Q3 2023 Coinbase Global Inc Earnings Call
Good afternoon. My name is Sarah and I will be your conference operator today at this time I would like to welcome everyone to the Coinbase third quarter 2023 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session and if you'd like to ask a question. During this time please.
Press Star one on your phone.
And they'll group Vice President Investor Relations you May begin your conference.
Good afternoon, and welcome to the clean base third quarter 2023 earnings call. Joining me on today's call are Brian Armstrong co founder and CEO, Emily Choi President and COO, Alicia Haas, CFO, and Paul <unk>, Chief Legal officer.
Hope you have all had the opportunity to read our shareholder letter, which was published earlier today on our Investor Relations website.
Before we get started I'd like to remind you that during today's call. We may make forward looking statements actual results may vary materially from today's statements.
Information concerning risks uncertainties and other factors that could cause these results to differ is included in our SEC filings.
Our discussion today will also include references to certain non-GAAP financial measures reconciliations to the most directly comparable GAAP financial measures are provided in our shareholder letter on our IR website.
non-GAAP financial measures should be considered in addition to not as a substitute for GAAP measures.
We are once again using say technologies to enable our shareholders to pose your questions. In addition, we will take some live questions from our research analysts.
And with that I'll turn it over to Brian and Alicia for opening comments.
Thanks Neil.
Let me start with the provocative statement.
Unchanged is the new online.
The Internet was and is a game changing technology that redefined our modes of communication business and social interaction.
It broke down barriers democratized access to information and made knowledge universally accessible block.
Blockchain and crypto are doing the same thing today with Erie decentralization of the web and the introduction of a new building blocks ownership.
Net of just reading and writing on the traditional Internet on chain, you can now rewrite and own.
And change is about digital assets broader access to financial services and even changes, how we think about identity governance artwork and non financial services.
Crypto leverages, the crypto creates a level playing field, where everyone irrespective of their socioeconomic status or geographic location has access to more robust and transparent systems.
Crypto creates a world with fewer middleman lower fees faster transaction speeds and greater protection and control over one digital assets and identity.
It is for all these reasons that we believe that crypto was the greatest tool increasing global economic freedom.
We also think that on chain will be as essential and impactful as the internet is today.
If we look back to the early years of the Internet the companies that ignore the noise and built for the future of the Internet now stand at Tech Giants, the Entre and company as of today will be the tech Giants of Tomorrow.
<unk> stands at the forefront of this technology and continues to build a responsible compliant trusted financially strong and innovative business that is building those linchpins products.
Speaking of financial strength Q3 has been another strong quarter for us.
Q3, we delivered positive adjusted EBITDA for the third consecutive quarter and demonstrated continued operational discipline.
In fact, we're on track to deliver meaningful positive adjusted EBIT. This year, which reflects the direction. We set at the start of this year to be a company that can generate adjusted EBITDA in all market conditions.
We thought it may take us more time to get here, but through operational discipline rigorous cost management and more favorable interest rates I'm very pleased with the results we've delivered.
Our balance sheet remains strong and our financial position enables us to continue to invest in the future and deliver products and services that expand the utility of crept up.
Which brings me to what we've built this quarter.
We've obtained licenses that enable us to access new markets continued to drive toward regulatory regulatory clarity for crypto and build innovative products that expand the utility of crypto.
This continues to be a year of international progress for quite a bit starting with international expansion here in 2023 we officially launched three key go deep markets, Brazil, Singapore and this quarter in Canada.
Country launches are a significant investment for <unk> base, when we launch in a country. We hired local leadership work with local regulators and we establish new payment rails to enable seamless Fiat decrypted transfers.
In Q3, we also obtained key licenses or registrations in Singapore, and Spain, and continue to pursue and obtain licenses and registrations, where it's clear that we need them to serve our customers speak.
Speaking of licenses.
Talk about derivatives unlocking.
Unlocking the ability to offer derivatives products to users is a huge opportunity for coinbase as the global derivatives market for crypto represents 75% of all trading volume.
Trading volume that up until now has largely going through unregulated offshore exchanges.
Derivative products are an important tool as the ability to trade crypto using margin.
It essentially giving the giving traders the ability to use margin increases our capital efficiency and access to the crypto market less upfront investment.
In Q3, Queen based International Exchange received regulatory approval from the Bermuda Monetary authority to enable perpetual futures for eligible non U S retail customers, which.
Which we began offering just last month.
And maybe it's financial markets also received regulatory approval from the National Futures Association to offer futures to eligible U S customers via advanced trading.
And as of yesterday, we now offer regulated futures to U S customers via Queen based financial markets.
Customers seek to do business with trusted counterparties when they trade complex levered products, such as derivatives and perpetual futures and Coinbase financial markets in Colombia International exchange are best positioned to be that trusted partner.
We're just getting started and plan to roll out additional products and expand to more markets over time with derivatives.
So you can watch them new products in Q3, we launched our new layer two solution called base as I touched on last quarter. Most blockchain transactions today are happening on what are called layer, one and layer, one networks or slowed their inefficient and expensive to use.
Think of the jump from El ones to Ltvs as the jump that the Internet made when it went from Dialup broadband.
Later accused are built on top of later ones to make them faster and more efficient and they result in lower transaction costs and higher confirmation speeds.
Our base platform enables developers to harness the full power efficiency and cost savings of a layer two network with the convenience of it being built in right into the Queen based ecosystem.
In August we moved based on domain net which means it's now available to everyone and to celebrate the launch we created an entre and movement. This summer for developers in the crypto community called unchanged summer during that campaign, we saw over $10 million of Ts minted across more than 1 million wallets on base.
This momentum helped drive rapid growth of base, including more than $500 million in assets that are now on the platform.
While early we are encouraged by the early utility of base and are optimistic about the role layer choose can play not only for quite for Queen base, but also for the growth and development of the entire crypto economy.
Finally, I just want to touch on how clean basis, driving ray with regulatory clarity for the industry.
One of the biggest items holding back adoption of this technology is the lack of clear rules and regulation, most notably in the U S.
We're actively involved in U S legislation with a variety of bills that are in development and we're still confident that the U S will get this right embrace innovation and proposed clear rule.
American Crimson crypto holders are owed clarity and they are an increasingly expanding voter base there.
There are 52 million crypto holders in the United States to put that into context, that's more than the owners of electric vehicles and more than all collective members of U S unions.
The American people are embracing crypto as more Americans grow and happy with the traditional financial system only 9% of those surveyed say that they are satisfied with the current U S financial system and only 22% of people.
I think that it's better than any other countries and nearly two and five younger people, that's 38% say crypto and blockchain can increase economic opportunities for them in ways traditional finance can't.
To aid in the mission of driving for Crypto regulation claim basis is a proud supporter of an independent movement noticed stand with crypto it.
It now has more than 100000 advocates and continues to stand with the American people to drive towards clarity in the U S.
While the U S continued to struggle to keep pace. The rest of the world has made great strides in embracing crypto and on chain technology with clear legislation we're.
We're seeing global efforts to bring crypto into regulatory scopes as 83% of the G. 20 nations are adopting crypto regulations.
Most recently, we've seen this with nikko legislation in Europe, and it's incredibly encouraging to see that now 27 countries stand together with one unified set of rules for crypto.
The U S desperately needs.
In response to this groundbreaking regulation Coinbase moved quickly and recently announced that Ireland will be our Mika hub.
We continue to work with regulators around the world on laws for Cryptocurrencies and act quickly to embrace new regulation when it's developed.
In conclusion, although we continue to be in a down market with volatility the lowest we've seen in years.
It's financially healthy with our third consecutive quarter of positive adjusted EBITDA.
While we have the most trusted brand in the easiest use products and continue to build innovative key technologies that expand the utility of crypto and best position Coinbase to take advantage of the next bull market we.
We continued to do the work of running a trusted secure and compliant crypto platform and this is our competitive advantage. We have a long term focus on building and then following the rules, which has proven to be the right strategy.
We believe <unk> is the new online and the onshore technology represent the same opportunity that the internet did before it.
With compliant and responsible companies like coinbase, leading the charge on chain applications are set to become the foundational pillars of the future financial system and more.
With that I'll hand, it over to Hugh Alicia to tell us more about our Q3 performance.
Thanks, Brian and good afternoon, everyone.
As Brian said Q3 was a strong quarter, where we saw the efforts of multi quarter initiatives come to fruition.
Further we continue to make progress on building, an increasingly efficient and financially disciplined company.
Let's dive right into our Q3 results I'm going to start with transaction revenue.
Which was $289 million.
Down 12% quarter over quarter.
In Q3, crypto asset volatility and drive of our trading business continue to decline and it reached levels that we haven't measured since 2016.
As a result total claim based trading volume declined 17% quarter over quarter.
Which outperformed the global spot market, which declined 24% quarter over quarter.
The blended average fee for consumer was higher in Q3 as compared to Q2.
Again, driven largely by the mix of simple versus advanced trading volume in the quarter.
We continue to experiment with our pricing models for both our consumer and institutional products and price changes may impact future quarters, but that was not the case in Q3.
Turning now to subscription and services.
Revenue was $334 million essentially flat quarter over quarter.
We saw inflows of native units in custody, we saw an increase in states balances and we saw growth in U S. D C on our platform.
However, offsetting this unit growth where price effects as crypto market cap declined approximately 9% quarter over quarter.
Now shifting to expenses total operating expenses declined 4% quarter over quarter to $754 million.
Technology, and development general and administrative and sales and marketing were collectively $654 million down 1% quarter over quarter.
Expenses did come in at the low end of barrel outlook, driven primarily by a shift in timing of certain legal and marketing expenses from Q3 to Q4.
Net loss was $2 million and adjusted EBITDA was $181 million.
Our Q3 net loss benefited from two transactions first we completed a debt repurchase in the quarter, which had a favorable impact of $82 million.
Second we had a $50 million gain on strategic investments both of these items were recorded in our other income.
Additionally, in the quarter, we increased our valuation allowance on deferred tax assets, which contributed to the higher tax rate you can read more about our effective tax rate in our shareholder letter.
Now I'd like to turn to our outlook for the fourth quarter.
Our letter we noted that October transaction revenue with approximately $105 million.
We're expecting subscription and services revenue to be approximately flat with Q3 levels and this assumes no material change to crypto asset prices or market conditions as compared to the month of October.
In terms of expenses, we expect technology and development and general and administrative could be between 525 and $575 million, which.
Which is lower compared to the Q3 level.
Key driver of this decrease quarter over quarter is lower stock based compensation in Q4 as compared to Q3.
As we have previously shared has a nonlinear expense recognition timing.
We're expecting sales and marketing expenses to be between $85 million to $95 million slightly higher than Q3 levels due to the shift in timing from Q3 to Q4 for certain expenses that I noted earlier.
Just as I noted at Q4 than Q3 for SBC. When we look ahead to Q1 of 2024 said will be sequentially higher than Q4.
As Brian mentioned, we expect to deliver meaningful adjusted EBITDA in 2023.
Which I want to know is an improvement from our prior goal of just improving adjusted EBITDA in 2023 as compared to 2022 on an absolute basis.
To close Q3 was a strong quarter for the business. Despite the low volatility environment. We're pleased with our revenue performance as well as our ability to grow our USD resources, while opportunistically, reducing our total debt.
As we look ahead towards next year, we see a wide variety of positive catalysts for the crypto industry on the horizon as well as potential risks. We're closely monitoring these inputs as we plan for the coming year, and we will share more with you next quarter.
Yeah.
Thank you both so with that let's turn to shareholder questions. We're taking the most upward questions as determined by the number of shares and we might combine questions that touch on the same teams.
First question is will coinbase consider reducing transaction fees to make them more competitive with other platforms, where etfs are being.
Being traded at significantly lower prices Emily Alright.
Got it thanks for the question so to answer it.
Directly we have no current plans to reduce transaction fees because the bts.
If you just assume that a little bit spotty Etfs should be a positive catalyst for the entire aircraft estimates they should add credibility to the market and we should see increased liquidity and market stability <unk> with other asset classes such as gold.
ETF should expand the pie and bring new people and institutions into the crypto economy.
One stat that I find really powerful is at 52 million Americans unprotected today. Despite the current regulatory overhang. So imagine what will happen. Once Etfs are introduced and widely available RIS retirement funds other institutions that have been precluded from this asset class historically will gain access to correct. The first time.
And that's very powerful.
Terms of economic impact.
And before the primary way that will monetize etfs directly in the near term Mr custody fees and <unk>.
This is very proud to have been selected to partner with the majority of the potential issuers, who are among the world's most trusted financial institution overtime. We think there will be other ways to monetize but thats too early to get into those now.
We also believe that the approval of these products will renew interest in crypto generally and that we would benefit from increased demand and trading volume. That's a result operationally we are set and ready to go and length approval Orion, we are ready to hit the ground running.
Second question when do you see coinbase with positive earnings per share Alicia.
Let's dial back looking back the last several years, we were actually net income positive in 2021 in the midst of a bull market that changed in 2020 was the market turned.
We are in a nascent industry and what we'd like to do here at claim basically balance our investment and growth and product innovation and profitability.
You may recall that we pivoted in the middle of last year to evolve from a company that's profitable through the cycle to one that can generate positive adjusted EBITDA in all market conditions and that was a very deliberate shift in our strategy.
We are focused on that as our goal at this time generating positive adjusted EBITDA in all market conditions and year to date, we've made significant progress towards that goal. You've noted that this is the third consecutive quarter that we've had positive adjusted EBITDA This year.
And all of those were in excess of $100 million.
And as we said earlier in this call. We are on track this year to deliver meaningful positive adjusted EBITDA in 2023, and all of this is in a down market.
Will have multiyear low levels of volatility.
As a result, we believe we have a strong position to enable us to continue to invest in the future.
Our strategy to bring new product innovation to the market. During this challenging point in the crypto market cycle.
I have a strong balance sheet with over 5 billion.
Julien and U S resources to strengthen further strengthen the balance sheet. This year. So you purchased that and so with that.
That is our focus adjusted.
Adjusted EBITDA investing in the future and trusted products and services to expand the utility of crypto.
Next question, how it's coinbase handling and preparing for the challenges around the IRS proposed regulations on reporting of digital assets.
Alicia This is a great question and we're spending a lot of time working on this internally. So I'm glad we had a chance to highlight some of the work here.
First I wanted to share some background for those who are unfamiliar with the proposed regulations. The IRS recently proposed rules that would require claim based on other crypto platforms to report every crypto transaction of our U S customers.
I think every transaction that includes those on chain transactions related to payments and if Ts everyday applications. For example, using crypto to buy a cup of coffee becomes a reportable transactions.
This means for claim base alone we could be required to report billions of transactions to the IRS each year.
The IRS has admitted that it will receive.
8 billion reports that is more than all tax reporting combined this creates a huge compliance burden for us for the industry and importantly here is threatens our customers' privacy and ultimately we believe would impede the adoption of crypto.
I wanted to state that we have long supported broker reporting of transactions on our exchange on par with the reporting requirements for traditional finance.
But we believe these proposed rules are workable and practical because they've reached far beyond that objective.
They set a dangerous precedent for surveillance of non financial transaction and could lead to the invasion of privacy for American people. So we've been very active here first we filed a comment letter introducing our concerns and highlighting the challenges raised by the proposed regulations.
We are actually preparing our more detailed comment letter to be submitted shortly with further observations and recommendations regarding the proposed regs.
We're also preparing oral testimony on our perspective and concerns of an IRS hearings scheduled for November seven.
And lastly, we're working with trade associations and peer companies to provide an industry wide perspective, we've made public aware of these proposed rules with mobilized with Stan with crypto to encourage public comments, the IRS and proud to have seen tens of thousand comment letters be submitted so far.
While we think these proposed regs went too far and I worked well, we think a staged approach to broker reporting is the correct path with a realistic targets and effective dates for the industry and we remain committed towards transparency and working towards this objective.
Thank you so with that Sarah let's switch and take questions from analysts. Please.
Thank you. Your first question comes from the line of Ken Worthington with Jpmorgan. Your line is open.
Hi, good afternoon, and thanks for taking the question I wanted to dig in further on derivatives. So you got your ex Jam license and you've rolled out derivative trading on your website I guess importantly, windows coinbase start to launch on mobile and how are you thinking about marketing and growing that and then more broadly as we think about derivative growth for coin.
Base inside and outside the U S. How much of a void is there in derivatives, given the SPX blow up and the pressure on finance and how challenging might that volume be to pursue.
Yes.
Yeah. Thanks for the question I can start off.
So I think the first part of your question was really about rolling out <unk> on mobile and <unk>.
Well I don't want to give any kind of launch dates on the call here you can imagine that's one of several things that we're working on which would improve people's access to it.
Both retail and institutions actually and so there is still a lot of work to be done to fully integrate our derivatives products into.
Our other products, both claim as prime and our retail app.
I do think that.
We have a big opportunity to essentially go out and provide some trusted infrastructure around this as I mentioned in the opening statements.
People really care about their counterparties in this market and.
I do think when base has the best reputation out there in terms of being trusted and we can we can be an important player by providing this infrastructure in a way that's regulated and compliant and.
Has our long track record of cyber security for instance.
Just a few pieces of data that we havent shared I think before so we've done about $10 billion in notional volume in Q3 on derivatives, which is.
It sounds like a big number but in the derivative space. It's actually it's a good start but it's still relatively small.
Also been really increasing the number of institutions, we've been onboarding. So in Q3, we now have over 100 institutions that have been on boarded so.
With our with our launches that we talked about we've got a lot of work in front of us, but we're making really good progress on that and.
I can't really predict what percentage of the derivatives market wood wood.
Would come over but I know, it's important for the space to have trusted infrastructure and that's what we're going to go build.
Your next question comes from the line of Devin Ryan with JMP Securities. Your line is open.
Thanks. Good afternoon, just wanted to talk a little bit about base and the adoption that you're seeing you guys gave a few stats there it sounds like off to a really good start so just maybe want to talk about.
What you guys think are going to be some of the biggest applications.
That are going to be on base, what makes it attractive relative to other layer to his injuries.
Coinbase as this starts to become hopefully a bigger contributor for you how should we think about kind of the ability to monetize and also just geography, where kind of that shows up thanks.
Yes, I can start off with some of the applications and I'll turn it over to Alicia talk about monetization.
So.
Look I think if anybody was sitting there kind of in broadband with first introduced on the Internet and they tried to predict what the use cases would be theirs.
Some good video clips, we can go back and look at people predicting that and I'm sure. They look a little bit silly, because it would've been hard to predict.
<unk> and Netflix and all these kinds of things that were enabled so.
There's a little bit I don't want to I don't want make any kind of firm predictions here, but I can definitely say that.
One area, we're excited about it.
Is payments for instance, just because.
If you think about.
On layer ones today, if if it costs you know between.
$1 $15 or so to make a transaction it takes anywhere from minutes to an hour to confirm that that could be serving these use cases around trading because people don't necessarily do trading.
Every second they might need to do it periodically and so <unk> has served use cases like trading well.
But if you're trying to build a global payment network. It really benefits everyone to have that happen fast and cheap. So for instance, if you're at a merchant and you hit send you want the kind of confirmation to show up ideally within a few seconds, you don't want to be sitting and waiting around for 20 minutes or something like that so payments and by the way the payments could.
A whole variety of things right. It could mean sort of commerce type applications that could mean peer to peer it could mean either be it could mean remittance. It could mean payments in third party applications that are like these new types of data that are being created.
I made this analogy at one point in the past, but when we saw the friction when it friction was reduced from sending a text message to sending a whatsapp message as it went from like 25 to send a text message to being free on Whatsapp, we saw an order of magnitude more messages sent every day and I think.
If you bring down the friction of of.
Payments or transactions on these later choose you could see an order of magnitude more.
Transactions happening on these changed now.
Now, we don't know exactly all of the things that it will be used for but we are seeing good early adoption of base as I mentioned, so we've had more than 1 million transacting wallets over the last month for instance, and base is still quite new 10 million Ftes got minted during unchain summer 500 million in assets had been locked up on the platform already so that's a great sign of adoption and.
<unk>.
Hopefully.
This this new kind of this new.
<unk> is introduced with layer two creates thousands of different types of applications, and we will see which of those rise to the top.
At least you won't talk about monetization yeah, I'll just quickly add on here Brian So.
Based on monetize both directly and indirectly on a direct basis, we do earn sequencer fees.
We are reporting those as transaction fees and today Theyre included in the consumer transaction fees in our financial statements. It's very early they are not material enough to break out but over time as hopefully they grow we would provide more disclosure in the future.
But more importantly, I think are the indirect opportunities, whereas Brian said, if we see the proliferation of.
Opportunities for apps on base. This will provide opportunities for our wallet product for more money to come from traditional Fiat into crypto and we are an on ramp to that overall economy and so we can see.
Opportunities to earn revenue in many of our existing products as well.
Your next question comes from the line of Mike <unk> with H C. Wainwright. Your line is open.
Hi, good afternoon, and thank you for taking my question a question for me around the spreads so retail spreads have consistently increased for four quarters in a row now, which I know you guys are attributed to the mix shift towards higher yielding simply trading volumes and now looking back here about 100 basis points higher than you were back in 2021 when trading.
He was certainly a lot more robust on the platform. So if you can help us to understand what spreads could look like when the next slips and advanced traders become more active again.
Can we get back to 2021 type levels or will some of these pricing changes allow.
Allow spreads to be above those type of levels.
Thanks for the question. So it's a good chance for me to just remind everybody that.
When we look at the weighted average fees by taking our transaction revenues divided by volume is an output not an input and so mix and behavior on our platform are really important drivers of what that output is in terms of blended fee rates.
We've shared with you in Q1 earlier this year, where we did increase spread on simple trading so that so for an example, if we went back to the volumes and the mix. We saw in 2021, we would see higher fees on the platform as a result of that she wanted decision, but we would see it looks.
It looks much more like the 2021 fees if the mix shift because as we've shared over the last two quarters, we've seen more volume reduction in our advanced trade than we have in our civil trade and so today more and more of the volume is coming from the civil training products than it did in past periods. So I would say mix is a very critical input into what.
Resulting fee rate is.
As we've said before our fees are transparent there disclose to our customers and so customers get the choice of how they transact on our platform and its possible behavior shifts over time, but this is the behavior that we're seeing today and we will be transparent with you and talk about how that shifts and future market conditions.
Your next question comes from the line of Joseph <unk> with Canaccord. Your line is open.
Hey, everyone. Thanks for taking my question here this afternoon.
Maybe Brian could you give us the latest from your team in Washington on the Legislative front I know, obviously Congress has been a little bit.
Preoccupied with.
With the speaker and the like but.
It does feel like legislation coming out of.
Out of the Congress could ultimately be kind of a silver bullet relative to.
Yes.
Uh huh.
Environment of regulation by enforcement. Thank you.
Yes, sure happy to give an update so we've certainly been very focused on getting clarity in the U S. I do think it's a major issue that's holding back the U S right now.
And although we've been able to make great progress in other countries in terms of licensing in the meantime, and with our derivatives licensure in the U S. We still need to get more clarity. So theres a few things we can do on that front. One of them is our FCC case, I think hopefully we'll get some clarity from the courts there next year.
Or at some point.
And the other one is staying with crypto. So I mentioned that at the beginning we're really trying to activate the 52 million Americans, who own crypto to come out in force in this 234 election make their voice heard.
Make sure that folks in D C, but recognize that.
Nine out of 10 Americans don't feel the current since the financial system is serving them and there is enough Americans now that have used this technology, it's actually five X the number that own electric vehicles.
<unk> is the number that have union cars right. They don't they don't recognize the scale of it quite yet.
But we've now seen over 100000 people kind of raised their hands and say I want to be an advocate for crypto.
On staying with scripted out org <unk> fuel to checkout, if they haven't.
And we've been able to sort of drive that towards comment.
Comment letters with the IRS, calling their representatives in Congress.
And so some of the things we've been asking them to talk to Congress about is what you mentioned the legislation. So there are a couple of bills that.
For those who aren't don't know there are a couple of bills that got approved bipartisan support through the house committees.
This is the fifth 21, bill stands for the financial innovation and technology.
20, <unk> century, 21 is one of those Theres also a stable coin bill.
In the Senate the lummus in jewelry brand have have some legislation. They are working on and so I would say of the folks that I meet with in D. C. The.
The majority opinion, you know 80% of people I talked to is it's a pretty common sense approach. They say this is.
Interesting new technology, we don't exactly know how it could be useful but it has some innovation potential, but let's make sure we protect consumers. So they won't get harmed make sure we don't have any more blow ups.
And also to make sure of America doesn't get left behind I mean, 83% of the G. 20 countries are already working on legislation here.
Why isn't the U S and so I know Patrick Mchenry now.
Now that they're kind of question marks about who is going to be speaker has passed.
He has publicly said that it's a priority for him to get back to advancing crypto legislation. So.
I am optimistic that America will get this right and whether it's.
Whether it's through the courts or through Congress, passing legislation or the 'twenty 'twenty four election.
America is going to get this right and we're going to make sure that happens and the 52 million Americans that abuse script youre going to make sure that happens more importantly.
Your next question comes from the line of Ben <unk> with Barclays. Your line is open.
Hi, good evening and thanks for taking the question I wanted to follow up on the earlier question around the transaction fees, you talked a little bit in the Q&A about the mix, but just kind of parsing. Your words very carefully from the prepared remarks. You said you may raise fees and then later you said you wouldnt raise fees in response to the Etfs. So I guess could you perhaps remind us like what are the considerations there I know you've.
Sort of changed the approach more recently to think about balancing the output of.
Volume and revenues you are no longer just optimizing for volumes, but how are you thinking about potentially.
And I guess, maybe I don't mean to misinterpret. Your words, if you mean, you may raise them you may lower them.
But how are you thinking about adjusting them in the future. Thanks.
Experimentation has long been part of our product strategy and increasing part of our pricing strategy to experiment around which model works best for our customers. So for example claim based one started as a pricing experiments in many ways and we're proud to see the continued growth of <unk> one.
Quarters.
As we shared in Q1 of this year we raised.
On our spread within simple trading and we did not see any change in our customer behavior. As a result of that and so Ben just to answer. Your question is we may increase we may decrease in other products.
And we will continue to learn what works best for our customers over time ultimately to drive engagement and revenue on our platform.
I'm thinking about just Emily's comment on Etfs, what we wanted to say very specifically if that is not necessarily a driver. The driver is overall customer engagement with our products overall competitive environment broadly and we take all of that is important to inform our strategies and pricing experiments.
Your next question comes from the line of Owen Lau with Oppenheimer. Your line is open.
Good afternoon, and thank you for taking my question. So you continue to manage the expense down sequentially, even though your head count I think it's high in the third quarter compared to the second.
<unk> guidance in the case that you will continue to go down in the fourth quarter because of stock based comp and Alicia you also mentioned some guidance in the first quarter as well, but can you. Please talk about if there is any.
Are the lackluster can pull to manage expands and also how will international expansion and other growth initiatives will impact the expense growth in the near term. Thank you.
Thanks Owen.
As we've said this year, our focus has been on financial discipline and prudent allocation of our expenses.
The underlying theme here around stock based compensation is it has a nonlinear expense recognition and so if you look back a quarter. What we shared with you is that the first half stock based compensation was going to be very similar to the second half, although Q3 and Q4, we're going to have different levels and so driving the Q4 expense is a lot of the reduction in stock based comp.
Would just be naturally seasonally occurring in the fourth quarter.
Broadly, though the.
International growth and new product innovation is all within the expense envelope and outlook that we provided for Q4, we shared with you before our approach to allocating our expenses aligned with a 70 2010 model, where 70 roughly 70% of our resources is going to our core products, 20% strategic and 10% to our venture kind of newest.
Product initiatives that are very early stage, Brian talked a lot about the importance of the company of a lot of <unk>.
Innovation and fail fast so we continue to try and experiment with new things. So that's all included in that outlook and we feel really good about our ability to continue to invest in growth invest in innovation, while generating positive adjusted EBITDA and building a company that is more financial ambition.
Your next question comes from the line of John <unk> with Needham <unk> Company. Your line is open.
Great. Thanks for taking my question sorry.
Sorry for asking another one on the take rate.
Just wanted to understand so.
Advance going downwards simple it is at the understanding that advanced users for some reason are using a simple interface. Our advanced users, leaving the platform maybe to go to Texas or some other trading venue.
In general what we see in a low volatility environment is less trading from advanced users from market makers and participants that are looking for arbitrage opportunities across the ecosystem and across a variety of exchanges. So this is more of a comment on the overall volatility environment.
And the opportunity to make appropriate.
Appropriate trade in this environment than it is around losing customers either switching platform.
Your next question comes from the line of Bill pay with U S. Tiger Securities. Your line is open.
Hi, good option had management thanks for taking the question.
So two if I may so given all the emphasis.
Emphasis anqing at 10-K, what is the next move to further.
Launching product portfolio.
Tend to launch any SaaS yourself, just focusing on developing the infrastructure and then second.
Hello.
The retail strategy so.
Do we charge different grasp what this one digital asset is bitcoin trading lower than the overall average.
On our platform. Thank you.
I'll answer the ticky-tacky on fees and I'll, let Brian talk about the future of Unchained product Roadmaps.
Pricing experiments at this point in time, historically have really been by product, but in the future. We may evaluate different pricing experiments bi claims that foreign geographies as well. So all of those are opportunities, but historically they've been largely byproduct.
Yes, so thanks for asking about the move to on chain.
So obviously with the introduction of base, we're making big investments there and.
One of our next major efforts is going to be how to integrate that into all of our products.
And I am really making a push internally to get more and more.
The activity on coinbase happening on chain. So there's a few areas, where we've been doing that to date.
<unk> wallet is our focus dodi of wallet. So all of the transactions happening there are on chain, that's where we saw over $1 million.
Things like <unk> commerce are putting efforts into how more and more of that can happen on layer two on chain.
Okay.
Actually we created some end to end metrics internally, where we look at all of the transactions happening.
The previous platform and some of those especially in our centralized exchange products are happening off chain.
That's where you kind of get high frequency trading happening on our exchange that's not those aren't all happening on chain today.
But if you look at all of the transactions being generated.
I think only about 7% or so what's happening on our layer two today and we need to increase that percentage.
I think this is true not just of corn based by the way, but just the entire crypto industry as we get later to needs to really become the default I would say.
For payments.
For interacting with the apps for.
<unk>.
For decentralized social for identity decentralized identity applications.
So if we can get layered <unk> to be the default internally and we're sort of taking our own metrics around that.
Hopefully the rest of the industry will also join us on that and I think that's going to be a big factor in kicking off another wave of adoption and utility around crypto.
We have one question left in the queue. So let's take that please.
Your final question comes from the line of Eric <unk> with Bank of America. Your line is open.
Hi, guys. Thanks for squeezing me in just wanted to follow up on the legal front kind of two parts here one.
I appreciate you kind of the date the January 17th day. There is there any other dates that investors should kind of be aware of and then second.
Brian you talked a little bit about your conversations in Washington, how long people been prioritizing crypto regulation heading into such a key election here. Thank you.
This is Paul great well, let me just speak to the first part of your question. The January 17, 2024 date is the most important data to focus on in our.
Enforcement case with the SEC, that's the date that the district judge will hear oral arguments for.
For judgment, we think it's an important opportunity to present the court with.
Even even more reason to grant our motion that was done was laid out in our papers we.
We are gratified that the court set an oral argument date with something that we requested specifically.
We're looking forward to that opportunity.
But it's also important to understand that.
We do not expect that the court will necessarily rule on the motion on that date.
When the core issues or opinion on our motion of course is fully within her discretion, whether we win or lose the motion. We're fully prepared to litigate the case going forward and we remain confident in the strength of our position in this case, we remain confident in the in the end we will win this case.
So more to come there, but the 17th is really the most important critical day to focus on in terms of next steps. The next events in the enforcement case.
Yes, and I think the other part of your question was just about how folks are prioritizing crypto as an issue in D. C. So.
I can say for some of the folks that we've engaged with over there, it's they're probably their top legislative priority.
But you know.
D C has something crisis coming up coming up every week or two here or a government shutdown new speaker the issues in the middle East So.
We don't we don't pretend to be the top issue for everybody at all times.
We can do is kind of meet with folks be an educational resource.
Make sure they know that.
There's 52 million Americans, who really care about this we actually.
And then also in some cases helped the parties come together to sort of.
<unk>.
Negotiate language in some of these bills and things like that that can build support for it.
The other thing that we did I didn't mention earlier was that we did on a stand with crypto day actually where we invited about 40 or 50 different crypto entrepreneurs around the U S. All flew into D. C and what was pretty cool about it was that they got to meet with their representatives and many of these states.
And actually talk to them about what their building in there in their jurisdictions.
With crypto why they are excited about it and they were able to speak just very passionately about it where I'm.
I'm happy to speak with all of these folks as well, but sometimes they can think okay. Well. This is a big Tech company or Fintech company, that's not located.
People in my area actually care about this are the people that I'm serving.
And it was really cool to have those folks fly it and get it put a face to the name how they're creating jobs of crypto how they believe this is helping their hometowns.
And building the future of the financial system, because its sorely in need of an update so.
We're certainly working to make it a priority and I think whenever these issues come up like we see consumer harm or.
Some issue it just really highlights the need for regulation and for make sure that U S doesn't fall behind here.
The vast majority of activity in crypto today is is legitimate positive it is.
People, who are passionate about updating the financial system and using this technology kind of like the early users of the Internet and.
Sometimes it feels it feels generational.
There is an older generation that they haven't used it but they are they don't they don't use e-commerce either right. So there sometimes they have a little trouble wrapping their head around it but they often will talk to their staffers to their children.
Some of the younger folks in Congress just immediately get it.
And so it's one of these things that's inevitable, it's just a matter of educating folks about it and making sure we get to the right outcome.
Alright, well that does it. Thank you all for joining us and we look forward to speaking to you again on our next call.
This concludes today's conference call. Thank you for joining you may now disconnect your lines.
Please wait the conference will begin shortly.
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