Following Coinbase’s successful direct listing on the Nasdaq exchange in New York, IFLR managing editor John Crabb sat down with the company's chief legal officer Paul Grewal, deputy general counsel Juan Suarez and associate general counsel Doug Sharp to discuss the IPO, legal innovation and the future of the company.
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Thank you all very much for agreeing to this interview today, I will start with a nice easy question. You successfully listed on the Nasdaq last week, can you talk me through the IPO. Were there any bumps in the road or did things run to plan?
Paul Well, firstly thank you for taking the time to talk to us today. As the chief legal officer, I have a number of opinions about how smooth the road was, but overall it was a far less eventful path to listing than we expected given the complexities we were confronting. The credit for almost all of that, if not all of it, goes to Doug, Juan and the others who lead the corporate legal team here at Coinbase.
When we first kicked off our work to become a public company, we were aware that there would be a number of unique challenges for Coinbase, separate from the challenges that every company looking to go public faces. First, we would be the first crypto company – certainly of our scale – to go public, particularly in terms of giving proper assurances to the securities regulators that we were in shipshape for life as a public company. That presented some unique challenges.
We also made a decision relatively early on in the process to pursue a direct listing rather than a traditional IPO. That added its own complexities in that there has only been a handful of other companies that have successfully made the transition in that way. The third stand out challenge that we confronted along the way was the rapidly shifting institutional and public appreciation for crypto, including bitcoin, as a viable, and indeed an important, asset class.
See also: Coinbase IPO will be a turning point
Over the course of this period, we also saw not quite a sea change but a major shift in attitudes among important institutional stakeholders about our entire industry and the opportunity it presents. That created challenges along the way that we may or may not have entirely expected when we got started.
Could you talk me through the decision to opt for a direct listing rather than a more traditional IPO route?
Juan There were two main reasons. Firstly, with a conventional IPO the prevailing goal for companies is to raise money. Coinbase has been tremendously fortunate and successful so far, so we did not feel that there was a need to go through a traditional IPO route to raise funds.
Secondly, a huge part of what we are all here to do is to increase economic freedom in the world and open up the financial system for greater participation. We liked the idea of a direct listing, which is a genuine price discovery auction process, where we go straight to the market and sell the company stock without a lot of intermediation through bankers or underwriters. It is consistent with the thematic of the business and we thought it was a very much an on-brand way to take the company public this way. We were excited to be among the first group of companies to explore this model.
You just said that the kind of the goal was not to raise money as such. So what was the goal behind the idea of listing?
Juan Taking a company public is a natural part of the trajectory for any growing business. We felt this was another important milestone in the growth and maturation of Coinbase. Direct listings make liquidity available to shareholders and employees of the business, which is an important part of the evolution of any business.
We have reached a level of maturity unmatched by any other crypto businesses, in that we are a public reporting company and registered with the SEC [Securities and Exchange Commission]. As such, we see this as an important threshold to move through but obviously is not an end unto itself. This was one milestone along the journey, there is of course a lot more work to do but we feel very proud of the work we've done and the success of the of the listing.
Was that decision tied to your choice to opt to list on the Nasdaq?
Doug We were excited by the Nasdaq team. We used their private market platform to help drive price discovery prior to the direct listing and their technology is very good. There were a number of attractive factors, one of which was that we were able to secure the COIN ticker with them, which was an important branding moment for us.
In the run up to the IPO, I saw commentary on social forums from people suggesting it would have been more appropriate for Coinbase to use a different way to register the IPO, suggesting that using a blockchain would have been more of a statement for your support of the technological side of things. Did you consider this? Is there a way the entire process could be modernised to incorporate new financial technologies?
Paul We think the opportunity for companies to list their equity securities in the form of tokens on Coinbase is extremely important for the future, and something we are very interested in pursuing. We are talking to regulators and others about how best to go about that, we are very eager to help crack that nut.
Juan Although this was not part of the S-1 form, Coinbase is very interested in exploring the realm of opportunity and blazing a trail in the world of tokenised securities. This is part of the reason that we invested in – and continue to invest in – a broker dealer and alternative trading system (ATS) that will enable the trading of tokenised equity securities.
Following on from this, can you explain the reason to acquire Keystone Capital Corp in 2018?
Juan There is a huge opportunity in the security markets as far as blockchain technology is concerned. There are unique opportunities to change settlement timelines, access level liquidity, and at a fundamental level increase efficiencies and change the way trading, and even capital formation, can work. We are at the extreme early stages, still exploring the realms of possibility in the securities markets and what technology can unlock.
See also: FATF and the future of decentralised finance
Our view is that if Coinbase does not take a lead on trying to solve some of these hard questions and perform some of these early stage products around blockchain and in securities, then who will? We do not think that there is another company out there putting the kind of resources into the necessary relationships with the regulators or into the first principles of legal work that we do, just to allow this to work.
We are excited to be the vanguard of what could be an exciting new technology. The critical thing we need is a home for tokenised securities to trade in a manner that is compliant with US securities laws. The acquisition is one piece of a puzzle that will allow us to launch these products.
Paul We are unwilling to offer these products and services in a manner that is not compliant with the law. We are more than willing to try and fail as a matter of market acceptance and customer demand. With those two principles firmly in mind, Coinbase is uniquely situated to make these things happen – but it is important that we do so in a way that is consistent with our core principles.
A few weeks ago, I wrote an op-ed that stated the Coinbase IPO would be a turning point for the crypto industry, arguing that the additional regulatory oversight you would get from being a listed company would be an important step in the evolution of the sector. Is this something you agree with, do you think this is a turning point?
Paul
I certainly agree that the Coinbase listing was a big moment, not just for Coinbase but for the industry as a whole. The recognition that crypto has not just arrived but it is here to stay really will benefit both the crypto industry and the crypto economy as a whole. I fully agree with that statement.
For companies beyond Coinbase, and individuals interested in crypto on Coinbase, the listing is a recognition that regulators, policymakers, and industry, now have common cause to figure out how to make some of these products and services work in ways that matter to real people to solve real problems. In that sense, it was an important milestone for everyone interested in the success and proliferation of crypto.
In September 2020, Bryan Armstrong said that Coinbase is a mission-focused company – focused on expanding the use of crypto. What steps has Coinbase taken to do that lately, besides from the IPO?
Juan We have taken a ‘crawl, walk, run’ approach to developing opportunities in crypto for our users and our customers. Trading has proven to be an important first step for us and for the wider industry, but the greater excitement and our long term focus is on products that go beyond simple trading to include other products like credit lending and securities, for example. We believe these things belong in the crypto economy in a compliant to regulatory way.
See also: The EU tightens its grip on crypto assets
Beyond financial services, we also think that the blockchain itself offers some fundamental opportunities to solve problems that go far beyond just the saving, investing or spending. That is why, for example, we recently announced that we are committing 10% of our resources to moonshots that will focus on long term bets that may not bear fruit for years, but that we think are important for the state of the art.
Shortly before the IPO, the crypto exchange Binance listed a stock token called “COIN” which allowed exchange users to trade fractional Coinbase shares. Is that something they discussed with you beforehand?
Doug We have not discussed with that with them, and we do not really have much to say about it.
Paul
As Doug says, it is not really something we have any say or frankly, much interest in.
Last week, you announced that you would list Tether, or USDT, a coin that has had its fair share of criticism. What was the decision behind that and is this an indication that you support the project despite the inquiry from the New York State Attorney General?
Paul We have come to appreciate and understand that there is a great deal of interest among our customers in having access to Tether on our platform. Obviously, we were very interested in meeting that demand and providing optionality when it comes to Tether where appropriate. We were very clear that we would be listing USDT on Coinbase Pro, but only in a manner consistent with the conditions that we laid out in our announcement.
The main thing I would just say about that decision is that we are well aware of the regulatory interest in USDT, and certainly pay very careful attention to what regulators have to say about it. We are confident we can offer Tether in a way that respects the needs of our regulators, and meet the strong market demand for the asset.
There have been suggestions that some of the management team, including you Paul, were dumping shares post-IPO for maximum gain. What do you make of the claims?
Paul I have all kinds of thoughts, which appeared on Twitter, but will happily elaborate on. Firstly, I have no shares to sell so did not personally do this. For those executives who chose to sell a relatively small portion of their overall equity position in the company, the misrepresentations really speak to at best an ignorance and perhaps at worst, a willingness on the part of some to create a lot of fear, uncertainty and doubt.
In a direct listing, it is very clear; in fact, it is critical that the shareholders provide liquidity and supply on first day. The whole point of a direct listing is to create that market. The people who are in that position to create that market include the existing shareholders. Among them, of course, are employees of the company.
The second thing is that those representations fundamentally misstated the overall positions that certain individuals have in Coinbase stock. To suggest that there somehow was a dump is itself a loaded term that did not accurately capture the relatively modest transfer of shares that most or all of those executives did.
See also: How blockchain can help drive sustainable finance
The best way to understand this is to look at other direct listings and how other executives and companies have approached those. If you look at any number of direct listings that have taken place up until this point, you can see that the percentage of positions sold by Coinbase executives were entirely in line, in fact even slightly on the low side, as compared to others. We are very comfortable that everything that happened here was entirely appropriate and we think it is important to correct that record. This is why I spent my whole Sunday on Twitter arguing my case.
The stock price has dropped by nearly $100 a share in value since the listing, after trading well over $400 a share at one point. What should readers and investors make of this? Is it indicative of the health of the crypto market overall and do you think the two are linked?
Paul Well, I pay very little attention to the price of Coinbase shares on the open markets, largely because we leave it to the market to tell us its view of our long-term prospects. Our own views are very positive; we are focused on building the company to be strong and resilient. We talk a lot internally about focusing on the mission of the company as you mentioned, so the best thing we can do for shareholders is pay less attention to where the stock price might be on any given day, and more attention to how new products and services are going to work. This will better serve those shareholders in the crypto economy as a whole.
Going back to the “mission focus” of Coinbase and the marked decision to not take a social stance. Do you think it is right that Coinbase does not focus on ESG issues or things like racism, even if customers expect it?
Paul Brian has very clearly stated that as a company, Coinbase is focused on issues that will drive or impact the proliferation of the crypto economy. To the extent that ESG concerns raised publicly or by regulators would impact Coinbase we are more than happy to engage with them. We are very proud of our record on those issues, but what we are not going to do is get distracted by issues that lie outside of the remit of our fundamental purpose as a company, which is to grow the crypto economy.
See also: Interoperability a key challenge for central bank digital currencies
We will engage with those topics as raised and as necessary, but we will remain focused on the mission of building an economy that works for everyone. We are not going to be distracted by discussions that are ancillary or irrelevant to that.
Excellent, thank you very much for your time today and I look forward to seeing what Coinbase comes up with next.
Paul The only thing I will say in conclusion, in addition to saying thank you, is that we could not be more excited about the future of crypto. As a legal team, we have been privileged to be able to play a significant part in the company's access and we will continue to focus on that going forward.
