The last man standing in crypto

Brian Armstrong’s Coinbase, a winner from the new bitcoin ETFs that recently started trading, faces a big legal test.

Brian Armstrong has ramped up his crypto influence campaign. Picture: Cam Pollack/The Wall Street Journal

Brian Armstrong has become the new face of crypto.

Coinbase Global, the cryptocurrency exchange he co-founded in 2012, is one of the last big digital-asset companies standing after a string of high-profile collapses and government crackdowns.

Armstrong’s former rivals — FTX founder Sam Bankman-Fried and Binance founder Changpeng Zhao, who once boasted far greater influence and wealth — are either in jail or facing time behind bars.

Armstrong has continued expanding Coinbase despite the industry slowdown and a long string of unprofitable quarters. As chief executive, he has pushed the company into overseas markets, launched new products and forged business ties with Wall Street asset managers to try to become less reliant on crypto trading revenue.

Notably, Coinbase is serving as the custodian for eight of the spot bitcoin exchange-traded funds that started trading last week. Its custody arm is responsible for safekeeping the bitcoin and will receive a fee based on the total value of the funds’ assets.

Armstrong has also become increasingly brash in the face of US regulators’ effort to rein in the crypto industry. Armstrong spent significant time in Washington, D.C., last year lobbying for crypto legislation. He hired former lawmakers as advisers and donated more than $US1m ($1.5m) of his personal wealth to a pro-crypto super political-action committee.

The first test comes Wednesday when Coinbase will ask a federal court judge to dismiss the high-stakes lawsuit brought against the company last year by the Securities and Exchange Commission. The agency sued Coinbase in June for allegedly offering and listing unregistered securities, among other things.

Industry watchers say the request for dismissal is a long shot. The SEC has long argued that most crypto tokens are securities, a category that includes assets such as stocks and bonds. Selling securities to the broader public without registering them with the SEC makes the issuer liable for violating investor-protection laws. The agency says Coinbase traded at least 13 crypto assets that are securities and should have been registered with regulators before they were issued.

Coinbase has called for US regulators to draft clear rules for governing the crypto industry. It argues the SEC, under Gary Gensler, is taking an “enforcement-only approach” to set the law on a case-by-case basis.

And that strategy hasn’t always worked: Gensler’s approval of the new bitcoin ETFs last week, prompted in large part by a legal setback in another lawsuit, was a notable loss for the agency.

Assuming the judge allows the SEC’s suit to go forward, the company could litigate it into 2025 or longer before any trial is held, Paul Grewal, Coinbase’s chief legal officer, said in an interview.

“The case is very unlikely to be dismissed,” said Lisa Bragança, a lawyer who worked as an SEC enforcement branch chief. “Coinbase is saying that the types of coins it lists on its platform are not securities, and that is going to be very hard for them to prove.” If Coinbase ultimately loses the case, regulators could force a separation of its exchange, brokerage and clearing businesses. The company also risks having to delist the tokens in question and halt its staking program, which allows investors to earn interest on their crypto assets. About one-third of the company’s revenue is at stake, according to Mizuho Securities analyst Dan Dolev.

Coinbase has struggled to turn a profit after crypto prices plunged in the wake of the industry scandals. It posted its seventh consecutive quarterly loss in November, and its overall market share has declined, according to crypto data provider CCData. It is trying to find new ways to make money and expand its business beyond the US, where it generated more than 80 per cent of its 2022 revenue.

Analysts have cast doubt on the money-making potential of Coinbase’s custodial-fee business, which generated about $US50 million in revenue for the first three quarters of 2023 and is known for its low margins. A fee war has broken out among the asset managers offering the new spot bitcoin ETFs — and over the longer term, that could eat into the revenue for Coinbase’s custody business. The advent of the funds could also backfire for Coinbase if they become too popular among investors who opt to buy bitcoin via ETFs instead of using the exchange’s platform.

The excitement surrounding the funds has sent bitcoin prices rallying anew. They are hovering around $US43,000, up from $US17,000 in January last year. Coinbase’s shares soared last year, too, quadrupling to top $US170 and giving the company a market value of over $US40bn. That was still a far cry from the stock’s 2021 peak above $US350.

Against that backdrop, Armstrong has ramped up his crypto influence campaign. In September, Coinbase brought in more than 50 crypto executives and entrepreneurs to Washington for what was billed as a grassroots campaign for crypto legislation. Armstrong walked with the participants to Capitol Hill for scheduled meetings with their congressional representatives. They warned lawmakers that America risks falling behind on innovation and losing jobs to other countries if it doesn’t soon enact clear rules for the crypto industry.

Coinbase spent $US2.2m on lobbying in the US last year, according to OpenSecrets, a nonpartisan group that tracks political contributions.

Among those who joined Coinbase as an adviser is former Senator Pat Toomey, who was one of the cryptocurrency industry’s most outspoken proponents during his time on the Senate Banking Committee. Other Washington insiders including former Reps. Tim Ryan and Sean Patrick Maloney, former Democratic strategist Chris Lehane and Democratic pollster John Anzalone joined Coinbase’s global advisory council.

Fairshake, the pro-crypto super PAC supported by Armstrong, has spent more than $US1.2m on TV ads supporting House candidates and has raised $US78m to support pro-crypto candidates in this year’s elections.

To many in the industry, the 40-year-old Armstrong is filling the void left by Bankman-Fried, who served as the crypto industry’s primary ambassador to US lawmakers and regulators before FTX’s collapse. Bankman-Fried and former FTX executives donated more than $US70m to election campaigns between 2020 and 2022.

“When Sam went down, there was a vacuum,” said Adam Jackson, chief executive of Braintrust, a decentralised professional network and a portfolio company of Coinbase’s venture arm. “Brian stepped in and attempted to bring back credibility to the space.” Bankman-Fried was convicted in November of stealing billions of dollars from customers of FTX, which filed for bankruptcy a year prior. Weeks later, Zhao, who built Binance into the world’s largest crypto exchange, stepped down as CEO and pleaded guilty to violating US anti-money-laundering requirements. He faces up to 18 months in prison. Binance is a shell of its former self and fighting its own case versus the SEC.

Unlike with Zhao and Binance, the agency’s suit against Coinbase didn’t name Armstrong as a defendant or accuse the company of mishandling customer funds.

An introverted and private person, Armstrong hasn’t always been interested in mingling with Washington insiders. His reluctance to position himself as an industry leader frustrated employees during FTX’s rapid rise and Bankman-Fried’s frequent Washington appearances in 2021, according to former employees.

Armstrong said in a 2022 documentary available on Coinbase’s website and YouTube that he didn’t like the idea of being a public figure because it was too risky.

“You can slip up and say the wrong thing and … the angry mob will come after you,” he said in the documentary from Emmy-winning filmmaker Greg Kohs.

Alesia Haas, Coinbase’s chief financial officer and a confidant of Armstrong, said the company is conducting business as usual as it continues to battle the SEC.

“We are preparing the company for a variety of scenarios,” she said. “We are investing in the future.”