Fred and Brian’s philosophy of running through brick walls had served the company well, inspiring employees to pull off near-impossible feats in the name of growth. But like Face-book, whose early motto was “move fast and break things,” Coinbase would pay a price for its run-and-gun approach. Running through brick walls is a killer tactic—when it works. When it doesn’t, you end up on your ass—with a bloody nose.
Coinbase’s earlier bid to outwit Apple, for instance, had been clever. It let the startup flout Apple’s rules by letting customers buy and sell bitcoin directly in its app, all the while keeping the iPhone maker in the dark by disabling the buy-sell feature in the city of Cupertino, where the app was vetted. But it took Apple only a few months to discover the ruse, and Coinbase was tossed unceremoniously from the App Store.
Sometimes when Coinbase crashed through a brick wall, the founders discovered there was nothing on the other side. That’s what happened after Adam White, the former Air Force captain, made a superhuman effort to sign up dozens of merchants to accept bitcoin—including ten companies with over $1 billion in revenue. Brian and Fred had believed the sign-ups would unlock a gold mine, letting Coinbase take a cut whenever a retailer accepted a bitcoin payment. It sounded grand in theory. In reality, it required a steady stream of customers wishing to buy coffee, furniture, and everything else with bitcoin. That stream was more like a trickle, and then even that dried up. As would happen over and over in coming years, Coinbase’s attempt to add a new line of business fell flat.
“The company wanted to be best at all things,” Craig Hammell, the shy engineer who was Coinbase’s second employee, recalls. “But the brokerage business was always the bread and butter.”
The struggle to find diverse business lines was hardly unique to Coinbase. Other tech companies in the Valley—even the biggest—still rely heavily on a core business for the bulk of their revenue, and especially their profits. This includes Google and its parent company, Alphabet, which dabbles in everything from driverless cars to human biology. Most of these bets, though, are money-losing, and it’s still search engine advertising that brings in most of the cash that powers Google. Facebook, meanwhile, has failed repeatedly to bring shopping to its platform, and its effort to crack the mobile phone market—in the form of the short-lived Facebook phone—remains one of the company’s spectacular flops. The point is that diverse money-making lines are a splendid idea for a company but, as Coinbase was discovering, are very hard to achieve in practice.
In 2015, as the bitcoin bust dragged on, Brian still saw blue skies. It didn’t hurt that Coinbase had begun the year with a popping $75 million funding round, which brought the total raised since Brian’s time at Y Combinator to $106 million. Among the investors were the usual crowd of venture capitalists, but also a new set of faces from Wall Street—a sign that the traditional world of finance, which had mostly sneered at cryptocurrency, was starting to take bitcoin seriously. Coinbase’s backers now included the likes of the New York Stock Exchange, the banking giant USAA, and the former CEO of Citigroup, Vikram Pandit.
Coinbase was also marching into more countries, including more than two dozen in Europe as well as Canada and Singapore. And in a critical move, the company launched a professional exchange. While Coinbase’s original retail product let ordinary individuals buy and sell bitcoin, the exchange was a turbocharged version that let big-time traders swoop in and out of positions worth thousands or millions of dollars. To mark the launch, Coinbase staff donned pajamas and stayed up all night for the morning launch of the exchange, code-named Moon Launch—a nod to the crypto world’s favorite phrase, “to the moon,” which invokes a price run that makes everyone rich. The exchange also promised a new line of business at a time when bitcoin merchant payments had turned out to be a bust. The company’s cut, in the form of commission, would be much lower than the 2 percent or so paid by Coinbase retail investors—only 25 basis points, or 0.25 percent. But the trades would be much bigger: A hedge fund buying $1 million of bitcoin would pay Coinbase $2,500. If the exchange caught on, it would mean Coinbase could claim institutional customers in addition to its core base of retail bitcoin buyers.
• • •
A new infusion of investor cash and the launch of a professional exchange was all well and good, but it didn’t outweigh the ugly reality that the price of bitcoin remained in the toilet, and that trading volumes had stagnated. Brian, meanwhile, needed to learn how to lead in tough times—and too often, he was a slow learner. His shortcomings were on display during a four-city tour from London to Helsinki that called on him to drum up interest in bitcoin and Coinbase across Europe. It was an uncomfortable experience for a man most at home with his headphones on, face melded with screen, coding like a maniac. Here, he was an introvert doing the job of an extrovert. Being a CEO required selling, schmoozing, and media glad-handing, and Brian disliked all of it. What he liked was building and putting his passion into products.
“The product is never good enough. It often causes me physical pain to think about the state of our product, especially when it’s slow, buggy, or inconvenient. It’s an obsession,” Brian would later write in one of his many blog posts. For an introverted CEO, writing rather than speaking proved the best way to tell his company and his customers what he was thinking.
Normally Fred, the swashbuckling trader, would handle the outside world. But on this trip to Europe, Fred had been tied up with urgent business in the United States, leaving Brian to lead the push alone. As his train pulled into Paris ahead of his appearance at the city’s new “Maison du Bitcoin,” Brian looked at the overcast skies and felt his energy flag. As he would do more and more as the trip wore on, he retreated to the place he liked best—his private world of “headphones on,” where nothing and nobody could disturb him. Going into this inner world—while hardly ideal for drumming up publicity for Coinbase—gave Brian his unusual ability to summon serenity even in the most stressful of situations.
That didn’t mean others at Coinbase could do the same. In San Francisco, the mood was growing tense. Coinbase now numbered dozens of employees, and in April, the staff, along with Satoshi the betta fish, finally left the cramped Bluxome Street apartment for a real office on Market Street, the city’s main thoroughfare. New corporate digs did little to dispel the gloom as the price of bitcoin fell further and further. Only true bitcoin believers like Olaf and Craig stayed unfazed. “If you looked at any other metric than the price of bitcoin, it gave you a lot of faith and confidence,” Craig recalls of the doldrums of 2014 and 2015.
Others’ faith was less sturdy. A third of Coinbase’s newer employees quit the company in 2015, leading Nathalie to lobby Brian and Fred to conduct a survey of workplace satisfaction. Seeing the results jolted them: employees were anxious, and morale was sinking.
“Fuck morale,” Fred snarled in response to the survey. “If you don’t believe in bitcoin and this company, you shouldn’t be fucking working here.” (Years later, Fred, now fantastically wealthy, would look back at the lean times and reflect, “There were a lot of unfortunate folks who lost faith.”) But in 2015, Coinbase’s board didn’t see it Fred’s way. Already concerned by the founders’ imperious management style—including remarks by Brian like, “If you’re not blowing my mind while talking to me, I don’t care”—the board reached for a familiar remedy: consultants and coaches. Brian and Fred were hardly the first Silicon Valley executives who needed to smooth out their rough edges, and the company dug deep to train them.
It wasn’t that the founders lacked humanity. Longtime Coinbase employees describe Brian and Fred as brusque and unfuzzy, but also compassionate in critical moments. Adam, the Air Force pilot, recalls their kindness as he struggled to work while his mother was losing a battle to cancer. Craig, the shy workhorse, remembers the founders going out of their way to celebrate his birthday. Nonetheless, Brian and Fred’s day-to-day demeanor, their expectation that others match their workaholic lifestyle, and their callous dismissal of things like office morale were often brutal, and the Coinbase board was determined to fix that.
Unfortunately, some of the remedies backfired. Brian glommed onto a cultish management fad called “Conscious Leadership” that employees described as a hybrid of New Ageism and a twelve-step recovery program. They compared it, unkindly, to something out of the satirical TV show Silicon Valley. In the name of fulfilling a program called “The 15 Commitments,” Conscious Leadership encouraged employees to engage in odd language and rituals when confronted with conflicts large and small. These involved approaching colleagues with the phrase “Can I clear with you?” and then presenting a roster of grievances couched in language like: “The facts are these . . .” “The story I told myself was this . . .” “Voices were raised and you were angry! This triggers me.”
“The whole thing was a recipe for confusion and passive aggression. It can be great for self-actualization, but in the workplace, it’s a terrible tool,” says Nathalie, who more than once found herself crying in the bathroom over the conflicts rippling through the company.
For Brian, though, Conscious Leadership was ideal. To his engineer’s mind, it amounted to an equation for emotions, a way to reduce feelings to a formula. In data-driven Silicon Valley, the mumbo jumbo made perfect sense.
• • •
In 2015, the giddy days of $1,000 bitcoin were a distant memory, and the press and the general public recalled crypto and blockchains as a fad—if they thought of them at all. At Coinbase, the company could take some comfort in its squeaky-clean reputation compared with the rest of the crypto industry—but now a series of events meant even that hung in the balance.
“Coinbase’s strategy was to be the white knight of crypto,” says the venture capitalist Chris Dixon. That meant engaging in none of the shady stuff that had given bitcoin a bad reputation elsewhere. In an industry oozing with crooked players, Coinbase wanted to stand out as a straight shooter. Looking back years later, the company’s first lawyer, Juan Suarez, said the game plan for the company’s success was straightforward. “A big strategy didn’t win the day for us,” he says. “All we had to do was say, ‘Don’t get hacked, don’t break the law, and maintain a banking relationship.’”
Even if the world saw it that way, Brian and Fred knew it wasn’t exactly true. Coinbase had already been hacked once, though the company had kept it under wraps. It also blew up a critical banking relationship.
Silicon Valley Bank, which goes by SVB, is sui generis as far as banks go. It’s built by and for the entrepreneurial machinations of fast-moving tech startups, and its risk profile looks unlike that of any other bank. It has provided financial lifeblood to tens of thousands of startups. Much like Gringotts Wizarding Bank in the Harry Potter series or the Iron Bank of Braavos in Game of Thrones, SVB is run by a particular set of bankers with a code of their own. A startup has no revenue yet? No problem. SVB is built for the needs of the Valley, taking on risky startups other banks wouldn’t touch and operating within a tight clique of founders, venture capitalists, and tech incubators.
Still, even with its Valley-centric worldview, SVB wasn’t particularly enamored of Coinbase or its promise. It had taken a special nudge from Fred Wilson of Union Square Ventures to get SVB to take its business. From the bank’s perch, the problem wasn’t Brian or Coinbase’s business plan—it was bitcoin. Like the emerging cannabis industry, bitcoin faced perceptions of illegitimacy and genuine, unregulated volatility. Mt. Gox had proven that. More than ever, bankers looked at bitcoin companies like so many unexploded landmines. They operated in a legal netherworld where one wrong move could see a company blow up in a federal criminal investigation. Banks funding the ventures could suffer the collateral damage in the form of massive fines. Better to stay clear altogether.
Silicon Valley Bank had made an exception for Coinbase, in part because of Fred Wilson’s endorsement and in part because the company had cast itself as just another tech company. “These are companies that are not software companies, but say they are,” says a former Coinbase executive, explaining how the company persuaded SVB to be its banker in the first place.
It had been a coup for Coinbase to get SVB as its bank, but that was just step one. Now, it had to keep SVB happy. The bank had seen its share of mercurial founders and high-risk business ventures, but Coinbase was operating on the edges of a Bermuda triangle of finance, tech, and regulation—meaning the stakes were far higher for the bank than backing a Valley bro who builds collaboration software.
It’s fine to run through brick walls in software development and on the business front, as Brian and Fred did; it’s less desirable (especially to your investors) when you do it in the legal and regulatory environments. For Martine Niejadlik, Coinbase’s compliance officer, this approach induced ulcers. It fell to her to persuade the hard-charging founders to adopt the tedious, time-consuming steps needed to stay right with Uncle Sam. “It was their first reality check. You can’t just transfer funds around the world without anti–money laundering controls,” she recalls.
Brian and Fred did not accept the new oversight with grace. The pair, whether they knew it or not, had taken on the truculent approach of billionaire investor and entrepreneur Peter Thiel, who had helped launch PayPal fifteen years earlier. Like Coinbase, PayPal was ahead of its time and, in Thiel’s words, was in a race between tech and politics. In such a race, lawyers and compliance officers only slowed you down. When an executive at PayPal told him it was time to hire a big legal team to guide them, Thiel—an attorney himself—shot down the plan. “No, we’re not going to hire them,” Thiel recalls telling the executive. “They’ll just tell us what we can’t do. So we have to just go ahead and not hire the lawyers and just do it.”
Thiel’s approach during PayPal’s early days very much resembled the “running through brick walls” ethos at Coinbase. But there was a critical difference. As Thiel himself has noted, PayPal was built before 9/11 and the Patriot Act—when government scrutiny of banking was much less stringent.
In theory, this meant Brian and Fred had to heed Martine but, in practice, the outcome was a series of blowups, each playing out in roughly the same way. Martine would discover some potentially damaging choice that could spook regulators and would call for measures to get Coinbase on the right side of US banking laws. Brian, who still took his gut-checks from the chatter on Reddit forums, would push back and ask if such steps amounted to a betrayal of bitcoin.
It didn’t help that Martine’s corner of the company—compliance—was a cost center that didn’t create customers or products. She built brick walls rather than running through them.
Martine couldn’t stop Brian and Fred from making a series of public gaffes that began to dull Coinbase’s once-shiny halo. This included them jumping the regulatory gun by announcing that Coinbase would be offering a licensed exchange in numerous states—basically saying their crypto business, which existed in a sort of legal netherworld, would soon have the status of a regular old stock exchange or brokerage. Martine’s stomach sank when news of Fred’s boast hit her phone while she celebrated her birthday at Disneyland.
The fallout from Fred’s comments came fast as California’s powerful financial regulator, the Department of Business Oversight, issued a public smackdown in the form of a “consumer alert” about Coinbase. Officials in the state of New York piled on, telling the New York Times that—contrary to Fred’s claims—the company had been operating without a license.
Worse was soon to come. Fred had created a PowerPoint deck for investors that highlighted four benefits of bitcoin, including the obvious ones like low transaction costs and a reduced risk of fraud. But the first bullet on that list explained that bitcoin was “immune to country-specific sanctions,” citing Russia as an example. This may have been true—governments in many cases could not stop the flow of bitcoin—but advertising this on a company slide amounted to saying, “Our product can subvert US banking sanctions.”
It didn’t take long for someone to leak Fred’s deck to the press. Conservative media outlet The Washington Free Beacon published the presentation in February under a blaring headline of how Coinbase was touting cryptocurrency as a tool to circumvent sanctions on Iran. With a single bullet point, Fred had jerked Coinbase into geopolitics.
Silicon Valley Bank had seen enough. Its lawyers had been watch-ing Coinbase closely, and, in the course of a semiannual risk review in the spring of 2015, Coinbase was cut off. No more bank account, no more lines of credit, no more help. For Coinbase, it was an unpa-ralleled disaster, as operating a cryptocurrency service without a bank would be like selling ice cream without a freezer. For one longtime investor and adviser to Coinbase, the bank’s move was an unexpected gut-punch, leaving him feeling angry and betrayed.
SVB extended one lifeline to Coinbase, giving the company a six-month grace period to find another bank, which it was able to do, but just barely. “Silicon Valley Bank cutting us off was an existential moment for sure,” Olaf says, recalling days of shell shock and tumult in the Coinbase office. It also led the long-running tension between Martine and Brian to boil over. She was given an afternoon to pack her stuff and be gone.
• • •
Coinbase had started 2015 ready for its rocket-ship ride to resume, but by the end of the year, the company felt more like an old Chevy stuck in neutral. Coinbase’s board members grew antsy and they pushed Brian to pivot. The word pivot is another popular Silicon Valley term and is short for “What we’re doing isn’t working, so let’s try something else.” In some cases, it works out spectacularly. Slack, for instance, was a failing video game site before pivoting to become a multibillion-dollar office messaging platform while Airbnb started out trying to offer housing for conferences. More often, however, a pivot is just one last gasp before a startup collapses.
In the case of Coinbase, the board wanted Coinbase to pivot into enterprise blockchain—a crypto flavor-of-the-month that saw companies like IBM and Microsoft offer up privatized versions of bitcoin’s famous ledger technology. These amounted to a “members only” blockchain, controlled by a handful of companies, that could create a tamper-proof record of transactions without creating or using a currency.
Brian flat-out refused. He had started Coinbase to spread Satoshi’s vision of a new type of money run on a permission-free global ledger—not to build corporate databases. If bitcoin was an unbridled stallion galloping over a wild meadow, enterprise blockchain was a wooden horse going up and down on a carousel. Better for Coinbase to fail, Brian thought, than sign up for that.
Unfortunately, no amount of idealism would help Coinbase make payroll. The company had already seen 35 percent of its engineers grow disillusioned and quit in search of the next hot Silicon Valley thing. And now, as 2015 drew to a close, the company would have to cut some of those who were left. Brian and Fred had always managed Coinbase’s finances to allow for a two-year cash cushion if things got bad, and now that window was shrinking fast. In a grim meeting, they realized they would run out of runway unless they cut 40 percent of staff. Any other option would require a miracle. In the waning days of 2015, Brian and Fred sat in the Coinbase tower on Market Street drawing up a long list of candidates for layoff. This wouldn’t be mere trimming but an emergency amputation to keep the company solvent. But something gave them pause.
In late October, the price of bitcoin had broken $300 for the first time that year, and in November, it hit $400 before swooning 25 percent. Then in December, when it climbed again to nearly $500, Brian and Fred realized the miracle they needed had arrived. Higher prices meant higher commissions for Coinbase and more money in the bank. Better yet, bitcoin’s latest run brought a spate of attention in the media and a stampede of new customers for Coinbase. Brian and Fred could delete the layoff list. Bitcoin was back, and the mood in the Coinbase office grew giddy.