Good afternoon. My name is Maria, and I'll be your conference operator today. I would like to welcome everyone to the Coinbase Second Quarter 2021 Earnings Call. The call lines have been muted to avoid background noise. After the presentation, there will be a question-and-answer session. I will now turn the call over to your first speaker, Anil Gupta, Vice President of Investor Relations. You may begin your conference.

Good afternoon and welcome to the Coinbase Second Quarter 2021 earnings call. Joining me on today's call are Brian Armstrong, Co-Founder and CEO, and Alesia Haas, CFO. I hope you've all had the opportunity to read our shareholder letter which was published on our Investor Relations website earlier today. Before we get started, I'd like to remind you that during today's call, we may make forward-looking statements. Actual results may vary materially from today's statements. Information concerning risks, uncertainties, and other factors that could cause results to differ from these forward-looking statements is included in our SEC filings and shareholder letter available on our IR website, @investor.coinbase.com. Our discussion today will include references to adjusted EBITDA, a non-GAAP financial measure. We believe that certain non-GAAP measures of financial results provide useful information to management and investors regarding trends relating to our financial condition and the results of operations. Non-GAAP financial measures should be considered in addition to, not as a substitute for, or in isolation from GAAP measures. You can find additional disclosures regarding adjusted EBITDA, including a reconciliation to net income, the comparable GAAP measure, in our shareholder letter and current report on Form 8-K, which are posted on our IR website. Similar to last quarter, we are using SEI technologies to enable all Coinbase shareholders and analysts the opportunity to submit and upload questions for our management team. We had several thematic questions, so I'll summarize some of them. With that, let's go ahead and get started. Brian, Q2 was a strong quarter for Coinbase. What trends do you think are most important to highlight to our investors?

Thanks, Anil. You're correct. Q2 was a really strong quarter for us. We had amazing growth in terms of users added to the platform, assets on the platform, revenue, just about everything. And also, great diversification across our revenue lines and users. So, this is really good to see. More and more people are using crypto and using the Crypto Economy, individuals, businesses, developers all over the world. Now, it's important to remember that just because we had a strong quarter, we at Coinbase always think about longer-term cycles of crypto. This is a theme you're going to hear us talk about a lot here on this earnings call. So, we don't try to get too excited about any particular quarter being up or down. We're always looking at the long-term trends about how people are using this new technology, how the crypto economy is growing, and how that eventually influences our mission of creating more economic freedom in the world. So, the question asked about trends as well, there are really two that came to mind for me that I think were really important in the last quarter. The first one is that we're continuing to see this trend of people using crypto for more and more things beyond trading. For example, we shared in the letter that we now have 1.7 million users doing staking in crypto, which is a way to earn a yield on your assets. And this is up from basically, that number was probably zero a year ago. And I think if you go back to late 2019, we had less than a million MT users on our retail side for Coinbase in total. And now we have 1.7 million just doing one type of activity, staking. So, we're seeing people do more and more things with crypto, whether that's earning money with crypto, borrowing and lending, staking, using the Coinbase card, and then, of course, trading. And so, I think we'll continue to see that percentage go up over time, which is great. That's how a truly crypto economy is forming; it's not just a trading platform. And then the second big trend we're seeing is this idea of Coinbase embracing decentralization. And I wrote a blog post about this. Really what this means for us is that we believe the future of this industry is going to be decentralized. There's going to be more and more third-party apps being created where people will want to connect their wallets to it and Coinbase is their primary financial account, so we need to make it easy for people to connect and integrate with all of these third-party apps out there that are happening; NFTs and DeFi, and there are hundreds of crypto startups now being built. We're also focusing on international expansion, another form of decentralization, and just listing more and more assets. We want to be the Amazon of assets, list every asset out there in crypto that's legal. There are thousands of them today. There are eventually going to be millions of them. This is all under the theme of embracing decentralization. Those are the two big trends that I'm seeing today.

Great, thanks. And Alesia, can you recap the financial highlights before we dive into investor questions?

Thanks, Anil. The second quarter was a strong quarter for Coinbase. To elaborate on some of the things that Brian just spoke about, we saw user growth across the board with our retail MTUs, institutions, and our ecosystem partners. The metric that we really focus on is what percent of our retail MTUs are now using multiple products on Coinbase, and in Q2, it was for 27% up from 25% in the first quarter. What's really notable to me, though, when I look at this number is the growth in the underlying MTUs and how many users we now have used multiple products on our platform. Brian shared we have 1.7 million users with staking, but we also saw 2.3 million users engaging with the earn campaign during the quarter. Separately, on our institutional side, we're seeing broad adoption. One of the things that we highlighted for you all is that we now have 10% of the top 100 hedge funds measured by AUM now clients of Coinbase and engaging with the crypto economy. Just like buying shares a few years ago, where we had very few MTUs, or like a year ago, very few stackers; about a year ago, hedge funds weren't participating in crypto. This is really a new theme that we're seeing, that more and more hedge funds are making the allocation of the crypto economy and engaging in multiple assets on our platform. Combined, our users generated $462 billion of trading volume which led to $2 billion of net revenue and $1.1 billion of adjusted EBITDA. We were also pleased to see the growth in our subscription and services revenue which totaled $103 million in Q2, roughly 5% of our total revenue. I want to take this moment just to remind everybody that crypto asset prices and volatility heavily influence our transaction revenue. And these inputs continue to be volatile and very hard to forecast. We do not extrapolate our quarterly results. We shared our current outlook of potential future full-year 2021 scenarios within our shareholder letter, and we believe that any of those outcomes are possible for the full year.

Thank you. Let's move on to the questions we have received from our analysts and investors through the SEI technologies platform. Several questions focused on the regulatory landscape. Will Nance from Goldman Sachs, Sean Horgan from Rosenblatt, Rich Rippetoe from Piper Sandler, and Lisa Ellis from MoffetNathanson, along with others, all inquired about this topic. Brian, could you share your perspective on the current regulatory environment? What proposals or actions do you anticipate as a result of recent events and commentary, and how should we interpret that for the industry as a whole? What implications does this have for Coinbase, especially in comparison to potentially fewer conservative competitors?

The regulatory environment has been quite intriguing lately, especially with the recent Senate vote on the Language and Infrastructure Bill, which has drawn significant attention. One takeaway is that the crypto community has emerged as a strong force, with around 20 million people in the U.S. involved in crypto, making them a valuable player in policy discussions. While there is a notable gap in understanding among policymakers regarding the potential of this technology, many are beginning to engage with the crypto community. Similar to the advent of the internet, there is a major opportunity for governments to harness economic growth and innovation from crypto, although some risks need addressing, which creates a chance for us to provide education. Coinbase has pursued being an educational resource from its inception, aiming to be a trusted crypto company committed to compliance. We have continued this strategy through various initiatives, including hiring Faryar Shirzad as our Chief Policy Officer. He is working on building his team and helping us advocate effectively. We are also involved in the Crypto Council for Innovation, an advocacy group formed by several industry companies to promote education. We have always supported sensible regulation and want to compete fairly with traditional financial services. Unlike some tech companies that react to negative events before engaging with the government, we proactively seek to educate and advise leaders on how they can adjust their economies to seize the opportunities presented by the crypto economy. Topics such as Central Bank digital currencies and competitiveness with China are pressing issues. Ultimately, we aim to shift perceptions of crypto from viewing it solely as a risk to recognizing it as an opportunity, where risk mitigation is just one aspect of a broader focus. This encapsulates our current efforts in policy engagement.

Okay. great, and as a follow-up for Alesia, lending, in particular, seems top of mind not just for SEC Chairman Gensler, but for states as well that have taken action against other companies. Could you talk about what types of lending activities Coinbase is currently engaged in and what concerns do you have around scaling these efforts while also remaining compliant with any forthcoming regulations?

Thanks, Anil. It's a great question. We've begun to build out a robust financing business. Today, we offer bilateral lending and post-trade credit to our institutional clients. On the retail side, our retail borrow product has seen growth, and we allow many of our customers to borrow up to $100,000 against their crypto holdings. These products are offered through Coinbase Credit under the state-line lending licenses that we have. It's important to note that today, we lend funds off our own balance sheet. We are paying careful attention to SEC Chairman Gensler's public statements. And we are eager to understand the legal framework for the concerns that he has raised and how and if those may impact our product roadmap. As Brian said, we are engaging with staff and we reiterate our commitment to bring just the market reality to their attention and are looking forward to engaging with regulators to drive more regulation to provide clarity and to enable our product growth.

Okay. Let's turn to some questions that we received from our investors. We had a number of questions this quarter, including some of the top-voted ones that deal with the topic of decentralization and applications like DeFi, NFTs, Web 3.0, and others. Brian, could you help our investors understand a bit more about that shift and talk about the investments Coinbase is making here?

Yeah, sure. It's funny for a long time, Coinbase has been around for about 9 years, and people always asked me what are the use cases aside from trading. And the good news is that we're now seeing tons of these cases pop up in crypto. Some of them were mentioned, DeFi, NFTs, and all the third-party apps or this Web 3.0 concept. There are literally hundreds of startups out there being funded by top-tier VCs with really great founding teams. It's like basically the dot-com startups of the internet era. And so, there are tons of use cases out there being created. With Coinbase as the primary financial account for many of these people participating in the crypto economy, they, of course, want to take those assets they're storing with us and go use them with all these different new applications out there, these third-party applications. So, what do we need to do to make sure we can enable that? Well, with Coinbase Wallet today, which is our self-custody app, you can go participate in all of these things; DeFi, NFTs, third-party applications, and a number of our customers are taking advantage of that. But how do we bring that functionality to the main Coinbase app, the one that has the majority of our users? Well, that's the next thing that we're working on. And so, we're doing that with a crypto app store, if you will, that's to be built right in the app. We're also doing some work to re-architect our hot wallet using a technology called MPC, or multiparty computation, which is going to make our hot wallet compatible with these dApps or third-party applications. There's some really important engineering architecture work happening there. And just the concept of embracing decentralization is bigger than just NFTs, or DeFi, or whatever the hottest thing is that's happening this month in crypto. It's also about us embracing a global mindset. We are trying to build a company that enables people all over the world to access the crypto economy, so we're putting a lot of effort into international expansion. It's also about enabling all the new assets that are being created in crypto. Like I mentioned earlier, we really want to be the Amazon of assets. We actually added 22 assets in Q2, which was great, that was the most we ever added in a quarter, but we need to keep scaling that. I think there's eventually going to be millions of crypto assets out there. You could imagine if there's going to be a crypto asset for every startup that wants to get created and who wants to raise money, or if every kind of individual might create a coin, or there are NFTs. There are so many new assets being created that we eventually need to support millions of these. And so, there's a lot of work going into how we scale that process internally and making sure we're ready for all that growth.

Great switching gears a bit. We got a question about asset listing. So, Sean Horgan over at Rosenblatt Securities asked about engagement and activity on Coinbase after the introduction of those last quarter, and how that approach has changed as we look at new assets. And Brian, can you just overall expand on our approach to asset listings in general?

Yeah. No major changes as a result of that asset listing, but that was one of the 22 that we did in Q2. I mean, our overall approach is we're agnostic about which assets are going to win; we really just want to support every asset that's legal for our customers. And we have a very rigorous process we've created for the compliance, legal, and cybersecurity evaluation of these assets to make sure they comply with those standards, but once we get comfortable with that, we want to list various assets that meet those listing criteria. Bitcoin and Ethereum still make up about 50% of our trading volume, and the other 50% is the long tail of all the other assets that we support. No single one of those long-tail assets accounts for more than 10% of our trading volume, so it's really starting to become quite a diverse set of assets out there. And in any given week or month, there's something interesting that happens in one of them; that tends to trend up or down. We never know which one is going to be the active one that week, but we need to support the entire ecosystem of assets out there for our customers.

Great. Brian, several shareholders asked about our institutional business and how Coinbase's offering is not only differentiated relative to other service providers in the market today, but also how do you believe the product evolves over time as more established players enter the space? Could you talk a little bit about that?

Yeah, sure. So, I'm really excited about our institutional product, and it's going super well. We've now basically become the dominant institutional platform out there. We're serving customers like SpaceX, Tesla, also PNC Bank, Third Point, and WisdomTree. Alesia mentioned earlier, 10% of the top 100 hedge funds by AUM have now onboarded our institutional product. And we're just really excited about this product. The asset managers and corporate treasuries are now using these products; pension funds. It's really quieted a lot of adoption that we've seen. The question asked about why are they choosing Coinbase? What's defensible about it? I think the main thing with defensible is that we are really the fully integrated solution here. People not only trust us to do custody and store crypto assets, but we also have our Prime brokerage products integrated, so they have the full suite of products there in terms of our smart order router, which connects into more than 10 venues to get the best liquidity. We also have a number of services for them like post-trade credit. If they want to do staking on these assets and earn yield or if they want to participate in the governance of some of these blockchains; these are all features that our institutional customers ask for. We've also integrated our market and on-chain data analytics products in a way that is providing them a lot of value. And so we basically have this one-stop shop where you can store your crypto, trade it, earn yield, do post-trade credits, and things like that that are needed all in one place. I think it also really helps that we've established ourselves as the first public crypto company offering this kind of service. Larger companies are much more comfortable trading with us. And the work that we've done to create this product is really difficult. People sometimes don't realize that integrating with all these different blockchains, doing transaction monitoring for compliance, storing these private keys and materials in a way that's distributed globally so it has redundancy, consensus mechanisms, and is audited and tested; this is all a really core differentiator for us. And so, we're really excited about this product. The last part of the question really is you asked about what's going to happen as more established players enter the space. I mean, first of all, I think we're really excited about that. We want every single financial services company out there to enter the crypto space because we believe this is going to be a huge part of the economy in the future; a substantial portion of global GDP. And so, we want every bank and financial services company and fintech out there to integrate crypto if they haven't started already. So, I think this is partially competition for us, but it's also partially an opportunity because one of the things we're building is called Coinbase Cloud, and this is our AWS for the crypto product. It's taking all those difficult things that we've had to build that I mentioned; integrating blockchains, transaction monitoring, custody, and everything, and exposing those through APIs in a way that any third-party can actually build on top of those services, those APIs to get to market faster. And we're seeing interest from a number of those financial service players, for instance. And so, I think that we may have an opportunity to actually create a big business out of that as more and more people enter the space and not have it just be truly competitive.

Thank you. Alesia, investors often ask about our marketing efforts in the wake of the incremental investment we spoke about last quarter. Could you outline our marketing efforts and what they've looked like to date? What we've learned? And any clarification on the marketing strategy for the remainder of the year and beyond for Coinbase?

Thanks, Anil. Yes, our marketing spend has grown, and we grew about 65% quarter-over-quarter, so we're definitely ramping up our efforts here. To date, our spending has primarily centered on paid media on digital channels. And we believe the step-up in marketing was the key component of the growth of our MTUs this quarter. As we look forward, though, we plan to ramp up additional marketing investments in three ways. With the goal of driving brand awareness, growing customer acquisition, and increasing our customer retention globally. You're going to see a focused scenario of brand awareness via partnerships and sponsorships. We're going to look to new strategic channels and new venture channels for us, which could include TV or out-of-home advertising off of the digital space. These are going to be fundamentally new marketing channels for Coinbase, and we expect them to perform differently than the optimized core performance marketing we've invested in to date. What we're looking to do here is to test, learn, and iterate to get the right balance between optimizing the new channels to drive additional growth and return on our investments over time. We believe all these new investments in brand campaigns and strategic and venture channels will drive the full funnel estimate growth and bring more and more people into the crypto economy, which is really our long-term goal of driving a billion people into crypto and increasing economic freedom. As we look to the rest of the year in terms of spend, we've left our outlook unchanged and we believe sales and marketing expense as a percent of our net revenue for the full year 2021 will range between 12% to 15% of our net revenue.

About half a dozen shareholders inquired about topics related to our capital allocation principles, how Coinbase evaluates investment opportunities, how we fund these opportunities, and ultimately, if and when capital may be returned to shareholders. Alesia, can you provide a framework for helping investors understand our approach to capital allocation?

Happy to. We are a high-growth company, and we are in what we think of as the earliest days of a massive global opportunity to bring crypto to a billion people. As such, we think it's the best opportunity to put our capital to work in our growth flywheel, for product development, to add users to our platform, to add new assets to our platform, and build the exciting product roadmap we have. We invest this resource in a 70-20-10 framework, thinking about 70% for core work, 20% for strategic investments, and then 10% for innovative new ideas. We also think about investing both organically and inorganically. And we think about using our capital for the potential for opportunistic acquisition in service of our product roadmap. When we think about the use of our cash overall, then, it's to fund our operations, just core business operations. We also think a bit for strategic purposes. And lastly, what we would think of is for investment cash. We're very mindful that crypto is volatile, and we want to ensure we have enough cash and resources to weather any prolonged crypto winter cycle and still be able to grow our business and execute on our business goals. As we said previously, we have no intention of any near-term return of capital to shareholders in the form of a dividend or share repurchase.

Okay, thanks. Brian, customer service continues to be a hot-button issue and a very important topic for many of our shareholders and consumers. What would you tell shareholders about the state of customer service at Coinbase, and what are we doing to address ongoing customer concerns?

Yeah. Well, with all of this type of growth happening in the last couple of quarters, you can imagine this has been a big focus for us. I'm proud to report that we are doing much better, but there's always more to do. We've increased the headcount five times or so since January this year working on support specifically. That means there are now more than 3,000 people dedicated to solving customer support issues. We're also rolling out live support for customers via chat and phone later this year in a more robust fashion. Some of these things along with just improving our education resources, making sure the help center is up to date with all the latest features, these are all investments that are happening, and I think we'll continue to make progress there.

A few investors honed in on the consumer financing products we've brought to market recently like Coinbase Card and Bitcoin Borrow. Brian, can you talk about the vision for those offerings, early learnings from how consumers are engaging with them, and how and when we intend to expand those programs?

Sure. Coinbase Card and Coinbase Borrow are both initiatives aimed at enhancing the crypto economy. Initially, crypto was mainly used for trading, but people began to explore other possibilities such as spending, borrowing, and earning money with it. The Bitcoin Borrow feature allows users to secure USD loans using Bitcoin as collateral, and we have successfully launched this product. Coinbase Card enables customers to spend their crypto through a debit card wherever Visa is accepted. Our long-term objective is to increase the number of transactions for goods and services in everyday commerce using crypto. For this to occur, we need to enhance the scalability of blockchain and create demand among both merchants and consumers who want to use crypto. This presents a two-sided marketplace challenge. Coinbase Card helps address this by allowing customers to spend crypto without requiring merchants to specifically accept it, as long as they accept Visa. By increasing crypto spending among users, we can identify merchants that process the most crypto payments and encourage them to accept crypto directly, highlighting potential savings in fees. This approach aligns with our broader goal of growing the crypto economy and encouraging more widespread use of crypto for various purposes, including some unique applications that do not have equivalents in the traditional economy.

Okay, great. I think we have enough time for one last question here, which comes from Owen Lau at Oppenheimer about fees. Alesia, you mentioned before, Coinbase doesn't compete on fees, but could you elaborate on our reported fees in Q2, as well as thoughts on both fees and spread going forward?

Yes, you're correct. We have said before that we do not compete on fees. Instead of focusing on being the lowest-priced platform, we focus on providing the most value to customers through our custody, our security in storage, in addition to trade execution, which is critical for bear instruments like crypto. On the retail side, these services are bundled into our transaction fee. We're really competing for these users based on the product suite. As we shared earlier, our users continue to further engage with the crypto economy in non-trading products like staking and earn. These types of services, new assets, and new ways to engage with crypto are what attract users to Coinbase. If you look at retail transaction revenue relative to our weighted average retail trading fee volume, you will see that our weighted average retail transaction fees were 1.26% as compared to 1.21% in Q1. This was driven by a mix shift between our customers; we saw more volume on consumer versus pro in Q2. I'd also remind investors we're reporting matched volume. On the institutional side, customers are choosing us for deep liquidity and the integrated products suite that Brian spoke about earlier, as well as our heritage of security and compliance. If you look at our institutional transaction revenue relative to our institutional trading volume, you'll see that our weighted average fee was 3 basis points as compared to 4 basis points in Q1 driven by our tier-based pricing in the higher volume that we saw in Q2. We haven't made any broad modifications to our pricing in some time, but we are constantly running pricing experiments and testing to see if there are opportunities to better serve different customer segments with different pricing models.

Great. Well, thank you. And so, with that, I think we're done. Thanks, everybody, for joining us on the call today and we'll talk to you again next quarter.

And this concludes today's conference call. Thank you for participating. You may now disconnect your lines.