What the most active investor in crypto and blockchain has to say about the FTX fallout

What does the world’s most active crypto and blockchain investor think about the spectacular collapse of the cryptocurrency exchange FTX?

In the wake of FTX’s dissolution, we spoke with Shan Aggarwal, head of corporate development at cryptocurrency exchange Coinbase and head of venture investment arm Coinbase Ventures, about what the collapse means for his firm and the future of the industry.

Coinbase Ventures has amassed a portfolio of more than 400 companies since 2018. That includes FTX, which it invested in during its $900 million Series B in 2021, along with 59 other investors.

We had an extended conversation with Aggarwal about the investment outlook for Coinbase Ventures, the impact of the FTX fallout on the firm’s portfolio, the broader implications for the crypto industry, and the strongest use of crypto today.

The following transcript has been edited for brevity and clarity.

What is Coinbase Ventures’ view of the industry in relation to the collapse of FTX?

Aggarwal: I think the collapse of FTX is very much a seminal moment in crypto, probably one of the biggest cases of corporate fraud that has ever existed in business anywhere. As you would expect from my perspective, we have seen the terms of venture funding tighten quite a bit as many investors are looking to find out the true extent of the fallout.

The benefit we see is that the FTX collapse actually motivates many individuals to learn about and explore decentralized technologies, which are exactly the kinds of things we invest in. Ultimately, the goal and mission of Coinbase is to create more financial freedom in the world.

After FTX, you saw a significant increase in volumes on DEXs and Ledger recorded a record number of sales for their self-storage hardware wallets.

I think our overall view is: It’s a pretty striking and eye-opening display of corporate fraud. It shakes consumer confidence in many ways, and likely contributes to some of the negative narratives that have existed around crypto in the past.

But at the same time, it is in many ways very validating for the technology and for the core ethos of why decentralized technologies must exist in this world.

How does it affect your investment strategy going forward?

Aggarwal: It does not affect or change our investment strategy too much. We have actively invested in the area since 2018.

Our point of view, and our focus, has always been to invest in the best and brightest founders who are building the future protocols and applications that we believe are going to matter in the future of this space. I think what it has done is create more emphasis on understanding corporate governance – the ways in which many of the startups we invest in are managed.

Are there other sectors that have weakened in crypto, based on the current environment – like the crypto lending space?

Aggarwal: First of all, we think about the dichotomy between centralized platforms and decentralized platforms. So the biggest category of companies that have been negatively affected are centralized platforms – which include centralized exchanges, centralized custodians and centralized lending desks. These businesses are largely based on trust. And a lot of confidence has been shaken in the industry. And it’s a shame to see one actor and one entity have this kind of ripple effect, because it’s not indicative of the overall industry.

What conversations are you going through with portfolio companies to support them at this point?

Aggarwal: We obviously check in with all our portfolio companies to get a sense of who has been directly affected, who has not been directly affected.

Regardless of the companies that have not been directly affected, given the size and scope of FTX and the collapse, most entities in the group or room had an indirect exposure. Perhaps they had some clients who had funds tied up in FTX, or they did business with FTX in some capacity.

So there are going to be some adjustments that firms will potentially have to make to how they run their business.

Have you gone through a revaluation based on the market correction of your portfolio companies?

Aggarwal: We do it roughly on a quarterly basis. We do not make the valuation results or exercises public. So we haven’t done one as a direct result of the FTX fallout. We will, as we go into the end of December and look into the end of Q4.

In the Q3 update, you said you might be reducing your position in certain companies or projects. What does that mean?

Aggarwal: Coinbase Ventures was born in the last bear market. We started the company in the first half of 2018 just as the crypto cycle turned. We now have a portfolio of almost 400 companies. Many of these companies have launched tokens.

We have always said that we are long-term owners and we have continued to support all of these companies. But next year we have our 5th anniversary. In that period, we have never sold a single symbol position. Some of our portfolio companies have been acquired that didn’t have a token and so obviously we’ve exited those positions.

However, as we look to the next phase of Coinbase Ventures’ life cycle, we may selectively choose to sell certain of our positions, if that opportunity becomes available to us, to realize the return. But then also to have more capital available that we can recycle for future innovations in this area.

Have you written down FTX to zero?

Aggarwal: Yes we have.

Coinbase Ventures is the most active investor in crypto and blockchain, based on Crunchbase data. Does this mean you’re in a place where you’re slowing down in the short term, or is it time to invest more?

Aggarwal: We see this as a generational opportunity to invest in crypto startups right now. And I’m really excited in a lot of ways because when these moments happen, a lot of the noise and a lot of the excess in the room gets flushed out.

And what you’re left with are missionaries—not mercenaries—and founders who really invested in the space for the right reason. They build products for the right reason. And ultimately, when we take the long view, those are the exact people we want to align ourselves with. These are exactly the people we want to invest in.

Do you think we will see a house of cards with the collapse of FTX?

Aggarwal: I think that you will see the failure of future firms that we haven’t seen come up in the mainstream media yet. And I think a lot more will come out around other businesses that had business trials with FTX and they may be in a bind now where they can’t raise some capital or have been impacted.

I think we’ll continue to see other firms rise up and go public that are struggling, and eventually will be dominoes falling as a result, and I think you’ll see that in the next few quarters.

Honestly, it’s not something where you want a secular washout and then everything is great. It becomes a kind of slower drip.

Is it responsible to have a venture fund investing money from Coinbase, if it is not a profitable company?

Aggarwal: I think of them as two separate relationships. When you say profitable: I’m thinking of the P&L, the income statement, and that’s on an annual basis. We are not profitable today. We have not been in recent quarters. We were very profitable last year, but there are times.

We also have a large balance sheet. And that balance gives us the flexibility to invest in our core business. It also gives us flexibility to acquire other firms or to invest in other firms, because we believe it as a strategic initiative that will add value back to Coinbase, and/or help us enter new business areas or geographies.

And Coinbase has escrow accounts?

Aggarwal: You can think of us as a diversified crypto platform: an exchange, broker and depository. And then we also have a package of purely software-based products that are largely oriented around and towards developers. So in some ways the businesses were similar to what we were doing, making it easier to buy and sell crypto assets. In many ways they were very different.

An example of how our platform is very different is that we do not allow our clients to take leveraged positions in any way, shape or form. FTX enabled their clients to take up to 100x leveraged positions. So, for example, if a client only had $1, they could take on a position that gave them $100 in exposure. That type of trading tends to be riskier in general. There is a chance for significant growth and appreciation, but also a great chance for significant losses. So we are very different from that perspective.

Another way is that Coinbase is based in the US, is a public company that has financial statements published on a quarterly basis, detailed financial statements that are blessed by our auditors. If you look at these financials, you will see a corresponding asset and a corresponding liability showing our customer funds and our customer liabilities held one to one. You can always confirm it. So it’s very, very transparent, and fully disclosed and verified by third parties that are blessed by our regulators. So there are certainly similarities between the businesses. There are quite a few differences too.

Does that mean people are moving away from custody overall? Do you see that trend?

Aggarwal: It is difficult to say overall. We have noticed an increase in interest in decentralized technologies and self-storage services. The good thing about it for Coinbase and Coinbase businesses is that we offer self-custodial services. We have a Coinbase wallet product, which is a purely self-custodial wallet product where the user owns and controls the private keys of their crypto. And we have a number of other products that are also custodial, but which customers have greater confidence in.

We have seen that the narrative we have preached about Coinbase since its founding is that we consider ourselves to be the safest and most trusted exchange for a number of reasons. And that narrative is greatly reinforced in many ways by the events of the last month or so.

What is the strongest use case you see for crypto?

Aggarwal: One of the areas we’re really excited to invest in right now is actually crypto-based rewards programs.

So you may have noticed, even just today, that Starbucks launched its Odyssey program, which is Starbucks’ loyalty program launched with crypto-based rewards. I don’t know how many millions of users use Starbucks or have a Starbucks loyalty app, but I do know that it is a very significant population and that Starbucks is a globally recognized blue-chip brand that many other brands will take a lot of inspiration from.

And you need these little sparks to expose people to crypto to understand what it is. When you understand what it is, the fear factor, the natural human response of engaging and or doing more with it, goes down.

Beyond that, we’re seeing very interesting behavior and activity in things like Web3 and consumer social platforms, especially with what’s unfolding with Twitter. People are thinking, “Is there an alternative platform where I, as a creator, maybe own my own data, I own my own audience?” There are some platforms we have invested in that are in line with that task, such as Farcaster.

Is there something we didn’t cover that you want?

Aggarwal: These types of volatile periods have existed before, and technology has always risen and continues to exist, and it has risen to new heights.

In the short term, what we are focused on is building amazing products that abstract away the complexity of crypto and can get consumers to invest in crypto. And so from an investment product, we think some of the best entrepreneurs who are in it for the right reasons are starting companies today. So we are very excited to partner with and invest in these companies.

Illustration: Dom Guzman