Coinbase’s Rapid Rise Left It Exposed In Crypto’s Collapse

Brian Armstrong, an early devotee of blockchain technology, built the cryptocurrency exchange Coinbase Global Inc. to be big.

He hired employees by the hundreds, pushed into new markets and scaled up the number of digital tokens available on the platform. Coinbase became the largest crypto exchange in America and went public in spring 2021 with a market value of nearly US$86 billion.

This year’s crypto collapse has dropped that value to roughly US$21 billion. And it has left Mr. Armstrong to wrestle with a sprawling business now faced with high expenses, dwindling cash and, more recently, a challenge from federal regulators.

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

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

Coinbase raced to add employees even after the crypto market weakened this year, and sometimes before even deciding on the new hires’ responsibilities, according to former employees. It pushed into some businesses that have floundered and adopted unorthodox management practices that led to pushback among some on the staff.

Coinbase now finds itself at odds with the Securities and Exchange Commission, which has taken the position that several crypto coins traded on Coinbase’s platform are securities. Coinbase, which isn’t licensed to operate as a securities exchange, denies they are. But a potential lawsuit from the securities regulator could lead to a delisting of some coins and greater hesitation about adding new ones in the future.

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

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

Mr. Armstrong, who studied economics and computer science at Houston’s Rice University, was running an e-learning startup in 2010 when he read the original bitcoin white paper by the pseudonymous Satoshi Nakamoto. He soon became enamoured of the new ideas of blockchain technology and a digital version of cash.

He started Coinbase in 2012, seizing on an early problem: There was no secure and accessible way for people to store their digital currency.

When customers asked to trade bitcoin, not just store it, Coinbase became an exchange.

In late 2013, Coinbase’s handful of employees worked in a cramped apartment on Bluxome Street in San Francisco, where staffers took calls in the bathroom or in closets. Adam Draper, an early investor, said the company’s first hire was a customer-support specialist, a sign of Mr. Armstrong’s focus on making it easy for investors to bet on crypto.

“He wanted Coinbase to be the trusted brand for regulators, consumers and investors,” Mr. Draper said.

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

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

Shy by nature, Mr. Armstrong sometimes struggled to communicate with some staffers, including those outside of the technology field, former executives said. After Brian Brooks was hired as chief legal officer in 2018, he had weekly check-in meetings with Mr. Armstrong in a conference room. They sat across from each other and typed comments back-and-forth on Google docs, spending nearly 30 minutes without uttering a word, a person familiar with the meetings said. Later, as Mr. Armstrong became more comfortable with Mr. Brooks, he began speaking with him in their meetings, the person said.

Asked about that, a Coinbase spokesman declined to comment.

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

After hiring more executives, Mr. Armstrong delegated some responsibilities and preferred to spend time with his headphones on, coding and working to solve technical problems, one former executive said.

He could be a supportive boss. In 2017, when Coinbase listed bitcoin cash, a spinoff from the bitcoin code, user demand was so high Coinbase had to freeze trading. As tech staffers raced to fix the problem and mollify unhappy customers, Mr. Armstrong offered encouragement, assuring a tech employee the CEO stood behind him.

Mr. Armstrong and other executives hurried to expand their team to keep up with growing interest in cryptocurrencies, hiring people from leading tech and financial firms.

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

Staffers often spent much of the day in meetings, sometimes as many as 15 in a day, according to former employees. One said that productivity was hindered by internal debates, competition and criticism.

Employees launching new products sometimes worried about “blockers”—a term for others on the staff who tried to hinder new ideas.

Coinbase executives say they realize they conduct too many meetings and have begun taking steps to reduce them. One executive said the company may take longer than others to make decisions because it is thoughtful about new products and is more focused on security and compliance than others in the crypto world.

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

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

Coinbase executives disputed the figures but didn’t provide other data on the NFT platform. They said it’s too early to count out new initiatives, including the NFT marketplace.

Staffers have in the past debated creating a Singapore-based crypto exchange to offer leverage and other trading capabilities to non-U.S. traders, but never implemented the strategy, a former executive said. The Coinbase spokesman wouldn’t comment.

This April, Coinbase executives traveled to India to announce the launch of operations there. Within days, Coinbase restricted local-currency transfers after criticism from an Indian regulator. It hopes to resume the transfers soon.

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

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

Mr. Armstrong said a year ago that Coinbase would ultimately offer “every reputable cryptocurrency to our users (read: not a scam, or illegal).” By the end of 2021, Coinbase supported 172 coins for custody and 139 for trading.

The company continued adding staff this year despite the weakness in crypto values. It reached a headcount of 6,000 this summer, compared with about 300 employees at rival FTX.

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

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

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

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

Late last month, federal prosecutors filed an insider-trading case against a former Coinbase manager, who denied the charges, and at the same time, the Securities and Exchange Commission asserted that seven crypto assets traded on the Coinbase platform qualify as securities. While known as an exchange, Coinbase isn’t regulated as one, the way New York Stock Exchange and Nasdaq are.

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

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

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

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

More than 90% of Coinbase’s revenue comes from 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 employers. Coinbase executives said the retail crypto market is large enough that the company won’t be threatened by new entrants.

They added that Coinbase is rolling out digital wallets and other products to help investors access so-called Web 3.0, referring to a new, decentralized iteration of the internet reliant on blockchains.

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

TAIPEI—For years, Beijing hoped to win control of Taiwan by convincing its people their economic futures were inextricably tied to China.

Instead, more Taiwanese businesses are pivoting to the U.S. and other markets, reducing the island democracy’s dependence on China and angering Beijing as it sees its economic leverage over Taiwan ebb.

In one sign of the shift, the U.S. replaced mainland China as the top buyer of Taiwanese agricultural products for the first time last year.

Electronics firms such as chip maker Taiwan Semiconductor Manufacturing Co. are also selling more goods to American and other non-Chinese buyers, thanks in part to Washington’s chip restrictions and Apple’s bets on Taiwanese chips.

Overall, Taiwanese exports to the U.S. in the first 10 months of 2023 were more than 80% higher than in the same period of 2018, Taiwanese government data shows. Taiwanese exports to the mainland were 1% lower—a major change from a decade or so ago when China’s and Taiwan’s economies were rapidly integrating.

Taiwan’s outbound investment has also shifted. After flowing mostly to mainland China in the early 2000s, it has now moved decisively toward other destinations, including Southeast Asia, India and the U.S.

Taiwanese electronics giant Foxconn, which assembles iPhones in mainland China, is expanding in India and Vietnam after Apple began pushing its suppliers to diversify.

Chinese state media recently reported that China had opened tax and land-use probes into Foxconn. Though Taiwanese officials and analysts interpreted the probes as a sign that China wants Foxconn founder Terry Gou to drop plans to run in Taiwan’s presidential election in January, some have said Beijing may also be trying to pressure Foxconn into resisting decoupling with China.

“Any attempt to ‘talk down’ the mainland’s economy or to seek ‘decoupling’ is driven by ulterior motives and will be futile,” said a spokeswoman for Beijing’s Taiwan Affairs Office in September. “The mainland is always the best choice for Taiwanese compatriots and businesses.”

Fully decoupling from mainland China’s economy likely isn’t possible, and would be disastrous for Taiwan, not to mention China, even if it were.

Foxconn and other major Taiwanese companies depend heavily on China for parts, testing and buyers. Some 25% of Taiwan’s electronic-parts imports still come from the mainland.

If China’s weakened economy returns to strong growth, it could shift the calculus back in favor of the mainland, where the Communist Party claims Taiwan despite never having ruled it. About 21% of Taiwan’s total goods trade this year has been with mainland China, versus 14% for the U.S., though the U.S. share has risen from 11% in 2018.

“My hunch is that the large manufacturing sectors will try to stay in the Chinese market, even with harsh conditions,” said Alexander Huang, director of the international affairs department of the opposition Kuomintang Party, whose supporters include business people with mainland ties. “If you talk to those business owners, they say, ‘Nah, no way will I give it to my competitors.’”

Even so, many forces are pushing Taiwan to rewire its economic relationship with China.

Trump-era tariffs and Biden administration export controls have raised the cost of sourcing from China, and in some cases prohibited it. U.S. firms are pushing their Taiwanese suppliers to diversify sourcing, and rising wages in China have made it less attractive than before.

Long-running shifts in Taiwanese sentiment toward China—and China’s own efforts to punish the island using its economic leverage—are also factors. China has banned Taiwanese agricultural products such as pineapple and, in 2022, grouper fish, and restricted outbound tourism to Taiwan.

Those restrictions to some degree have backfired, pushing Taiwanese businesses to look elsewhere.

Casting for new markets

Chang Chia-sheng, who runs a fish farming operation in Taiwan, said his main export target a decade ago was mainland China. But as geopolitical tensions climbed, he looked elsewhere. Sales to Americans have jumped fivefold since 2018, he said. “In the U.S., things just seem to work out more easily,” Chang said.

The U.S. and Taiwan reached an agreement in May on a number of trade and investment measures to deepen ties, though the deal stopped short of reducing tariffs.

In the June quarter of 2023, 63% of revenue at TSMC, which makes most of the world’s most cutting-edge logic chips, came from the U.S., up from 54% in the same period in 2018, according to S&P Global data. Just 12% of TSMC’s revenue now comes from Chinese buyers, down from 22% in the second quarter of 2018.

Taiwan’s government is also encouraging closer economic links with Southeast Asia, South Asia, Australia and New Zealand. Its “New Southbound Policy,” rolled out in 2016, has been the subject of fierce debate in Taiwan, with the Kuomintang Party saying steps to boost relations—like handing out scholarships—aren’t worth the cost.

Exports to “New Southbound” partners have risen, however, to $66 billion in the first nine months of 2023, about 50% higher than the same period in 2016.

“Frankly speaking, we’re responding reactively” to the need for more diverse trading partners, Taiwan’s Economic Minister Wang Mei-hua said. “Taiwan needs to manage the risks on its own, but we also need our allies to join us more in mitigating these risks.”

Together, the U.S. and the six largest Southeast Asian economies accounted for 36% of Taiwanese exports in the third quarter of 2023, according to data from CEIC, surpassing the percentage sent to mainland China and Hong Kong on a quarterly basis for the first time since 2002.

In September, Taiwan sent less than 21% of its exports to the mainland, the lowest percentage since the global financial crisis.

Taiwanese foreign investment into mainland China, steady at around $10 billion a year for most of the early 2010s, plummeted in late 2018 and has since been running at about half that level, according to Taiwanese government data. In 2023 so far, just 13% of Taiwan’s investment went to mainland China; 25% went to other Asian locations, and nearly half went to the U.S.

A survey of Taiwanese businesses conducted last year on behalf of the Center for Strategic and International Studies, a Washington think tank, found that nearly 60% had moved or were considering moving some production or sourcing out of China—a significantly higher rate than European or American firms.

Jay Yen, chief executive of Yen and Brothers, a Taiwanese frozen-food processing company, said his firm received a government subsidy of around $75,000 to market his products to American consumers. China now only accounts for about 3% of its revenue, he said.

That said, “if you really have to consider the risks of a war between the U.S. and China and its potential impact on Taiwan, you might want to place your bets on a third country—neither China nor the U.S.,” Yen added.

Reversing the tide

After China began to open up its economy in the late 1970s, Taiwanese businesses were among the first investors.

By the 2000s, China seemed to be succeeding in its strategy of integrating the two economies, with more than 28% of Taiwan’s exports going to the mainland in 2010, from less than 4% a decade earlier.

Direct flights between the two sides were normalised for the first time in decades. Mainland tourists were allowed to visit Taiwan on their own.

By 2014, the tide was turning as more Taiwanese grew worried about over dependence on China. Student demonstrators protested against a trade pact, later abandoned, that would have deepened ties with China. President Tsai Ing-wen, who took office in 2016, has pushed to diversify Taiwan’s economy.

China has responded by moving trade issues more into the spotlight.

In April, it opened an investigation into Taiwanese trade restrictions that it says limit exports of more than 2,400 items from the mainland to the island in violation of World Trade Organization rules. In October, China’s Ministry of Commerce announced the probe would be extended until Jan. 12—the day before Taiwan’s coming election.

Taiwan’s government has called the probe politically motivated.

Chinese officials have implied that Beijing could suspend preferential tariff rates for some Taiwanese goods in China under a 2010 deal signed when Kuomintang’s Ma Ying-jeou was president. Beijing has also reacted angrily to Taiwan’s recent trade agreement with the U.S.

For Taiwanese companies, building and operating new factories in places other than China isn’t cheap or easy. Protests have at times disrupted operations at Indian plants operated by Foxconn and Wistron, another Apple supplier. In September, a fire halted production at a Taiwanese facility in Tamil Nadu.

Still, some Taiwanese businesspeople have clearly soured on China.

“The electronics industry has already become a Chinese empire, not a Taiwanese one,” says Leo Chiu, who worked in mainland China in quality control for an electronics manufacturer for 14 years before concluding he couldn’t move up further there and returning to Taiwan in 2019. Many of his old colleagues have left, he said.

“If Xi Jinping steps down, there’s still a chance it could change,” says Chiu. “But I think it’s very hard.”

Coinbase’s Rapid Rise Left It Exposed In Crypto’s Collapse

Fast expansion made Coinbase the biggest U.S. crypto exchange. Now it faces high expenses, dwindling cash and a challenge from regulators.

As geopolitical tensions rise, Taiwan is shifting its economy to rely more on the U.S. and other countries but at a cost

Casting for new markets

Reversing the tide