dar, a partner at the venture firm Lux Capital. And with so much money flowing into the exchange, that has important implications for the industry as projects vie for visibility and funding.
“They essentially play the retail gatekeepers for what’s legitimate in crypto,” Dar said of Coinbase. “The more selective they are, the better their brand is.”
But Coinbase plays a more active role in shaping the environment, too. This year it launched Coinbase Ventures, an investment arm that pours funding into early-stage cryptocurrency initiatives. And many former Coinbase employees have gone on to start virtual currency companies and investment funds, some of which Coinbase Ventures has said it will support financially. This group of ex-Coinbase entrepreneurs is so large and influential that it has become known informally as the “Coinbase mafia.”
As members of its original team have moved on, Coinbase has gradually changed in character, said Linda Xie, who joined the company when it had fewer than three dozen employees. (Xie, a member of the Coinbase mafia, founded Scalar Capital in 2017.) The company now has fewer hard-core believers who are steeped in bitcoin’s founding ideology – one that envisions cryptocurrency supplanting traditional banks and similar institutions – and more who simply believe in creating a financial system that functions faster and more smoothly using blockchain technology.
For Brian Armstrong, Coinbase’s founder and chief executive, that’s perfectly fine.
“The idea of being compliant and trusted is not really a popular stance in the crypto community,” Armstrong said. “Early crypto people, especially, were like, ‘You’re destroying crypto!’ So there’s anti-Coinbase people out there. But I really believe that if we’re to shepherd this technology to a mainstream audience, we need to do it in a compliant way.”
Although Armstrong has been disciplined about which coins to allow on Coinbase and its power-user platform, GDAX, the company says it will begin widening what it lists in the coming year. Retail investors will have more choices. To a much greater degree, Armstrong said, so will accredited and institutional investors, many of whom are sophisticated enough to take on more risk. Tracking it all will be Coinbase’s cryptocurrency index fund, which behaves much like Fidelity or Vanguard products that mimic the composition and performance of the S&P 500 or the stock market as a whole.
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Coinbase’s explosive rise last year, alongside bitcoin’s, was not without growing pains.
Social media are littered with complaints of long waits for transactions to clear, delays in getting customer service, and funds tied up with little explanation.
In late January and early February, many customers were alarmed to discover that their purchases on Coinbase were leading to double or triple withdrawals from their bank accounts and racking up mysterious fees. “Coinbase drained my bank account,” said one reddit user who said the debacle caused his rent check to bounce.
The errors came at a sensitive time for Coinbase – just weeks after the price of bitcoin hit $19,000, prompting a flood of interest from average investors. Executives leapt into action to identify the problem.
“I remember Dan [Romero, head of Coinbase’s consumer division] rallying the team, I remember Asiff [Hirji, the chief operating officer] hopping on the phone and making calls,” said Adam White, a Coinbase vice president.
The issue turned out to be beyond Coinbase’s control: a change in the coding scheme that banks and payment processors use to identify transactions. Visa and Worldpay, the two financial institutions that took responsibility for the problem, issued a statement in mid-February apologizing for the mix-up and announcing refunds.
But the incident nonetheless dinged Coinbase’s all-important reputation.
“I remember reading reddit posts where someone had been double charged or Coinbase had withdrawn money from their checking account, but their Coinbase [account] hadn’t been credited for several days,” said Zak Yaffe, a medical student at the University of Washington who bought a mix of virtual currencies in September. “In both cases, Coinbase support didn’t seem to respond for many days or even weeks.”
In subsequent surveys, customers said they were now somewhat less likely to recommend the company to others, according to White, the Coinbase vice president.
“Customers were just less happy with the experience they had,” he said. “And that sucks.”
The episode underscored what executives already knew: The enormous demand for bitcoin would require far more customer support. Since then, Coinbase has more than doubled its support staff and decreased the amount of time it takes to respond to most inquiries – from more than 70 hours to less than 10. It has cut its backlog by 95 percent, according to the company.
The pressure eased as the price of bitcoin dropped this spring. At the height of bitcoin mania in December, Coinbase was receiving as many as 100,000 phone calls a week from the public, said Tina Bhatnagar, vice president of operations and technology, who is also head of customer support.
“Now we’re leveling off,” she said. “We get a lot of volume, but that was definitely peak peak peak. Now we get 30,000 to 40,000 in a week.”
In retrospect, the service hiccup, ultimately, may have worked less as a drag on the company than as motivation to kick its expansion into overdrive. Even as Coinbase continues to flesh out its main offering – the trading platform – its investments and acquisitions all appear aimed at diversifying the company, much as Google gradually expanded its ambitions from the search engine into online video and self-driving automobiles.
The past year has forced Coinbase to grow up much more quickly than many of its peers, said Barry Schuler, the former chief executive of AOL and a Coinbase board member.
“The company [had] to evolve from start-up to growth stage in under 12 months,” he said. “It was the equivalent of going from toddler to college graduate with no time to be an adolescent.”
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