Katie Haun on Coinbase, a16z Crypto Fund Investments

Coinbase's Journey and Future Outlook with Katie Haun

Coinbase, a cryptocurrency exchange that recently became a public company, has experienced both successes and challenges. However, the San Francisco-based company, approaching its ninth year, demonstrated foresight in several key areas leading up to its successful direct listing, notably by inviting former federal prosecutor Katie Haun to join its board in 2017.

Haun's Background and Transition to Coinbase

At the time of her appointment, Haun had dedicated eleven years to the Justice Department, handling complex cases involving violent crimes and organized criminal activity. Later, her focus shifted to the rapidly evolving realm of cryptocurrencies.

Through her work, Haun gained familiarity with Coinbase and other emerging startups, seeking to understand digital currencies and decentralized systems. Recognizing a desire for a new challenge, she accepted Brian Armstrong’s offer of a formal role, having successfully argued every case during her time as a prosecutor. (Subsequently, Andreessen Horowitz, an early Coinbase investor since 2013, appointed her as their first female general partner.)

The Impact of a Powerful Combination

This partnership has proven both impactful and financially rewarding. As an independent board member, Haun received shares that are now estimated to be worth approximately $150 million. Andreessen Horowitz’s stake in Coinbase is currently valued at over $11 billion.

Haun, having recently renewed her board term, believes the company’s most significant achievements are still to come.

Discussion on Valuation, Evolution, and Crypto Funds

We recently spoke with Haun about Coinbase’s valuation, its future development, and her involvement with a16z’s crypto fund, which she co-leads with Chris Dixon, a fellow Coinbase board member. She noted that the team has completed more deals in the past few months than in the previous two years.

She also highlighted a16z’s increasing investment in tokens.

Our conversation has been lightly edited for brevity and clarity.

From Prosecuting Crimes to Understanding Bitcoin

TC: You handled serious cases, including murder trials, and were then tasked with understanding Bitcoin. How did this lead you to Coinbase?

KH: I initially became acquainted with Coinbase through my work establishing the U.S. government’s first cryptocurrency task force within the Justice Department. A key part of our role involved meeting with companies and entrepreneurs in the crypto space to gain insights into their operations and explore potential collaboration.

While government objectives didn’t always align with the crypto industry, there were instances of synergy and a need for communication. Coinbase was one of many crypto companies I interacted with during that period.

The Silk Road Case and Uncovering Corruption

TC: You were involved in the prosecution of Silk Road founder Ross Ulbricht and the discovery of corrupt federal agents connected to the case, correct?

KH: I did not directly prosecute Ross Ulbricht or the Silk Road case itself. My involvement centered on a related matter: the discovery that agents on the task force investigating Silk Road were secretly working against the government.

Initially, a tip about a rogue agent seemed like a conspiracy theory, but I investigated to clear the individual’s name.

TC: Was this a long-term federal employee?

KH: Yes, the agent had served for over a decade. It turned out there were two such agents, operating independently.

TC: That is unusual!

KH: Indeed. Such instances are rare in reality, unlike what is often depicted in television. During my decade as a federal prosecutor, I had never encountered such a situation.

The investigation revealed that hundreds of thousands of dollars – now worth tens of millions – were being transferred to personal accounts. Initially, we suspected a poorly managed undercover operation, but the transfer patterns were inconsistent and ultimately led us to the agents’ personal accounts.

The Role of Exchanges and Blockchain Technology

Companies like Coinbase, with their compliant record-keeping, were crucial in solving this case, along with the blockchain itself. Without the blockchain, we would not have been able to uncover the agents’ misconduct. They would still be federal agents today.

Had they used traditional wire transfers or fiat currency, we would have been unable to trace their activities, as they could simply flash their badges and request the deletion of records. This was not possible on the blockchain.

NFTs, Money Laundering, and the Future of Investigation

TC: Regarding NFTs, a16z has invested in companies like Dapper Labs and OpenSea. What are your thoughts on the potential for using NFTs to illegally move money?

KH: I prosecuted money laundering cases at the Justice Department, including one of the largest ever, involving BTC-E. I also led the investigation into the Mount Gox hack, utilizing blockchain technology to resolve those cases.

I read your article, Connie, and found it insightful. While criminals often adopt new technologies early, I believe the perception that fiat money laundering is largely successful is inaccurate – 99.9% of fiat money laundering crimes succeed, which is a staggering statistic.

Crypto offers a significant improvement in traceability, leaving “digital breadcrumbs” that are absent in the physical world or with cash. NFTs, in particular, can make investigations easier due to these digital trails.

Pacing, Deals, and Investment Strategy

TC: How would you describe your current pace of activity and deal-making?

KH: We are currently deploying capital from our second crypto fund. It’s an exciting time to see these projects gain traction and mainstream attention. There have been numerous launches in the last six months, which is also encouraging.

The pace is fast, but it’s an incredibly exciting period for the crypto ecosystem, especially following Coinbase’s recent milestone.

We’ve completed more deals in the last few months than in the past two years, and announcements are forthcoming. There’s a significant surge in activity.

We are also reinvesting in earlier investments, such as Dapper Labs, which we’ve supported through multiple funding rounds.

Evaluating Crypto Deals: Similarities and Differences

TC: How does evaluating crypto deals differ from evaluating traditional startups?

KH: Some criteria remain consistent. We always seek visionary founding teams with strong execution capabilities, as exemplified by Coinbase. We also assess the total addressable market, the product, the technology, and its defensibility.

However, crypto deals require additional scrutiny regarding regulatory compliance, security audits, and vulnerability assessments. We also focus heavily on token economics.

We are increasingly investing in tokens, which we view as foundational technology. We have the flexibility to do so as a registered investment advisor.

While equity investments remain viable, as demonstrated by our investment in Coinbase, the majority of our funds are now deployed in tokens.

Token Investments vs. Equity Investments

TC: Are you actively purchasing tokens, rather than investing in the underlying technology companies?

KH: We consider tokens to be foundational technology, representing the protocols themselves.

We are investing in the tokens themselves, including Bitcoin and Ethereum, and acquiring tokens directly from protocols, not necessarily through equity ownership in the companies that created them. In some cases, we have equity stakes that grant us token rights, but increasingly, we are simply purchasing tokens directly.

Bitcoin and Ethereum Holdings

TC: What percentage of the crypto fund’s assets are allocated to Bitcoin and Ethereum?

KH: We haven’t disclosed specific percentages, but we maintain a substantial position in both Bitcoin and Ethereum.

Coinbase’s Valuation and Future Growth

TC: Given Bitcoin’s increased value, how can Coinbase’s $87 billion valuation be justified? Will the company become less reliant on transaction fees?

KH: Coinbase is actively diversifying its revenue streams beyond transaction fees, exploring recurring subscriptions and services. However, transaction revenue remains a significant component of the business, both now and in the future.

Coinbase is at the ground floor of a rapidly expanding market. Currently, 56 million people use the Coinbase platform, while over 100 million people globally are involved in crypto.

We anticipate the emergence of entirely new industries within crypto, such as NFTs, decentralized finance, and digital identity.

The unpredictable nature of innovation means we can’t foresee all future developments. Just as the iPhone led to ride-hailing and the gig economy, Coinbase is well-positioned to capitalize on unforeseen opportunities in the crypto economy.

Addressing Wealth Disparity and Looking Ahead

TC: The recent wealth generated at Coinbase may exacerbate existing inequalities. How does the company address this issue?

KH: Coinbase attracts individuals motivated by various factors, including economic opportunity. However, candidates are also drawn to the company’s vision and the broader crypto movement.

The management team is committed to long-term growth and maintaining focus on innovation. Following the offering, Coinbase immediately emphasized the importance of continuing to build and innovate.

Disclosure Regarding Investment Advice

TC: Can you comment on whether Andreessen Horowitz sold part of its shares in this week’s offering?

KH: Unfortunately, I cannot comment on that.

Note: Haun clarified that her statements were not intended as investment advice or directed towards any investor or prospective investor in a16z funds.