Years from now, we’ll talk about “the period before Coinbase’s listing” and “the period after it.”
The raucous arrival of the biggest crypto startup onto Wall Street Wednesday has unleashed an explosion of self-perpetuating interest in the crypto world. Pundits now expect wider adoption, unleashing capital and feeding even more new ideas into the crypto innovation machine. Already, as you’ll see in the “Relevant Reads” section of this week’s newsletter, the buzz is driving another buying frenzy across the crypto markets.
That Coinbase buzz sets the tone for both this week’s column – which looks at how the company’s status as a listed company could pose challenges to how easily it can innovate – and for the podcast. For the latter, Sheila Warren and I were joined on the day of Coinbase’s listing by Wall Street Journal reporter (and my co-author) Paul Vigna and CoinDesk Director of Research Noelle Acheson to discuss the myriad ways the Coinbase listing is going to challenge Wall Street and vice versa.
Have a listen after reading the newsletter.
The promise and peril of going public
Coinbase’s Nasdaq listing has unlocked tens of billions of dollars in new wealth for its founders and early investors, but the move comes with a catch: decision-making is now constrained by the higher public scrutiny and quarterly performance expectations all listed companies face.
Having just leapt into the ranks of the world’s 100 richest people, CEO Brian Armstrong no doubt believes that’s a price worth paying. He’s probably also looking at the renegade behavior of crypto-friendly CEOs at other public companies, such as Tesla’s Elon Musk and MicroStrategy’s Michael Saylor, and concluding he still has plenty of room to maneuver.
But the real issue is that Wall Street’s regulatory and self-regulatory system of reporting and compliance – introduced over decades by both government and self-regulatory bodies to protect the interests of minority shareholders and the general public – is now broken. Relentless monetary expansion, which has indiscriminately boosted all stocks in dollar terms, has reinforced a pre-existing problem where executives are rewarded for short-term share price gains rather than for pursuing long-term growth.
When you represent an industry that challenges the status quo of centralized finance, it’s awkward to embrace a corporate system that’s enriching a few at the expense of the many.
A broken system
Executive pay is exhibit A in the failure of the stock market to align corporate actions with the wider interests of the economy and free markets, as the Wall Street Journal recently showed. Surveying 300 companies that had filed 2020 compensation data, it found median CEO pay soared to $13.7 million last year from $12.8 million in 2019, even as COVID-19 fostered the worst recession since the 1930s and millions of Americans lost their jobs, and despite companies responding to that situation by cutting executive packages. (See the chart in the section below.)
The reason for this anomaly is simple: the bulk of executive earnings is tied up in stocks and option grants. And thanks to the Federal Reserve’s unprecedented “quantitative easing” (QE) efforts to boost the value of financial assets, share prices skyrocketed last year, with the S&P 500 index gaining 16.26% to close the year at a record high. That performance had little to do with management decisions.
While the thinking was once that stock-based compensation would constructively align management interests with shareholders, a great deal of academic research in recent years has found real flaws in the approach. Both shareholders and employees are harmed by short-termism and the temptation to tap easy quarterly earnings results rather than invest in bigger gains over a longer period. In the case of Enron and other scandals, options-based compensation has even been blamed for encouraging fraud.
Yet, the model persists, in part because companies are fearful about retaining talent in a tight market for top-level management recruits.
Now, the QE phenomenon is entrenching it even further as it encourages CEOs to stay put, continue with the status quo and let the central bank-led price rally do its magic.
There is a sign of pushback from corporate boards, which are not happy about bumping CEOs up on the cap table when, by any other measure, they’re not actually performing very well. A number of companies face more pay reform this year, according to the WSJ report.
Coupled with the increasing power of ESG (environment-social-governance) compliance committees at investing institutions, which are already expressing concerns about Bitcoin’s carbon footprint and perhaps about Coinbase’s employee diversity record, the company is entering an environment where its policies and practices will be under greater scrutiny.
That’s nothing new, of course. All startups make this adjustment when they go public. But it poses especially interesting questions for Coinbase.
To be sure, Armstrong and Co. likely have more leeway than stodgy, established companies to undertake innovation and even to kill profitable business lines to make way for needed change.
Much like Musk and Saylor’s bitcoin holdings, his firm’s stash of crypto assets has become a hugely valuable buffer against volatility. And given that widespread crypto adoption is yet to happen among corporate and retail users in a $90 trillion global economy, there is surely plenty of room for even more growth than it is currently reporting. Also, unlike many fast-growth tech companies, Coinbase is already profitable.
That trifecta of advantages gives Coinbase’s management more freedom to ignore pressure from institutional shareholders that might otherwise demand changes in corporate strategy. What’s more, because no new money was raised in the Nasdaq listing – it was a direct listing, not an initial public offering – founders and early investors will retain a relatively high level of control over the company.
This is not to say there won’t be any pressure. The eyes of the world are on Coinbase now. And if earnings drop during a sustained down period in crypto markets, calls for change could grow.
For Coinbase, there’s the added pressure that innovation in the crypto industry is faster paced than just about anywhere. (And, ironically, as I wrote last week, its listing is creating opportunities for others to stoke that innovation fire.)
As decentralized exchanges – the alternative model to Coinbase’s central custodian approach – achieve scaling and user experience improvements, the privacy advantages and added capabilities for plugging into the decentralized finance (DeFi) zeitgeist might eventually prove hard for Coinbase to compete with. The company is going to need to be ready to innovate – it must think like Netflix, not Blockbuster.
There are reasons to believe Coinbase will be up to the challenge. It now has massive fundraising capability and an ever-growing war chest with which to make useful acquisitions. It can hire the smartest crypto guys in the room.
But going head to head with big, open-source, decentralized communities of unencumbered, genius crypto developers is harder to do when you’re constantly having to explain yourself to the Wall Street suits.
Off the charts: CEOs’ COVID windfall
To put that CEO pay increase into context, let’s compare two charts.
The first is lifted from the Wall Street Journal’s article on the topic. (With a credit going to WSJ’s own source on those numbers, MyLogIQ).
It shows that, apart from a dip in 2011, median CEO pay among the 300-strong sample of S&P 500 companies has increased sharply over the past decade. In fact, it has almost doubled since that dip in the first year. And, as mentioned above, it rose another 7% during last year’s recession.
The second chart is from the Federal Reserve Bank of St. Louis’s FRED database. It shows 10 years of median weekly earnings for the U.S. economy reported on a quarterly basis. (We only have the first three quarters of data for 2020.)
Usually, economists address median wages in real, inflation-adjusted terms to capture the true purchasing power of workers. However, the CEO pay data was expressed in current dollars, so we used a similar non-adjusted number for this FRED chart.
The first takeaway is that, notwithstanding a modest acceleration in the last two years of the Trump Administration, wage earnings have grown much more slowly than CEO pay, rising 33% from third quarter of 2010 to the third quarter of last year. (Based on a separate, inflation-adjusted dataset from FRED, the gain was just 12% in real terms.)
The other is that between the second quarter and third quarter of last year, in the midst of the recession, wages fell. The contrast with CEOs is stark. Wage earners don’t have the same exposure as wealthier people to stocks and other financial assets that were bolstered by the liquidity expansion – and they certainly don’t have their income determined by them.
Also, setting aside comparative percentage increases, consider the proportionality. Ideally we’d have superimposed annualized median wage numbers onto the CEO pay chart, but the tiny bars at the bottom would have been barely discernible.
Simplistic, knee-jerk apologies for this glaring inequity typically say, well, this is the market at work. CEO talent is clearly worth it. A better approach is to look at this through the lens of decentralization: This is a direct outcome of Wall Street’s central gatekeeping place in the U.S. economy, a centrality that creates massive distortions and misaligned incentives. In fact, it undermines the free market. This is what crypto, with its peer-to-peer value transfer system, was supposed to try to fix.
The conversation: The SEC gets a new chairman
The other big news Wednesday might seem tangential but was totally relevant to Coinbase’s listing: Gary Gensler’s confirmation as Securities and Exchange Commission chair.
The crypto community has keenly anticipated the arrival of Gensler, whose MIT blockchain teaching experience makes him the best-crypto-informed U.S. regulatory chief ever. People are hoping for clarity on outstanding matters such as a bitcoin exchange-traded fund, the SEC’s position toward DeFi’s decentralized exchanges and some definitive guidance on tokens as securities.
The confirmation was expected but the commentary around it was telling for what it says about how many different vested interests are vying for Gensler’s attention.
Take this rather obligatory statement from the other SEC commissioners, published in two tweets by the SEC’s communications department.
What was interesting was the barrage of “XRP Army” replies calling on Gensler to drop the SEC’s lawsuit alleging Ripple sold XRP as an unlawful security. Wishful thinking, I’d say, given that in 2018 Gensler said he thought XRP was a “noncompliant security.”
Then there was this tweet from U.S. Sen. Cynthia Lummis from the blockchain-friendly state of Wyoming, who is a big proponent of U.S. regulatory agencies taking a more innovation-friendly approach toward the technology. She ties the argument back to a key concern of the Biden Administration: competing with China in technology, in this case in digital currencies.
Less polite was Sen. Pat Toomey of Pennsylvania, whose comments are shown here via a tweet from CoinDesk’s Nikhilesh De. Toomey voted against Gensler’s appointment, citing fears of a “social liberal agenda.” That may hint at a future battle as institutions involved in ESG investments look to the SEC to take a stance on accounting standards in that field.
Relevant reads: Crypto market revival
Riding on the Coinbase buzz, the entire crypto market burst to life this past week, with multiple tokens within the CoinDesk 20 hitting all-time highs and/or posting record- or near-record weekly gains.
Not everyone thinks that’s a good thing.
- Bitcoin then took a breather but everything else suddenly slotted into what Brad Keoun and Muyao Shen described as another “altcoin season,” one that has pushed the entire crypto market capitalization to more than $2 trillion for the first time. It wasn’t just ether. It was tron. It was stellar. It was XRP, with the XRP Army buoyed by some favorable court rulings and by Ripple’s move to call on the SEC to abandon its lawsuit.
- More fundamental was the gain in ether, which broke above $2,500 for the first time after the Ethereum network successfully integrated the Berlin hard fork package of upgrades aimed at addressing problems with soaring gas fees. Muyao Shen reports.
- From a complicated technical Ethereum upgrade to yet another dogecoin buzz moment. The Shina Ibu meme coin hit yet another all-time high as the company behind Slim Jim – “social media’s favorite meat stick,” says CoinDesk’s Danny Nelson – pulled off an interesting symbiotic marketing relationship with the DOGE fandom.
- By the end of the week, bitcoin had stalled but all the action was happening in these buzzy, sentiment-driven altcoins. Inevitably, with echoes of 2018 ringing in people’s ears, some, including Galaxy Digital CEO Mike Novogratz, are now warning we are due for a shakeout.