Coinbase Global, Inc. Q4 FY2022 Earnings Call

Good afternoon. My name is Paula, and I will be your conference operator today. I would like to welcome everyone to the Coinbase Fourth Quarter and Full Year 2022 Earnings Call. All lines have been muted to prevent background noise. After the speakers' remarks, there will be a question-and-answer session. Anil Gupta, Vice President of Investor Relations, you may begin your conference.

Good afternoon, and welcome to the Coinbase fourth quarter and full year '22 earnings call. Joining me on today's call are Brian Armstrong, Co-Founder and CEO; Emily Choi, President and COO; Alesia Haas, CFO; and because regulatory questions may be top of mind, Paul Grewal, Chief Legal Officer, is also joining today. 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 these results to differ is included in our SEC filings. Our discussion today will include references to certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are provided in our shareholder letter and on our Investor Relations website. Non-GAAP financial measures should be considered in addition to, not as a substitute for, GAAP measures. We are once again using Safe Technologies to enable our shareholders to post questions. And in addition to that, we will be taking some live questions from our research analysts. So with that, I'll turn it over to Brian and Alesia for opening comments.

Thanks, Anil. So I want to touch on three themes in my opening comments. The first one is about how we're reducing our operating expenses to operate more efficiently and better generate EBITDA in the future. The second theme is going to be about the current regulatory environment. And the third theme is going to be about where we are in this crypto cycle. So let's start with our reductions in operating expenses. When Coinbase went public, our goal was to operate at roughly breakeven across crypto cycles, but the market has changed, and so we're evolving along with that. We're now evolving the business with a goal to generate adjusted EBITDA in all market conditions. In January, we further reduced headcount by 20%. This follows the headcount reduction of 18% we did last year in June. We've also worked hard to reduce the amount of dilution from stock-based compensation and adjusted our compensation policy across multiple dimensions. Our total dilution since going public in April of 2021 has been about 5%. These changes will ensure that we continue to manage dilution going forward. Now parting ways with colleagues and changes to compensation are never easy, but I think this is helping us be a more efficient company as a result, and it positions us to better weather this downturn with a very healthy balance sheet and continue investing in the future so we can be the global leader in the crypto space. I was also really glad to see that our subscription and services revenue grew 53% year-over-year to $792 million in 2022. This was a major downturn in crypto, of course, from 2021 to 2022. And I think this really shows that our strategy of becoming an all-weather crypto company is paying off with more predictable revenue streams. So next, I want to talk about the regulatory environment that we're currently in. In the wake of FTX and other crypto company failures, we've seen increased regulatory scrutiny, of course. But let me be very clear, I believe this is a good thing for the space and that it will ultimately benefit Coinbase. It's really easy to look at the headlines and assume that increased regulatory activity is bad for crypto, but I really don't agree with that. There are many legitimate companies in the crypto space, like Coinbase, and those of us who prioritize trust and compliance from the beginning, I believe, will be beneficiaries. This really goes back to the founding of Coinbase more than 10 years ago. When I started the company, I really decided that this was going to be a compliance-focused company. We were going to do things the right way even if it was more difficult. I anticipated that there would be companies that would come in and try to cut corners. They might even grow really quickly because it's easier to move fast when you don't have to follow the rules. But they would inevitably come crashing down because regulators don't always act quickly, but they do eventually act. We decided to do things the hard way, playing the long-term game and built a very different company over the last 10 years. In many cases, we proactively put in place appropriate controls before they were even required, anticipating that this greater regulatory clarity would be coming. So I think we're really well positioned in this type of environment and how things are changing. We need more clarity in the United States around regulation, and we probably need new legislation at some point, but I'll talk about that a little bit later. So third, let's talk about where we are in this crypto cycle. Now I think it's important always to look at the fundamental indicators that we have and try to separate out the signal from the noise and the negative headlines. The narrative in crypto tends to flip every two years, it's either irrational exuberance or despair. Neither one is true at any given time, but we're in one of those despair phases right now, and that also means there's an opportunity for builders who are focused in this space like Coinbase. So if you take where we are now or in 2022 and compare that to just two years ago, you kind of have to look over at least the prior cycle. You can't just look at what happened in the last year or the last quarter. The Bitcoin price in January of 2023 is up 80% compared to the average price in 2020. The number of software developers who work in crypto has doubled since 2020, and that's a great predictor, I think, of where the future is going. The number of major brands that have started integrating Web3 and other technology, including Starbucks, Adidas, Nike, Coca-Cola, and social media platforms like Instagram, Twitter, and Reddit, are all integrating crypto services into their products. Customers who use those platforms are going to need a crypto wallet. That's where Coinbase comes in. We've come a long way on the regulatory side. Outside the U.S., just about every major financial hub is vying to be the leader in Web3. We've seen comprehensive crypto legislation get passed in the EU with MiCA. Even the UK, Hong Kong, Japan, and Brazil are all making very positive strides toward comprehensive crypto legislation. I believe we'll get that in the U.S. eventually. So in short, we remain incredibly bullish on this technology and this industry. We're operating more efficiently at this new size. We believe we will be net beneficiaries of increased regulatory clarity. And of course, ultimately, we've got to keep driving the utility of crypto, improving our products, and driving more use cases so that a billion or more people can benefit from this technology, and we can increase economic freedom in the world. So with that, let me turn it over to Alesia to talk about our financial results.

Thanks, Brian. First, I'm going to recap our Q4 results. Our fourth quarter net revenue increased 5% quarter-over-quarter to $605 million. This was driven by strong growth in our subscription and services revenues. In terms of transaction revenue first, we gained trading volume market share. Our trading volume did decline 9% quarter-over-quarter, but it outperformed the total crypto spot market, which saw a 21% volume decline quarter-over-quarter. As a result, our total transaction revenue declined 12% to $322 million. In contrast, subscription services grew 34% quarter-over-quarter to $283 million. This was largely driven by our participation in the USTC program as reported by the growth in interest rates in Q4. Our total operating expenses increased 3% quarter-over-quarter to $1.2 billion, which was consistent with the outlook we provided. There are three factors that contributed to this slight increase in spending. First, we had higher seasonal marketing spend. Second, we saw a timing of certain SEC awards increased the cost quarter-over-quarter. And third, we had a $50 million settlement with the New York DFS. Absent this settlement, expenses would have been down about 1% quarter-over-quarter. I want to zoom out now and look at the full year of 2022. Our adjusted EBITDA was negative $371 million in 2022, well within the $500 million loss guardrail we've provided for in February of 2022 about a year ago. This included negative $124 million of adjusted EBITDA in Q4. I want to note, while this was slightly lower in Q3, our revenue improved quarter-over-quarter, and our recurring expenses, excluding the impact of the DFS settlement, were lower quarter-over-quarter. So the primary reason EBITDA was lower in Q4 was due to a foreign exchange loss that we experienced in Q2 that was not fully realized until Q4. I want to shift gears now towards our outlook. Crypto markets have improved so far into Q1 as compared to Q4. The crypto market cap is up 40% year-to-date through February 17. Crypto volatility is 5% higher over the same time period. As a result, we generated $120 million of transaction revenue in January 2023. I cannot underscore this enough. We caution investors to not extrapolate these results forward. We all need to keep in mind last year's experience of how quickly markets can evolve. They evolved quickly between Q4 and Q1, and they have the potential to evolve again. We are mindful of the industry dynamics across multiple dimensions that remain in flux. In that spirit, we've updated our outlook approach for 2023. Our outlook reflects what we believe are the most stable and predictable elements of our business, specifically subscription and services revenue and expenses. We are now providing one quarter of outlook. With that, we expect Q1 subscription services revenue to be between $300 million and $325 million. As Brian mentioned, we are focused on cost management and operating with discipline. That means we're more rigorously assessing our product-market fit, we're taking a scrappier approach to investments, and we're getting back to small team sizes. For Q1, we anticipate technology and development and general and administrative expenses, together, will be between $625 million and $675 million. And that sales and marketing will be between $60 million and $70 million. When totaling these operating expense categories, this represents more than a 30% reduction in Q1 compared to the Q4 reported results. If you back out the $50 million settlement from Q4, we have reduced recurring expenses by more than 25% quarter-over-quarter. Embedded in that expense outlook is an expectation of $250 million of stock-based compensation in Q1. This compares to $431 million of stock-based compensation expense in Q4. So we've brought that down by more than $200 million quarter-over-quarter. Separately, our outlook includes approximately $150 million for restructuring expenses associated with our January headcount reduction. Overall, our goal for 2023 is to improve adjusted EBITDA in absolute dollar terms versus full year 2022. And we believe our cost reduction efforts position us to do so. As we look forward, we don't expect to meaningfully increase our headcount, which is one of our largest expense drivers, compared to our Q1 levels which we anticipate will be around 3,650 people. All right, before we go to Q&A, I want to briefly give some context around some updates you're going to see in our 10-K that we filed this afternoon. Following the events of 2022, which included failures and other situations of financial distress at certain crypto companies, the SEC has issued new guidance in December on expected disclosures for public companies like ours that are crypto market participants. While we already disclosed much about what was outlined in the guidance, we made some additional disclosures this quarter. So you will see an expanded discussion of how the 2022 events have impacted Coinbase, how similar events could impact our company, and we've expanded disclosures of our lending activities, counterparty risk and the interconnectedness we have with other market participants. Accordingly, you'll see updates on our business section, MD&A and risk factors. These are in direct response to the new guidance. The full letter can be found on the website. So with that, I think we can turn to questions.

Okay. Thank you, both. So with that, we'll turn to shareholder questions, and we are taking the most uploaded questions as determined by the number of shares, and we might combine questions that touch on the same themes. The first question is about, has Coinbase considered operating an offshore business, perhaps with Big 4 audits and additional risk management controls, to offer new products to international investors while they wait for regulatory clarity on such products in the U.S.?

Thanks for the question. Our mission is to increase economic freedom in the world by enabling better access to crypto. To fulfill our mission, we have to be a global company. As such, international expansion is going to continue to be a very core part of how we operate. In the past quarter, we had a launch in Australia. We have an upcoming launch in Brazil. And we've been very encouraged by the positive regulatory developments in the EU with MiCA and the UK's long-awaited consultation. You can expect to see us continuing to invest in the UK and Europe. They're really important parts of our business. We're going to lean into working with jurisdictions to help us maximize global coverage. We will always be focused on offering our products in a safe, compliant way with, as you referenced, good risk management and sound audits. So there's nothing to announce here today, but international continues to be a focus area for us in 2023 and beyond.

Thanks, Emilie. Next question, has Coinbase considered updating its P&L target from operating at a loss during times of trading volumes like those in 2022 and 2023 year-to-date to operating at breakeven or profitability during such times? Alesia?

I feel like the questions had a preview into Brian's opening comments. This is not a change we can make overnight. But yeah, as Brian shared in his opening comments, we have changed our approach, and we are building towards the future. We used to say Coinbase would roughly breakeven over time, over a cycle, but now we are very focused on giving a company that can generate EBITDA in all market conditions, which is to say we aspire to be an all-weather company. Specifically, for 2023, our goal is to improve our adjusted EBITDA performance in absolute dollar terms year-over-year. We're going to continue to work to build revenue streams with less volatility. While the focus is on improving adjusted EBITDA, as I shared in my opening comments, our stock-based compensation is coming down, too. So we are focused on overall expense performance, and we think that will set the stage for long-term financial performance.

Next question, will Coinbase expand to compete with platforms like Robinhood? Brian?

I can take that one. The short answer is no. We believe our best opportunities are still in the crypto and Web3 space, where there are many solutions. We aim to be the leader in that space. There are various options for trading traditional securities today, which makes it difficult for us to differentiate ourselves in that area. However, if we could find a way to tokenize or wrap traditional securities, making them more crypto-native, that could be very appealing for our customers and for us. It would open up additional functions, such as 24/7 trading, easier trading of fractional shares, and access to a broader global capital base. Unfortunately, the current regulatory environment in the U.S. is not conducive to that kind of product, and we are working on changing this. We acquired a broker-dealer license several years ago, but it's currently inactive. We would like to collaborate with the SEC to reactivate it. If we could wrap traditional securities and make it straightforward for people to register cryptosecurities, that would be intriguing and is something we wish to pursue in the future, but I don't expect this to happen in the short term. It's a goal we'll need to work toward over time.

Next question, how does Coinbase plan to compete with other trading platforms that allow users to purchase crypto without fees? Alesia?

Thanks for the question. I want to start with just a comment that there are no true zero-fee products out there. Some monetize, like Coinbase, do via our posted fees, but others monetize on the back end where the fees are not transparent to the users, but there really are no zero-fee platforms. We generate most of our transaction revenue today from our retail customer base. They are trusting our products because they are safe and easy to use, and we're giving them an integrated platform to engage with a range of crypto assets and activities. So you can stake, you can participate, and you can spend your crypto on a Coinbase card. You can do many different things. We believe this is a premium product that our customers are willing to pay for. We also have a subscription product, Coinbase One, where you can trade without fees. We are definitely experimenting with different monetization models and different ways to offer our services to our customers. As we said before, over the long term, we believe fees will compress due to commoditization, but we have yet to see that in crypto. We think that coming into 2022, there is more value placed on a trusted platform, our regulated compliant approach, and people are willing to pay for that premium offering.

Next question, how is Coinbase working alongside lawmakers to shape U.S. crypto regulation? Brian?

I've been spending a lot of time in Washington, D.C. recently, with a notable visit just last week. I would emphasize that policy is my primary focus this year. During my recent trip, I met with several senators engaged in various cryptocurrency bills. There's a significant amount of bipartisan support for the passage of comprehensive crypto legislation. In light of the FTX incident, there is a clear need for stronger consumer protections. Additionally, there’s considerable enthusiasm surrounding the potential of this technology, with a strong desire to have it developed in America for reasons such as economic growth and national security. I was encouraged to see that understanding among the individuals I spoke with, as they recognize that the U.S. currently lags behind. The European Union has already enacted comprehensive crypto legislation, while other regions, including the UK and Singapore, are making strides in this area and determining how to incorporate successful elements into their regulations. I'm dedicating even more time to these efforts in D.C. However, it’s crucial to mobilize the approximately 50 million Americans who have engaged with cryptocurrency, urging them to reach out to their representatives and advocate for the construction of this industry in America, complete with robust consumer protections and the maintenance of innovation potential. In the lead-up to the 2024 election, this issue is poised to resonate with many voters. Cryptocurrency usage now extends to one in five households in the U.S., transforming it into a potent lobbying and constituent group. At Coinbase, we are committed to our role in this effort by organizing these individuals. We are providing our customers with information on policy issues and candidate evaluations directly through our app. However, as just one entity in this industry, it's vital for the entire sector to unify and mobilize all cryptocurrency users. There's much more in our pipeline, including donations to key crypto advocates and the recruitment of a skilled policy team. Our Head of Policy, Faryar Shirzad, joined us from Goldman Sachs, where he played a significant role in policy. We are collaborating with various trade groups and have submitted a detailed petition to the SEC requesting clearer regulations while highlighting areas where current laws lack clarity on crypto regulation. Moreover, we have established a public policy page on our website, which I encourage everyone to explore. There is a lot we can accomplish in this arena, making it a major focus for both myself and the company. Paul, our Chief Legal Officer, would you like to add anything?

Yeah. Happy to, Brian. Coinbase has a 10-year plus record of regulatory compliance engagement, and we remain committed to working with regulators to develop sensible solutions that put consumers first, protect them, and ultimately help to grow the crypto economy. We are in constant conversation with all of these regulators and, of course, the policymakers as well, particularly in D.C. In those conversations, our agenda is clear. Regulators should follow the standard course and undertake public rule-making that will give clarity, not just to the industry and consumers but also to investors. The bottom line is this: not everything in crypto is a security. That’s just not the law today. It shouldn’t be the law tomorrow and in the future. Securities laws don't exist to turn everything of value in our economy, whether it's baseball cards, sneakers, or digital assets like crypto, into a security that only a small number of people or the elite are able to buy or trade. That's why we have to get these lines right. Back in July 2022, we filed a comprehensive petition for rule-making with the SEC that outlined the issues with applying existing securities regulations to modern digital assets, and we suggested areas where the SEC could engage in rule-making to provide clarity for the entire industry. We’re hopeful that the SEC and others will recognize that rule-making is the proper path forward. Importantly, we’re not going to stop engaging until they do so. It’s not too late. One final point: just recently, the SEC issued a notice of proposed rule for safeguarding crypto assets with qualified custodians such as Coinbase. We see that as a signal that the SEC recognizes and is willing to follow a standard public rule-making process to get these answers right.

Great. Thanks. Next question, are there any plans to initiate stock buybacks or reduce overall debt load if the company valuation becomes low enough? Alesia?

Thanks for the question. I would share with you that we constantly evaluate the most accretive way to allocate our capital. It’s something we’ve looked at and talked about. But today, our focus is on cash conservation and maximizing the options available to us, maximizing our ability to navigate this transition period as we shift from being a company with volatility in our P&L to a more stable P&L where we can generate EBITDA in both up and down markets. While we have the right business, we don’t plan to use cash this time around for stock buybacks or a debt buyback program. However, I would point out that we do not have a formal buyback program. We generally net settle our equity awards to employees. We pay taxes on behalf of the employees, and those shares don't end up in the market. Since we went public, we’ve effectively bought back just over 5 million shares due to this approach. While this isn’t a formal stock buyback, it has the effect of reducing shares outstanding and minimizing our dilution in the market.

Our next question is, with Kraken staking as a service being cracked down upon by the SEC, what differentiates Coinbase staking as a service from theirs? And what assurances can you give investors that their funds will not be affected? Paul?

Coinbase's staking products are not securities and are therefore not affected by this news. Staking on Coinbase continues to be available to our customers and staked assets continue to earn rewards. The staking products we offer at Coinbase are fundamentally different from the yield products discussed in the enforcement action against Kraken. The differences matter. First and foremost, customer assets always remain theirs. At all times, customers retain the title to and ownership of their tokens. We hold all user assets, including tokens, one-to-one. Another important difference is that our fees are tied to realities; they're determined by the network protocols, and commissions we take are fully disclosed in our help center. On Coinbase, our customers have a right to the returns. We can't simply decide not to pay any returns at all. Customers have deep, transparent insights into our financials because Coinbase is a publicly traded company with public audited financials. The bottom line is that Coinbase customers have access to proper disclosures. We've always disclosed critical information for our staking users, such as what happens to assets when they're staked, which we do in our retail user agreement. Rules making clear these distinctions would provide real clarity, and we think the public shouldn’t have to parse complaints in federal court to understand what a regulator expects.

Our next question is, what is Coinbase going to do to recover the value of its stock from the initial IPO? Emilie?

I'll take that, yes. Coinbase is focused on generating long-term value. We are the leading regulated player in a still nascent market. Much of our economic potential will come in future years, much like it has for other new category leaders over time. And like all tech and high-growth companies, we've experienced a market reset over the past year. This isn't just Coinbase or crypto specific. That said, we are laser-focused on driving positive shareholder value. In particular, we’re focusing our energy on three areas: one, cost management and efficiency; two, investing in core product growth so that we offer our users the best crypto products and services; and three, securing a positive regulatory outcome for the ecosystem and for our users.

Next question, do you feel that Coinbase can play a big role in making cryptocurrency mainstream? Brian?

Yeah, absolutely. One of our goals is to get crypto to 1 billion people globally. That would indicate to me that we’re starting to have a real impact on a global scale regarding economic freedom, which is the mission of Coinbase: to increase economic freedom. I think we have a significant and important role to play in that. I think it will happen across various areas. One is scalability; we need to get the blockchains to be more scalable. There's a lot of important developer work happening on that dimension. A couple of areas where Coinbase has been able to help on the margin, but many great teams are doing that too. Also, in terms of usability, many people don’t understand how electricity works, but they can benefit from it via a light switch. Coinbase has a role to play in making crypto easier to use. Many people don’t even really know how it works underneath, but they just want to get paid. They want to transfer funds with lower fees. They want to earn a living, have stable currency, etc., so we can make those things easy and intuitive. Lastly, I think on the regulatory environment, we have an important role around education, advocacy, and policy. There is much we can do to help crypto reach that 1 billion user mark and beyond.

Okay. Last question before we turn it over to the analysts, Coinbase NFT. What is your cumulative loss? What is your plan to reduce the burn, increase market share? And overall, what's your plan regarding Coinbase NFT? What will you do differently next time when developing new platforms? Emilie?

We allocate our resources 70-20-10: 70% to core, 20% to strategic adjacencies, and 10% to venture opportunities. We are always looking to expand our portfolio of products to serve our customers better. NFTs were an example of a venture initiative in that 10% bucket. We see medium and long-term opportunities here. We've got a lean team on it now, but we're not throwing in the towel by any means. There are many Fortune 100 companies experimenting with NFT opportunities, including Meta, Starbucks, Nike, and Anheuser-Busch. We have a product that is creating a more social customer NFT experience. We have a lot of work to do, but we want to continue to invest limited resources there. In terms of investments, as indicated in the shareholder letter, we’re taking a more rigorous approach to investment in new and unproven products, but we're going to do it in a very lean, efficient way, getting back to smaller team sizes to do things operationally efficiently. USTC was an example of something that started with just a couple of folks and has expanded into something much bigger.

Okay. So with that, Paul, let's switch to some live questions from the research analysts.

Thank you. Your first question comes from Owen Lau of Oppenheimer.

Thank you for taking my questions. I have a question about international expansion. The Hong Kong SFC put out a consultation paper on virtual assets trading platforms. They propose to allow digital assets trading for retail customers. Will Coinbase apply for this license or how will Coinbase approach this regime? How many exchanges in the world can meet this high bar?

In general, we don’t currently have an entity in Hong Kong, but I’ve been really pleasantly surprised to see that the financial hubs are making great progress toward regulatory clarity. We would have to look in detail to see if Coinbase meets those requirements, and we don’t have anything active in that country to date. I think it’s exciting as a general trend. Paul or anybody else want to add anything?

We do have a practice of holding the vast majority of funds on our platform in cold storage. We maintain mechanisms to keep a small amount of assets in hot wallets or subject to cyber risk, which is one of the requirements. I think Coinbase has operated TrustCo for a number of years now. There are parts of our business that we could lean on if we chose to build in that market. Our broad international strategy, as we outlined in previous years, is to go broad and go deep. Currently, we don’t have announcements on adding additional countries to our portfolio. We're focused on building in the countries we're in now. Regulatory structures that are clear will become attractive to us. When we consider new countries to add, we view those conditions as a positive indicator of a market where we can enter and assess our ability to comply with those standards.

Got it. Thank you very much.

Your next question comes from the line of Devin Ryan of JMP Securities.

Hi, this is Michael Falco standing in for Devin. You highlighted your goal for 2023 is to improve full-year adjusted EBITDA in absolute dollar terms versus 2022. After the current 25%-plus expense reduction, why do you believe this is a reasonable goal? What are the revenue scenarios underpinning that? What's the revenue threshold that would make that goal achievable?

Great question. In our outlook, we’re really focusing on things we can control. For Q1, we believe subscription and services revenue will be between $300 million and $325 million, showing healthy growth off Q4 results. We've seen volatility in our transaction revenues, and the crypto market cap was up 40% quarter-to-date in Q1. Transaction revenue could be volatile. It could be up, down, or static over the year. We are preparing for that range and are set to grow subscription and services against this more moderate expense base. Scenarios exist where we could be EBITDA positive this year, but we are preparing for the worst while hoping for the best, setting our goal to improve EBITDA year-over-year. We will continue to update as we gather more data points throughout the year.

Your next question comes from the line of Kenneth Worthington of JPMorgan Securities.

Hi, good afternoon. Thanks for taking the question. Brian, Coinbase has historically invested heavily in crypto businesses and technology. Looking ahead to 2023 and 2024, are there use cases or developments on the level of DeFi or NFTs that particularly excite you? What do you see as the next big leap forward for use cases in crypto?

I have to be a little careful predicting the future, especially regarding M&A. Let me keep comments broad. You're correct that we've been investors in the space. This marks the beginning of a big trend and industry. We'll build our products, buy companies, and invest. Among the areas that I find exciting, decentralized identity is one. It allows crypto to move beyond a new form of money and financial services and creates a new type of app platform. With decentralized identity, people can access their information not owned by big tech companies, and we can start creating social graphs and decentralized social networks. There's a lot of developer activity in this area, a good indicator of the future. So by that measure, crypto is doing quite well.

Thank you. For Paul, what risks are associated with registering either firm or products with the SEC?

Coinbase is familiar with SEC registration. As a publicly listed company, we completed an S-1 in April 2021 and are familiar with Chair Gensler’s comments regarding registration of products and services. If they qualify as securities under federal securities laws, we are open to seeking a registration path where one is available. Currently, the path to registration for products and services that may qualify as securities has not been easy. That has proven challenging. We’re eager to pursue registration where it makes sense and engage in conversations with the SEC and others.

Your next question comes from Lisa Ellis of SVB MoffettNathanson.

Hi, terrific. Thanks for taking my question. As you highlighted, you expect 2023 to be a significant year for crypto policy. What do you see as the top three or four things that would constitute a win on the policy or regulatory front over the next year?

I want to temper expectations. Getting new legislation passed is complex, and a lot of stars have to align for that to happen, and for good reason, in the U.S. government. We don’t know exactly what the chances are for that this year, but over time, the chances are quite good. Stablecoins seem to be a key issue; there's broad consensus among Congress to bring them into the regulatory perimeter with best practices around oversight. Another area of interest is delineating the territory between the CFTC and SEC: defining crypto commodity vs. security and revising the Howey test for digital assets. We could use clarified definitions and best practices around financial services, like KYC procedures for crypto. These are vital areas to explore. When we can work through these issues, we may consider how DeFi fits within regulatory frameworks. Stablecoins would likely be a priority.

As previously mentioned, we submitted a petition to the SEC in July, outlining over 50 questions regarding crypto regulation. We believe initiating rule-making would provide needed clarity for the industry and anyone interested in digital assets. We hope the SEC will recognize the importance of this process in achieving the right balance between consumer protection and promoting innovation.

Your next question comes from the line of Pete Christiansen of Citi. Pete, your line is open.

I'm sorry, can you hear me?

Yeah, we can hear you.

Okay. Please remind us how you're thinking about the integration with Aladdin and how we should view its monetization?

We don’t have a material update on the integration with Aladdin. We are now in and on the back end, but the monetization will involve customers with Aladdin serving on the Coinbase platform. We’re hopeful this will allow crypto transactions alongside stocks, bonds, or other hedge fund and asset manager assets. This will enable effective risk management and operational control in crypto similar to other asset classes. Customers would be onboarded to Coinbase and access our products and services on the platform. There’s a commercial agreement between us and BlackRock, but we have not provided public information on it at this time.

That's helpful. Lastly, Brian, could you share the pulse of the company after your second restructuring? How is employee engagement faring under these conditions?

Overall engagement is pretty good. We have many employees who are passionate about the mission and want to see this work in the world. Some have been through crypto cycles before, which include the current one. They are relatively unfazed by it. Those who are experiencing this for the first time might find it a little scary. However, those who've been through it recognize sometimes in the down cycle you come to appreciate it. There is less noise, and bad actors are more likely to wash out, while the true builders in the space get some time to do real work. A lot of the best innovation actually happens in down markets.

Okay. Well, we're out of time for today's call. Thank you for joining us, and we look forward to speaking with you again on our next call.

Thank you. This concludes today's call. You may now disconnect.