The Spotlight is a Coin98 Insights exclusive interview series on hot market topics with industry builders.
"Coinbase does not violate any of the securities laws in the United States"
Zach Segal came to our Coin98 office with a very "American" openness. He was dressed in jeans, a T-shirt, and a baseball cap.
When asked about what was going on with Coinbase, he didn't hesitate to discuss it. Zach also said that he had a special connection with people in Vietnam, both at work and in his personal life. “I’m getting married to a Vietnamese woman", he said.
- Greetings, Zach. You were a product designer before entering the world of crypto. What inspired you to make this transition and join the crypto industry"?
Zach: I joined the crypto industry about 10 years ago, back when it was basically the Bitcoin industry because it was all that existed back then. For me, what was most interesting about crypto is the fact that it allows you to have complete control and custody of your assets. I found the idea of sending values anywhere in the world without having to ask for permission from banks or any intermediary quite interesting.
I saw this as a complete transformation of digital property rights.
At the time there weren’t really a lot of great designs around crypto as well. So as a designer, I saw the incredible opportunity in crypto, and one of the biggest barriers to crypto reaching mass adoption was the lack of great designs. So very early on, I had always been interested in improving the user experience of crypto.
- You started Blockchain Curated, which was later bought by Earn.com, where you were the Product Manager. This is an interesting fact. Then, Coinbase bought Earn, which is where you currently work. What role did these things play in your path to crypto?
Zach: I founded Blockchain Curated in 2017 with the sole mission of crypto education. I saw there was an incredible amount of crypto information, but how do you separate signals from all of the noise? So that was the mission of Blockchain Curated.
So what I did was to curate who I felt were the best thought leaders in crypto, and their writings, and I would feature them on the website. Thanks to that I met Balaji Srinivasan, the co-founder of Earn, who later became the CTO of Coinbase and absolutely brilliant.
After Blockchain Curated was acquired by Earn, I joined in and helped on the product side there. At Earn, we were able to scale that platform up quite a bit and eventually, it was acquired by Coinbase where I’ve been for the last 5 years.
Coinbase has been traded on the Nasdaq since 2021. We’ve acquired companies like Tagomi and many others which became important pillars of our business.
I think right now is a really interesting time in the mergers and acquisitions in the market, in the midst of what seems like a crypto winter and the evaluations (of crypto companies) have come down quite a bit. However, we are still having incredible talents working on incredible projects, and still more to come.
- At Coinbase, you hold the position of Head of Listings, and the community is constantly very concerned about which tokens can be listed on the exchange. So could you explain how Coinbase handles this process?
Zach: The listing process at Coinbase is quite complicated but essentially, there are 3 to 4 components of it.
First off, there is a pretty lengthy review of any token we look at. And we look at it from a legal, compliance, and security perspective. On the legal side, what we look at is the likelihood of that asset becoming a security on the market that we list it. Because Coinbase strictly only lists non-security on our platform.
Secondly, we do a compliance analysis. We are looking at KYC, and anti-money laundering, and we make sure that the asset holds the compliance standard that we expect.
And finally, also very important, we do a very detailed security audit. So if it’s a blockchain, we’d do a complete teardown of the blockchain and evaluate, for example, its consensus mechanism as well as potential vulnerabilities for things like the 51% attacks.
We do a very detailed security audit. So if it’s a blockchain, we’d do a complete teardown of the blockchain and evaluate, for example, its consensus mechanism as well as potential vulnerabilities for things like the 51% attacks.Zach Segal, Head of Listing, Coinbase
And then, if it’s a token on some of the platforms that we support. For instance, we support tokens on Polygon, Avalanche, Solana networks, and many others. Then we do a complete review of these tokens’ smart contracts. This includes examining the risks involved in its governance, such as the ability of one person to unilaterally take tokens from the holders.
So this is the most important review process because no tokens can get listed without going through this process. I want to give you an idea about just how strict this process is. Coinbase has evaluated over 1,000 tokens since it started, of which only a little over 200 got listed. So officially, over 90% of those tokens didn’t pass our review process.
And when we look at the listing tokens on the platforms, we took into account what tokens that users are most excited about, as well as market capitalization and volumes. We might look at some of the “softer” aspects of the asset, such as the community. Certainly, we would look at the product itself to see what kind of traction it has.
There are many ways to measure that, but we really do a full comprehensive review of all the assets that we list.
- Many companies have been in trouble with the SEC lately because of the question of whether assets listed on crypto exchanges are securities or not. The SEC has just sent Coinbase a Wells Notice warning about the company's staking service. How is Coinbase facing this?
Zach: Coinbase was founded over 10 years ago. It’s one of the oldest companies that’s been servicing the crypto industry since. When it comes to the topic of compliance with regulatory agencies such as the SEC. As a result, since the beginning, we’ve worked with the SEC to make sure that our products are compliant.
And in fact, when it comes to our staking and asset listing services, all these products - I am very comfortable saying that they don’t violate any of the securities laws in the United States.
I have previously mentioned our review process for asset listings, which is something we care deeply about and we’ve invested a lot of time, energy, and money into. So we are very confident about the legal status of every asset that is listed on our platform.
And in terms of staking, there’s indeed been a lot of interest in staking recently, there’s been a number of actions taken by regulatory agencies. But our staking service is different than some of the others.
Essentially, we are only operating a technical service for our customers, that is we are passing on the rewards from the blockchain directly to our customers after we take a fee. We are not charging any other fees. It is just the blockchain and the customers and us in the middle hoping to facilitate that technical transaction.
Build a bridge, not an isle
- Another thing regarding the SEC: Following the collapse of several significant cryptocurrency companies last year, the agency is tightening legal restrictions more and more. Since users frequently switch to decentralized exchanges or personal wallets to store assets after such incidents, we are particularly interested in how the collapse of FTX as a centralized exchange will affect businesses like Coinbase or Binance. What is your opinion on this matter?
Zach: It’s interesting that Coinbase always has different types of products. So we have a more centralized product (the exchange itself), and we do custody for our users but at the same time we have more decentralized products like Coinbase Wallet to store your crypto assets, and NFTs, and you can use our DEX et cetera…
But the first thing I have to say is if any of the allegations are true, what happened with FTX was an absolute tragedy. This is a disaster for the industry and it’s gonna take some time for us to recover from.
One of the most unfortunate aspects of the event was the regulatory uncertainties in the United States, which prompted a lot of teams are looking to work with overseas exchanges - which may have more questionable practices in terms of how they run their operations.
A lot of damage has been done to the investors, builders, and project teams who may have held their custody on FTX. And I hope everyone gets compensated as much as possible but it’ll take a while to recover from that. And this event has the potential to push more activities into two directions.
The first direction is towards the more regulated companies like Coinbase, which since the start has really proactively tried to make sure to follow the law - as best as we can. We follow all the best practices that you would find in many of the exchanges in the securities world even though we don’t necessarily need to.
For instance, we never trade against our customers and we are called what is known as the “qualified custodian” in New York, which is a very high kind of bar in terms of regulatory oversight. So I think what we’re going to see are people and companies who are holding a lot of crypto assets getting pushed much more to the regulated sides.
And then separately, I completely agree with you that when you have collapse cases like FTX, people are also pushed into the complete opposite direction as well, which is more decentralized. Right? This is where companies like Coin98 shine. And Coinbase has always been very supportive of that.
We have a centralized exchange and it’s a big part of our business, it’s very important to us. But also, the crypto economy is a completely new economy where you’re gonna have decentralized applications that people are going to use and we want to help to get people on-chain, the way we get online like 10 years ago when the Internet first exploded. We are very supportive of this move to decentralized applications.
- Coinbase is involved in another problem with a government agency right now. A former employee of the company was recently convicted of insider trading. What are your thoughts on this?
Zach: Yes, let’s go back to how we define Coinbase as a company. One of the most important aspects of this is we aim to be one of the best companies in crypto. So whenever we notice something like insider trading, we take it very seriously.
In fact, it’s we who actually reported the activity to the authorities when we received the complaint about this insider trading. We have a very sophisticated internal program for trade surveillance to make sure that there’s no insider trading that can happen inside Coinbase. When it comes to that type of behavior, we have zero tolerance for it.
When it comes to our trading program, we have all sorts of restrictions on what assets you can trade, and when you can trade them, and we have ways to enforce these restrictions. It’s quite similar to what you’d find in a traditional exchange company, where there are trading windows, and requirements around how employees can trade, and what they can trade, as well as what types of disclosures can be public and what not.
- Coinbase just announced that their platform, Base, is getting a Layer-2 network. But the Layer-2 race on Ethereum right now is a very tough one. Other Layer-2s can benefit from token launches and promises of future airdrops. But Coinbase doesn't plan to release any new tokens, and concerns about centralized entities in DeFi are growing. What will Base do to succeed?
Zach: Great question! So first off, I would like to give a brief introduction to Base for anyone that’s new to the platform. So Base is a brand new Layer-2 protocol built on Ethereum that leverages the Optimism stack and is incubated by Coinbase. So you’re gonna see a Layer-2 that’s incredibly easy to use, very inexpensive, and very fast.
The Layer-2 landscape is very interesting, it’s been growing very fast lately. Coinbase supports many Layer-2s directly. For example, we may list many of the platforms on our exchange, we support the deposit and withdrawals for those, like Polygon in that way. We also invested in many Layer-2s with Coinbase Venture.
Our philosophy around Layer-2 is we are building a bridge, not an isle. We want to bring everyone on-chain, and we don’t think of this as a winner-take-all market.
I think you posed a very interesting question regarding the difference between Base and other Layer-2 platforms. But we believe that there are going to be many different Layer-2 platforms on Base that co-exist with each and every one of them. And we are looking to partner with all of them, and in fact, we already did with many of them.
What I want to say is: The biggest difference between Base and others is Base is allowing us to bring over 100 million users and all of their assets on-chain. We also provide users with custodianship of assets worth around 100 billion USD.
For many users that are new to crypto, who never used a Layer-2 platform before, they might feel it’s expensive to do transactions on-chain. Therefore, their first on-chain experience might be with Base, and they might use a decentralized social network such as Farcaster, or they might use a decentralized application on Base for lending or Finance.
Again, going back to the philosophy of building a bridge, not an isle. Over time, we hope that people might venture out to Polygon, Solana, Avalanche, Arbitrum, and even the main Optimisim network itself. Gradually, I think we’re going to see a lot of these integrations between networks to support each other.
We just announced that we’re on testnet a few weeks ago, and our mainnet is launching in May - June. The developers’ excitement around this has been incredible so far, especially here in Vietnam.
To bring 100 million users and their assets on-chain
- Base seems like a chance for Coinbase to get more people to use their service. What other opportunities or challenges are there for Coinbase and the industry as a whole?
Zach: Another great question! I think that in reality, on-chain is still a relatively small part of the current crypto economy. A lot of what’s happening in crypto right now is trading, most of it is happening on centralized exchanges. But they are increasingly moving to Layer-2 platforms because they are inexpensive and fast. And one of the most obvious opportunities is bringing hundreds of millions of people (who are already using crypto) on-chain.
Now I’m not talking about doing a trade, I’m talking about the use of decentralized applications. In that sense, we envision an open and permissionless appstore where anyone anywhere in the world can deploy apps to, and be usable to everyone. It’s everywhere and you can freely exchange value with anyone.
And we think of that transition as important as the transition we made moving from offline to online in the late 1990s-2000s when WordPress, Facebook and Instagram gave a voice to people. We feel that the value exchange, the ability to send payments, and the use of decentralized applications anywhere in the world are going to be just as powerful. Basically, with what happened to information and the unlocking of information, we believe the same thing’s going to happen for finance and applications as well.
Moreover, we’re gonna need a lot of infrastructure, Base is one of the examples of that infrastructure. When crypto truly hits mass adoption, you won’t even know you’re using crypto. You just use the applications and get the values out of them in return. For instance, me being able to send you 50 dollars for a fraction of a penny on Base from my home in San Francisco to you in Saigon is one simple but very powerful idea. It’s up to the developers to paint the future that we wanna see.
- Any special moments or memorable stories during your five years at Coinbase you would like to share with us?
Zach: There were so many so it’s hard to pick a single favorite one, but I would say it’s the launch of USDC. This project was spearheaded by Balaji and a few of our incredible engineers at Coinbase.
You got people inside a “war room” to figure out how to design and build and launch a product as quickly as possible. For us, it was really important that we launched USDC as quickly as possible. It was a very strategic time that we chose to launch it (USDC).
You got people inside a “war room” to figure out how to design and build and launch a product as quickly as possible. For us, it was really important that we launched USDC as quickly as possible. It was a very strategic time that we chose to launch it (USDC).Zach Segal, Head of Listing, Coinbase
So we had people come to work at nights and on weekends, and we ordered food to the office. It felt very much like a startup. I think Coinbase was still quite small at that time. Right now we have 3,500 employees but at the time it was around 300. So those are some of my most special times at Coinbase when I forged most friendships, met people at 10 at night, and worked on a product launch that we were all very excited about.
And this was when stablecoin was still in its infancy, USDC was very tiny back then, with only a dozen of us in a room to see where USDC is today as one of the largest stablecoins in the world with a market cap of over 40 billion USD. This really gives me a perspective on the scale of crypto and its global reach, as well as how fast something could grow in a short period of time.
- Would you like to share your thoughts on your trip to Vietnam today to wrap up our chat?
Zach: It’s incredible being in Vietnam and meeting a lot of builders here. I think the energy is just incredible. The entrepreneurial spirit in Vietnam differs from that of many countries I've visited.
We (Coinbase) have long supported products such as Kyber, Coin98, Ancient8… And we see a lot of potential here in the Vietnamese market in terms of talent, people, and products and we are looking for what is unique about Vietnamese and the Vietnamese market that we could bring on-chain.
This is something I'm also excited to see in the next few years.