Regulation
Regulating Crypto in the Name of National Competitiveness with Emilie Choi
In this talk with a16z General Partner Ben Horowitz, from the a16z American Dynamism Summit, Coinbase President and Chief Operating Officer Emilie Choi discusses, among other things, crypto’s potential to power the next-generation internet and bolster individual freedoms — two major reasons why America should not only embrace crypto, but take charge in shaping its future.
Here is a transcript of their conversation:
Ben Horowitz: So, I’ve got Emilie, who is the very distinguished chief operating officer of Coinbase. So, we’re gonna talk crypto this morning. And so, those of us in crypto world have been very, very nervous that the U.S. may be losing its lead in what’s very likely the next generation of the internet. But there are some out there that say, “Oh, let crypto go offshore. We don’t want it.” How do you think about that?
Emilie Choi: I think it’s a travesty. I really think it’s a travesty. And I think the U.S. falling behind on crypto is not dissimilar from what we’ve seen with chips and what we’re having to do now with the chips bill. I think it’s like 5G, I think it’s a national security issue and threat to not have critical technology infrastructure built in the United States. And I think there’s technologies that we don’t always understand, whether it’s crypto, whether it’s AI. The instinct should not be to be like, push it off, push it offshore, or push it back in the bottle.
Ben: Yeah. When has that been a good idea?
Emilie: It’s never been a good idea. It’s never been a good idea. And the genie is outta the bottle. And we see all sorts of countries and regions starting to adopt sensible crypto frameworks. For example, 80% of the G20 now either has enacted or is in the process of enacting crypto legislation and regulation, and we just haven’t done anything here. And so, the net result is that 70% of crypto developers are now offshore, and thus the technology and data will continue to be built offshore. So, I think this has to be the year where we do something, we enable very sensible regulation here. You don’t often hear industries saying, like, “Please give me some lines. Please give me some level of regulation here so that we have some rules of the road.” You know, we have an organization called Stand With Crypto that has more than 275,000 advocates for crypto. It’s these entrepreneurs in all the different states. They come and they meet with their local representatives and senators and their friends in Singapore and other countries are saying, like, “Why would you build here? This is, like, such a dangerous thing to do here because here’s no rules of the road.” So, that’s what we have to do. We have to push stuff forward in the U.S.
Ben: So there were kind of no rules of the road on the internet to a large degree. How is crypto different? Like, what’s going on in the U.S. that makes that, like, a very bad idea?
Emilie: What makes out a very bad idea is that we have overzealous regulators such as the SEC, who are overstepping their boundaries. We’ve seen with the FTC that they’re overstepping on antitrust and thus not enabling any M&A to happen. With the SEC, they issued a wells notice to Coinbase about a year ago. And the thing is that we have an exchange, we have something that… there’s a parallel analogy in financial services. There’s ways to create certain lines around this, but update them for 2024 and beyond, that is the difference and I think it helps ultimately really protect customers and consumers, which should all be in our interests.
Ben: Right. So, you have a campaign speaking of upgrades called Upgrade the Financial System. What do you mean when you say upgrade the financial system and then, what is Coinbase’s vision for what that could mean for the United States?
Emilie: Most Americans are dissatisfied with the current financial system. They feel like it is not serving them in terms of fees. They feel like it is slow. It is clunky sending a wire. They feel like they don’t have access to certain services. And we see this all the time. The thing that is novel about crypto, it’s 24/7, it’s global in nature. It’s decentralized. You don’t have a middleman, arbitrating that you are worthy of something. It is done through the blockchain. And so, it brings all sorts of benefits. I think that we’re just in a time, Ben, obviously of distrust of institutions. And so, it’s a time to kind of update the financial system and bring it into the modern era. A lot of these systems like Swift are decades and decades old. So when I think about Coinbase, we have three different customer groups.
We have consumers, many, many consumers, that’s the core of our business who often come into Coinbase and buy Bitcoin. And then they become exposed to all different parts of the crypto economy. Maybe they want to stake some ETHE, maybe they want to buy an NFT. Whatever it is, they can do all sorts of novel things within that crypto ecosystem. We have an institutional business which enables trading custody. We have more than 25% of the world’s top hedge funds using it. We were named as the custodian of 8 of the 11 approved ETFs at this point and all sorts of prime brokerage services such as lending. And then our other business is the developer business, which serves developers and offers them cloud services and a development platform to be able to build on the crypto ecosystem.
Ben: Interesting. Yeah. And I read a stat where if you’re middle to low income and you’re banked, you spend more on overdraft fees than on vegetables, which is pretty crazy. It’s actually more expensive to bank if you’re poor than if you’re rich.
Emilie: Yes. I think that’s the funny thing about crypto… in many ways, it started as a libertarian movement about individual freedom and having control over your money. In many ways, it’s also on the other side, progressive in nature if you think about serving the underbanked and the underserved populations who typically haven’t had access to those types of traditional financial services. And so, it should be very equal opportunity, but for some reason, it’s not perceived that way.
Ben: Yeah. It’s interesting… it’s by far the most inclusive financial technology we’ve ever had.
Emilie: Exactly.
Ben: Which brings me to my next question, which is some say, some very specific people say that crypto’s only use is for illicit or illegal behavior and they’ll even go further to say it’s or imply that it’s kind of most of illegal financing as crypto. How do you respond to that?
Emilie: It’s a myth. So, if you look at any study that actually has data behind, less than 1%, usually less than 0.5% of crypto transactions are deemed illicit. Whereas it’s estimated that 3% to 5% of cash transactions are illicit activity. And the blockchain is actually a terrible mechanism for illicit activity because it’s traceable. You have the Keystone pipeline, the vast majority of those funds were recovered because that was traceable. And even Hamas, I think in 2022, 2023 announced that they were no longer gonna be accepting Bitcoin because it was too traceable. So, it is a myth.
Ben: No Bitcoin.
Emilie: No Bitcoin for us, but yeah, we’ll take cash. I think it’s one of those things where it’s a convenient narrative, it’s a convenient soundbite. The data doesn’t map to it at all. So it is a total myth. And we have spent so much time, we have bank-level, if not better than bank-level compliance, knowing our customers, making sure that we’re checking for illicit activity. It’s a little disappointing to hear certain politicians trying to use that as the wedge to kind of drive crypto out of the United States because it’s just false.
Ben: Yeah. Interesting. Why do you think they’re trying to drive crypto out of the United States? Are they just confused about that? Or do they know that they’re not actually being totally straightforward and they have a separate agenda?
Emilie: I think it could be one of two things. I mean, I’ve talked to a lot of people in this town and I think there is a little bit of a scariness factor with new technologies. It feels complex and overwhelming, and so it’s just one of those things where, okay, maybe it’s illicit, maybe it’s not. It just feels like we don’t need to protect it at this moment. And then I think there is a nefarious element. I think there’s an element that is trying to promote an agenda either to protect the traditional banking system or potentially to foster the adoption of a CBDC or something where every citizen’s transactions are tracked and monitored in a way that I think most people should not be comfortable with, given the value we place on privacy. And so, I think that if you’re really kind of playing this out, some of the people who are promoting that agenda probably wanna be able to trace all of your transactions.
Ben: So, create a closed-end financial system. Trace everybody, cut off the money if they want to, that kind of thing. Interesting. Scary but interesting. All right, now you’re scaring me.
Coinbase, you guys started out, and when we invested, I believe you were basically a Bitcoin exchange. So, why do we need other crypto that’s not Bitcoin? And this kind of gets into this whole thing about the name of it, cryptocurrency. Is a currency the right way to think about it? Or is that just like bad naming again by those of us in technology?
Emilie: Yeah, I think Bitcoin is the gateway asset and I think it is proven so resilient and enduring. We were talking about the market cap last night. I think it’s at like…the crypto market cap is well over a trillion.
Ben: Yeah, it’s right below a trillion.
Emilie: And Bitcoin is just under a trillion. It’s never been hacked. It’s decentralized and it’s an incredible asset. I think it’s actually a store of value. It’s outperformed virtually every asset during its time of existence. But there’s other assets. And I think the way to think about this is that the world is going to be tokenized. So, we have more than 200 assets on our platform. Whether that’s Ethe or Solana or others, and it could be an NFT, it could be that we digitize real estate. It could be whatever…the whole world is likely to be tokenized at some point things are gonna be digitized. And so, it can be all sorts of different types of assets. And one of the things that I’ve always was excited about with Coinbase was that we weren’t picking an asset. We were a platform for those assets.
Ben: Interesting. And so, you’ve become kind of maybe necessarily more politically active. What motivated you to do that? Because you weren’t so much early on and particularly this election cycle, you’re super active. What motivated that? Why are you doing that? What are you doing?
Emilie: I think we’ve talked about the fact that crypto has been woefully naive of the way the game is played. And I think that we were always kind of optimistic that politicians would see the light and understand how important this technology was and that it would just kind of figure itself out. That clearly didn’t work. And I think that post the FTX and finance issues offshore, it makes it even more apparent that we need clear, sensible regulation here. And so to that end, we’ve done a few things, some in partnership with you. We have a grassroots organization that I mentioned called Stand With Crypto, which has 275,000 advocates. We’re gonna grow that and kind of rally the crypto army. The idea there is that a lot of these politicians have really active crypto constituents in their districts, and they don’t even understand.
I mean, one of the things that blows people’s minds when I tell them there’s 52 million Americans that hold crypto, like, it’s not a fringe thing anymore. It’s not this thing that’s off to the side. It’s actually a mainstream activity. And so, if you get these really vocal folks to come into these offices and help them understand, I’m trying to build products here. I’m trying to found great technological innovation in Michigan, in Ohio, and I don’t know if I’m safe to build this thing here. I don’t know if I should go move to Singapore with my friends who are also developing because there’s more knowns there about the safety of me building products there.
And then just generally Coinbase, we’re meeting with politicians, we’re meeting with regulators, we’re meeting with people who understand things like national security. So, we just formed an advisory council we’re really proud of. We have people like Mark Esper, the former secretary of defense who understand very acutely the national security issues inherent in allowing technologies to go offshore. We’re doing everything we can to make this a political force, especially 2024 is gonna be a really important election year.
Ben: Yeah. Yes. No, super important for crypto and for all of us. There are many large issues at stake.
Emilie: Yes. Many things. A lot of stake in many ways.
Ben: So, there’s been a tremendous amount of news about the Bitcoin ETF and you mentioned that most of them are at Coinbase. And so, what does it mean for Coinbase?
Emilie: Yeah. How many people in the room hold Bitcoin or some form of crypto?… I think it’s really an important signal in many ways and I think it’s gonna be ushering a new era of crypto. So, if you think about this, there were many who were never able to access Bitcoin in their current portfolios. They didn’t have a vehicle for that. So, having the most traditional, stodgy, frankly, conservative institutions offering this and actually advising that some portion of your portfolio should be in crypto, I think just it switches the mental math for folks. I think it makes it more legitimate. I think people crave a new asset class, and this is it. So, I think it’s going to usher in a new era of people holding crypto, starting with Bitcoin. So, I think that’s incredibly important. So, I think that’s going to influence the crypto market cap in a major way.
For Coinbase, specifically, we are the custodian on 8 of the 11 named ETFs. And so, it’s very important that we are playing that role because we’ve invested so much in compliance, security, and offering the best products to our customers that, to be named that, frankly, with the overhang of the SEC, just validates it even more that we’re here to stay and that this is the company for these products. So, we’re proud.
Ben: So, that brings me to kind of an interesting phenomenon, which is Coinbase is, you know, and we’ve evaluated this many times, by far the most compliant, the most secure, no question, SEC-approved public company in the space, like, by far. But you’re surrounded by some colorful, some fraudulent actors. And yet you’ve been harassed or, kind of, you know, targeted, investigated more than most of them. You know, it’s very frustrating for us as investors to see, you know, people kind of running these Ponzi schemes, casinos, and whatnot, and there’s no law enforcement, and then you’re getting a Wells notice. So, what can policymakers do to make the rules of the road such that the good actors who try to be compliant and stay within the law and protect consumers are rewarded and the criminals go to jail? Like, what can we do?
Emilie: Yeah. It is extremely frustrating. Like, I think when you think about us somehow getting penalized for FTX being a fraud of, like, Bernie Madoff proportions…and that year, post-FTX, was the hardest of my career because it felt like just all of the attention and focus was on us. As Ben mentioned, we went public in 2021, under the auspices of the SEC, we have substantially the exact same business that we had in 2021 when we went public under them. And we comply. We comply with the Bank Secrecy Act. We are regulated as a money service transmitter. The NYDFS, I mean, we comply with everything. We go above and beyond. To me, the number one thing we can do is pass legislation. There’s a bill called Fit 21, which was sponsored by Patrick McHenry. It’s a very simple bill and elegant in that way in the sense that it just simply says that the SEC would have jurisdiction over digital securities and the CFTC would have jurisdiction over commodities for spot. That kind of, like, just basic clarity is what we need to be able to operate our business without feeling this overhang of the regulator kind of overstepping its boundaries.
Ben: And what are the key, kind of, points that kind of separate the good guys from the bad guys?
Emilie: I mean, to me, if you think about it and boil it down to something very simple, it’s about knowing your customer. And I remember back in the day with FTX, people would be like, “How can you have so many compliance people? This is insane. Like, how can they operate with so few? What’s wrong with you guys?” And I always felt like, “Oh, my gosh. Like, what are we doing wrong? What am I not understanding? Are compliance people not as efficient? And ultimately it just turned out that we were doing the hard work of actually knowing our customers and putting them through the whole system to make sure that they were valid and to make sure we were monitoring for illicit transactions. That ultimately is the most important thing in a financial system because you don’t want illicit activity, and you wanna have tabs on what the activity is, and you wanna know that you have quality customers and that nobody’s trying to also steal from your customers or hack into them. So, that to me is the most paramount thing.
Ben: All right, great. Well, on that note we have run our time, so please join me in thanking Emilie for enlightening us on what’s going on in the world of crypto.
Emilie: Thank you.