Wall Street Journal: Armstrong, the Last Man Standing in Cryptocurrency
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Wall Street Journal: Armstrong, the Last Man Standing in Cryptocurrency
Coinbase is the winner among recently launched spot Bitcoin ETFs, but on the other side, it faces significant legal challenges.
Navigating Web3 tides with focused insightsBy Vicky Ge Huang, The Wall Street Journal
Translated by Luffy, Foresight News
Brian Armstrong has become crypto’s new frontman.
Coinbase Global, the cryptocurrency exchange co-founded by Brian Armstrong in 2012, is one of the last major crypto asset firms to survive a series of high-profile collapses and government crackdowns.
Armstrong’s former rivals—FTX founder Sam Bankman-Fried and Binance founder Changpeng Zhao—who once wielded greater influence and wealth—are now either in prison or facing incarceration.
Despite a slowdown and downturn in the crypto industry, Armstrong continues to expand Coinbase. As CEO, he is pushing the company into overseas markets, launching new products, and building business ties with Wall Street asset managers to reduce reliance on cryptocurrency trading revenue.
Notably, Coinbase is the custodian for eight spot bitcoin exchange-traded funds that began trading last week. Its custody division holds the bitcoin and charges fees based on the total value of assets in the funds.
Faced with U.S. regulators’ efforts to rein in the crypto industry, Armstrong has also grown more urgent. Last year, he spent significant time lobbying in Washington, D.C., for crypto legislation. He hired former lawmakers as advisers and donated over $1 million of his personal wealth to a political action committee supportive of cryptocurrency.
The first test comes Wednesday, when Coinbase will ask a federal judge to dismiss a high-stakes lawsuit brought by the Securities and Exchange Commission (SEC) against the company last year. The SEC sued Coinbase in June, alleging it engaged in offering and listing unregistered securities.
The SEC under Gary Gensler considers most crypto tokens to be securities. Photo: ANDREW HARRER/Bloomberg News
Industry observers say dismissal is unlikely. The SEC has long maintained that most crypto tokens are securities. Selling securities to the public without registering them with the SEC exposes issuers to liability under investor protection laws. The SEC says at least 13 crypto assets listed on Coinbase are securities and should have been registered with the agency before being offered.
Coinbase is calling on U.S. regulators to draft clear rules to govern the crypto industry. It argues that under Gary Gensler’s leadership, the SEC is pursuing a “regulation by enforcement” approach.
That strategy hasn’t always worked: The approval last week of spot bitcoin ETFs came largely due to a legal defeat in another lawsuit, where the SEC was clearly the loser.
Paul Grewal, Coinbase’s chief legal officer, said in an interview that if the judge allows the SEC’s case to proceed, the litigation could stretch into 2025 or beyond before a final ruling.
“It’s unlikely the case will be dismissed,” said attorney Lisa Bragança, a former head of the SEC’s enforcement division. “Coinbase claims the tokens listed on its platform aren’t securities—they’ll have a hard time proving that.”
If Coinbase ultimately loses, regulators could force the separation of its exchange, brokerage, and clearing operations. The company also risks having to delist certain tokens and halt its staking program. Mizuho Securities analyst Dan Dolev estimates about a third of Coinbase’s revenue is at risk.
Coinbase monthly spot and derivatives market share, excluding Coinbase International data. Source: CCData
After industry scandals sent crypto prices plunging, Coinbase has struggled to return to profitability. According to data from crypto data provider CCData in November, Coinbase posted losses for a seventh consecutive quarter and saw its overall market share decline. The company is working to find new ways to profit and expand its business beyond the U.S., where over 80% of its 2022 revenue originated.
Analysts are skeptical of the profitability potential of Coinbase’s custody business, which is known for low margins and generated about $50 million in revenue during the first three quarters of 2023. A fee war among asset managers issuing spot bitcoin ETFs could erode Coinbase’s custody revenue over time. If these funds become too popular among investors choosing ETFs over buying bitcoin directly through exchanges, their rise could negatively impact Coinbase.
The launch of these funds has driven bitcoin prices higher again, hovering around $43,000, up from $17,000 in January last year. Coinbase’s stock has surged fourfold over the past year to $170, giving it a market capitalization of over $40 billion—still far below its peak above $350 in 2021.
Coinbase stock price performance over the past year. Source: FactSet
Against this backdrop, Armstrong has intensified his crypto influence campaign.
In September, Coinbase invited more than 50 crypto executives and entrepreneurs to Washington for what it called a grassroots movement for crypto legislation. Armstrong and attendees walked to Capitol Hill for scheduled meetings with congressional representatives. They reminded lawmakers that without clear rules for the crypto industry, the U.S. risks falling behind in innovation and losing jobs to other countries.
According to OpenSecrets, a nonpartisan group that tracks political spending, Coinbase spent $2.2 million on lobbying in the U.S. last year.
Advisors joining Coinbase include former Senator Pat Toomey (R., Pa.), one of the industry’s most outspoken supporters during his tenure on the Senate Banking Committee. Other Washington insiders joining Coinbase’s global advisory council include former Representatives Tim Ryan (D., Ohio), Sean Patrick Maloney (D., N.Y.), former Democratic strategist Chris Lehane, and Democratic pollster John Anzalone.
Fairshake, a pro-crypto super PAC supported by Armstrong, has spent over $1.2 million on TV ads backing House candidates and raised $78 million to support candidates favorable to crypto.
For many in the industry, the 40-year-old Armstrong is filling the void left by SBF, who served as the crypto industry’s chief ambassador to U.S. lawmakers and regulators before FTX collapsed. SBF and former FTX executives donated over $70 million to political campaigns between 2020 and 2022.
“When Sam fell, there was a vacuum,” said Adam Jackson, CEO of Braintrust, a decentralized professional network and portfolio company of Coinbase Ventures. “Brian stepped in and is trying to restore credibility to the crypto industry.”
SBF was convicted last November of stealing billions of dollars from FTX customers; the company filed for bankruptcy a year earlier. Weeks later, Changpeng Zhao, who built Binance into the world’s largest crypto exchange, stepped down as CEO and pleaded guilty to violating U.S. anti-money laundering requirements. He faces up to 18 months in prison. Binance is currently battling the SEC.
Unlike Zhao and Binance, the SEC’s lawsuit against Coinbase does not name Armstrong as a defendant, nor does it allege mishandling of customer funds.
Before FTX’s collapse and his conviction, SBF served as the chief ambassador of the crypto industry to U.S. lawmakers
Source: BEBETO MATTHEWS/Associated Press
Armstrong, introverted and privacy-conscious, wasn’t always eager to engage with Washington insiders. According to former employees, during FTX’s rapid rise and SBF’s frequent trips to Washington in 2021, Armstrong was reluctant to position himself as an industry leader—a stance that frustrated some employees.
Armstrong said in a 2022 documentary released on Coinbase’s website and YouTube that he dislikes being in the public eye because the stakes are too high.
“You might say something wrong, and then… an angry mob comes after you,” he said in the Emmy-winning documentary by filmmaker Greg Kohs.
Alesia Haas, Coinbase’s CFO and a close friend of Armstrong, said the company continues business as usual while fighting the SEC.
“We’re preparing the company for every scenario,” she said. “We’re investing in the future.”
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