Coinbase exchange’s rapid rise left it exposed in Crypto winter

 Brian Armstrong, an early enthusiast of blockchain technology, built the cryptocurrency exchange Coinbase Global Inc. (COIN) to be a big company. He hired personnel by the hundreds, pushed into new geographies and scaled up the number of digital coins available on the platform. Coinbase exchange became the largest cryptocurrency exchange in United States and went public in spring of 2021 with a market capitalization of nearly $86 billion.

This year’s cryptocurrency winter has dropped that value to roughly $21 billion. And it has left Mr. Armstrong to struggle with an expansive business now faced with huge expenses, falling cash and, more recently, a challenge from federal regulatory bodies.

Adam Dell, chief executive of Domain Money, an app that allows investors to buy investments including cryptocurrency and is a Coinbase exchange competitor said that “Coinbase expanded wildly before it got its sea legs. They grew so fast that it got away from them.”

Almost every cryptocurrency company is struggling, with Bitcoin (BTC) prices off more than 50% this year, and Coinbase exchange’s struggles reflect those of many others in the crypto industry. If cryptocurrency prices rise, Coinbase exchange is likely to emerge as a winner. The company’s share price rose sharply this week, a potential sign of investor faith in its future results. But after its rapid growth, Coinbase exchange, one of cryptocurrency’s most important company, faces unique challenges in the downturn.

Coinbase exchange raced to add staff even after the cryptocurrency market weakened this year, and sometimes before even determining on the new hires’ responsibilities, according to its former staff. It pushed into some business domains that have stumbled and adopted unconventional management practices that led to pushback among some on the staff.

Great Expectations

Coinbase exchange ramped up staffing even as its trading volumes fluctuated. Now its trading volumes are a quarter of their 2021 peak, and the company has cut its staff recently.

Coinbase exchange now finds itself at odds with the Securities and Exchange Commission (SEC), which has taken the stance that several cryptocurrency coins traded on Coinbase exchange’s platform are securities and fall under SEC’s purview. Coinbase exchange, which isn’t permitted to operate as a securities exchange, denies they are. But a potential lawsuit from the securities regulatory body could lead to a delisting of some coins and greater reluctance about adding new ones in the future.

Coinbase exchange is cutting back, including a deep employee’s reduction in June and cost cuts that include eliminating free staff lunches.

A Coinbase exchange spokesman said, “Building a firm that will disrupt as many industries as Coinbase exchange was always going to be over ambitious. We’ll define our success over decades.” Mr. Armstrong, the chief executive and co-founder, declined to be interviewed and comment.

Brian Armstrong, who studied economics and computer science at Houston’s Rice University, was leading an e-learning startup in 2010 when he came across the original bitcoin (BTC) white paper by the pseudonymous Satoshi Nakamoto. He then soon became captivated of the new ideas of blockchain technology and a digital version of cash and currency.

He started Coinbase exchange in 2012, grabbing on an early problem: There was no safe and accessible way for people to store their digital currency and assets. When users asked to trade BTC, and not just store it, Coinbase became an exchange.

In late 2013, Coinbase exchange’s handful of staff worked in a small apartment on Bluxome Street in San Francisco, where staff members took calls in the bathroom or in the closets. Adam Draper, an early investor of the Coinbase exchange, said the company’s first recruit was a customer-support specialist, a sign of Armstrong’s focus on making it easy for investors to bet on cryptocurrency. “He wanted Coinbase exchange to be the trusted brand for regulatory bodies, consumers and investors,” Mr. Draper said.

By 2017, Coinbase exchange was in a proper office with more than 150 staff members. Co-founder Fred Ehrsam departed that year, leaving Mr. Armstrong at the helm of the organization.

Brian Armstrong would work late into the night, then come to the office at 10 a.m. or later. Much of his attention was on improving Coinbase exchange’s technology, as he attended product meetings and weighed in on new offerings, former executives recall.

Shy by nature, Brian Armstrong sometimes resisted to communicate with some staff members, including those outside of the technology field, former executives said. After Brian Brooks was recruited as chief legal officer in 2018, he had weekly check-in meetings with Brian Armstrong in a conference room. They sat across from each other and typed comments and suggestions back-and-forth on Google docs, spending nearly half-an-hour without uttering a word, a person aware with the meeting proceedings said. Later, as Brian Armstrong became more relaxed with Brian Brooks, he began speaking with him in their meetings, the person said.

Asked about that, a Coinbase exchange spokesman declined to comment.

Brian Armstrong told his colleagues that he was reluctant to speak at industry events, some say. Two former staff members described him as “Vulcan”-like, referring to the “Star Trek” humanoids that show very less emotion, and said he appeared to be uncomfortable at reprimanding underlings. A former employee recounted how a senior executive fell asleep during a company retreat, after a series of late-night work sessions, but Brian Armstrong wouldn’t wake the executive, surprising at least one member of the team. The Coinbase exchange spokesman declined to comment.

After hiring more employees, Brian Armstrong delegated some roles and responsibilities and favored to spend time with his headphones on, coding and working to solve technical problems, one former employee said.

He could be a supportive leader. In 2017, when Coinbase exchange listed bitcoin cash, a spinoff from the bitcoin code, customer demand was so high that Coinbase exchange had to freeze trading. As staff members of the technology department raced to fix the issue and mollify unhappy users, Brian Armstrong offered reassurance, assuring a technology executive that the CEO stood behind him.

Armstrong and other employees hurried to expand their team to keep up with increasing interest in digital currencies, recruiting people from leading technology and financial companies.

Within the firm, according to some who worked there, executives who gained power often were those focused on hiring. Coinbase exchange sometimes set aggressive hiring targets without a clear understanding of what the new recruit would be doing, according to these people, who said that at times, various sets of executives tackled similar projects.

Staff members often spent much of the day in meetings, sometimes as many as 15 hours in a day, according to former executives. One said that the productivity was stalled by internal debates, competition and criticism.

Employees launching new products sometimes worried about “blockers”—a term for other team members who tried to hinder new ideas.

Coinbase exchange employees say that they realize they conduct too many meetings and have started taking steps to reduce them. One employee said that the company may take longer than others to make decisions because it is thoughtful about new products and is more focused on safety and compliance than others in the cryptocurrency industry.

In another quirk of the Coinbase exchange culture, senior employees, including Emilie Choi, president and chief operating officer (COO), regularly scrutinized executives’ LinkedIn profiles, sometimes ordering staff members to adjust language on them, according to former employees. Ms. Choi said that she reads the LinkedIn listings to see if employees overstate their responsibilities, part of an effort to build a culture of accountability.

While Coinbase exchange raced to add executives and draw up expansion plans, it sometimes was slow executing them. Coinbase exchange said last October that it would launch a marketplace for nonfungible tokens, or NFTs, and shifted some top engineers to the project. It didn’t release a beta version until April, and the NFT marketplace has done just $4.2 million in transactions, according to Dune Analytics.

Coinbase exchange employees disputed the figures but did not provide other information on the NFT platform. They said it’s too early to count out new initiatives, including the NFT marketplace.

Staff members have in the past argued creating a Singapore-based cryptocurrency exchange to offer leverage and other trading capabilities to non-american. traders, but never executed the strategy, a former executive said. The Coinbase exchange spokesman wouldn’t comment.

This April, Coinbase exchange employees traveled to India to announce the launch of the company’s operations there. Within days, Coinbase exchange restricted local-currency transfers after criticism from an Indian regulatory body. It hopes to recommence the transfers soon.

Sixteen months ago, when Coinbase exchange was going public, keen investors embraced Brian Armstrong’s vision of bringing bitcoin to the masses. At Coinbase exchange’s value after the IPO, Brian Armstrong’s 20% stake was worth about $17 billion. Nine months later, he bought a $133 million Los Angeles real estate, one of the priciest home sales ever in the L.A. area, according to people familiar with the deal details.

Coinbase exchange more than doubled its employee count last year. Though it had a history of adding new tokens to its exchange platform at a slower pace than its competitors such as Binance Holdings Ltd. and FTX exchange, Coinbase exchange sped up the listing pace in the first half of last year.

Brian Armstrong said about a year ago that Coinbase exchange would ultimately offer “every reputable digital currency to our customers (read: not a scam, or illegal).” By the end of 2021, Coinbase exchange supported 172 tokens for custody and 139 for trading.

The exchange platform continued adding employees this year despite the weakness in cryptocurrency prices. It reached a headcount of 6,000 this summer, compared with about 300 employees at rival FTX exchange.

As digital tokens’ values slid this year, trading volumes shrank and Coinbase exchange share value fell. An employee at one point circulated a petition calling for the ouster of three top executives, not including Brian Armstrong.

The CEO responded on Twitter, calling the petition “really dumb on multiple levels” and writing: “If you have no confidence in the executives or CEO of a company then why are you working at that company? Quit and find a firm to work at that you believe in!”

In June, Coinbase exchange laid off 1,100 employees, equivalent to almost 18% of its total workforce. The move caught many by surprise. Some members of what employees have dubbed “the Coinbase 18” tried logging into their work laptops but couldn’t, and learned they’d lost their jobs only after coming across an email on a personal device. Some told friends they were distressed at how the news was sent.

A Coinbase exchange spokesman said deciding to reduce the total workforce was difficult but the exchange platform took pains to see that the transition was as smooth as possible, giving severance pay and helping employees find new jobs.

Late last month, federal prosecutors filed an insider-trading lawsuit against a former Coinbase exchange manager, who denied the charges, and at the same time, the Securities and Exchange Commission (SEC) asserted that seven cryptocurrency assets traded on the Coinbase exchange platform qualify as securities and fall under SEC’s purview. While known as an exchange, Coinbase exchange isn’t regulated as one, the way New York Stock Exchange (NYSE) and NASDAQ are.

Coinbase exchange said that it doesn’t trade securities, and criticized the regulatory body for failing to engage with digital currency and asset companies or adapt the agency’s regulations to cryptocurrency markets. Coinbase exchange’s business model is largely dependent on the revenue from trading by retail investors, so a determination that the seven cryptocurrency assets are securities could upend part of that model.

If the court agrees with the SEC that some of the digital tokens are in fact securities, Coinbase exchange would likely have to stop trading them on its exchange platform. Coinbase exchange itself could potentially face liability, such as penalties, if the SEC eventually sues Coinbase exchange over its decision to list the assets.

Either step could have a chilling effect on Coinbase exchange’s future listing decisions, while its overseas competitors would have fewer constraints on their business growth. Binance.US, the U.S. arm of Binance Holdings, earlier this week delisted one of such alleged securities.

A Coinbase exchange spokesman said that in 2018 the exchange platform acquired the licenses necessary to operate a securities trading platform, though it didn’t do the work necessary to employ them. Coinbase exchange could take the steps to become a licensed securities exchange if this is deemed required, the spokesman said.

More than 90% of Coinbase exchange’s revenue comes from trading by individual investors. In a potential competitive threat, Fidelity Investments moved in April to let people hold cryptocurrencies in 401(k) accounts, which Fidelity administers for thousands of executives. Coinbase exchange executives said the retail cryptocurrency market is large enough that the exchange platform won’t be threatened by new entrants.

They added that Coinbase exchange is rolling out digital wallets and other new products to help retail and institutional investors access so-called Web 3.0, referring to a new, decentralized finance (DeFi) iteration of the internet reliant on blockchain technology.

Ms. Choi, Coinbase exchange’s president and COO, said the firm has been through several up-and-down cycles. “We’re investing in the core business and in the future,” she said. “We welcome competition.”