Coinbase Moving Offshore?! with Tom Duff Gordon VP, International Policy, Coinbase

Bankless Nation, we have a special bonus episode for you. Is Coinbase moving offshore? That is the question. Has the regulatory climate in the US become so bad that it has caused one of America's largest exchanges to actually relocate to another jurisdiction? That is the question we pose on today's episode. We're going to be talking about Coinbase's digital asset business license from the Bermuda Monetary Authority and what's going on over there. David, who do we have on?

We're talking to Tom Gordon, who is a vice president of international policy at Coinbase. And this really got on our radar when Tom and and uh his coworker released a blog post that talked about this uh license that Coinbase has gotten in Bermuda, which has raised the question is is Coinbase moving offshore? And are they doing one of those offshore derivatives exchanges, which we all know about? We've seen these before. Is Coinbase doing one? So these are the big questions, and that's the the questions that we start with asking Tom about, but then it spirals into a much longer conversation about the global chessboard of international rules and regulations and how that makes some areas uh easier for Coinbase to operate in and harder for the Coinbase to operate in. And how will this landscape change and adapt moving forward? And overall, what is Coinbase's plan for navigating this changing chessboard? So that's the episode.

Before we get into that episode, Bankless Nation, we got a message from our friends and sponsors over at

Ryan, before we get into this episode, I want to just like bring up uh this f era in crypto is marked by regulatory. We're talking about Gary Gensler every step of the way.

Yeah.

And it's so frustrating.

And it's regulatory season, which is not a fun season to be in. Uh and I remember going through just uh lessons from cycles have passed back in 2018, which was 2020, 2022. So like it was down only. And then it was 2019, which was the year of both building and also frustration. Uh and so understanding the landscape, and I was newer at the time, but understanding the landscape because there was also regulatory conversations back then too. China was banning crypto for the some of the first times. Uh, we were finally seeing crypto have a glimmer of relevancy in uh Congress, although, albeit briefly, but it was it was still similar. Yeah, now these conversations have moved forward one cycle bigger, uh, crypto's one cycle bigger. And so, as we have these much bigger conversations, I just want to remind listeners that this was always inevitable and this is part of the plan. And just because we are in the pain part of the cycle.

That means that the better horizons are on the way. And this is what Coinbase is seeing. This is what why they are doing their international strategy. And I think it's going to force the hand of the United States eventually once we are done gritting our teeth and getting through 2023 regulatory season.

Yeah, I think that's a great point. What I would add to that is um the the problem. This we're still in the bear market, obviously, and this is kind of the regulatory bear. The last bear market, David, back to 2018, you know what kind of bear that was? It wasn't a regulatory bear so much. I know there's some FUD in China. That was minor comparison. We didn't have product market fit. Okay. Like had nothing. We wouldn't know. We would be begging at that time, please talk about us in front of Congress. Uh Mika regulation in Europe, that would be a dream. Like, oh my God, crypto's actually important enough to pass European regulation on. That would be incredible. And so um, even though some of you might might be thinking about this regulatory season is it's bearish. Let me tell you, this is the this is the most bullish. This is exactly this is a win condition. This is a problem that a winning industry actually has, where uh, okay, now it's big enough. We have product market fit, it's established enough, we're at $1 trillion. And now uh the worldwide regulators have to figure out how to handle this asset class. So that's the wider context of you could look at the short run, you could be like bearish. Well, you know, Gary Gensler and the US doesn't get it, and they're you're falling behind. No, this is incredibly bullish. We have major international communities and geographies actually talking about crypto, passing regulation about crypto. It's entered the conversation. There's hearings in Congress about this. So that is the wider context, I think, where we bring on this guest today.

Yeah, and we we it's also important to know that, like, oh, don't be bearish, Bankless Nation. The only reason why we're saying that is because Ryan and I are from the United States. This is only bearish for the United States. Crypto's fine. It's just going to be better elsewhere. Sorry to the United States citizens, but this is just a bullish crypto conversation for the rest of the world. Now, the United States is a very wealthy and very large market, and eventually we need the full weight of the United States behind crypto. But the the Ryan brings up a very point in this a very important point of this episode is that when other jurisdictions entice crypto, it forces the United States hand. Um this is our our dose of hopium that you didn't know that you needed. Not that you even did need it, but first, before we talk to Tom, we have to talk to our fantastic sponsors who make this show possible. Especially Make this nation. We are here with Tom Duff Gordon, the vice president of international policy at Coinbase. Tom, welcome to the show.

Great to be with you.

So the the big news here that uh I think a lot of people are focusing on is that Coinbase has received a digital asset business license from the Bermuda Monetary Authority, which has led to people wonder is Coinbase moving offshore? Are you guys abandoning the US? Because understanding the current regulatory environment in the United States, I don't think anyone could really blame you. But that's a question that everyone has is is Coinbase moving offshore?

It's a good question. The simple answer is no. We're proudly US. We're going to stay a US company. I think some of you saw the response to the Wells notice that we put out yesterday, where Brian and Paul talked about the reasons for setting up in the US. We think the US has an awesome opportunity here to kind of lead because of the strength in tech and in finance. But clearly, you know, we've been struggling with a lack of regulatory clarity. So we've been amping up our kind of mission to kind of spread economic freedom globally. We want to bring a billion people into the crypto economy. We can't just do that in the US. So international is a big part of what we're trying to do here. And part of that is trying to light up the map. We go broad and we and we go deep, and we've announced a number of really exciting um developments, including the Bermuda license, over the last few weeks. So we're gonna continue to push for regulatory clarity in the US as much as possible, but equally we're gonna be uh expanding overseas as well.

So I I think I really want to know what that looks like and what and what that means. And so is Bermuda like a big area of emphasis? Is like one question. There's also another question of like UK also seems to be an area of emphasis. But maybe you can just we can just zoom out and start at the high level, just the broad scope, scope of international. What is can you just kind of explain the calculus of like what is Coinbase's plans at a high level to expand internationally? What does that look like? What should people know?

Happy to do that. So we tend to look at international in two ways. One is the go deep markets, and the other are the go broad markets. And we know we set that out in a blog about a year ago. We have more or less 10 international markets where we want to go deep. So if you look at the kind of in Europe, UK is our biggest international market. And then we have five other kind of European markets, you know, the big ones that you would expect, you know, France, Germany, Italy, Spain, Netherlands, and Ireland. And then in APAC, we're kind of going deep. We're onshore in places like Australia and Singapore. And in the Americas, you know, we've just announced some kind of exciting new developments in in Canada and in Brazil as well. So these are kind of the markets that we're very focused on. We're equally going broad. Bermuda is going to be part of that kind of go broad push where we cover other markets kind of, you know, from a single location. And we're also, you know, we have interesting conversations with regulators in the Middle East. I'm sure we'll get onto that, and places like India, Indonesia as well. But, you know, stepping back, 10 kind of major kind of go deep kind of markets internationally, and then some other markets that we're going to cover more from a kind of go broad perspective. And that's how we kind of carve the world up at the moment.

I know Tom, you said that uh Coinbase is not a moving offshore outside of the bounds of the US, though it does have an international strategy.

Let me ask you the question though. Um, are there conditions under which that might change? I think some of the quotes that we saw circulating from Brian Armstrong basically that it's not off the table, right? And it seems like very much now Coinbase has decided to double down, dig in, and fight in the US, basically, suing the SEC um for more uh rulemaking, responding to the Wells notice very publicly. Uh Brian keeps tweeting out uh pictures in Washington, D.C., where uh Coinbase is presumably speaking to folks that are uh in Capitol Hill. So it seems very much like the current posture is to actually fight. But if things got bad in the United States, are there other avenues where Coinbase might consider actually moving offshore or at least uh relocating its headquarters somewhere other than the United States?

Well, for the time being, we're we're staying and fighting. Um, you know, there when Brian set up Coinbase 12 years ago, there were an you know, there were a number of other kind of crypto companies setting up offshore immediately, but we deliberately decided to establish kind of Coinbase in the US. We've been fighting for that regulatory clarity. I think, as you know well, over the last few years. Last year we petitioned the SEC for kind of clear rules. Um, part of the, you know, the recent kind of writ and court process we're going through with the SEC is to get them to respond to that petition, not telling them how to respond to it, just asking them to respond and to create those clear rules. We want to see the development of a securities kind of market for crypto in the US. We think it's a huge opportunity. So we're not gonna, we're not kind of running away. We want to continue to fight the good fight. But equally, we are seeing an extraordinarily exciting amount of kind of you know regulatory development happening internationally where clarity is forthcoming, right? And, you know, there are normally three steps in generating that kind of clarity. First of all, um, geographies tend to kind of focus on money laundering, terrorist financing. It's kind of step one travel rule type stuff.

Step two is they then think about stable coins because they could become super systemic very quickly, types of kind of licensing and custody rules. And then the third step is kind of technical rules and implementation. We're seeing a huge number of geos move forward now into kind of stage two and potentially stage three. Europe, for example, with Mika is arguably at stage three. So we have to be engaged in those processes. You know, we want to spread economic freedom. We want to bring a billion people into the crypto economy, and we've got to be part of those conversations. Brian said in London, uh, nothing is off the table. Um and I think what he means by that is we will, you know, we'll continue to stand fight in the US, but equally our mission is broader. Uh, and we will be very present and we'll make sure that we're you know involved and engaged in all of those conversations in those other markets, as that regulatory clarity will bring more users into the ecosystem.

So for bankless listeners do doing the math, obviously Coinbase needs to be broader, uh, other than the 350 or so million Americans who who live in this country, if it wants to get a billion, of course, there are a lot more people that live outside of the US, if if that indeed is the mission. Um, Tom, since you you've got some of this exposure, you mentioned a few markets already. You also mentioned Amika. I'm curious if you could kind of like rank order uh the different geographies in terms of how high quality and friendly their crypto regulation regime is. And I know everyone is somewhat still early to this game, of course, because this is a brand new industry, brand new technology, but I'm trying to get a flavor. I mean, like

the Middle East, for instance, or uh areas in Asia, or the UK, uh, or Europe, for example, uh, and then the United States and Canada. Where does everyone stack up if you were to do sort of a, you know, a top ten list?

Yeah, it's it's a it's a great question. Maybe I can start by answering that by saying

the debate in the US, which which I see a little bit from the inside and the outside around, you know, what is a security and what's a commodity, should, you know, should this market kind of belong under the SEC or under the CFTC,

this is not a debate that I see

Kind of pronounced in any shape or fashion happening outside of the US, right? Yeah. So this is sometimes what I think is kind of gets lost and is missing a little bit in the debate in the US. Like genuinely what happens outside is that we do a token mapping exercise. And this is happening across multiple different kinds of geos, so not just kind of Europe, but also parts of, you know, the major parts of the Middle East and APAC,

where the first thing the regulators and policymakers are doing is trying to figure out

is crypto an existing financial instrument? And should we apply existing financial instrument laws, or is it something new or is it something in between? And I think where the UK is coming out, where Europe is coming out, where Australia and others are coming out, where Japan is, et cetera.

Is quite simply to say

there are kind of Bitcoin, Ethereum, you know, main, all these kind of main unbacked kind of tokens. These are not existing financial instruments. So therefore they're going to need a new set of tailored rules. Where some of the regulatory risks are the same and some of the underlying activities are a bit similar, we're going to take existing rule books for financial instruments, slightly modify them and apply it to the crypto economy. We'll develop new rules for things like stable coins. But where we've got tokenized securities, tokenized commodities, tokenized financial instruments, clearly those are financial instruments, right? And you just apply the existing financial services law. So it's kind of interesting that.

You know, the the kind of distinction between what's a security and a commodity is mainly only relevant in the US because you have separate regulators with jurisdiction. The the distinction that we care about outside of the US is are these things existing financial instruments or not?

And that's been a much easier question for everybody to get to grips with. So I feel like answering your question, you just have to kind of start by level setting to say that the conversations and discussions are very different, you know, internationally outside.

Well well let me just dig in that to make sure that that point lands uh completely. So there's this this famous, uh not famous, but like a clip, viral clip back and forth, Patrick McHenry asking Gary Gensler, is ether a security? I repeat, is ether a security or a commodity? Again and again and again he asked this question. And Gary Gensler would not answer the question, basically. Uh if I went to a governance body in Europe, let's say, and I asked um uh legislators that same question, is ether a security? What would the answer be? It would the answer be, or or is it a commodity? Would the answer be uh that's not the right question, or that's not the question. That's not how we do things. That's not how we do things. Like, or would they very clearly be like, oh, this is a new financial instrument. Clearly it resembles somewhat of a a commodity. What would what would the the return answer be to a question like that?

Yeah, I I it's a great question. They would they would basically say what we look at is slightly different. We want to know, is this an existing financial instrument or is this something new? And so, in kind of European terms, you would say, is this a MIFID instrument? And MIFID is the markets and financial instruments directive, which is the existing kind of corpus of financial regulation. So is it an existing financial instrument that fits in there, or is it a Mika instrument, right? For which we've got new rules, right? For yeah ARTs and asset reference tokens and stable coins, et cetera.

The direction of travel, if you ask this question, Ryan, in Europe, I think is very clear. Ether would not be an existing financial instrument. It would be an other financial token to which the rules under Mika apply, not MEFID. Now, that has not been 100% finalized. We had the ink is not quite yet dry because there are some technical rules that have to be made after the vote in Parliament that we've just recently kind of seen. But that is the direction of travel, which is very clear. And I think that's the same in the UK, and we're going to see that the same across Asia as well.

So Tom, the the the the difference is whether it's MiFIT or uh Mika, and that that's almost like traditional finance versus digital finance, let's say. And that would be the kind of the axis of conversation. And clearly something like Ether is is Mika. It's digital finance. It's not traditional finance. And so

Rather than commodity versus security, it's old versus new.

Yeah, and and a new set of rules and kind of thinking like that seems um smart and like healthy and like normal and build up from first principles. I don't know why we're having such trouble in the United States with this, uh Tom. But but anyway, I don't want to um delay this, but thank you for digging in. Like, so so give us the the the stack ranking here. Who's on top? Who's got the best regulation? Who's got the kind of the worst?

Good question. So I won't go through all the countries. Look, I think Mika is good. We support it. There's a lot of level two technical rules that have to come out. But for centralized actors like ourselves, the rules came out in a pretty good place. If we had a small criticism, it would be around the treatment of stable coins, which we think is a little bit harsh under Mika, but more or less I think that's a very good framework. I think Mika will also be influential at the global level, because we haven't talked about this either. But kind of whilst we're kind of waiting to see what happens in the US, no one else is kind of standing still. And the global standard setters are also kind of moving, and we're going to get principles from the FSB and IOSCO and kind of others kind of later on this year. But you know, Mika is Mika is good. I think it's going to be influential for those global rules. The UK have just started consulting. That framework seems to look a lot like Mika, but it's kind of more flexible in certain areas. So we're kind of quite pleased with the way that that is trending. I would say that there are some markets that I would group.

As a little bit more cautious on the retail side. And some of that has changed post FTX. So places like Hong Kong, which is big, which is opening up, which is super interesting, right? Because China obviously banned crypto, but Hong Kong is now opening up. And a recent consultation paper from the SFC was kind of really interesting for everyone to see. But I will say when you dig into that a bit more,

The pivot is fantastic, but they are very cautious on the retail side. So only a limited number of tokens can be traded by kind of retail users. And a similar kind of hesitancy we see somewhat in some other geos in APAC, like Singapore, for example, where a huge amount of excitement overall in the space and the technology, but again, concerns around consumer access on the retail side and consumer detriment. And we see that in a number of markets. So I would say, you know, the themes post-FTX, where some jurisdictions are beginning to tighten up and reduce kind of flexibility, tend to be around conflicts of interest and consumer access, right? And these are things which kind of crystallized, you know, over the last few months. But, you know, look, I think we're positive more or less about what's happening in the Middle East, uh, what's happening in Europe, in the UK, um, Australia are kind of one step behind, but their token mapping exercise was very thoughtful and they're moving ahead nicely. Um, Singapore and Hong Kong have good regimes. Looks like they're developing good regimes, but perhaps more cautious on the retail side. Um, and then, you know, Japan, um, you know, we found that a market which was um very exciting, a big early mover, but one in which they had quite a lot of localization requirements, particularly on the custody side. So that was a bit harder. But it's you know, without wanting to give you a kind of a full stack ranking, um, I think we would see from a comprehensive kind of perspective, Mika really being right up there. Um, but kind of fast follows from a number of other geos, and the G20 rules will probably pick up a lot of what Mika says and allow everybody to generate.

a bit of consensus. Because here's the thing, guys, the at the end of 2023,

it could well be that a lot of international jurisdictions or the the ones that kind of really matter.

Are in stage two or stage three of this process, and there are global principles.

And it could just be the US, it just finds itself increasingly kind of, you know, standing alone in the room without, you know, being on this on this journey. And that's something that concerns us. And again, we're not pleased about that, and we're doing everything we can to try and push the US along. But, you know, particularly from my perspective, focusing on the international markets,

this is a pivotal key year. There's a heck of a lot happening. Things are moving fast. And we have to be part of those conversations, even as we kind of struggle to get off the ground in the US.

So so the US has its own unique problems, you know, and its own unique systems. Maybe it's just you've not adopted the metric system uh yet and that you know, the rest of the world is uh ahead. And so you're saying that the US you'd place them at the bottom in terms of closer to the bottom, lower court quartile anyway, in in terms of crypto friendliness?

I would just say that they are just behind where everybody else is, right, on this on this process, because we want to have um clear rules, not regulation by enforcement. And that's unfortunately what we've been seeing.

So I think they would certainly be, you know, behind the rest of the pack in the sense that we have not seen, you know, white papers, we have not seen open consultation papers. There hasn't been transparent rulemaking that the industry's been invited to engage in. But we have seen that in the UK, we have seen that in Europe, we've seen that in Japan, we've seen it in Brazil, we've seen it in Singapore, we've seen it in the Middle East, we've seen it in Australia, we've seen it in Canada.

The list goes on, right? But we have not seen that on the US side. So I think from that perspective, you know, they are, they are lagging. We hope they can catch up. It can be faster.

But, you know, think again about Europe. 27 countries came together to agree hundreds of pages of very complicated text, multiple different languages, but they managed it. And they started three years ago. But in the next year and a half, a lot of these regimes are going to enter into kind of application. And, you know, I hope that the US will be kind of part of that journey.

Seeing this like global landscape kind of like play like a chessboard when different parts of this landscape are becoming more difficult to play on and other parts of this landscape are becoming easier to play on is a I think a useful mental model. There's two parts of this conversation that I think are worth um separating. And one is like how easy does parts of this chessboard make it easy to play on? And then what are the values of those locations, right? So the United States makes it very, very difficult to play on that part of the board, but it's a very valuable part of the board because the United States market is huge and wealthy. Um and uh the you know it's it's always shifting, right? The global relationships to the crypto industry is always shifting. And I think just like in the moments of at post-2022, it's just a big conversation of like how is this board shifting? The I think, and that's like one side of the calculus. I think one so the big question that that I think users are primarily interested in, and like the what just the gut reflex is, is like, is there going to be a Coinbase international, right? And we've seen this model before. There's Binance US versus Binance. There's FTX, F FTX, FTX US, and then also FTX, right? Is that kind of the mental model that we should be thinking? Is there going to be a Coinbase US and Coinbase international? Is that how we should think of this? Or how should like users and consumers of Coinbase think about this?

So so maybe we can come back to kind of the Bermuda announcements. So we are gonna have uh Coinbase International Exchange. Um and and

That that's the new thing.

So that's the so that's the so that's the new thing. Really excited about that. So we have a full license kind of now there. And you know, we're just starting a effectively new product. Um perpetual futures. Um it's gonna start with just Bitcoin and Ethereum kind of contracts with kind of wholesale institutional kind of clients, moderate kind of leverage to kind of kick off, but you know, that will then kind of like scale and proceed, and we'll bring kind of you know our retail users uh into that and we'll make that available in in select markets across the world. So kind of we're excited by that. We've moved, I think, sensibly uh into that space. We haven't rushed. Um we choose high-bar regulatory jurisdictions. Um, to your point, we kind of almost seek out the parts of the chessboard where it's a little bit harder because we know that if we're able to do that, that's a badge and people will then trust us. And you know, our brand is about being safe and trusted and easy to use. And we don't necessarily want to rush into things and do them wrong. We want to take our time and do them right. Um, so that's why we've taken a bit of time to launch this new product. Um, but we're very excited about it, and I think that will, you know, that will kind of scale um, you know, over over time. So we will have a US exchange.

We will then have a non-US international exchange. And then Coinbase will have a localized experienced kind of banking rails in the GoDeep markets that I described kind of beforehand. And we'll continue to announce kind of exciting developments as we as we kind of continue conversations in other parts of the world, the Middle East and other places.

Okay, so there's US Coinbase, which we all know, like that's the known quantity. The new thing is uh Coinbase International, which is going to accept certain jurisdictions, certain citizens from certain jurisdictions that get approved to access the international exchange. And then there's also kind of like one off, more call it proprietary, I guess, just like more niche coverage of the rest of the world in one in more one off particular fashions. And then you add all of those things together, and that's Coinbase, right?

That's right. That's right. And you know, and going back to the and going back to the kind of the chessboard analogy, as as different geos move through that, through those three phases of kind of figuring out, you know, the AML, KYC travel rule rules first, and then the license custody and stable coins, and then the implementation. And by the way, there are other steps around kind of DeFi and other things, but we kind of hope they come later.

It gets harder and harder, right, to operate in those in those jurisdictions. But in some ways, you know, that's a good thing because it means that there's, you know, there are more compliance requirements. Okay, that's difficult, but we're hoping that that is just going to bring more people into the crypto economy because there'll be more trust uh in the system, and there'll be incentives for people to be onshore and in those high bar regulatory jurisdictions. And you know, some of those situations, the FTX um uh events and others that we saw were.

Uh effectively we had exchanges in offshore, more lightly regulated jurisdictions getting into trouble. I mean, hopefully that will be that'll be lessened as as we kind of move forward. But that puts a lot of onus and burden on centralized exchanges like ourselves. Um so we need to be thoughtful and judicious about, you know, where we go deep and and you know making sure that we get that right.

So I think this is actually kind of a dumb question, but I'm gonna ask it anyways. Um uh the other offshore derivative exchanges that is now Coinbase is like adding into themselves into the category of are Binance and BitMEX and FTX, and maybe a few other ones that I can't remember, but just like it's not necessarily a great list to be on. Uh and so, like, what's what's Coinbase's international's like strategy around that? Or like what are the thoughts about that?