Coinbase 2023 Annual Summary: Net Income of $95 Million

Source: Bailu Living Room

Coinbase is one of the biggest winners in the virtual asset industry in 2023. Under the general trend of global compliance, the advantages accumulated over the years have been fully utilized, and it has quickly become the first choice for institutions and American retail users. In the second half of the year, with the increasing possibility of SEC approval of Bitcoin spot ETFs, Coinbase has become the first choice for Bitcoin custody among major institutions, taking advantage of the market development.

Overview of 2023, Coinbase’s total revenue is US$3.1 billion, net income is US$95 million, and operating costs are reduced by 45% year-on-year. Coinbase also relied on stock gains of up to 400% to ascend to the throne of the king of US stocks.

On January 15, 2024, Coinbase publicly held its 2023 annual earnings conference call, summarizing the development in 2023, sharing key points and litigation progress in 2024, and answering questions from various agencies Targeted questions raised. In this article, Bailu Living Room has compiled and shared the full text of the conference call.

Key contents include:

1. Coinbase’s summary and outlook on the three stages of cryptocurrency development;

2. Coinbase’s main tasks in 2024;

3. 2023 annual financial report;

4. The latest progress in SEC litigation.

The following is the full text of the conference call minutes.

Anil Gupta, Vice President, Investor Relations:Good afternoon. Welcome to the Coinbase Fourth Quarter and Full Year 2023 Earnings Conference Call. Joining me on the call today are Brian Armstrong, co-founder and CEO; Emilie Choi, president and chief operating officer; Alesia Haas, chief financial officer; and Paul Grewal, chief legal officer. We hope you all had an opportunity to read the shareholder letter we posted on our investor relations website earlier today.

Before we begin, I would like to remind everyone that during today's call, we may make forward-looking statements. Actual results may differ materially from today's statements. Information regarding the risks, uncertainties and other factors that could cause these results to differ are included in our SEC filings.

Our discussion today will also include references to certain non-GAAP financial measures. A reconciliation to the most directly comparable generally accepted accounting principles (GAAP) financial measures is provided in the shareholder letter on our investor relations website.

Non-GAAP financial measures should be considered in addition to, not as a substitute for, GAAP measures. We are again using Say Technologies to enable our shareholders to ask questions. Additionally, we'll be taking live questions from some of our research analysts. With that said, I'm going to hand over the microphone to Brian for his opening remarks.

Brian Armstrong, Co-Founder and CEO: Thanks, Anil. I'm proud to sayWe managed to reduce costs by 45% year-over-year in 2023 and launch products faster with a leaner team. This resulted in positive net income of $95 million, positive adjusted EBITDA of $964 million and total revenue of $3.1 billion in 2023. Coinbase has always taken a long-term view in its business, always focusing on building in a compliant manner, even if it wasn't a popular option at the time. Many of our competitors have taken shortcuts, grown quickly, and even violated the law, and we've seen the results of this strategy.

In contrast, Coinbase has now established itself as a trusted leader in the cryptocurrency space. I have always said that there will be three phases of cryptocurrency adoption, and I want to talk about what we are doing in 2023 to drive these three phases. In the first phase, cryptocurrencies were a new asset class that people wanted to trade. Cryptocurrency trading has been a major revenue source for the industry, and Coinbase is the leader in spot trading in the United States.

But in 2018, derivatives trading became the bulk of cryptocurrency trading volume. It took us more time to do this in a compliant manner, but I'm pleased to report that in 2023 we have launched derivatives trading globally.

In the second quarter, we launched Coinbase International Exchange to provide derivatives trading to non-U.S. customers. In the fourth quarter, we launched Coinbase Financial Markets, providing regulated futures trading in the United States.

We have also expanded our trading offerings globally through the acquisition of new licenses. In 2023, we launch operations, licenses or registrations in Bermuda, Brazil, Canada, France, Singapore and Spain.

Most of the world's capital is in the hands of institutions. In 2023, we also significantly improved our institutional trading products with the launch of Coinbase Prime. We expanded our institutional financing offerings. We launched Coinbase Asset Management.

We even played a key role in the approval of a Bitcoin ETF, as Coinbase was selected as the custodian of 8 out of 8 of the ETFs. This will unleash new capital flows into the cryptocurrency space, where Coinbase plays a key role. We earn revenue not only on custody but also on trading and financing. We are already seeing tremendous demand as Bitcoin is now the second largest ETF commodity in the United States, surpassing silver. All these improvements will continue to drive the first phase towards cryptocurrencies as a new asset class.

In the second phase, Coinbase not only serves new asset classes, but also promotes new financial services. In 2023, stablecoins will begin to be used in global payments.

We have launched the ability to send free, instant global payments on USDCoin using Base. We are now integrating this functionality into our products to provide a best-in-class payment experience.

In August, we entered into an arrangement with Circle to help expand the utility of USD Coin, which has now launched on more than a dozen blockchains and has a market cap of $28 billion Becoming the second largest stablecoin.

In the third and final stage, we believe that cryptocurrency will also become a new application platform for the Internet. Over time, the Internet has become more and more concentrated in the hands of large companies. The Internet also didn’t start with native forms of currency, payments, or built-in value. So we added the credit card as an add-on after the fact. Numerous related issues such as fees, fraud, chargebacks, and limited ability to send microtransactions or conduct cross-border commerce have led to the rise of ad-based business models.

Cryptocurrencies are re-decentralizing the internet through a host of new protocols involving currency, identity, messaging, social media, content, governance, and even voting. Coinbase is trying to accelerate this trend in a number of ways. In 2023, we launched our own second layer solution called Base. This will help blockchain scale to 1 billion or more users, lower transaction costs and shorten confirmation times, similar to how the Internet transitioned from dial-up to broadband.

We also improved Coinbase Wallet. For example, we make it easier to find and use decentralized applications (dapps). For example, with just one tap you can now open a dapp, already logged in and connected to your wallet. There is no need to register for each application or enter credit card details in each application.

It is still early days for cryptocurrency as an application platform, and many early applications look like toys, but it has captured the imagination and enthusiasm of developers, and Coinbase is one of the few that can bring it to the forefront. One of the companies that integrates all decentralized protocols into an engaging customer experience, which is exactly what we are trying to achieve with Coinbase Wallet.

So, this is how we look at the development of cryptocurrencies. First as a new asset class, secondly as a new set of financial services, and thirdly as a new application platform.

In 2023, I also stated that regulatory clarity is a top priority and I wanted to give you a quick update. Now, most G20 countries have passed or are drafting cryptocurrency legislation. This is truly huge progress. In the United States, there are even two bills currently under consideration in Congress that have strong bipartisan support. Coinbase, along with other players in the cryptocurrency space, has contributed $85 million to a super PAC aimed at electing pro-crypto candidates.

We helped create standwithcrypto.org, a grassroots movement of U.S. cryptocurrency advocates. Their goal is to reach one million voters willing to support cryptocurrencies in the 2024 elections.

They have hit 30% of their goal today, have about 300,000 members, and are growing every week.

In the United States, we are still fighting for clarity through the court system. But at the same time, we are continuing to grow our business. Speaking from experience, this is what our clients appreciate me most for, leading the push to gain regulatory clarity in the United States.

We remain confident that the United States will be able to get this issue right, whether that comes from the courts, the development of new case law, new legislation passed by Congress, or ultimately from the 52 million Americans using cryptocurrencies in the upcoming vote in the election.

As we look ahead to 2024, I want to conclude by sharing some of our top priorities for this year.

Our first priority will be driving revenue, specifically growing our two largest revenue streams, trading fees and stablecoins. We will achieve this through international expansion, adding derivatives and spot trading, and integrating USDCoin more deeply into the crypto economy.

By continuing to drive revenue growth, we are able to fund our other priorities and the practical aspects of cryptocurrency. Our second priority will be to continue to drive the utility of cryptocurrencies. This year, we will try to use payments as a use case.

We are starting to see the adoption of USD stablecoins in emerging markets, especially those with higher inflation rates, and customers can now send USDCoin instantly to anywhere in the world for free on Base. This has the potential to reduce global payment friction and lower fees.

We will also continue to support developers building on Base. For example, just recently we have seen a surge in activity on the decentralized social media protocol Farcaster, and most developers are now using Farcaster on Base to build so-called Frames.

We will also invest in Coinbase Wallet, our self-hosted application where many early utility applications like decentralized social, identity or messaging are starting to take shape. Cryptocurrencies still need an iPhone-like moment to make these decentralized protocols accessible to the average person, and we want to help make that happen.

Finally, we will continue to push for regulatory clarity for the industry. We support standwithcrypto.org and its goal of activating one million cryptocurrency advocates in the upcoming election, and we will continue to work with Congress to work on new cryptocurrency legislation in the United States. Finally, we will continue to fight in the courts to pass sound case law.

I am very pleased with our financial position, operating efficiency and competitive landscape, and I believe we are excellently positioned for long-term growth. Now, I'm going to hand the microphone over to Alesia.

Alesia Haas, CFO: Thanks, Brian. good afternoon everyone. In 2023, we focus on financial discipline and operational excellence. As a result, we are in a much stronger position today than we were a year ago. I want to share some highlights.

Some highlights for 2023 include significant growth in our subscription and services revenue during the market downturn, significant expense reductions, a return to profitability and a stronger balance sheet. We enter 2024 with more dollar resources and less debt, and we've accomplished all this while accelerating product launches.

Let’s dive into the full year 2023 details. We achieved $95 million in net income and nearly $1 billion in adjusted EBITDA. Our total revenue was $3.1 billion, down $86 million from the same period last year.

We saw transaction revenue decline, but this was largely offset by a 78% increase in subscription and services revenue. Ourtotal operating expenses for the full year decreased by $2.6 billion. Within this range, sales and marketing, technology and development, and general expenses each decreased $1.7 billion on a year-over-year basis.

Turns over to our fourth quarter results. All comparisons I will share are on a quarterly basis unless otherwise noted. Cryptocurrency prices and volatility started the fourth quarter low, but by the end of the quarter they had increased by approximately 40% and 60% respectively.

This is largely due to excitement over the approval of a Bitcoin ETF and broader expectations for improving macroeconomic conditions in 2024. The increase in volatility has had a meaningful impact on our trading revenue. We are seeing strong growth and re-engagement from Simple and Advanced traders.

It is worth noting that the average trading volume among our Advanced traders has increased significantly. This resulted infourth-quarter trading revenue of $529 million, an increase of 83%. The mix of volatility and Advanced and Simple volume was similar to Q1 2023. As a result, our fourth quarter blended average rate was similar to first quarter levels.

As a reminder, we continue to experiment with our consumer and institutional pricing models, and price changes may impact future quarters. But, to be clear, we didn't make any material changes to our rate structure in the fourth quarter. The blended average rates you see are simply due to mix changes on our platform.

Now turning to subscription and service revenue. Fourth quarter was $375 million, an increase of 12%. The main driver of growth is blockchain rewards, influenced by higher crypto asset prices.

In the fourth quarter, we experienced another quarter of local unit growth. We are seeing inflows inescrow as well as an increase in equity balances. Our USDC growth on the platform. Wehad nearly $200 billion in assets on the platform at the end of the year.

As for expenses, total operating expenses in the fourth quarter were $838 million, an increase of 11%. Expenses were primarily driven by seasonal and performance market expenses, an increase in legal expenses and the decision to increase bonuses in 2023 due to our strong full-year financial performance. Fourth quarter net income was $273 million and adjusted EBITDA was $305 million. Fourth-quarter net income benefited from strong revenue growth and two items.

First, we released a non-cash tax provision of $121 million. Second, we repurchased $100 million of our 2026 convertible notes, which had a favorable impact on the income statement of $18 million.

Now turning to our outlook for the first quarter of 2024. Overall, the first quarter got off to a strong start. As of February 13, trading revenue was approximately $320 million. That's roughly the first six weeks of the 12-week quarter. We are seeing strong trends in simple, advanced and institutional trading. Thematically, it looks similar to Q4.

Weexpect first-quarter subscription and services revenue to range from $410 million to $480 million, with cryptocurrency prices being the largest driver of our performance within that range.

On the expense side, we expect technology and development and general expenses to increase slightly to $600 million to $650 million, primarily due to higher equity compensation.

We provide additional background information in our letter. We expect sales and marketing expenses to be slightly lower at $85 million to $100 million, primarily due to seasonally lower NBA spending. Overall, the fourth quarter was a strong end to our business and we are excited about our outlook for 2024. Before we take questions, I'd like to turn the microphone over to our Chief Legal Officer, Paul Grewal, who will share an update on the progress of our SEC case.

Paul Grewal, Chief Legal Officer: Thanks, Alesia. As Brian mentioned at the beginning, regulatory clarity is one of our top priorities, and one of the ways we seek that clarity is through the courts.

We are still seeing some progress in the early stages of our enforcement proceedings with the SEC. Just last month, on January 17, the judge in our case held oral arguments on our motion for judgment against the SEC.

This is still the very early stages of the case. At this stage, it is difficult for defendants to dismiss any case entirely, and court statistics clearly show this. But we firmly believe that we are legally correct, and we are grateful for the court's careful attention to this issue and its deep understanding of the issues during oral argument.

What’s next? The motion is currently being filed, and the court has not set any timetable for a decision. There are multiple possible outcomes, but we are prepared for any outcome. The court may dismiss the complaint entirely, may dismiss only some of the claims and leave others in place, or may not dismiss any claims at this early stage. Any claims that are not dismissed will be the subject of discovery, a process that can take time.

If discovery is the next step, we are ready for that and this will include discovery on both sides. After discovery and before trial, we will have the opportunity to file a motion for summary judgment, which is similar to the motion we currently have pending in that it can end the case before trial. This is the type that solves most of the problems in Ripple’s case.

Whether the case goes to trial or is dismissed, we will get the clarity we have long sought. We are confident in the outcome, whether it comes later or earlier, because we are factually and legally correct.

Anil Gupta, Vice President, Investor Relations: Thank you all. With that out of the way, let's turn to the question of shareholders. We will select the most uploaded questions, determined by the number of shares. The first question is: Why do insiders continue to sell their shares on a daily basis? Alesia?

Alesia Haas, CFO:Thank you for the opportunity to share some background on this topic. First of all, all of us internally - myself, Brian, Emilie, Paul, the people on the call, all internally - we all have long-term confidence in Coinbase.

The second point I want to emphasize is: equity is an important part of what we offer to insiders and employees. We believe this best aligns our incentives with business performance and the interests of our stockholders.

Third, it’s worth noting that these sales represent only a small portion of insiders’ total holdings in Coinbase.

Finally,executives and board members may only trade through trading plans that are regulated by SEC regulations. We have established company policies common among public companies to govern these programs. No one trades based on real-time stock price movements or company news. All our trading plans must be set up in advance.

Furthermore, as disclosed in our public financial filings, theyallow insiders to make sales in predetermined quantities of shares at predetermined times or prices.

Our stock price is up nearly 400% in 2023. As a result, some sales plans reached thresholds and were executed. But I just want to emphasize that all of us have a long-term belief in Coinbase's opportunity.

Anil Gupta, Vice President, Investor Relations:Let’s move to the next question. What are the plans to scale revenue drivers outside of ETF custody plans? The market is changing rapidly, and Coinbase needs to be flexible in the U.S. and international markets. We see that you have entered the European market. How will the future evolve? Brian?

Brian Armstrong, Co-Founder and CEO: Yes. I'm going to focus on the issue of ETFs because there is a lot of focus surrounding this issue. We've always said that ETFs would be a win-win for Coinbase, and we're starting to see that happen on our platform. So in preparation for the launch of this service, we won 8 out of 11 spot Bitcoin custody programs, and today Coinbase custody represents approximately 90% of the $36 billion in Bitcoin ETF assets.

As a result, across the industry, we saw over $4 billion in net inflows into spot Bitcoin ETFs. Bitcoin ETF sets record. When gold was launched in November 2004, it took a year to reach $3 billion. And these ETFs did that within weeks. So it was really an incredible start.

This is really just the beginning. We are now starting to see some issuers apply for Ethereum ETFs, for example. We have been named the custodian of five of the eight ETH ETFs. And hosting isn't the only way we monetize. We also assist with transactions through Prime. We assist with financing of transaction settlement. So there are other opportunities to earn income here.

For those worried about cannibalism, ETFs are positive for the industry, which is good for Coinbase. So far, on both the retail and institutional fronts, we are seeing improved participation and net inflows. What’s more, since every institution is now starting to hold crypto assets, this asset class will become a standard part of every diversified portfolio. The financial system officially embraces cryptocurrencies. This is great and Coinbase is the most trusted partner here.

Anil Gupta, Vice President of Investor Relations: Our next question: Coinbase Venture’s portfolio is an overlooked gem on Wall Street, and in their valuation of Coinbase The value doesn't seem to be taken into account. In the earnings call and possibly in your materials, can you highlight this portfolio and its long-term opportunities. Emilie?

Emilie Choi, President and COO: Yes. I completely agree that this is an undervalued long-term opportunity, and I think we have a huge advantage in the market.

As an aside, I should mention that the value of our investment portfolio is recorded on our balance sheet at cost and not reported at fair value.

So when I joined six years ago, we started Ventures. And one of the things Brian and I talked about was, if you were in the early days of Google, Facebook, etc. These companies were able to invest in the most exciting emerging internet companies at the time, such as Stripe or Shopify.

This is the opportunity we see in the crypto ecosystem. We started from scratch with no dedicated team or resources. We just started investing in great startups, and now we're one of the most active investors in the space, with over 400 investments in our portfolio.

I think our competitive advantage is the great relationship we have with Coinbase alumni and the ecosystem. As Brian mentioned before about Farcaster, that was founded by a Coinbase alumnus. We also take a very long-term view. We don't panic when the market sells off. This is the opposite of group psychology; we work harder when others are afraid. We love it because it helps us stay connected to the crypto frontier and invest in the ecosystem.

Currently, we see a field that is developing rapidly, and that is the creator economy. Companies such as Paragraph, XMTP, Farcaster and others are trying to decentralize existing social platforms. And then looking ahead, we're very excited about consumer applications on the chain, like gaming, social, messaging and media, as well as a lot of new protocol developments like restaking.

We also see significant growth opportunities outside the United States, where our portfolio holds a significant position in the global crypto ecosystem.

I would also mention that due to the lack of clear regulation in the United States regarding cryptocurrency, we are driving a lot of innovation out of the United States. Since 2017, the United States has lost 2% of its blockchain developer share every year. This is the same situation with semiconductors and 5G migrating overseas.

This actually emphasizes the need for us to have clear regulations, and we think the United States is missing a huge opportunity right now. That's why on the Ventures side, we're investing globally. There are many interesting regional trading platforms in Latin America, India, Africa and other regions.

Anil Gupta, Vice President, Investor Relations: Great. So with that, Sarah, let's switch over and take questions from the analysts.

Operator: Your first question comes from Ken Worthington of JPMorgan Chase.

Ken Worthington, J.P. Morgan:I want to take a deeper look at what's happening on the payments side. We note the recent collaboration with Ledger and the updates to Commerce you announced earlier in Q4. Obviously, there's also a strengthened relationship with Circle.

So first of all, how do these different pieces work together to drive what you're building? Secondly, in terms of use cases, is this basically cheaper remittances for retail users and 365 days a year for institutional clients? Or is there a longer-term vision?

Finally, what does Coinbase’s revenue model look like in terms of payments? Is it more asset-based? Or transaction-based?

Brian Armstrong, Founder and CEO:Yes, I can answer that question. Thanks, Ken. As you mentioned, payments are one of the utility areas that we're exploring in 2024 and I'm very excited about that. I mentioned in my opening remarks that last year we announced that you could send USDCoin on Base for free and have it reach anywhere in the world instantly.

As a result, costs, transaction fees, and confirmation times do start to decrease. Reduce friction and you’ll see more and more payments. So there are various different use cases for payments. Payments is a huge industry.

In some emerging markets, people use local currencies and the inflation rate there is high, so the US dollar has a good reputation there. People want to get dollars.

So they can now use stablecoins, and USDCoin gives them a regulated, trusted option, our partner with Circle. They are a great partner. They are an excellent issuer of this coin.

Therefore, emerging market demand for dollars as a hedge against inflation is a starting point. Then, once people own those dollars, they will want to pay in those dollars in their daily lives, rather than in their local currency experiencing inflation.

So some of it is cross-border. As you said, there are people in these markets who order goods and services for their stores from Asia or Europe: some are cross-border, some are B2B oriented, some are remittances.

Others are, they just want to make a profit on their assets. A starting point like an inflation hedge is great, but it's even better if you can earn gains on a stablecoin like USDCoin. So this is a use case for emerging markets.

Then we also try to get into payments in other areas, and like you mentioned, Coinbase Commerce launched this blockchain payment protocol, which is really innovative. We try to make cryptocurrency the simplest and easiest way to pay on the internet.

Even the Coinbase Card allows people to spend their cryptocurrencies and USDCoin anywhere Visa is accepted. So there are many different use cases. If you want to dig deeper, you're asking what the long-term vision is. I mean we really want to update the financial system, right?

We hope that cryptocurrencies will play an increasing role in the global financial system and account for an increasing proportion of GDP over time. So, cryptocurrency started as an asset that people traded, but we now need to see how it improves these other areas. And payments are a huge area of ​​that.

As we have seen, layer 2 solutions like Base are now the time to invest. You also asked about monetization. I mean, look, this is all still in the early stages. So we're not making any predictions or anything like that. But we have monetization opportunities here with Base and USDCoin, and you can see some of those aspects in our financial statements today. So this is all long term.

I think even if people don’t think of it as a cryptocurrency, they will still benefit if we can promote practical use cases for cryptocurrencies. The fees were lower and my funds arrived instantly instead of waiting three business days. You might not even know it’s a cryptocurrency underneath, but that’s how we’re ultimately going to benefit a billion people. I think there's going to be a lot of opportunity to monetize that over time.

Operator:The next question comes from Chase White of Compass Point Research & Trading.

Chase White, Compass Point: Expenses were above guidance on all fronts, which appears to be driven at least in part by stronger market conditions. We at least think it's clear that we're entering a bull market cycle, and we're just entering it now. I mean, obviously that should drive volume and revenue higher, and actually, most revenue items are probably going to be higher.

So, if business returns to previous cycle highs, or even higher, how should we view various spending items?

For example, do needs in technology and development, marketing, general affairs, etc. need to grow significantly in line with revenue, or should they remain at current levels? It would be great if you could provide some clarification on this issue.

Alesia Haas, CFO: Thanks, Chase. I'm happy to answer this question. Overall, we have some costs that vary as our revenue grows, primarily our transaction fees.

As we shared with you, this includes miner fees, including verification and various transaction costs, and also includes payment of staking rewards. These will be 100% correlated with our revenue.

We have some other variable costs that need to be added, such as more CX customer support costs. If we see a significant increase in transaction volume, we will need to add some network support, but it will be very minor.

We can absorb a lot of the volume growth without increasing expenses. That said, we continue to review our expense base and aggressively invest in diversified revenue streams.

So if we find ourselves in a market that continues to grow, we may choose to increase our spend, but if we make that decision later this year we will be very transparent with the community. We've given our Q1 fee outlook, where we expect some very minor adjustments to Q4 results.

So, for now, you will be communicated in this way and expect changes in spending to remain fairly modest over the next few months.

Operator: The next question comes from Owen Lau of Oppenheimer.

Owen Lau, Oppenheimer: At a House hearing yesterday, the Deputy Minister confirmed with Congressman Tom Emmer that reports that Hamas used digital assets to raise funds were inaccurate, and that cypto Not even a common tool used by terrorists. Although Chainalysis released a report correcting this statement, it doesn't seem to have attracted enough attention. So I have two questions. Can you talk about Coinbase's investment in anti-money laundering programs to protect your customers and your reaction to this conversation?

Alesia Haas, CFO: Thanks, Owen, for noticing this. We were very pleased to see yesterday's House hearing and pleased to see this record corrected.

First, we have significant investments in anti-money laundering. We have a large compliance team and adopt the same best practices as any other fintech company or bank. We follow very standard rules in this regard and are regulatedby our MTL license and our Bitcoin license with the New York Department of Financial Services (NYDFS).

We are really proud to be one of the most compliant crypto companies in the world in this regard. Maybe I'll turn the conversation over to you, Paul.

Paul Grewal, Chief Legal Officer: Thanks, Alesia. We are pleased to see Congress paying serious attention to this issue. House subcommittee chairman French Hill made it abundantly clear when he observed that the undersecretary of the treasury made it clear that bad actors still prefer to use traditional finance rather than digital assets to fund their activities. I think this is an important validation of what we've been saying for a long time.

Mr. Nelson, the deputy minister, also confirmed previous reports that successful international cooperation with Israeli law enforcement had limited Hamas and its use of digital assets before attacking Israel.

We therefore believe the facts are clear. As Congress is faced with these facts, we are pleased to see them emphasizeCrypto is the answer to the problem of illicit financing, not just the problem.

Operator: The next question comes from John Todaro of Needham & Company.

John Todaro, Needham:First of all, congratulations on a great quarterly report. I have two questions about institutional business.

Looks like rates have gone up there. Want to understand what's driving this, or is there other revenue coming into institutional revenue, whether it's the Base chain or other products?

Then, the second question, as we think about the first quarter of 2024, are Bitcoin ETFs driving more institutional activity, should we think institutions will be the larger total volume moving forward? Part of it?

Alesia Haas, CFO: Thanks for your question, John. Embedded within our institutional product revenue are actually two products. One is the Markets business, our exchange, where market makers and liquidity providers trade directly on the exchange; the other is Coinbase Prime. Coinbase Prime has higher rates than exchanges.

So, similar to the consumer side, we see the blend shift driving blended average rates for institutions. We saw strong growth fromCoinbase Prime and took a greater share of trading volume in Q4, driving fee increases in Q4.

To answer your second question, does the Bitcoin ETF drive more institutional activity. As we shared before and Brian mentioned in his answer, ETFs are only good for the industry and good for Coinbase. We are seeing increased participation and net inflows so far in Q1 on both theinstitutional and retail side.

Operator: The next question comes from Devin Ryan of JMP Securities.

Devin Ryan, JMP: From what I understand, you have experienced a very considerable acceleration in derivatives volumes in recent weeks, and it appears to be quite evident on international exchanges.

So it's great to see momentum on that front. Obviously, we know that the derivatives market is larger than the spot market. So, first of all, how do you frame the expansion that you've experienced versus your view of the broader potential long-term impacts?

Then, what do users look like in terms of rates for derivatives trading? How do you think your user mix and rates will evolve over time?

Brian Armstrong, co-founder CEO: I can start with derivatives first, and then Alesia, maybe I will ask you some questions about rates.

So thank you for your attention. We've been hitting all-time highs on the international exchanges, which is really great. Of course, to be clear, it's still early days, butthe market has certainly demonstrated that they want to see a trustworthy counterparty that is structured in a compliant manner. And Coinbase is really the first company they've seen that fits that definition.

We have made a lot of progress in international derivatives exchanges. Inthe fourth quarter, we added 11 new markets. We now cover approximately 70% of the global market.

We announcethat we are acquiring a MiFID license, which will help us unlock derivatives in approximately 20 EU member states. We have added some new product features, such as 10x leverage. We did that in the fourth quarter. I think on international exchanges we have about $16 billion or so in notional volume. So the progress on that front is really good. Also, by the way, for Coinbase Financial Markets in the United States, weare licensed to trade futures in the U.S., which is really nice.

Yes, I think the daily milestone we just achieved - we hit $700 million in 24 hours on international exchanges - is really is a good start. I think clients will continue to want to choose a trusted counterparty that follows the rules. Coinbase is a brand that can help them achieve this goal. In fact, derivatives trading accounts for at least 75% of cryptocurrency trading volume. Although the fee is lower, it is the main volume of transactions. So I'm really pleased that we're now starting to grow our business in this area. Alesia, do you have anything to add about the rates?

Alesia Haas, Chief Financial Officer:Absolutely. As Brian said, we are still in the early stages of derivatives trading. We are excited about the progress we have just begun. So our goal right now is to really gain market share.

We willoffer tiered pricing over time. But right now, our goal is to compete, build liquidity, and attract usersand we will experiment and adapt as we scale.

Operator: Your next question comes from Benjamin Budish of Barclays.

Benjamin Budish, Barclays: I want to follow up on an earlier question about the Prime business. Can you give us a little insight into what exactly you're doing in that area? Obviously, I would assume there's some kind of execution involved here.

But what services do you provide? How do you monetize it? Can you confirm that the revenue realized through Prime is also reported or confirm or deny that they are reported within the institutional volume metric you provided?

Alesia Haas, CFO: Why don’t I start with this question? Coinbase Prime is our one-stop shop for institutions. It includes a suite of products including custody, trading, and financing, which are the three main businesses within the scope. When you look at our institutional trading revenue, that's primarily the trading business.

We disclose custody fee revenue separately, while the financing business is currently primarily included in other subscriptions and services as it is still in its early stages and growing. We haven't broken it out into separate line items for disclosure.

Operator: Your next question comes from Citi's Pete Christiansen.

Pete Christiansen, Citi:Alesia, I'm a little surprised that sales and marketing are expected to level off in Q1. I think given the current state of the asset class and the growth of international business, Coinbase may be more inclined to invest more in this area.

I was just wondering if you could talk a little bit about these dynamics. Maybe you're seeing a different mix change between agencies or retail that affects it, or maybe you're seeing better marketing efficiencies. Just wondering if you could give us a little more detail on that development and what you envision for this year.

Alesia Haas, CFO: Thanks, Pete. A large portion of our sales and marketing spend is actually brand spend, and we have seasonality in our NBA contracts.

So what you saw between Q4 and Q1 is a shift in spending where we're spending less in other areas, which resulted in a slight decrease in guidance for Q1 versus Q4, but we Reinvestment is taking place.

We're very proud of our marketing efforts, and I'll probably ask Emilie to answer some questions about that, but we really feel like we've made a lot of progress in marketing over the past year. progress, and we are continuing to invest more as we see strong ROI and returns.

Emilie Choi, COO: Absolutely agree, the return on marketing investment is very high and that is one of the things we have been asking for since we implemented this program. I think we'll continue to test its boundaries, especially as we expand more into policy marketing to get our message out to policymakers.

Operator: Your next question comes from Bo Pei of U.S. Tiger.

Bo Pei, U.S. Tiger:Hi management. There are some questions about retail transaction rates. With the recent approval of a spot Bitcoin ETF, most believe that cryptocurrencies are now becoming a more mature asset class.

Typically, when a new asset class becomes more mature, it is expected that it will become cheaper to trade it. So do you think cryptocurrency investors are becoming more sophisticated now? Do you see more traders migrating to the Coinbase premium platform?

Do you expect transaction rates to gradually drop below 1% during this cryptocurrency cycle, as they have over the past 1.5 or 2 years? If that happens, do you think the increase in volume will make up for the drop in rates?

Alesia Haas, CFO: Thanks, Bo. I will share it. Every quarter since we went public, we have received questions about rates and rate compression or cannibalization. To date, we have not seen this phenomenon on our platform, and we have not seen results from ETFs.

As we shared, even in Q1 so far, we have seen net inflows on both the retail and institutional fronts, we have not seen client behavior occur due to ETFs Any change, all we see is a net addition to the industry from the ETF, a net positive to Coinbase, a net positive to the industry as a whole, more engagement with both our retail and institutional clients.

Over time, we agree with you that fees should come down as commoditization occurs. But we're not seeing that today, we continue to see customers choose Coinbase because of the breadth of our products and the security of our platform, and we think that's going to be here for quite some time.

Brian Armstrong, co-founder and CEO:Yeah, sorry, I just wanted to add to that. Keep in mind that the industry as a whole has attracted approximately $4 billion in net inflows since the launch of the Bitcoin ETF. I think this is very beneficial. The thing to remember here is that we want cryptocurrencies to truly update the global financial system.

This means we need to integrate it into more parts of the financial system. Every time this happens, we cheer.

We want fees to come down and make it easier for people to get into cryptocurrencies in a variety of different ways. ETFs are a huge way to drive more capital inflows.

So far, we haven’t seen any cannibalization. As Alesia said, this is beneficial for Coinbase, we are seeing improved interaction and net inflows on both the retail and institutional sides. In my opinion, ETFs are a completely positive thing for our business.

Also, the more institutions get involved in cryptocurrencies, whether through ETFs or whatever, the better, because they will end up using it in other ways:Keep it in their On the balance sheet, paying suppliers, making payroll payments.

We hope that cryptocurrencies will drive more of the global GDP. We must take every opportunity to make this happen. So in my opinion, ETFs are very positive for our business.

Operator: Your next question comes from Joseph Vafi of Canaccord Genuity.

Joseph Vafi, Canaccord Genuity: I have a few questions, but maybe I'll focus them on following up on the previous question. For some investors, holding underlying spot versus holding ETF may look the same, but I believe you have thought carefully about holding underlying spot versus holding ETF, and the differences between them.

So, it’s great to hear what you think are the benefits of holding Bitcoin itself versus holding ETFs.

Emilie Choi, President and COO: I think I'll start, Alesia, and maybe you can join in anytime. The role we want to play in this ecosystem is to leverage our strongest competitive advantage. Because we've invested so much in custody solutions and Prime services, we feel like this is a great area for us to play, which is why when we work with these ETFs, we get the majority of the share.

Also, we also want to make sure that we invest in solutions that allow customers to invest in different crypto assets, and we have CBAM, Coinbase Asset Management, as something different from that.

But I think we are trying to play the role that best suits us in each different part of the value chain. Alesia, do you have anything to add to this?

Alesia Haas, CFO:One thing I will share is that most of the customers on our platform don’t just hold Bitcoin. Most clients hold more than two cryptocurrency assets. If you look at our volume in Q4, 42% of the volume came from other crypto assets that were not Bitcoin, Ethereum or USDT.

As a result, we believe that the Bitcoin ETF brings in some new capital that may not have come to the spot market, and these people may want to invest it in a 401(k), invest in a Within funds, that's where we're seeing more adoption, growth and awareness of this asset class.

But what we see is that when people start to learn about Bitcoin, they often get excited about other assets and want to use those assets. They want to stake. They want to explore the crypto ecosystem and decentralized applications.

We are therefore excited to see the expansion of users and investors in this asset class. We believe this will only be a net addition to the sector.

Operator: Last question.

Alesia Haas, CFO: Maybe two questions, the first one is for Paul. Regarding challenges to the SEC’s decision not to pursue a rulemaking. Can you briefly describe the process and the range of results you expect?

Paul Grewal, Chief Legal Officer: I'm happy to answer. Of course,you are referring to the petition we filed in the Third Circuit Court of Appeals challenging the SEC’s decision to deny or deny our formal rulemaking request. This challenge is ongoing.

We are pleased to see the court setting a timetable for a memorandum. Arguments will begin next month and continue into the spring on whether the SEC exercised its discretion in denying our request for rulemaking or whether it was arbitrary and reckless in denying our request.

We believe the Third Circuit will support our view, and we look forward to the opportunity to present our arguments at the appropriate time.

Anil Gupta, Vice President, Investor Relations:Okay, that’s it for today. Thank you all for participating and I look forward to communicating with you again next quarter.

Operator: This concludes today’s conference call. You can hang up now.