Coinbase Brought Crypto to Main Street. Now Brian Armstrong Wants to Be Your Banker

Brian Armstrong once feared he’d been born too late. As a teenager growing up in the late 1990s, he could play video games and chat and surf on the burgeoning internet. But he was too young to take part in the dot-com startup boom happening all around him, transforming the economy along with how he spent his days and nights. “I didn’t know if something so important would come along in my lifetime again,” he says today. Something did. And Coinbase is the company he co-founded to do something about it. For most of Coinbase’s nearly 10-year history, Bitcoin and its cybercoin kin were not so much investable assets as they were the focus of a philosophical and economic argument. Old, fiat money asked: How can any store of value be based on an algorithm that solves a cryptologic problem tied to something called a blockchain ledger created by a pseudonymous code ninja named Satoshi Nakamoto? Could a hash function really replace cash?

Crypto’s tech bro-libertarian-anarchist evangelists viewed things much differently. (So, too, did criminals and terrorists.) Removed from the clutches of governments, central banks, and big financial institutions, crypto, they proclaimed, was the perfect transaction medium, especially for digital nomads job surfing the global economy. By the mid-teens, crypto fanboys had formed the next wave of support, and a growing cadre of day traders gloated in subreddits and on Twitter as the Bitcoin they bought for $226 in April 2015 rocketed to $13,062 in December 2017. Then along came “crypto winter” in 2017-18, which saw prices crashing more than 50 percent, and crypto’s many doubters began enthusiastically writing its obituary. (Not for the first time, either.)

That debate is now done–and crypto has won. Bitcoin’s price eclipsed $67,000 in early November, and even after cooling a bit, it is up nearly 300 percent from the year before. Trading volumes are soaring, and nonfungible tokens (NFTs)–unique digital assets tied to music, sports, the arts, and the stupid–generated around $4 billion in sales in August 2021 alone. The crypto market cap is now some $2.7 trillion.

Crypto is dominating the startup culture, too. There are blockchain mining startups; crypto trading platforms; crypto finance outfits. And decentralized finance–DeFi–is on the verge of reshaping the global economy. Large central banks may soon issue their own digital currencies, and everything from contracts to car titles to medical records could migrate to blockchain ledgers–digital repositories of data and value. Businesses of all sizes are integrating crypto into their payment systems, perhaps the greatest change to money since the development of credit cards in the 1950s. In the bigger picture, says Cornell University economist Eswar S. Prasad in his recent book, The Future of Money, cash is dead.

No U.S. crypto company has been a bigger winner in that debate than Coinbase–Inc.’s 2021 Company of the Year. It has served as both the industry’s lighthouse and its powerhouse throughout the sector’s stormy initial decade. “You never know exactly, in crypto, what’s going to happen,” Armstrong told Inc. during an interview from Los Angeles, where he lives (his company is based in San Francisco). “But in every major city I go to, a lot of the best entrepreneurs and young people are all excited about crypto. They want to go build products in this space.” And Coinbase would be the model for them all.

Coinbase has served as both the industry’s lighthouse and its powerhouse throughout the sector’s stormy initial decade.

A GOOD STANDARD-BEARER leads by example. Through the first three quarters of 2021, Coinbase’s revenue rose nearly eightfold, to $5.34 billion from $692 million the previous year, and generated a profit of $2.78 billion. That’s a breathtaking net profit margin of 52 percent. With the second-largest trading platform (after Binance) for retail and institutional customers, Coinbase is already a colossus of the cryptoverse: Seventy-three million users and more than $255 billion in customer assets are parked on that platform. To keep up with the growth, the company hired some 1,200 new employees this year, more than doubling its staff.

To top things off, Coinbase shifted from entrepreneurial startup to enterprise, going public in April through a direct listing, which means that it didn’t sell any new shares because the company doesn’t need your money. (Its market cap briefly topped $100 billion in mid-November.) Why go public, then? Because Armstrong says he wants to embrace regulators and the public markets to make Coinbase as transparent–even mundane–as possible.

That’s the practical entrepreneur in him. Armstrong the idealist has a much loftier goal for crypto: to be the pathway to a more inclusive global financial system. DeFi purports to offer more economic freedom, less friction, and lower costs than traditional financial operators, and it avoids third parties such as big banks that get between you and your money.

Likewise, Armstrong sees Coinbase as one of the architects for Web 3.0, a blockchain-based version of the internet that isn’t ruled by dominant tech companies like Facebook/Meta, one where developers are free to create and market apps without having to pay a toll to Apple. “One thing that’s really exciting to me about the crypto economy and the crypto culture is that it has this sense of optimism about it,” he says. “We can build a better future. There’s opportunity all around us. Anybody can participate in it.”

Armstrong is doing what he can to channel this spirit of limitless possibilities. Most of Coinbase’s income consists of fees earned from executing trades. It’s lucrative but highly variable–spot trading volume dropped 29 percent in the third quarter compared with the previous one, sending the stock price skidding. That’s why the company is diversifying. The initiatives include a hosting service for developers called Coinbase Cloud (think of it as AWS for crypto), a trading platform for institutions called Prime, and Coinbase NFT. There’s also Coinbase Direct Debit and Coinbase Reimburse, which allows you to deposit your salary and expense payments. There’s a Coinbase debit card, too. As Armstrong has made clear again and again, Coinbase wants to be “the Amazon of assets.”

Third-quarter hitch aside, the company is on its way to reaching that goal. “A lot of things went well that I had hoped for this year,” Armstrong says, “which is that we would be a public company, that we would have multiple revenue streams, and that we’d be seeing more uses of crypto. Not just people trading it as speculation, but actually using it for NFTs and games and DeFi and now even identity and the metaverse.”

This ambition dovetails with the evolution of the market. In 2021, crypto bridged the gap to the financial institutions, regulators, and general public who viewed it skeptically. In addition to Bitcoin, Ethereum, Tether, Dogecoin, and other well-known coins, more than 7,000 cryptos are now trading on more than 300 exchanges globally. With the launch of two crypto futures-based exchange-traded funds in the U.S. in October, institutional asset managers gave their blessing to 401(k) investors. More than 1,000 hedge funds, VCs, and pension funds are trading on the Coinbase Pro platform, and blockchain companies–those involved in creating crypto, NFTs, websites, and the plumbing that connects all of them–raised $7 billion in venture capital in the first half of the year alone, according to CB Insights.

The sector is getting an even bigger push from entrepreneurs such as Mark Cuban, Elon Musk, and Gary Vaynerchuk, who appeared on the cover of the last issue of this very magazine and made the case for NFTs. New York City’s mayor-elect Eric Adams declared that he wants his first three paychecks paid in Bitcoin, which would make the new mayor of Wall Street the mayor of Crypto Street, too.

Crypto’s critics inevitably point to the history of financial mania in explaining why crypto isn’t a currency or that it’s ripe for an epic collapse. The Mississippi and South Sea bubbles of the 1700s, schemes to convert royal debt to equity, collapsed in heaps that left Sir Isaac Newton, among others, poorer for it. Preceding them was the Tulipomania of the 1630s in Amsterdam, when a single bulb could buy you a mansion (until it couldn’t). Yet out of these and other early disasters came lasting innovation: convertible debt, the joint stock company, the futures contract, and the stock exchange itself. Today’s global economy can’t run without them. Which is to say, brilliant economic innovations will always survive. But not all brilliant innovators do. Everything Armstrong does at Coinbase is premised on his being one who does.

BRIAN ARMSTRONG looks very much the part of his chosen métier, a study in intensity topped by a radar dome of a shaved skull that you imagine is constantly emitting large amounts of data. Yet his route to Silicon Valley was a roundabout one, given that he was born and raised near San Jose, its capital. When he headed off to college, it was not to nearby Stanford but to Rice University in Houston, where he took up economics and computer science, earning a master’s in the latter.

True to his Silicon Valley upbringing, he also took up entrepreneurship. While a student, Armstrong founded a company called UniversityTutor.com, in 2003. Like many internet businesses, it sought to rationalize a highly fragmented category and create an efficient marketplace where sellers and buyers could find one another. But he could not overcome one issue–getting customers to part with their money. “One lesson I took away is that you have to get the value to the user before you ask for anything in return,” he says. “And I always struggled to get a good business model that really worked in that tutoring company.”

He struggled, in fact, for eight years before selling the company for, he says, “not a lot of money.” (He also founded ResearchHub, an open-source repository for scientific papers.) He later moved on to a role as a technical product director at Airbnb, another place where fragmented excess capacity–this time in hospitality–could meet up with fragmented demand in a transparent marketplace.

Then, in 2010, he read a white paper–and his life changed. The title was “Bitcoin: A Peer-to-Peer Electronic Cash System,” published in 2008 by the now famously mysterious, perhaps nonexistent, Nakamoto. The paper describes a process to “allow online payments to be sent directly from one party to another without going through a financial institution.” The process is powered by blockchain, which, to vastly oversimplify, orchestrates a network of users to create and verify unhackable ledgers that can store and serve up digital assets.

“In every major city I go to, the best entrepreneurs are excited about crypto. They want to go build products in this space.”

Armstrong says he immediately sensed that the next great opportunity was at hand. “It was describing something like the internet. It was this global, decentralized network, but instead of being for moving information around, it was for moving value around,” he explains. There had to be value in it, then.

As an economics student, Armstrong had been struck by the inefficiency and unfairness of the global financial system–big banks controlled by small groups of people in every country. He also lived for a year in Buenos Aires right after college to experience a new culture and a digital lifestyle. There, he watched hyperinflation gnaw away the wealth of the poorest people, because cash was their only asset.

This lack of financial freedom, as he saw it, destroyed optimism. (Now worth about $14 billion, he has already signed the Giving Pledge, and started GiveCrypto.org, which makes direct cash transfers to people living in poverty.) He’s not alone in this view. Mark Cuban, the Dallas Mavericks owner and Shark Tank entrepreneur, has become an ardent proponent of crypto and NFTs as a way for people to invest in appreciable assets at relatively low cost.

Working for another company could only be temporary for someone like Armstrong. His travels to Argentina had taught him how to live on a modest income and with few possessions. He earned money from the tutoring company, real estate investments, and a blog he authored called Start Breaking Free. “When you have an idea you’re excited about, get going on it right away,” he counseled in a 2009 post. “If you wait around too much, you’ll lose your motivation.”

Coinbase sprang to life after Armstrong presented his business plan at the Y Combinator Demo Day in 2012. His original idea, hatched while he was working at Airbnb, was a hosted Bitcoin wallet as easy to access as email. Seed investors such as Union Square Ventures bought in. But the business didn’t click until, after talking with customers, he created a crypto exchange. By making crypto trades as easy as stock trades, the technical details of Bitcoin and blockchain became irrelevant, the way the technical details of electricity and Wi-Fi are now irrelevant. Stuff just works. It also solved the value exchange issue that had dogged his tutoring company, because traders got everything they wanted immediately.

Armstrong’s co-founder was also enamored of the concept. Fred Ehrsam was a professional gamer as a high schooler, which introduced him to the notion of virtual currency. He went on to study computer science at Duke before moving to Wall Street. Ehrsam fled a trading desk at Goldman Sachs after failing to convince the company’s hierarchy–the same one that had bet big on the risky collateralized debt obligations that contributed to the Great Recession–of crypto’s looming importance in global finance.

Ehrsam and Armstrong found each other on Reddit, or as Ehrsam once put it, “Two nerds who met on the internet turned into a company of 1,000-plus.” In true startup mode, they set up a two-person shop in San Francisco. After four weeks of writing code, they launched their service in November 2012. In 2017, with the company firmly established and growing, Ehrsam departed to co-found Paradigm–a blockchain investment firm that recently announced a $2.5 billion venture fund–leaving Armstrong alone at the helm.

A BLEEDING-EDGE INDUSTRY like crypto runs on extreme volatility–and the ability to manage it. Coinbase gorged on Bitcoin’s magic run-up, yet by the end of 2017, the company was flailing. Though the swelling trading volumes left it awash in cash, the company was plagued by system outages that prevented trades from being executed, which infuriated customers, and its slow response times to their complaints made them even madder. It had grown too hot to manage.

Alesia Haas arrived in April 2018 to take the CFO job in the wake of crypto winter, as traders cashed out and crypto prices plunged. Haas had a résumé more suited to working at Wells Fargo than at a San Francisco startup. She had vast experience in banking, asset management, and brokerages, including buying broken banks with former treasury secretary Steve Mnuchin after the financial meltdown.

The experience would come in handy. “The finance team was closing the books in Excel and didn’t even have accountants,” she says. “I’d gone from being a public company CFO and had done my Q1 earnings, and when I showed up at Coinbase, they didn’t have a year-end audit. And didn’t have a clue how to do it.”

Besides Haas, Armstrong hired Emilie Choi, now president and COO, from Linked­In to spearhead mergers and acquisitions. “I met Brian Armstrong and I had tingles down my spine,” Choi says. “I felt that I had to be a part of it even though it was a little bit intimidating.” But what also sent tingles down her spine was the lack of structure in a company that was no longer tiny. “You went from people knowing that Brian in the hallway was the single decision maker to not knowing how to get a single decision made,” she says.

Yet both were persuaded by Armstrong’s grand strategic vision: Coinbase would thrive by providing every possible crypto service that an individual or an institution could demand. “I honestly thought to myself that if I don’t do this, my children will say to me when I’m a grandparent, ‘Mom stayed with checkbooks and ATMs? Why?’ So I jumped,” says Haas.

Her timing proved provident. In 2020, the institutional money that had been wary of crypto fully adopted it as an asset class. Pension funds added crypto to their portfolios the way they would Swiss francs or precious metals, to hedge other holdings. In other words, crypto became as good as gold.

If the serious money made its move in 2020, then 2021 was the year of crypto’s cultural revolution, especially in the form of NFTs, driven by the Ethereum platform. This includes generative art of the sort created by Larva Labs, which spawned CryptoPunks. These A.I.-sourced art characters, 10,000 of them in total, are now fetching as much as $7.5 million apiece. Human artists such as Beeple (real name: Michael Winkelmann) have done even better. His top-priced NFT, a photo collage called Everydays: The First 5000 Days, sold for nearly $70 million. NFTs mean that almost anything one can own–a song, a house, a video of LeBron James’s first NBA dunk–can be monetized.

Coinbase has been preparing for this boom for years. While the trading platform paid the bills and the investors, the company was steadily building or buying the plumbing to handle the massive flows of institutional liquidity and NFT business heading its way. It also added the capabilities–hosting, custody, development–that an Amazon of assets would require. This year, Coinbase has executed eight acquisitions, the latest being Agara, whose A.I.-powered customer-support platform addresses a key Coinbase weakness.

At the same time, Coinbase says it has become the biggest corporate investor in crypto through its Coinbase Ventures, which has made 37 investments in 2021 in companies such as OpenSea, an NFT platform. With zero staff. “We have a decentralized team,” says Choi. “Nobody is dedicated to Coinbase Ventures. These folks do it as a labor of love, on nights and weekends.”

It’s a highly structured and documented sort of love. The company employs a stripped-down decision-making system called RAPID that starts with Recommend–the suggestion of an initiative by any person in the company–and ends with Decide, with one leading manager–Armstrong or Choi–making the call. In between is a tightly choreographed process going from Agree–one or two people take up the case; to Perform–what the decision would mean for the people who have to execute it; to Input–whether anyone relevant to the discussion should add their thoughts.

“The crypto economy and the crypto culture has this sense of optimism about it. We can build a better future. There’s opportunity all around us. Anybody can participate in it.”

The system’s catchy rubric is one that new employees can absorb easily. And the whole concept has to function in a remote organization. Early on during the pandemic, Coinbase became a remote-first company, which has had the side benefit of making it less dependent on the Bay Area for talent. The structure is now in place to take crypto wherever it is going. But wherever that is promises to be a bumpy ride.

BLOCKCHAIN IS BASED on a so-called trustless system–you don’t have to rely on a third party, such as a bank, because all the nodes in the system will verify that your crypto coin is genuine and can be spent only once. That’s what makes it so attractive to the libertarian set (and drug cartels) and why governments are so wary of it.

Yet, from the beginning, Coinbase’s approach has been predicated on normalizing crypto, in part by embracing regulation. The company boasts of a “culture of compliance,” in effect seeking permission before the fact in contrast to tech’s historic approach of asking for forgiveness if challenged by authorities. The idea is to convince financial institutions and their customers–the mass market–that Coinbase is the most trusted place in the space. The somewhat conflicting message: Trust us–you can go trustless. “Trust is our foundation,” says Choi. “It always has been; always will be.”

Armstrong is certainly familiar with tech’s break-the-rules history and had been a student of startups such as PayPal and Square. That led him to the opposite approach: “I knew that if you try to start something that flies under the radar, OK, maybe they won’t have time to look at you while you’re small. But if the thing gets big, they’re going to come after you. So that’s never going to work long term.”

Instead, Coinbase has asked to be regulated. It has met with U.S. regulators such as SEC chairman Gary Gensler with the idea of creating a single rules framework for crypto. The company has even offered a framework called the digital asset policy proposal to do just that. “We really want this space to grow and have a thousand companies to create economic growth and economic freedom here in the United States,” Armstrong remarked during the company’s third-quarter earnings call. And if multiple regulators get into the act, Armstrong says, Coinbase’s size gives it a competitive advantage over the small fry. Meanwhile, the renegade Binance, which has largely avoided authorities, is now in the sights of regulators globally.

Every entrepreneur dreams of catching the moment, of being there as the opening notes of epochal change are sounding, and then joining, or even leading, the orchestra. When Armstrong picked up the beat of Bitcoin–something a computer scientist like him could deeply comprehend–he didn’t hesitate. “There’s never been a better time to start a crypto company,” he says. “This is a rare moment in history.”

The dot-com boom that Armstrong missed ended with an enormous shakeout, but it also reordered the universe. He expects no less from crypto as companies form to create the infrastructure, the applications, and the consumer businesses to build Web 3.0. “There are going to be more and more crypto startups,” he says. “More and more tokens and coins. During the dot-com craze, there were all these ‘dot-com startups.’ And now you don’t have to say ‘dot-com startup,’ because everyone uses the internet.”