Coinbase Global, Inc. (NASDAQ:COIN) Oppenheimer Blockchain & Digital Assets Summit November 17, 2022 3:45 PM ET
Company Participants
Alesia Haas – CFO
Conference Call Participants
Owen Lau – Oppenheimer
Owen Lau
All right, our next section is with Coinbase. Thank you everyone for joining this section. For those of you who don’t know me, my name is Owen Lau, I cover Capital Markets Technology and Digital Assets at Oppenheimer.
So, I have a statement to read for Coinbase. Before we get started, I would like to remind you that during today’s call, the company may make forward-looking statements. Actual results may vary materially from today’s statements. Information concerning risks, uncertainties, and other factors that could cause these results to differ is included in Coinbase SEC filings.
Our discussion today will also include references to certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are provided in the shareholder letter on the company’s Investor Relations website. Non-GAAP financial measures should be considered in addition to but not as a substitute for GAAP measures.
So, maybe introduce a little bit about Coinbase. So, Coinbase is well-known to be a crypto exchange, but it also has a joint venture with Circle, which issued stable coin USDC. And outside of trading, Coinbase also provides staking surfaces to both retail and institutional customers. And now that then that Coinbase also provides some other blockchain technology and also data products as well.
Today, we are so happy to have CFO, Alesia Haas joining us. Thank you for your time Alesia.
Alesia Haas
Thanks Owen. Happy to be here.
Question-and-Answer Session
Q – Owen Lau
So, maybe to start off with our conversation, Alesia, could you please talk about what Coinbase ate today? And what Coinbase will look like over the next five years? Again, like we just talked about Coinbase is widely accepted or perceived to be a crypto exchange, but if you can elaborate a little bit further, that will be great?
Alesia Haas
So, I want to start that I do not have a crystal ball. And crypto as we all have seen over the last couple weeks moves quickly. So, let me tell you our ambition and where we’re going.
So, we’re widely perceived to be an exchange. But at the end of the day, we’re actually a full stack crypto company and building a platform with a suite of services and products to serve three distinct customer groups; retail customers, institutions, and developers.
And so we’re building platforms that will enable a retail customer, for example, to use us as their primary financial account for crypto. We enable them to buy, to sell, to stake, to earn crypto, to lever their crypto and receive a US dollar loan using crypto as collateral. And increasingly, we’re letting them explore the world of Web3, various DApps via our wallet product. And we’re thinking over time, the goal is to be the key platform that retail customers use for all of their crypto needs.
Similarly, for institution, we offer a range of investment products to enable sophisticated and also everyday institutional traders to buy/sell crypto, to buy/sell derivatives products in the future, we’re actively working on building out a derivatives offering, we have an exchange today. But we hope once we receive regulatory approval, we can offer direct derivative products to our customers in the US fully regulated by the CFTC.
We’re also building out a suite of financing products, data, research, et cetera. So, being a full service broker — prime broker to our institutions. And then the most nascent of our product groups, one that we think is critical for that five-year vision and I think increasingly will be part of the story in five years is our developer tool products. And so here what we’re doing is we’re recognizing that Web3 continues to grow.
And if you look at charts about the number of developers who are building DApps, which are called decentralized applications, or Web3 applications, it is just up into the right. And it just continues to hockey stick growth with the number of new little companies that are founding around establishing applications in this space.
And this is what we’re building is really picks and shovels for them to enable more and more developers to build Web3 apps. Think of it like back when people were building their first websites, we’re building picks and shovels for people to build their first app. And we’re offering things like node services to allow to read/write the blockchain, we’re offering payment on ramps, and other things as a package of goods that will enable just the growth of this whole ecosystem.
So that is what our future looks like; serving our customers with an increasing number of products and services, and growing a platform that will provide infrastructure to the entire Web3 community.
Owen Lau
Got it. So, usually, we don’t start our questions with the news, but given the magnitude and the collapse of FTX, I have to kind of like break these practice. Let’s go back to FTX. From what you’ve gather so far, what could trigger that so called $8 billion shortfall in FTX?
Alesia Haas
I think it’s hard to avoid the news, Owen, given what a major earthquake this was to the overall crypto economy. So, first of all, I just want to reiterate things we’ve said before, which is that this is just a sad day as none of us from the outside saw this coming.
But there’s a lot of facts unfolding day-by-day and I think what the increasing perception is, is that the collapse of FTX and Alameda was that activity by a bad actor. And from what we understand, based on what’s been recorded, we don’t have any unique information here. It seems that there was poor controls, maybe a complete absence of controls. If you look at the bankruptcy filing that was made today, I thought it was notable that the current CEO of FTX, who was previously had experience with Enron, said this was the worst control environment he had seen in his 40-year career. I mean, that was other sobering statement.
But what it appears happened is that Alameda took loans from FTX, that were customer funds, so misappropriated customer funds from FTX to Alameda and use those loans to lever up an asset portfolio that was concentrated and illiquid. And so I think any of those who grew up in financial services know that you don’t lever up positions that are heavily concentrated and illiquid because then you have an asset liability mismatch, when you have liquid withdrawals on your liabilities, but like firm assets, and so we have poor risk management on the Alameda side, and then we have fraud, in my opinion on the FTX side, and that is what has given rise to what we see today.
Owen Lau
Got it. So, then going back to Coinbase, does Coinbase use any customer assets for collateral? Or we hypothecate customer assets? Could one of the bank happen on Coinbase?
Alesia Haas
No, and this is a really important question. So, I want to be crystal clear. Coinbase does not lend out customer funds, without specific independent direction from the customers to do so. Period. So, customer assets are customer assets, we are essentially when you safeguard and you say Coinbase here’s my Fiat or Coinbase, here’s my Bitcoin, Coinbase here’s my Ethereum, we are putting that Fiat or that crypto in its native unit into a little envelope with your name on it. And you can withdraw it at any time. But we have not done anything with that crypto that you didn’t explicitly tell us to do with that crypto.
So, we view ourselves as safeguarding your assets. We are an agency only exchange where if you’re buying crypto, we’re matching it with a seller saying buyer-seller, great, let’s match and we’ll take a fee for that transaction. But we are not trading against our customers. We are not lending out their balances without their consent. And we really differentiate ourselves in this way.
And then further what I would say, Owen is there’s a great lack of trust in crypto right now. And they say, well, how do we know that Alesia, and this is what I think is also so important is we’re a public company. So, we report quarterly financial statements, we have an annual audit of our financial statements where we are showing you the customer assets on the balance sheet fully segregated from corporate assets. We disclose the asset and the liability that are corresponding dollar for dollar matched on our balance sheet, which shows and evidences that there’s review and controls that we are holding these assets on behalf of customers.
Owen Lau
Got it. So, what are you closely monitoring right now to gauge the contagion risk, which is like everybody talks about what company to a specific area you’re more worried about if you are willing to tell us if there’s any spillover effect?
Alesia Haas
Sure. So, I want to start with us. And Coinbase does not have any meaningful first order impacts. That means that we have really got our arms around our counterparty risk and we disclose we had $15 million worth of deposits on FTX and so that is the loss that we will likely take on FTX subject to bankruptcy proceedings. We had no ownership of FTT tokens, we had no exposure to Alameda. So, that’s the direct first order.
Second order is what I’m going to find his credit risk exposure to other companies that may fail as a result of FTX. This we’re monitoring very closely. And overall, I think it’s important to zoom out and say we have a very manageable amount of total risk, — total notional risk.
So, in our Q3 shareholder letter, there’s a couple things we disclosed that I just want to point investors to. So, one is that we mentioned that we had pledged $145 million for FX hedging activities that will recover in 2023. This is one of our largest single counterparty exposures. And this was done with a bulge bracket bank, not a crypto company.
Another thing that you’ll see in our financial statements is in our cash disclosure, we disclosed that we held $168 million of cash at third-party venues. That is where that FTX $50 million was sitting. And so of that $168 million, I think it’s just important to share with investors that is diversified across many companies, many [Indiscernible] companies, so people that are our payments partners, as well as crypto exchanges, where we hold Fiat to pre-fund our ability to execute our smart order router, which we do through Coinbase Prime.
So, that is $168 million of counterparty risk out of our $5 billion plus of cash. So that is in portfolio, we’re monitoring very carefully and we feel very good about our health there. We’ve publicly stated post-FTX, that we had no exposure to Genesis, we haven’t taken any other losses that have occurred outside of that FTX today.
So, then we move on to our third order impacts, which I would define as other companies or partners that we work with more broadly. And we’ll continue to monitor those, but we have nothing specifically for our own portfolio to share.
And our takeaway is that we feel really proud of our risk management practices and that we invested in risk, talent, risk process risk systems, before we got into risk. And so that’s why we’re able to weather the storm, I think pretty strongly right now.
And so where are we see it broadly in the ecosystem? Look, I think that we are seeing great deleveraging occur. And so as people get spooked, they’re wanting to withdraw their cash from some exchanges where they don’t feel like they have the transparency and trust.
And in those events where those funds were lent, those companies are now failing. So, Genesis is one of the largest lenders, BlockFi was a large lender, the lending books of businesses were definitely seen risk in those areas. There’s not a lot of other lenders now in crypto. So, like I do think that’s going to be contained. And once we see the lending community kind of have its losses, that’ll be one aspect.
And I think then we’re going to test who had FTT tokens. I don’t think that those were concentrated positions, but I don’t know that. And we’ll see where those losses end up. And then I think the folks that have already publicly stated what their losses are you have — you’ve hopefully had the first round, but we still have apparently $8 billion of losses, and we haven’t seen $8 billion of disclosures come through. So, I think — I don’t know where they are, but I don’t think we’ve seen the end of this.
Owen Lau
Got it. It’s still — probably still pretty early, but trading volume was up quite a bit in November compared to October based on our tracking. Do you see any change in consumer — customer behavior for your retail clients? Do you see a surge or maybe a drop in new in retail customer lately?
Alesia Haas
So, you’re right, there was elevated activity surrounding the collapse of FTX and this is higher volatility. And whenever we see higher volatility, we see surge of volume, surge of activity on our platform.
I would also comment that we’re seeing in this market, just a flight to quality for both retail and institutional customers. And so I’ll note that Q4 is only half over and the crypto markets can move really dramatically. So, I just want to caution investors not to read too much into extrapolating any current activity, but we are definitely seen elevated activity around this event.
Owen Lau
Got it. And then how about your prospective institutional clients? So, people keep talking about adoption and adoption, but have they show more skepticism because of this event? How do you see the pace of institutional adoption recently?
Alesia Haas
It’s really heartening in the conversations that we’ve had with institutional investors. And what I would say is they have taken a very long-term view of the space and I’ve looked at the overall crypto asset class. They view this as this was an FTX-specific issue.
So, BlackRock, for example, remains very excited about the long term opportunities and crypto. So, I think that will say that we’ve said again, we think they’ll be a flight to quality. I think this will bode well for the Coinbase brand over time as being the most trusted and being a platform where we’ve really withstood significant operational due diligence to win institutional clients to our platform. And I feel really good about the future of institutional adoption of crypto.
Owen Lau
And the key lessons learned here. How does it impact Coinbase risk management culture?
Alesia Haas
My favorite question. Two things. First and foremost, as I said before, this was first a collapse due to bad activity by a bad actor. And second, what we’re seeing now in general is that we knew, it underscores the importance of risk management as you’ve seen these asset liability mismatches or concentrated positions or over leveraging.
So, in terms of how it impacts our culture, I’m really proud to say we’re not changing what we do. We had built a team who had deep experience in traditional financing credit and market books, we added a team that would really understood the 2008-2009 financial crisis in banks.
And before we got into any of these businesses, we had a really good discipline around underwriting, around diversification, around low leverage levels. And I think that we are seeing our approach to risk management shine through in these moments. So, I don’t plan to change much of what we do, I think we’re going to learn from these events. This is a great market that we can like back test and say, as we get more disclosure, would we have done those loans? And if we would have like, what can we learn from that make our controls even stronger. But I really feel good about our risk management team, I really feel good about how we plan, identify, and measure, monitor and control our risk and this is a moment of pride for Coinbase right now.
Owen Lau
Got it. So, from defense to offense, how can Coinbase potentially capitalize this opportunity?
Alesia Haas
This is a great question and something that we’re actively exploring. So, our main priority right now for these couple of weeks is to manage risk, reassure our customers, our partners, our employees, and the general public that crypto is safe on Coinbase, that this is not a reflection of crypto overall, this is a reflection of one company’s poor risk management processes. And that we are fundamentally different in everything we do than how FTX apparently had operated.
So, as we look ahead, we think there are opportunities to capitalize it might be partnerships, it could be acquisitions in these ecosystem, customer gains market share. That’s I don’t expect our name on any sports stadiums anytime soon. So, we’re not going to every direction, but we’ll focus on these opportunities in deep course, but for the near-term, we’re focused on risk management.
Owen Lau
So, one thing I do want to touch on, it’s about competition, in particular, after these FTX debacle. Maybe you please talk about your priority for international expansion, which is one thing that Coinbase has been talking about is any obstacles such as license that you need to overcome before you can launch more new products internationally? And how will Coinbase differentiate from competitor competitors outside of the United States?
Alesia Haas
So, you’re right, international expansion has been one of our core growth pillars and we’ve talked a lot about it in 2022. So, the key for us is we want to bring a billion people into crypto and we need to do that, we need to be an international company. We also think that crypto just naturally lends itself to being a global currency in many ways or a global ecosystem. And so international growth is a core pillar.
We’re approaching this from two goals. So, one is we talk about going deep and the others we talked about going broad. And when we go broad, I’ll focus on that one first, because it’s easiest. This is where we’re serving our customers who are wallet product, which is a software product. And so it’s very easy to move quickly through international expansion with a wallet product.
Going deep markets, though, is where we get the same product parity as we have in the US, which means Fiat on ramps and off ramps, it means more touching the regulated financial systems in these various countries. So, typically, especially in the countries that we’re going into, this does require some sort of license or registration.
And this is where I think we think it’s critically important when you’re dealing with being a fiduciary, or you’re holding customer funds. Those are licensed activities and we really lean into regulation in that regard. So, the good news is, we have a number of these licenses we’ve recently launched in Australia, as an example, we’ve recently announced that we have licenses in Japan and Singapore and some other countries.
And so these are already areas where we’ve done the first step, we’ve done the hard work of integrating bank partnerships, getting the license, kind of doing all the compliance work. And now we really need to develop the local products that go to market strategy and build and that’s where you’re going to see us focus a little bit more in the upcoming time period.
So, when we really go step back and look at about how this moment has changed for us, really what I think is we have a new, important opportunity to be a louder voice on the international market, which our value proposition has long been to be the most trusted and easiest to use.
And I think in light of what’s happened to FTX and their concentration in non-US market share, I think this is that there’s an opportunity that opens up for a brand like ours is the most trusted to think about how it wants to approach these international markets.
Owen Lau
Got it. So, I want to stick with this topic, but change and other end goal, which is from the regulations, regulatory landscape. And so I do feel like these landscape has been kind of like, pretty uncertain, but there are many builds coming out, at least within United States to define what commodities versus securities, right. So, and the SEC keeps like claiming for jurisdiction, doesn’t look like we are going to get any clear answers anytime soon here. I mean, after FTX, we may get a faster approach, but still it doesn’t appear to me this topic, it’s a big issue in the market outside of the United States. How does these uncertainty get into the thought process of Coinbase expanding internationally? Are you worried that capital people and new products will like move to other countries?
Alesia Haas
Well, there’s a lot to unpack there, Owen. So zooming back, let me just talk about a couple of things. So prior to the FTX news, we actually believe crypto policy was at an inflection point and we were really heartened to see the momentum in the direction of travel. So, I was feeling that we were going to see some regulatory clarity this year.
Now, post FTX, I do think people have stood back and its wide landscape people are reevaluating the regulatory. We’re really proud of the dialogues that we’re having and continue to advocate for crypto-specific harmonious global regulatory frameworks. And we believe that, if we don’t get this, we are going to see more nefarious activity happening on offshore exchanges.
We have seen regulation like MiCA come in the EU, and we would like to see that type of regulation follow in the US and the UK. So I am worried that a lack of clarity will drive innovation offshore and we said in our shareholder letter, we’ve seen some trend of trading volume move offshore this year.
And we think that, in part, that is due to the lack of certainty that we have here in the US. But I’m hoping recent events change this trajectory. And I’m hoping recent events will cause more people to be driving towards a goal of bringing clarity to the centralized crypto intermediaries around what regulations are critical to provide consumer protection.
Owen Lau
So, you touched on MiCA, how does that framework impact the international expansion strategy for Coinbase in Europe?
Alesia Haas
We think it’s great. We think it’s just great. So, it is the most comprehensive framework globally. So this is a landmark moment that provides a single rule book and it removes the current patchwork of national regimes. So, for all of Europe now, there’s going to be one clear framework that drives legal and regulatory certainty. So, this actually gives us greater confidence to invest and grow in Europe.
So, we’re actually considering where we’ll seek our MiCA license where our European hub will be located. In the meantime, though, we’ve already seen key national licenses and registrations that will allow us to operate across many European countries until MiCA apply.
So, MiCA is forward-looking. I think it’s — I think we’ve like two years before it is applicable. But more broadly, our real hope is that MiCA is going to incentivize and reward firms that are onshore and compliant in Europe, and it’s going to just raise the standards and drive trust in the industry more broadly. So, it’s an important starting point for the global consensus on crypto assets. We’re hopeful that other countries will step and take notice, but we’re really optimistic about this positive action by regulators in one of our core markets.
Owen Lau
Got it. So, by looking at some of Coinbase initiatives, the number one thing stood up is the partnership. So, you recently signed a number of key partnerships with large companies such as, you mentioned BlackRock, Meta, Google, broadly speaking, could you please talk about the importance of these partnerships to your long-term strategy? And in particular, we when we’re going through this strong market, like a how important that is for Coinbase?
Alesia Haas
Sure. So, yes, you’re right. We’re really proud to have signed several high-profile industry partnerships. And for us, what this shows is even through a down market even past the headlines of declining crypto prices and macro headwinds, it shows the adoption of the underlying technology and the belief that this is going to underpin so many of our core businesses going forward.
And so just like, the early days of the Internet, where everyone had like an Internet strategy and there’s a dot com today, we don’t talk about Internet companies. We talk about that everyone uses technology and in some form or fashion, like banks use it health care companies use it, everyone has internet. And so, we think that’s going to be the same in the future that everyone is going to have a crypto component of their business.
And so you see, and that’s what the diversity is between BlackRock, where we’re providing just crypto asset trading alongside other assets through a lot and their risk tool. But Google is very different. Google is working on a cloud strategy. And so partnering with us to leverage some of the tools that we’ve built in crypto using our commerce product, which enables them to take payments in crypto and monetize us back to fiat using some of our other cloud tooling.
So, I think that this just shows that crypto is moving in lots of different directions, both investment and financial services use cases, but also nonfinancial services use cases, which really, we believe, is the beginning of Web3. So, these partnerships reflects confidence and optimism of crypto over the long term. We think they also reflect very positively on Coinbase as being a trusted partner of these large institutions.
I can share with you that they do extensive operational due diligence before selecting us as a partner. And so we think of this as the coiling spring that when we see the next cycle, which we believe is inevitable despite the current headwinds, despite the events of FTX, we believe these partnerships will broaden just the overall aperture of the space and bring even more partners, customers and opportunities into crypto.
Owen Lau
Another important product — another important service for Coinbase’s custody, it doesn’t sound as attractive as other product, but it plays a key role for Coinbase, I think. I think the Coinbase now is about $100 billion of assets as of the end of the third quarter on the platform, which is about 11% of total market — total crypto market cap. How can Coinbase capture this 11% of market share? And what is the value proposition of Coinbase custody?
Alesia Haas
Thanks for the question. So, it’s the bedrock of our strategy. So, you’re right, a lot of the crypto journey starts with custody. So, and that value proposition starts with trust and so at the end of Q3, it was actually just under 10%, 9.6% of all crypto in the world was on Coinbase. Now, there’s some crypto we don’t support. For example, we don’t support FTT. We don’t support BNB, the Binance token. So, there’s — we don’t have the ability to go after the entire market. But we provide the ability to safely secure your crypto on our platform and what’s important about crypto for those who may be newer to the space is crypto, for all intents and purposes, is a bare instruments. It’s like you’re walking around with a cashier’s check. If you lose your cashier’s check, you’ve lost your money.
And so crypto, if you lose your private keys, you’ve lost your money, and so, we are providing a product where we can then safely secure those private keys for our users, but make it available to them whenever they want to transact on chain or through our sub-ledgers. So, it stems from a leading cold storage solution, where we have a decade of experience, and we’re the largest custodian that we’re aware of, of any of this scale and we custody up for both institutions and retail investors and we feel that is core to our strategy because the first thing you need to do is have access to your crypto to be able to then transact in this new Web3 world that, we’ve been talking about.
Owen Lau
Got it. So, another important angle for Coinbase, I think it’s Web3, in particular, the wallet. Could you please talk about the strategic vision of coin based wallet, which is a self-custody wallet? I mean, I think right now, a lot of people talk about that because of, after FTX. But can you maybe explain a little bit about the value proposition here? Why would customers want to use coin based wallet and how does Coinbase monetize this product?
Alesia Haas
All right. Let’s talk about Web3 and what’s exciting about Web3, and then we’ll talk about why a wallet is so critical to that feature. So, there’s a lot of exciting work happening with decentralized social media, gaming, the Metaverse, what we’ve referred to as DAO, Decentralized Autonomous Organizations, which is like a new form of like corporate LLC. And so what people want is they want to own digitally native items inside the Metaverse or inside various Web3 games. So, just think about it as a typical video game that you buy, Avatars or Short Swords or Shields or whatnot. And now there’s all Web3, where that is a token, and you can then monetize, you can trade that in and outside the game.
So what we’re trying to do is make sure these things get easier and easier to use over time and easier to access. And so that is what we’re building with products like our Coinbase wallet, it’s just the power of these new and emerging use cases. And what your wallet does is it holds you crypto for you, but a self-hosted wallet enables you to interact with Web3. A custodian wallet does not enable you to interact with decentralized applications. So, we do this through our wallet product and we have an ability then with this wallet product to make this even easier, because self-hosted wallet is like a passport. It allows you to go anywhere in Web3.
Otherwise, customers will just be combined to the wallets of Coinbase. And we’re not going to build the best of Web3 on our own that. We think this is an entire ecosystem that we want to give our users. And so we want to build the best wallet out there for you. And so things that we’re doing today that we think really differentiate us to make this the best wallet that you’re going to want to have is, for example, it’s multi-chain.
So one of the things that’s confusing about crypto in the past was that, if you want to send someone Ethereum, they need to give you an Ethereum address. They have to have an Ethereum wallet to be able to receive Ethereum. But if you wanted to send them Solana, they had to have a Solana address, a Solana wallet. We are making a multi-chain wallet so that you can then, in the future, have one wallet to receive any form of crypto into it.
And we think this is so important because, gosh, you wouldn’t want to have to have one account that says if someone wants to send you money from Bank of America, you put — you give them your Bank of America account. You can only send bank to bank, which is kind of the idea of sending chain to chain. You want to be able to receive any money from any place into one bank account. And so we want to create a wallet that has been receiving anything from any chain into one wallet.
The other thing that, we’re doing, Owen is we’re working like on ENS domain names. So ENS names, it’s like domain names. So, instead of going to like the old TCP IP addresses where we had a type in like 139.13 into a web address. We want to write in www.coinbase.com. We want to send crypto to owenlau.cb.e, alesiahaas.cb.e. We don’t want to send it to like my alpha-numeric character.
So, we’re working through all of the tools that we think make crypto usable, less complex, obviously, that complexity below the surface so that we talk about the fun use cases in Web3 and not about the technology to actually access it. And that’s what we’re focused on in a wallet, and that’s how we think it’s such an exciting part of the future.
And that you asked how we monetize this. Today, we monetize this as we get a fee on DEX trading, but we’re just scratching the surface. This is a very nascent product in our venture portfolio, and we think the monetization will evolve as use cases in Web3 evolve.
Owen Lau
Got it. I think you touched on that a little bit, but how will Coinbase approach like Web3 overall? What other — I think what role and services Coinbase can provide in this world. I mean we talked about wallet. Would that be like only wallet or maybe custody or maybe something else, can you maybe elaborate further?
Alesia Haas
So I think wallet is a key one, because the way I think about this is just a simple analogy, again, is if you think about the Amazon platform, one of the thing that’s great about Amazon is it used to be proprietary products, but now you can buy anything. Like I made a joke earlier today that I think I had a little pellets for my child to set on Amazon. And I wouldn’t have thought about them as like where I go get all my science tools. But they’re serving a wide use case where you can go there and get anything.
So similar to the Coinbase wallet wants to give you access to everything in Web3. You don’t want just the Coinbase products. You want to see Coinbase side-by-side with all other opportunities that you may have, so you can get the best price, you can get the best service, you can get whatever you want. But we want to be that first steps you only have to come to Coinbase and you don’t have to go find it on your own.
And so the wallet, I think, is going to be critical, because it’s a launch pad into Web3. But there’s more than that, Owen. And so I’m glad you asked the question, because the flip side of that is we’re building developer tools to enable developers to build in Web3. And so we think about this as we need to create Web3 and so we need to give you access to it, but we also have to help you build and get there.
And so this is part of our Coinbase cloud offering, where — we announced in Q3 a product called Node, which gives users the ability to then rewrite, access blockchains and really just start scaling up the easier use for developers to start building new applications, payment on ramps as an example. So we have developer tools to build on Web3. We have the wallet to access Web3. And then beyond that, we have to be able to buy the tokens. And so I think that all our other products and services, like the ability to convert fiat to crypto, those are all critical to kind of like the bridge to Web3. And people will want to be able to bring fiat and crypto worlds in and out, and we provide seamless execution between these two different economies.
Owen Lau
Got it. Maybe it’s also helpful if you can provide maybe a specific example. I think recently, a gaming company just announced a collaboration with Coinbase. And you also talked about gaming as well. Could you please talk about the role and value of Coinbase in this partnership so that we can get a better sense of how Coinbase can add value?
Alesia Haas
This is a great example of what I was just talking about. So I think you’re mentioning an announcement that was made by Enthusiast Games that announced that it was partnering with us on our cloud products. So this is — Enthusiast Gaming is a great example of a Web3 DApp developer, and they are using tools and products that we have in our developer product group.
So the examples here is Coinbase Node, which enables developers to build, launch and scale their applications, the payment on RAMPs that I just mentioned. And so through this product group, we’re really providing gaming companies that anybody else who’s building these Web3 apps, tools they need to accelerate and more easily build into this new ecosystem. So these are just customers using our products for simple explanation.
Owen Lau
Got it. And then another question I get a lot from investors is your stock-based compensation, if I may. Could you please talk about how much of the stock-based comp will come down next year compared to this year? And how should investors think about the dilution longer-term?
Alesia Haas
So I want to be clear that we haven’t provided an outlook for 2023, but I’ll share with you kind of how we think about it. It’s how we think about a lot of things in crypto, which we cannot evaluate ourselves quarter-to-quarter or year-to-year. So we think about dilution over a longer-term basis, just like we look at our profitability, just like we look at our revenue scenarios and like crypto price cycles.
So in 2021, for example, our dilution was in the neighborhood of 1.5%. In 2023, the dilution will be higher than that, because market cap is compressed given weaker market conditions. But we’re going to look at it over a cycle. So they are moving components. So on one hand, we’ve had some M&A and longer-term grants that will run off, and we had some attrition in Q3. At the same time, we’re focused on retaining top talent, and stock compensation is a key factor. So there’s some offsetting factors to consider, but we have shared that we believe it will come down year-over-year due to these one-time items, but we do not have a forecast to provide at this time.
Owen Lau
Got it. And then another product, sometimes I got question is your derivatives, which is I do think, which is quite important for international expansion strategy as well. Could you please talk about your progress of obtaining FCM license in the United States? And what’s the time line of getting the approval and the progress of launching more derivative products in the United States?
Alesia Haas
So let me back up a bit to give people a little bit of context and history here. So in February of this year, we acquired FairX, which was a CFTC-regulated derivatives exchange or what we call a designated contract maker, DCM. The DCM is effectually the exchanged. So we can offer that to other brokers. So over time and with the successful acquisition of the FCM license, which is currently in process and pending regulatory approval, we plan to leverage this infrastructure to offer crypto derivatives to point-based customers in the US.
And we think this is really, frankly, just a central part of a well-functioning traditional capital market. And these products are really high demand from crypto investors who seek to manage risk, execute complex trading strategies, gain exposure to crypto outside of spot markets. And also, some funds don’t have the ability to trade spot directionally, but they could trade regulated derivatives products.
We think it will introduce new capital and new market participants to this space. So we represent the first crypto native platform that could offer leverage to US domiciled customers, because up until recently, the only regulated product was offered by the CME. And now it’s Coinbase and CME and our contracts are trading more notional volume than the comparable CME contracts started to retail users. So we’re really excited about our progress, even though it’s just been very recently.
And it’s also, Owen, I think you probably know this, but when we look at crypto overall, spot is just a tiny component. Most crypto trading is actually derivatives. And so one of the things that this will do is give us the ability to grow into a bigger TAM and really kind of drive more opportunities. So we think this is large. We are starting with the US market. We’re starting with a very regulated, very compliant product. What is available offshore is very different today on the unregulated exchanges. So please investors to keep that in mind. And we would look to expand and grow in a trusted way as we move forward from here.
Owen Lau
Perfect. One of the key products, I think, for Coinbase and other key products, I think it’s staking. I think Coinbase began offering Ethereum staking for institutional clients, not retail, but institutional clients in early August. Could you please talk about the penetration so far? I know it’s early. What is the kind of approximate economics Coinbase is capturing? And what is the next step to expand offerings to kind of like more institutional clients?
Alesia Haas
So yes, we’ve recently launched ETH Staking for Institutions. I would note that one of the things that’s important here is that Ethereum’s staking is not able to be withdrawn. So it gets bonded into a staking validator and it cannot be unbounded until post the Shanghai merge and — or the Shanghai upgrade, I’m sorry. And so that is expected to happen on the Ethereum blockchain sometime in 2023. But the lack of liquidity is a deciding factor for institutions who want to stake their Ethereum.
And so it is very early days. But because of this factor liquidity, it’s one of the factors that we’re focused on, is making sure we can provide liquidity to those investors going forward. So we’re having ongoing discussions with people who are interested, but I think that will really be the unlock, because it’s immaterial to our overall blockchain rewards revenue stream today, we haven’t provided any meaningful color on it and we’ll provide more color as this business scales and it becomes a more meaningful driver of our revenues.
Owen Lau
Got it. And now about retail staking. I think Coinbase right now support about six tokens for staking. Could you please talk about any plan to add more tokens down the road?
Alesia Haas
So like kind of going back to what I said earlier, we want Coinbase to be the platform where anything you want to do in crypto that we are the platform to do it on. So our goal is to be able to offer stacking on all available assets that we can support. And proof of stake is a more efficient consensus mechanism than proof of work, because it’s more energy efficient. So we anticipate more protocols will adopt proof of stake over time, as we go forward. And so we’re hopeful that this will be a very large in growing revenue stream.
Obviously, Ethereum is the biggest proof of stake asset. It’s a really big deal when we went through the merger, we kind of moved everything to an Ethereum proof of stake network. We think this is great for the long-term viability of Ethereum with being more energy efficient. Also, it leads the ability to drive more faster processing times on Ethereum. So we think this is an important technical upgrade. But the goal, yes, is to continue to roll out more and more staking features and more ways for our customers to earn rewards on their crypto that they may hold.
Owen Lau
Got it. So I think we only have one or two minutes left. I do want to give you some time, Alesia. Do you have any final thoughts for us? I know we covered a lot of topics today. Do you want to summarize anything you felt like we should take away for today’s conversation?
Alesia Haas
Thanks for that opportunity Owen. I just want to reiterate that the events that FTX represent one company, bad actor in a unregulated market offshore, that does not reflect on the entire asset classes, it does not reflect on all companies in the space. And so I just want to keep people focused on the opportunities that we have here around building crypto utility, where we see as the growth in Web3, and that we are going to be focused on continuing to be the most safe, the most trusted and easy to use platform to continue to build in this space.
And I hope you come and join us on this journey because it’s a really exciting space to be in this week, as well, too much. But most of the time, the product innovation is what gets me up in the morning.
Owen Lau
We will get through it. Thank you, Alesia. Thank you for your time. And thank you all for joining us today. I hope you all have a good day. Bye, bye.
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