Good afternoon. My name is Celine and I will be your conference operator today. At this time, I would like to welcome everyone to the Coinbase Third Quarter 2021 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Anil Gupta, Vice President Investor Relations. You may begin your conference.

Thank you. Good afternoon and welcome to the Coinbase Third Quarter 2021 Earnings Call. Joining me on today's call are Brian Armstrong, Co-Founder and CEO; Emilie Choi, President and COO; and Alesia Haas, CFO. I hope you have 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 at 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 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 that comparable GAAP measure in our shareholder letter and current report on Form 8-K, which are posted on our IR Website. I want to note that we're once again using the Say technologies platform to enable our shareholders to post questions to our management team. In addition, we will take some live questions from our research analysts. And with that, I'll turn it over to Brian and Alesia for some introductory comments.

All right. Thanks, Anil. Thanks everybody for joining us as well. We've had another solid quarter and this is amid the volatility happening out there in crypto markets. We never know exactly what's going to happen in this quarter in crypto, but we are seeing a really strong and accelerating pace of crypto adoption globally. In the letter, we actually shared some insights on the pace of this adoption and how it mirrors that of the Internet 25 to 30 years ago. We looked at some third-party research that indicates that crypto users have doubled in the first half of this year, now over 200 million people, and that growth is accelerating. So what are we going to focus on at Coinbase? There are four main areas. The first is about products; we're a product-led company, and we focus a lot on how we can improve the customer experience to get to a billion people accessing the crypto economy through our products every day. So how are we doing that? Well, we're investing in our core apps, the main retail app. We're also investing in our prime brokerage app for institutions. We're building Coinbase Cloud, which is our AWS-like developer platform for any business that wants to build into the crypto economy. We've been investing in new initiatives, like a few marketplace and our direct deposit offerings. The second area is around customer service. So you saw that we announced 24/7 phone customer support, which we're going to be rolling out next quarter. We're also investing in cyber liability amidst all this growth, and we're very focused on maintaining adequate uptime for our apps and website in this unprecedented growth period. Lastly, we're focused on our policy, government relations efforts, and regulation. This continues the tradition that Coinbase has had since the beginning of seeking out regulators, being the most regulated company, and actually being an educational resource to help educate everyone around the world about how this industry can be something very positive for the world. So I know there are lots of questions to get to, but let me stop there and I'm going to turn it over to Alesia next to share a summary of our financial performance.

Thanks, Brian. As Brian shared, Q3 was a strong quarter for Coinbase. We provided a lot of disclosure in our letter, but I thought I would share a few perspectives. It starts with volatility; the story of our third quarter really centers on the lower volatility that we saw early in the quarter. Our monthly transacting users and trading volumes, and therefore transaction fee revenue, all correlate with volatility, as it is a very important driver of our financials. Trading volume across the entire crypto spot market declined quarter-over-quarter in Q3. For Coinbase, our institutional volumes outperformed this broader market, and our retail volumes performed in line with the industry. Next, I want to share a bit of color on our retail transaction fees. I know you all watch this closely. As you'll see from our disclosures, the blended average fee rates were lower in Q3 versus Q2 for our retail business. We want to be clear; there was no change to our retail transaction fee rates in the quarter. The decline that you see is the result of math. It's a consequence of the fact that in low volatility periods, we see our low dollar volume traders become less active. We've seen this transaction volume rebounding in October as customers have been very active on Coinbase, given the change in crypto prices and volatility that we've seen in October, and our blended average retail fees were higher in October. I want to emphasize that this is just an outcome of activity on our platform and that there is no underlying change to the fee rates. Three other important trends on our cloud: First, we're focused on asset addition and maintaining our position. We told you before that we want to be the Amazon of assets, and today we see 59% of our trading volume in Q3 coming from other crypto assets. We don't know precisely which assets customers are going to adopt, so our strategy of learning to support all legal assets will give our customers more options. Second, our customers are deepening their engagement with our product offerings; 28% of our retail MTUs that invested also engaged with a second product in the quarter. Nearly 50% of our MTUs are engaging with non-investing products overall. We see this as a great indication that we're moving to the utility phase of crypto. Third, our subscription and services revenue was strong at $145 million, up 41% compared to Q2. We are pleased to see this growth despite the impact of volatility on the transaction revenue. Again, this is just a positive indicator that crypto is increasingly moving towards utility, particularly with cases around yield and rewards. I want to turn to our outlook. In our shareholder letter, we noted that Q4 is off to a strong start. Volatility in crypto prices both increased in October, which has resulted in October monthly transacting users of 11.7 million and October trading volume of $186 billion. Additionally, as I mentioned before, we've seen an increase in those retail fee rates in October. As a result of that strength, we've increased our MTU scenarios for full-year 2021. Our low is now 8 million MTUs, which is the average over the course of 2021, and our high is 8.5 million, as outlined in our letter. We also shared that we anticipate our 2021 annual average net transaction revenue per month will be in the high $50 million range. On the expense side, our updated outlook reflects our strengthening view of Q4, including transaction expenses in the mid-teens as a percent of our revenue. Sales and marketing will be higher compared to Q3 as we ramp up our brand investments, and our tech, dev, and G&A spend should come in in the neighborhood of $1.4 billion combined. It's important to note that this excludes stock-based compensation. With that, I will turn it back to Anil to get started with Q&A.

Thanks, Brian and Alesia. Before getting into Q&A, I wanted to clearly lay out some principles for our Q&A session today. First, we will answer the most uploaded questions determined by the number of shares and group questions together that touch on the same themes. Second, we don't plan to answer questions related to potential listing of new assets. Third, we will avoid questions we've answered in the past if there are no updates. For example, we still don't plan to issue a dividend. So our first question is from Sylvie UP and Jason M. They asked about Coinbase Ventures. Can you talk a bit about our venture strategy, investment process, and maybe highlight one or two investments you are particularly excited about? Can you walk us through the capital allocation strategy and how these investments are captured in our financials?

Thanks for the question. So we're very pleased with the progress of Coinbase Ventures. We launched it in 2018 primarily with the mandate to support the growing crypto ecosystem, and we have become one of the most active corporate investors, with more than 200 portfolio companies at this point. One of the questions was about the ones we're most excited about. We look at it thematically, considering what is interesting and which teams and technologies are exciting. This includes everything from OpenSea, in which we invested in their seed round in 2018, because we thought NFTs would be interesting; TaxBit and CoinTracker because taxes are so important in crypto; BlockFi for lending; Uniswap for decentralized exchanges; and CoinSwitch, because we think India and international markets are such important themes. This is how we think about the portfolio; we look for interesting themes and try to find the best teams and technologies in the space. We want to support the ecosystem because it helps grow those companies and also provides us insights into what's emerging. A secondary goal for us is about M&A pipeline and partnerships. For example, Bison Trails is a company that we invested in as a Coinbase Ventures company and it is now acquired by us and forms the basis for Coinbase Cloud. Another example is our investment in Compound before partnering to support its day-one listing for custody and trading. There are many ways we can work with these companies, from partnerships to acquisitions. Lastly, we care about ROI, and we think we will see strong returns in the coming quarters around that, but that's more of a secondary goal for us. We've been focusing a lot on working with protocols, Web3 infrastructure, DeFi, CeFi, and, of course, the NFT Metaverse. We see an abundance of innovation in this space and want to keep doubling down on those opportunities. Alesia, do you want to talk about the financial part?

Happy to. The first part of the question is how we think about our capital allocation framework. I would emphasize there are no hard and fast rules here. When we look at our overall balance sheet, we allocate capital to four different use cases: 1. Working capital, 2. Product support and strategic initiatives, which includes venture and strategic investments; 3. Any potential risks that we may want to self-insure; and finally, the ability to fund our business through a crypto winter. This capital allocation is a constant discussion between Emilie, Brian, and me about what is the best use of our resources, and these are very important areas that we allocate capacity to. We call our strategic investments on our balance sheet under other non-current assets, in our financial disclosures in our 10-Qs.

The majority of our equity investments withhold less than 10%, so these are minority passive investments. We record them at net cost and test for impairments on a regular basis. While they could subsequently increase in value, this is very rare because the accounting criteria for when we actually recognize an investment increase are very precise. It has to be an identical transaction, and typically we do see these investments having subsequent rounds that are not identical. Therefore, you will usually see us carrying this at cost. There could be a significant difference between the fair market value of these investments and their carrying value on our books. We're looking forward to producing more disclosure in the future and giving you insights into this portfolio and potentially disclosing fair market value at a later time.

Next, we received several questions about NFTs. Sylvie UP and Steven D. asked if we could talk about the recent announcement of the Coinbase NFT platform and the overall strategy there. What are your plans for international expansion of the NFT platform and cross-platform usability? Devin Ryan from JMP Securities asked about the social component of NFTs, and Rich Repetto from Piper Sandler asked about the timing of when we will launch our marketplace.

So this is Brian. I'm excited to discuss NFTs. I believe this will become a significant area for crypto in the future, and it's already growing. Historically, Coinbase has concentrated on fungible tokens, but we are equally enthusiastic about NFTs; they have the potential to be as large or even larger, though that remains to be seen. We're launching Coinbase NFT in the upcoming quarter or two. Coinbase operates multiple products; we have an internal initiative we refer to as Project. Alongside Coinbase Wallet and Coinbase Commerce, the direct deposit feature we introduced, this NFT product is a part of that effort. Regarding the social aspect, I think Coinbase can really enhance that experience. We aim to make our Coinbase NFT platform more akin to Instagram rather than a conventional auction like eBay. Users can follow their favorite artists or creators and receive a curated feed of content from them, which could be very impactful. Additionally, users can purchase NFTs they admire and display them on their profiles. We're working to simplify the buying process so it’s as straightforward as possible; engaging with wallets should not require adding a browser extension if your identity and payment methods are already linked from your Coinbase account. We see this as a global trend, and we want our NFT platform to be compatible with all other platforms. We hope to launch something in the next couple of quarters.

Our next question comes from Lee L., who has noticed some Coinbase marketing efforts lately, including ads on YouTube and our recently announced partnership with the NBA. Can you walk us through the evolution of your marketing strategy and how that will continue to fuel the growth of your user base? How do you measure effectiveness?

Thanks for the question. Like many classic consumer Internet companies, we have had a strong base of organic users. Historically, we used very little marketing spend prior to this year. Now, we see a huge opportunity and are working to right-size our budget and invest more in marketing. We think the next concentric circle to reach 1 billion crypto users globally is possible, and we want to use both organic and marketing efforts to help reach those users. We're also exploring what is authentic for Coinbase and how to celebrate the unique aspects of Coinbase in the crypto community through our marketing efforts. To that end, we recently hired our first CMO, Kate Rouch, who came from Facebook. In the first half of this year, we focused primarily on performance marketing. Now, you’re seeing us expand into the full marketing funnel with brand efforts such as Made in America in Q3 and our multi-year partnership with the NBA as their exclusive cryptocurrency platform partner that you mentioned, with more to come. We believe there’s a significant opportunity to invest in brand and use channels that reach new audiences, including eSports, art, and sports, alongside a focus on content to educate existing and potential users about the possibilities of crypto.

Just to add on a little bit, Emilie, regarding how we measure our marketing effectiveness; this is a new muscle we’re building. As Emily noted, our marketing spend is evolving beyond performance marketing. We’re well-tuned to customer acquisition costs in determining regional outcomes that we'd like to see. We're planning to test, learn, and gather insights as we spend on various marketing initiatives, so you should expect to see us iterating and testing quite a bit, sharing updates as they become relevant.

Our next question comes from Hobik K. and Caleb O., who saw the updates to our crypto investment policy. Can you share a bit more detail around that program for those who may not be as familiar, and what purchases have looked like so far? Would Coinbase ever consider getting into mining?

Thanks for the question. In August, we announced an update to our crypto investment policy, and our goal is to become a vast majority, if not 100%, crypto over time. We want to have our assets in that direction. We've made two commitments: first, to invest $500 million of our cash and cash equivalents into crypto, and second, we’re allocating 10% of our quarterly net income into crypto investments. We are dollar cost averaging into a diverse portfolio over time; you will not see a $500 million step-up in our investments for Q3, but you should expect to see this balance grow over time. We have invested in crypto assets that are held on our balance sheet at cost. They sit under the line item called 'Crypto Assets Held,' and you can view additional disclosures in our financial statements that outline what is an investment versus what we hold for operational purposes. You can also see fair value disclosures within those notes, showing our crypto investments as of Q3 were on our balance sheet.

Regulation is top of mind. Can you provide insight into the regulatory state of affairs in the U.S. today? How is Coinbase participating, and how would you like to see the conversation evolve? In addition, Owen Lau from Oppenheimer asked about how the digital assets policy proposal has been received by regulators.

I can take this one. Regulation and our policy efforts are certainly top of mind for us as well. Whenever we see a run-up in crypto, we see an increased interest from policymakers around the world. Going back to our roots, Coinbase has always engaged with regulators, sought licenses, and aimed to be the most trusted voice out there. We've also wanted to be an advisor and a helpful voice for finance ministers around the world who are trying to navigate the changes happening in the global economy with crypto. We've continued that trend over the last few months, meeting with various regulators regularly. Just last week, I had a meeting with SEC Chair Gensler, which I found to be very productive. There are a variety of different regulatory bodies in the U.S., and this is part of our discussion in the digital asset policy proposal. We suggest that it may be time to consolidate under a single federal regulator for digital assets in the U.S. This could be under one of the existing regulators without creating entirely new ones. This approach would enable more innovation, particularly benefiting smaller startups in the space. We really want to cultivate an environment that allows 1,000 companies to flourish, creating economic growth and financial freedom here in the U.S. as a financial leader. This is also crucial as millions of young, talented people look to enter this industry.

Thanks, Brian. Our next question comes from someone who asked about the impact of competition on transaction fees. What are your plans for diversifying your revenue streams?

Great question; I'm glad you asked. We've shared before that we don't think of ourselves as primarily competing on fees today as we believe the services we're providing are not commoditized. On the retail side, we compete on access to assets, which is why we're focused on asset addition. We target products that allow our users to use their crypto, and increasingly the ability to interact with DeFi. We're providing a differentiated economy. On the institutional side, we offer an institutional-grade broker, with deep liquidity and secure storage solutions, so fees are not the main aspect we compete on. I want to share that we haven't modified our fee structure in Q3 and haven’t in some time. However, the weighted average fee varies quarter to quarter due to the mix of volume on our platform. We saw a decline in our retail transaction fees in Q3, as more volume came from our Pro platform than our consumer platform. This is normal during low volatility periods like July. High activity tends to remain among our institutional and Pro users while retail or consumer trading volume may lag. The reverse is true during periods of high volatility, as we experienced in both September and October. Long-term, we expect to see fee compression as more products become commoditized in the crypto space. Thus, we've already begun focusing on diversifying our revenue, with growth in our subscription and services revenue. We're thrilled to see crypto entering its utility phase; users are coming to us not only to transact, but also to engage with products like staking, lending, and earning. This is just the beginning, as we're set to launch new products and services over the coming quarters that will further diversify our revenue streams.

Timothy, Adam W., and Nicolas have asked about improvements in functionality around cost basis, profitability, etc. of a position. Similarly, what are you developing to help consumers during tax season?

I can take this one. Generally, we want to make it easier for all our customers to calculate tax implications for their crypto activity. We are working on producing a simple form for the end of the year, akin to other financial services firms, in which users get copies to submit to the government. We're getting very close to having this ready with the rollout of our Coinbase Tax Center, which tracks information for customers to alleviate their concerns. Looking to the future, I would love to see the crypto industry create interoperability, allowing for seamless transactions across different platforms, sharing tax information to streamline compliance. The tax center will be a substantial step in that direction, facilitating tax processing for those on Coinbase platforms. Additionally, tracking cost basis, gains, and losses in summary is crucial. We've been addressing that development for quite a while, and we aim to have useful tools in place for Q1.

We already view the entry of new companies into the crypto economy positively; it fosters more innovation. Additionally, companies like PayPal, Square, Robinhood, and traditional financial institutions are joining, signifying the validation of the space. Often, we collaborate with these companies, seeking partnerships wherever beneficial. Our differentiation from those companies is being crypto-native, allowing us to provide scalable features and assets based on specific user needs. We also draw inspiration from other crypto-native companies we've seen. While these companies are generally unregulated, we can offer more usable and compliant versions of those products. Customers choose us for our trustworthiness, ease of use, safety, and security in our services.

Great, thanks. We’ll take one more question before moving on. This question is from Jason M., who asked about our international expansion plans in South Asia and South America. Additionally, Harsher from Sanford Bernstein inquired about recent launches in Japan and Germany.

Sure. Our platform is now available in over 100 countries globally. To fulfill our mission, we need to have as deep and broad global reach as possible, so we aim to build products with a shift towards international default. Crypto is inherently global, and our product capabilities must align with that. We consider various signals in different countries and regions, including GDP, crypto volumes, and currency stability, as we actively pursue M&A and partnerships to help accelerate our reach in these geographies. Alesia, would you like to speak to the latter part of that?

Absolutely. As for Japan and Germany, we noted in our Q2 shareholder letter that we received licenses in these markets. It had been a long-awaited launch, followed by a long application process with regulators. Although we don't know the exact launch date, we plan to develop very similar products in those markets as we have in the U.S., creating a delightful onboarding experience to reduce customer friction. However, we don't have a meaningful update regarding those launches yet, but we hope to share news in the near future.

Thank you. So with that, we’ll now transition and take a few live questions from our analysts. Celine, I’ll turn it over to you for the first question, please.

Thank you. We'll pause for just a moment to compile the Q&A roster. We have our first question coming from the line of Kenneth Worthington with JPMorgan. Your line is open.

Hi, good evening. The cryptocurrency markets have seen positive movement in recent weeks. What do you think are driving factors in the current cryptocurrency market compared to earlier interest driving the ecosystem last year?

Thanks for the question, Ken. I can share my high-level thinking on this, and then if anyone else has additional thoughts, please jump in. Looking back three to five years, many of the cycles in crypto were more speculative. People bought crypto because it was seen as a scarce digital good, assuming its value would appreciate in the future, and while some used it for payments, it wasn't the primary driver. Now we are seeing numerous use cases, such as NFTs, gaming, staking, borrowing, lending, and the Coinbase card. Almost half of our active customers are now doing something other than trading crypto. While I often hesitate to speculate on what drives momentum in the market, I think it’s essential to focus on bringing more users into crypto through varied functionalities and ongoing utility. We are witnessing an increasing shift toward reduced speculation and expanded real-world usage, as highlighted by our numbers.

I agree with everything Brian said. To connect the dots: when we see NFTs gain traction, it provides tailwind effects for Ethereum and other related networks, which then drive growth across the broader crypto ecosystem. We're observing institutional investors beyond the typical categories making allocations towards crypto. We see a clear adoption curve, starting with Bitcoin, moving on to Ethereum, DeFi, and further innovations. The dynamics feel markedly different as they shift away from speculation towards utility and broader crypto adoption in everyday use cases.

Thank you. This quarter we've seen the launch of crypto ETFs in the U.S. Can you talk a bit about how these ETFs affect Coinbase or may do so in the future? Can you elaborate on how Coinbase is approaching partnerships versus competition with traditional asset managers?

About the bitcoin ETF, we believe it will increase trading volumes broadly and serve as a push toward greater adoption. Some institutions, unable to invest in the underlying spot, may find this avenue appealing. Crypto, being a 24/7 global asset class, presents unique opportunities compared to traditional market hours. ETF products will likely benefit from this global crypto backdrop. Additionally, we possess custodial capabilities and are engaged in discussions to support broader ETF adoption. While our business today is entirely spot, we are eager to expand into futures trading and have applied for approval to do so in the U.S. Ultimately, we're excited for the overall growth of the crypto economy and the users it will bring to our platform.

Brian, I appreciate your comments on the policy topic. Does the need for a separate regulatory framework and pathways to crypto integration underlie any key discussions you feel are necessary now?

That's a great question. As we recognize, we must navigate both existing regulation and this emerging crypto economy in tandem. This requires understanding the need for regulatory intermediaries that can facilitate this landscape. Technology can provide some solutions directly in crypto. Our priority remains consumer protection while addressing the need for regulated financial providers. An overarching regulatory framework could enhance innovation by establishing clear expectations for our industry and integrating guidelines within traditional financial frameworks. We're keen to achieve a balance to enhance regulatory assurance while allowing the industry to flourish as it evolves.

Our goal is to engage with regulators and facilitate a better understanding of the nuances in blockchain technology compared to traditional financial services. We want to design regulations that protect consumers while supporting innovation. Our advocacy aims to address uncertainty, especially with diverse crypto products that necessitate different regulatory approaches.

Thank you, Brian. We have one more question from Will Nance at GS. Your line is open.

I want to discuss regulatory context and how proactive Coinbase has been about compliance efforts. Are there any developments from your discussions with regulators today? Additionally, regarding product rollout, what do you think should be prioritized over the current expectations?

Thanks for your question, Will. I would say that 90% of our interactions with regulators are genuinely positive and constructive, and generally feel like they are going quite well. We make it a priority to engage proactively, reaching out to regulators well in advance of launching any product to keep them informed. This has resulted in generally favorable outcomes. Occasionally, we do see a poorly defined policy proposal or last-minute decision that can be frustrating for our team working hard on product launches, but we understand that these situations arise in a fast-moving sector. It's a complicated issue, and it's super vital as the largest player in the U.S. to lead this engagement. We share the aim of regulators in consumer protection and fair market behavior, which often align with our core principles.

Operator, we have time for one more question, please.

I want to touch on the growth in blockchain rewards. The profit from these initiatives has substantially increased. What is the future growth outlook for staking and rewards overall?

Thanks, Rich, for the question. As you noted, we've seen significant growth in our blockchain rewards revenue, primarily driven by the expansion of proof-of-stake networks and overall crypto growth. We plan to add more proof-of-stake networks, having a waiting list for staking services and working to onboard more users into these assets. We foresee a promising trajectory for growth in this space, which aligns with industry developments. Brian, do you want to add any further comments?

I believe that Coinbase is heavily invested in the growth of the staking market and the blockchain rewards economy, which will play a significant role in our future growth. I see Coinbase as one of the largest stakers, which presents a compelling opportunity. Income opportunities, like staking rewards along with earned revenue, will be crucial as they expand rapidly within the crypto landscape.

Thank you, Brian, Emilie, and Alesia. Thank you all for joining us today. We look forward to speaking with you again on our next call.

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