Fintech

Coinbase just launched a think tank. Meet the SEC veteran leading it.

Hermine Wong, director of the Coinbase Institute, says she’s trying to create a source of rigorous research about cryptocurrencies.

​Hermine Wong, director of the Coinbase Institute,

"Our advocacy is almost a fundamentally different kind of engagement than we've seen historically."

Photo: Coinbase

It was a quirky dig at the SEC.

“I've decided not to set any curfew for my teenager. I'll just ground her if she comes home later than I'd like. Regulation by enforcement,” Coinbase chief legal officer Paul Grewal wrote on LinkedIn last week, referencing what his company feels is the SEC’s heavy-handed approach to crypto.

Hermine Wong, director of the newly launched Coinbase Institute, acknowledged the off-the-wall post was “cheeky.” But she also said it was indicative of Coinbase’s growing annoyance with the regulator.

“You're going to see frustration sometimes when there aren't public and transparent and open engagements,” Wong told Protocol. “Everyone's trying to be like, ‘Where can we have a really public transparent engagement on these issues?’ That's not happening.”

That quest for stronger public engagement on crypto was largely why the company launched the Coinbase Institute in May. The idea actually came from Wong, who spent about a decade as a federal government lawyer, including six years at the SEC.

“In my old job as an administrative lawyer, if I think about all the work that we did — writing regulations, interacting with the public — we would frequently cite academic-style journals or create that academic research,” she said. “That was very much just missing here. It was filling a need that we needed to do in order to be more effective in our own advocacy.”

In an interview with Protocol, Wong, who joined Coinbase in February 2020, explained what the crypto company hopes to accomplish by launching its own think tank and how her many years as an SEC regulator shaped her view of crypto and technology.

This interview has been edited for clarity and brevity.

How did the idea of setting up an institute come up?

There was a real need in all our policy advocacy that we were doing to have research and evidence. The challenge again and again that we were hitting was that there isn't a lot of research in this space because the space is moving so quickly itself. Research tends to take a long time.

The best research out there was responsive to some subset of questions that people would pay for, but not necessarily always the research that you need when you're doing public policy advocacy.

How was it discussed with [Coinbase CEO] Brian Armstrong or chief legal officer Paul Grewal?

If I'm being perfectly honest, I articulated that we've got to stand up this function. I drafted up a proposal and it got sent up.

So it was your idea.

It was my idea. [Laughs.]

Were there any models that you used?

Microsoft has a research space. [JPMorgan Chase] has the Chase Institute. There's the McKinsey Institute that is also out there.

Those companies set up think tanks many years after they were founded. We’re talking about a 10-year-old company in an industry that's only about 13 years old.

Crypto is innovating faster than any of those other industries already. On top of that, there were laws on the books already for a lot of those industries. There aren't any here.

So our advocacy is almost a fundamentally different kind of engagement than we've seen historically.

What we're trying to do is not reinvent the wheel. Let's take what are good lessons learned from other industries and find a way to apply it here. This is one of those instances where we've got this huge information deficit, a huge research deficit. What have other people done in the past? Yeah, it might have taken 40 years for them to figure it out. It doesn't make it a bad idea if you do it, you know, earlier.

Crypto is often compared to the rise of the web during the dot-com era. There were similar concerns. Government stepped in, like when the Clinton administration put out an executive order essentially saying, “Let the internet evolve and just be mindful of potential pitfalls.” Given your decades of experience in government, are there any lessons from that period that are top of mind for you?

I tell this story all the time. I love the internet analogy for this. Right now, different surveys would have the crypto adoption rate at somewhere between 16% and 20% in the United States.

You may recall the famous interview that David Letterman had with Bill Gates in 1995. It's a great interview. But the interesting thing is that at that same time in 1995, these Pew surveys that we rely on for crypto adoption surveys said that 14% of Americans had the internet at that time.

So the parallels between 1995 and now are very striking. Imagine how difficult it was for Bill Gates to explain to David Letterman and the general audience what the internet was and what it could do. He couldn't quite do it right.

So it's always top of mind for me that we are at that phase of trying to get people to understand not just what crypto is in terms of the plumbing, but we really want to try to get people to understand what the Web3 future is going to look like.

That is hard work to do. It takes time to do that. The Coinbase Institute's mission is to accelerate getting that on paper, putting very thoughtful people, academics, and industry players together to try to give all of that a more concrete way of being talked about.

Given your government experience, what are you most concerned about? What are the things that you think Brian and other Coinbase execs probably don’t think about much, and you tell them, “We need to do it this way because this is the way government and the system work”?

If you're a regulator, if you're like a classic regulator, and you have your 9-to-5 regulatory job and you're drafting rules, you think first, “I'm drafting my rule. What is my authority to draft this rule? What did Congress say that I can do in this space?”

Then I say, “Well, what's the problem that I'm trying to solve?” Then I identify, who are the entities involved in this problem? And then I say, here are a few different ways I could solve this problem. Let me do a cost-benefit analysis. That's how the regulator 9-to-5 guy or girl does this job.

Now the challenge is, the first step doesn't really exist [in crypto]. You don't have that congressional authority. That also means you don't have the congressional appropriations for it. You don't have the expertise of people. You don't have the earmarked money to hire crypto experts to do this crypto work necessarily because the legislative authority doesn't exist. You're trying to figure out how to do it from your existing work.

That's the problem that we have. They don't have the time to organically develop this kind of research and expertise.

What we're trying to do with the Coinbase Institute is let us try to help jump-start that for you because I know the kinds of questions they need to have answered. Those are not the same kinds of questions that institutional investors might have or that a reporter might have about crypto or the average person who's trying to figure out what to do with Web3 might have about crypto. They have certain kinds of questions that they need to have answered at a macro scale. Let us try to unpack that for them without you having to do all that work yourself.

But the SEC, the CFPB, Gary Gensler, and Rohit Chopra would argue that there are laws, there are rules that are in place they are using to enforce certain actions, and there are laws that cover companies that deal with people’s money.

Black and white, that's true. There are absolutely laws on the books that deal with how people look at money. What there isn't yet, though, are laws on the books for crypto. How we know that this is challenging is to ask any member of Congress how you look at a particular cryptocurrency, which one of those is a security?

I don't think that you're gonna get a consistent response. People should know. Everyone should know. How much lawyers’ time do we spend on trying to figure this out and still get a legal opinion that has to be by necessity hedged because we don't know? These are people in good faith trying to struggle with these questions.

So I agree that when it comes to classical money, yes. But crypto is not and Web3 won't be money. So how should we be thinking about those use cases and how people will actually be interacting with it if their fundamental way of doing it will not be as, you know, some sort of hedge fund?

But crypto currently is about money. People see it as an investment although Web3 is promising other use cases.

I don't want to disagree with you, Ben. But again, if we think back about that 1995 analogy, sure we could try to get everyone to understand TCP/IP protocols, but that's actually not what's going to get anyone to understand what is going to be the function of the internet and how people actually interact with it.

You will obviously play a key role in Coinbase’s efforts to explore policy issues. I assume you will also play a role in the company’s lobbying efforts.

Our goal is to arm our own lobbyists so that they can get this in front of the right members [of Congress] and in front of anyone. We're producing this collateral for the good of the community. But our lobbyists I hope will also be using it to put it in front of people who are hungry for research.

What do you say to those who will be naturally skeptical about a Coinbase think tank, which they are likely to think was set up to defend Coinbase’s business and position in this market?

It's certainly a consideration. This is why we chose the kinds of advisers that we chose. Our advisory board [includes] academics. We have a chief economist who also comes from academia. So the research that we're putting out is research that they would put their name to. It may very well be research that is also helpful [to Coinbase] but it's not that this is research that shouldn't be out there and it is not peer-reviewed-caliber research. Otherwise, what's the point, right? We didn't have to go about getting an advisory board like that. I could have probably just hired a bunch of interns.

Let’s talk about a former academic who’s playing an important role in this debate, Gary Gensler. I listened to his 2018 lectures and he comes across as open to the technology, and even acknowledged that there are aspects of blockchain that could be beneficial to a financial system. But he’s viewed as someone who’s critical of the way the industry is evolving. What are your thoughts about the SEC chair?

The SEC chair is a political position at the end of the day. It is different from what I was doing at the SEC, what the 3,200 staff are doing at the SEC. How this chair is going to prioritize his time and his resources, what his ultimate goals are — I don't know what those are. But you can say that Gensler has not been — his only job has not been the SEC chair. He's also been at the CFTC. And who knows where he might want to go next.

So it's the political aspect that’s a focus for you.

I think that he is, by definition, a political person. He's a political appointee. He goes through Senate confirmation. So how he plays that is just going to be different. They put out speeches. Every time they put out a speech it's very different from what a staffer would do. They have to say every time these reviews reflect my own views, not the views of the commission, because again, they are political.

How he might interact as a 2018 professor over at MIT trying to educate on the technology is going to be very different from the way he prioritizes what he says as SEC chair.

What were the things from your long experience in government that have been helpful because that was not the way the private sector, or tech, or the startup world operated?

I think it's knowing actually how the sausage is made when it comes to rulemaking. What is it that the regulators are most concerned about when they are drafting a rule?

I say this because it always struck me as odd when I was in the regulator world how often people thought that regulators are targeting individual companies, that [a regulator] would even remember like, “Oh, that person was really ornery in a meeting with me. I'm going to now burn the entire industry” … there were those kinds of discussions where people thought that certain characters were larger than life and then they would just steamroll the industry through rulemaking because they didn't like a person in a meeting or something.

That's just not the way it is. This idea that people would have long-term memory at the staff level for these kinds of private interactions is not only untrue, they could not come up with the evidence to support any rulemaking if that's how they did things. They would just get vacated on the spot. The biggest black mark on a regulator you could get is when your rulemaking gets overturned by a court.

You just don't want that to happen. You'll guard against it. That's why you want deep cross-functional buy-in. You want to have a ton of research on your side. You want to present both sides of any issues.

Circling back to Gensler, do you have an understanding then that he's not targeting Coinbase or specific actors, but he is trying to do a very complex job as you describe?

Again, I would say that as a staff versus a political appointee, you have different priorities. So I'm telling you how the staff does its job. Staff do not get the benefit of actually doing that kind of cherry-picking of issues, whereas the chair can or any commissioner could certainly do that. And any political appointee could do that.

Let’s go to the way Coinbase has handled many of these public disputes. There's been a lot of criticism about how it's playing out on Twitter and social media. Just this week, Paul Grewal wrote on LinkedIn, “I've decided not to set any curfew for my teenager. I'll just ground her if she comes home later than I'd like. Regulation by enforcement.”

It’s cheeky.

Sometimes a lot of the attacks and exchanges have been personal and even mean-spirited.

I'll say this: I think that the reason why it's really important for us to all be able to have an open and transparent debate is that it's not actually really happening right now.

I think that everyone's trying to be like, “Where can we have a really public transparent engagement on these issues?” We sent over a rulemaking petition to try to get the SEC to do rulemaking, [to] open that up to a public forum. That's not happening.

I don't know why it's not happening. I wish I knew why it wasn't happening. But I think that over time, if people keep saying, “Please engage. Please engage,” you're going to see frustration sometimes when there aren't public and transparent and open engagements. There should be sunlight brought onto this area. Instead, we're only getting little slivers through enforcement actions that come from time to time.

If we take Paul's analogy a little further, his daughter could have said, “Dad, please just tell me what the curfew is. Please just tell me what it is. I will do whatever. If you say it's 8:30, I will do it. If you say 7, I will do it. Just tell me.” That is like the petition for rulemaking.

Tell me about the very first time you heard about bitcoin.

Ah, it was when I was at the SEC.

What was your reaction? What were the conversations like?

There was a lot of confusion between bitcoin and blockchain at that time. There still is a little bit of confusion on that front and it was seen as a novelty. This was very much part of the ICO phase of things. The overriding narrative of anything bitcoin-related at that time — it had not become an asset class, what it is now. The use cases had not yet been developed to the way that they are now. We didn't see adoption. It was very much still seen as a fringe thing among a fringe set of the population.

And we were still trying at the SEC to just modernize our disclosures so that they're machine readable. Let's not even talk about distributed ledger technology. We were just trying to get out of the fax phase and courier-in-triplicate to the regional office and to the main office and to the overseeing office. We were so backward at that time. Bitcoin seemed just totally fringe.

What were the early concerns that you eventually were able to overcome or go past in terms of your perceptions of bitcoin and crypto in general?

I came to Coinbase in 2020. By 2019 — probably late 2018 — I was already starting to become incredibly interested in crypto, generally. I read the [bitcoin] white paper and I started to understand a lot more about what the thesis was.

Without reading the white paper, all you're hearing about in the SEC domain is the ICO problem. And that was very much a problem. We can all acknowledge that that was a serious problem.

But by reading the white paper and understanding intellectually, it's so interesting to try to struggle with how do we come up with the right rules of the road for this really important industry that will have a ton of different use cases. Put differently, it can solve a lot of problems that we've accepted as trade-offs as a society, like this idea that we have to have a bunch of middlemen to stamp every single item, whereas, in fact, instant settlement, instant execution alleviates all of that. It also alleviates the fat thumb problem or of people knowing all of my business who have no reason to know my business and someone potentially stealing my funds or my digital identity.

I was like, “Oh my gosh, this is life changing for a lot of people.”

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