On The Brink with Castle Island - OTB Live! Weekly Roundup 09/23/22 (EU's MiCA regulation finalized, XRP lawsuit, SEC dings Balina, Audience Q&A) (EP.352)

Episode Date: September 23, 2022

Nic and Matt sit down for a special live recording of OTB in front of an audience at the Boston Blockchain Week. In this episode:  Ian Balina is dinged by the SEC for Sparkster The SEC's weird argument for standing over all of Ethereum Is XRP a prediction market on Ripple's case against the SEC Wintermute is hacked for $160m via a bad vanity generator Several Senators file an amicus brief to support Custodia's lawsuit against the Fed What the Congressional crypto agenda should look like Europe finalizes their MiCA regulation Europe discourages Dollar stablecoin usage in the EU Exchanges and token issuers in the EU will have to make disclosures Jesse Powell steps down from Kraken NASDAQ is launching a crypto custody business Helium strikes a deal with T Mobile Audience Q&A Sponsor notes: Talos powers institutional access to the entire digital assets ecosystem via a single-point of entry. Connect directly to your preferred prime brokers, lenders, investors, custodians, exchanges, OTC desks and more, or meet them on Talos. Get started at Talos.com Subscribe to the Coin Metrics State of the Network newsletter 

Today's episode is brought to you by Coin Metrics, an industry-leading provider of institutional-grade, crypto market, and network data, research, and risk management products. Check out the link in the show notes to learn more. For today's Metrics Minute, we have Bitcoin and Ethereum both hitting big numbers this week. Bitcoin's adjusted value settled on chain was 15.5 billion on September 14th, the highest level since June 21st. Over the last week, Bitcoin daily adjusted value settled rose 33%. Currently, 3.5 billion, currently, 13.8 million eth is being staked or about 11.5% of all eth's supply. Since the merge last week, over 5.7 million transactions have been processed in the first 32,000 blocks on proof of stake Ethereum. That's today's metrics minute. This episode is also brought to

by Talos, powering institutional access to digital assets. And so what does that mean? You can trade on TALOS through an API. You can also trade through their web-based GUI. And you can basically connect everywhere. So this is a, think of this as a one-stop liquidity shop. So you can do spot, you can do derivatives, you can connect to prime brokers, lenders, investors, custodians, exchanges, OTC desks. You can do pre-trade, post-trade settlement. Obviously, you can trade. And they have a great leadership team. So if you are in the crypto space engaging in any way, buying or selling, you need to be looking at Talos. So head over to Talos.com to connect. Brought down by bad mortgage investments, Lehman, which has 25,000 employees, will be.

liquidated. The federal government loans American International Group, AIG, $85 billion. This is a different kind of market, and the Fed is asleep. The federal government is stepping it to stabilize Fannie Mae and Freddie Mac, the two mortgage giants that have been threatened by the housing crisis. The Bank of England has pumped 75 billion pounds more to Britain's ailing economy with a new round of constituted easing. You print a couple trillion dollars, and all of a sudden people start to worry. So out of this worry, we have something called the Bitcoin. Bitcoin. Welcome to On the Brink. I'm Matt Walsh. I'm Nick Carter. And we're live. We are recording this in Quincy, Massachusetts for Boston Blockchain

Week. Ian Kane and John from Cubic are hosting us. We're excited to do it live. We're doing it live. Yeah, thank you for having us. There's like a gigantic storm going on outside. So if you if you guys hear rain, that's because there's basically some sort of monsoon happening here in Boston. It's true. And Boston Blockchain Week is happening in Quincy because Elizabeth Warren and Stephen Lynch are so hostile to the industry. They had to go south. They chased us out of town. And so Ian is trying to save us by having this in Quincy. So we thank him. I think Quincy will be the blockchain mecca of this part of the world going forward. That's right. So I think we're going to do the podcast as usual. And then we're also going to have questions at the end.

Yep. All right. So let's dig in. So let's start it out with some deals of the week. First one up is in our portfolio, actually. I always love it when there's a Castle Island deal. So yellow card. which is an African crypto exchange. They have raised $40 million in a series B round. It was led by Polly Chain. We participated, third prime, a number of others. Congrats to the Yellow Card team. Next up, we have Sardine, a financial fraud prevention platform.

They raise $52 million from Visa and Consensus. Sardine is a good name. That's not my name of the week, but that's a good name. Next one up is Integral. This is a creator of a real-time finance and accounting tool. They've raised $8.5 million this week from electric capital, Alad Gill, and Balaji. Next up, Maple Finance, the well-known D-Fi protocol, has launched a pool, a $300 million lending fund with Icebreaker Finance, focusing on Bitcoin miners. So this is a D-Fi lending protocol, lending to real-world public businesses in the Bitcoin mining space.

Those Bitcoin miners have just gotten hammered on the public markets. it's interesting to see new capital being made available to that sector. There's a lot of pain in the Bitcoin mining space right now. And the Bitcoin miners get usurious rates in the credit market. So this is actually a welcome development for Bitcoin miners that need to lower the cost of capital. Next one up is Trace. I think that's how you say that one. That's a provider of data lakes for Web3 companies.

They raise $7.6 million from F2, Mantis, and New Form Capital. Then we have Satchel, which is a Web3 compliance. business. They raised 5 million from brand foundry ventures and others. Big one this week from Masari. This is Ryan Selkis's company, a crypto analytics business. They have raised 35 million. It was reportedly

at a $300 million evaluation being led by Brevin Howard Digital with participation from Morgan Creek, Samsung, FTX, and others. Congrats to the Masari team. Yeah, huge congrats to Selechus and the team over there. A stalwart business in the crypto industry.

And, you know, I think really aiming ultimately to be a disclosure platform for crypto assets, when and if that becomes something that the SEC asks of the industry? I just hope that Selkis is able to sell Masari or take it public pretty quickly because the presidential election is coming up and we've got to get him involved. I think that's his future, champion of the industry. He's definitely not been a secret about his political ambitions. Yeah. That's for sure. Next up, we have Vulcan forged a play-to-earned gaming platform. They raised 8 million from Skybridge Capital and others. That's my name of the week. Were you a Star Trek guy? No, I never watched it. Vulcan, that's a Star Trek reference.

Next one up is Spot. This is a Metaverse startup. They target remote workforces, and they've raised 5.5 million from Freestyle and Liquid 2 ventures. Then we have a mortal game, an NFT-based chess platform and marketplace. That's the most creative business model of the week. I think. There was 15 million from TCG, Cassis, Greenfield 1, and Cracken. Did you see that chess scandal this week? I saw some news about it, but I didn't understand it. The guy who was like the number one ranked, quit, and there's all these rumors that he's cheating, but people don't know how he's cheating.

Because there's the view that his opponent was using, like, an AI model to play chess move? There's some conspiracy around how the cheating was done, but it's unclear that there was no walkie-talkie or anything, so they don't quite know what he's a lot. so they don't quite know what happened, but a lot of things going on in that chess space. I'm sure blockchain will solve all that. I mean, I think we are at the point where the best human players are not even remotely skilled enough

to challenge the best chess algorithms. It's definitely passed the humans by. Yeah. Next one up is Hyperlane. This is a blockchain interoperability platform. There raised 18.5 million. It was led by variant, participation from Galaxy, Coin Fund,

Circle, Figment, BlockDamon, crackin, and NFX. And last deal of the week, immunify a crypto security platform. There is $24 million from Framework, Electric Capital, North Island Ventures, and Third Prime. Busy, busy deal week. So the macro might not be good, but the early stage financing market is still on fire in the blockchain space, at least. Completely. Yeah.

I mean, that's as busy as I've seen it. All right, so a lot of news happened this week. Why don't we start with some regulatory news? A lot of stuff going on with the SEC. So the SEC has reached it, well, I guess they're suing Ian Bolina for a $35 million settlement. So to get this right, I guess they reached a $35 million settlement with an ICO project called Sparkster, and they've charged Ian Belina, who's kind of this notorious crypto influencer who is pumping ICOs back in the day, and they've charged him with failing to disclose the compensation that he received for pumping these tokens.

not really a surprising one to me. Yeah, so I actually wasn't familiar with Sparkster. Apparently, that was a $30 million ICO in 2018. So Ian Belina had this project, I guess. What was it called Token Metrics? I think it was called Token Metrics, and he had these leaderboards. Yeah, and he would rank ICOs according to their, you know, whatever, investability. And one of them was Sparkster.

In fact, Sparkster got like the best grade. And the best is that the SEC filing actually has a screenshot of this. Ian's opinion, number one, Sparkster, Hall of Fame ICO. This is a Hall of Fame ICO. There's a bunch of All-Stars and some starters, some substitutes, but this one was the best ICO of all time on his platform. So basically the SEC settled with Sparkster, and then they sued Ian Belina claiming that he was pumping an unregistered security

but he did not settle, right? I have no idea. I mean, this is the guy, remember he was doing the live stream, and he said he was being hacked in real time and all of his money went away or something. Right. There's a lot of shenanigans with this guy.

Definitely not someone that we should be rallying around and saying that the SEC should go softer here. I mean, this is some of the worst behavior in the industry. Yeah, I mean, you know, like we can be critical of the SEC while also admitting that some of these blatant violations are bad. This list, man.

Do you remember some of these? Virtue poker, Eden chain, cork chain, sovereign. Yeah. Autonomy. Oh, man. The Internet of Things ICO. There's so many of these that bring back memories.

Yeah. I think the only one of these projects that's still around is Telegram, albeit in a different form now. Yeah, it was forked off. So Metronome. That was a Jeff Garzik special ICO. A lot of ugliness here.

In the case against Belina, the SEC had an interesting, they had an interesting passage on standing because the SEC said that because a large fraction of Ethereum users are in the U.S., that the U.S. has jurisdiction over the Ethereum network.

I saw that, and that doesn't make any sense to me, and I don't know why they wouldn't have just said, hey, we have standing in this case because Ian Ballina's two feet were on the ground in the United States while he was scamming people. Yeah, why did they have to do this incredibly creative interpretation of where the blockchain is

instead of identifying where the individual that committed fraud was? Makes no sense to me. So does that mean that everything that happens on a blockchain is the blockchain is present in the United States of America? I suppose so, right? I mean, there's, AWS is pervasive, so I guess everything is in the U.S. I mean, if Ian Bolino wins the case because this is a terrible argument,

I actually wouldn't be surprised. I would think that with this case, you could just go down the list of everything that he's done and just bring additional cases. I wouldn't be very bullish. I would not be taking the odds on him winning this. But there's other SEC news. This Ripple case, what's going on here? So Ripple, XRP, the token, has been on a tear recently.

They're being sued by the SEC. The allegation is that they did billions of dollars in sales to basically retail investors of what the SEC thinks was an unregistered security. This case has been going on for, I think, two years now. And so now the price of XRP is like a prediction market on whether Ripple will win this case or not. If you think Ripple will win the case, presumably by the token, and Ripple has actually had a couple of key. had a couple key wins in the lawsuit. So the judge allowed this amicus brief to be filed

that was favorable to Ripple. They did some other incomprehensible legal thing that I don't understand. And basically, it appears that Ripple investors think Ripple is going to win this case against the SEC, which in my opinion is the most important, not that I'm very sympathetic to Ripple, but I think it's the number one most important lawsuit happening in the crypto space. I guess. I mean, I've always thought that XRP was a security, so I'd be kind of surprised if they win this, but the price of ripple is actually going up right now, so maybe the market knows something. Yeah, and Brad Garlinghouse gave a talk yesterday at the Masari Mainnet competing conference over there in New York. Two best friends right there, Selkis and Garlinghouse. So there's apparently, you know, they seem kind of, I don't know, I guess the mood out of the ripple camp is,

is positive, optimistic. So stay tuned. Another big story that happened this week was Wintermute. So Wintermute is one of the largest crypto market-making firms in the industry. They were hacked this week. It was on their defy wallets. So they were hacked to the tune of $160 million.

As of the time of this recording, they've sent a message to the hacker and offered a 10% bounty to classify the attacker as a white hat and not go after them. Thus far, no response. they haven't gotten the money back. It looks like this was a brute force on the vanity addresses.

Is that your take? Not a brute force, but the vanity generator that they used was compromised. It used bad entropy. So the story is kind of crazy. The reason that they used a vanity address, which just means, you know, like an Ethereum address that has some identifying features in it, in this case, they add a lot of zeros.

They did that because it was more efficient from a gas perspective to do transactions with an address that has lots of zeros in it. So they didn't, normally you do a vanity address because you want to identify yourself to a counterparty when you're receiving a transaction, and, you know, they can know by looking at the address, oh, this is like Matt's address or whatever. So some people do it for that reason. Wintermute did it for the reason that Ethereum has a weird quirk where it's cheap. to transact on chain if there's a ton of zeros in the address.

I had no idea. And so the problem was they generated, you can generate vanity addresses just by repeatedly generating public keys and getting one, you know, you do it trillions of times, and you get one that kind of looks like what you want, and they just used a bad buggy generated to do this, and it cost them $160 million. It's crazy. I will say this. the founder and CEO, Ivgeny, has handled this situation about as classfully as you can.

I think he comes out of this looking really good for the way he's been publicly messaging and disclosing the equity on the balance sheet and what they can make good on to their lenders, which is everything. So I thought he's handled it really well. It's a terrible situation, obviously. Yeah, it also speaks to the success of that organization that they can apparently absorb $160 million loss and still be solvent and functional. It looks like it was their own proprietary capital

that was basically hacked here. People want to know why Citadel is entering this space right now. It's because a crypto market maker can lose $160 million and shrug it off. There's a lot of money to be made in crypto market making. Completely. There was some other political news about one of these pending lawsuits

another very important crypto lawsuit is custodia, which is the bank, well, it's attempting to be a bank, I guess, under the special purpose depository institution license in Wyoming, which is, you know, a new piece of legislation that was introduced a couple years ago. They applied for their master account of the Federal Reserve. After 19 months of waiting, typically the Fed is meant to give you an answer within a year. After 19 months, they sued the Fed saying that they're being stonewalled, basically. And that case is still ongoing. A bunch of members of the Senate Banking Committee, including Cynthia Lomas, have now filed an amicus brief.

So they're urging the Wyoming court to dismiss the Fed's motion to dismiss. so we're trying to we're trying to dismiss the motion to dismiss the case so basically retain the case double negative it's kind of crazy so the Fed just won't give them access to Fed wires what this amounts to so they got approved in

Wyoming to have a bank that is very friendly to crypto and the Fed is just saying well you can't move dollars through our pipes yeah the Fed even though legally from a statutory perspective the legal interpretation has always been that if someone successfully applies to a

account and they get it. And in this case, they did it under the charter, which is just very much the law in Wyoming. You have to give the decision within 12 months. And the Fed hasn't given a decision one way or the other. So basically, they're, you know, very hostile to crypto and they are bending or breaking the law in not approving or denying this application. So I've been thinking about we need to be a little bit more specific from what we want from these politics. There's two representatives in Massachusetts local government that proposed a workforce bill that I thought was really positive. Representatives, Cutler and Garibadian, to train people to be blockchain engineers. I think that's great.

At a federal level, I think what we need is an act of Congress on two key things. One would be a DFI, just decentralized financial services. And my view is that it just needs to be dead simple. And it needs to say the CFTC has oversight over DFI, go figure it out. We need the SEC out of that. The other thing I think we very clearly need is just clarity on whether or not some of these things are securities or not. And so I think the easiest way to do that would just be to say, hey, SEC, you have six months to put the Safe Harbor proposal, Hester Persis' safe harbor proposal, into action, which will give token projects two years to come into compliance,

whether there's securities or not, with a disclosure regime. So I think those two things really open up the industry to a lot of pools of, capital that are just waiting on the sidelines right now. Yeah, and if you want maybe a vision of what future legislation could look like in the U.S. at the federal level, I would look at what is happening in Europe right now. So just this week, the EU has finalized their text for their crypto regulations. The bill is called Micah, M-I-C-A, and they finally firmed up the text, although it's an evolving process. And it's pretty interesting. Honestly, Europe will now, after this goes into effect,

have far more regulatory clarity on the topic of crypto. It's not necessarily clarity you want. They're clarifying that they don't like a lot of crypto, to be clear. But so there's some very interesting regulations in there. The first one is they don't want dollar-based stable coins circulating in Europe. So what do they want, Euro stable coins? Yeah, so, you know, that kind of answers the mystery of why Circle, U.S.DC, has issued a Euro stable coin. Above a certain threshold of usage,

dollar stable coins in Europe would effectively be prohibited. People don't want regular euros. Why do they want euros on a blockchain? Yeah. I mean, like, inflation rate in Europe is shocking. Yeah. You probably want to hold dollars, even if you're European transactory. I think I'd rather

hold one of those Ian Bellina ICOs. just in a euro. So you're going to be forced all euros, assuming they get their way. Cryptoacet platforms are going to have to make disclosures to their clients, so exchanges. Well, first of all, if you're issuing a token, you have to make a set of disclosures. So this is very much a disclosure-based regime. If you run an exchange and, you know, you list Bitcoin, for instance, there is no individual that can make a disclosure on behalf of Bitcoin.

then the exchanges have to then make those disclosures on behalf of the crypto assets. Okay. If they list decentralized crypto assets. And so basically it's all about consumer protection. The Europeans want regular crypto retail buyers to be getting information regarding the assets they're buying, whether it's from the projects directly or from the exchanges that are listing them. That actually seems pretty sensible to me. It seems pretty sensible to me.

I mean, you'd want to have a disclosure regime around when early investors are rolling off, what the supply schedule looks like. That all seems very common sense, actually. Yeah, and the interesting thing is this law treats NFTs as just a broader part of the crypto market. So they don't have any special carve-outs for NFTs. A lot of people think NFTs aren't subject to securities law. They can't be securities because they're not, you know, necessarily fungible. the EU says, well, actually, you know, that's nonsense.

These kind of look like securities, and we're pretty much going to treat them identically to other crypto tokens. I think they probably have a point there. That'll be interesting. There'll be a lot of back and forth on that part. So the other piece of this law is stable coin issuers are going to have to retain a capital buffer, whether or not they are algorithmic stable coins or fully out. asset-backed stablecoins. So basically, algorithmic stablecoins are out. Yeah. It doesn't surprise me.

I mean, that was the biggest debacle in the crypto markets of the last year, and regulators hate them unsurprisingly. There's a new law being proposed in the United States that if you issue an algorithmic stable coin, you go to jail for five years. You see that? I don't know if it has any chance of passing, but might not be the worst idea. Yeah, I mean, I'm not surprised that regulators are incredibly hostile to these things. I mean, the amount of retail individuals that lost money on Terra or the secondary fallout is astronomical. It's incredible. So some personnel news this week. So Cracken founder and CEO, Jesse Powell, is stepping down, and Dave Ripley, the chief operating officer, is taking his place. What a hell of a run, huh? Jesse Powell just built one of

the great franchises. And it looks like he's stepping down to spend more of his time focusing on policy, which I think would be great for the industry to have him more engaged. Ripley's a killer, Ripley's a great choice to replace them. So, congrats to Jesse on an amazing run. Yeah, I mean, Cracken was founded in 2011, and it really was one of those original crypto exchanges along with BitStamp. I think it was founded even before Coinbase. Now, they had a tough ride. They were almost out of business, and then I would think the Ethereum, ICO, kind of saved them.

Is that right? In terms of the trading volleys from Ethereum. Now, of course, they're doing really well. But yeah, amazing run for one of the stalwart CEOs in the industry. Speaking of, I guess some people would call him a stalwart CEO. I've got my issues. Micro Strategy and Michael Saylor buying some more Bitcoin. They bought $6 million worth of Bitcoin on Tuesday.

I hate how this is always a story. It's like Michael Saylor dribs and drabs a few more bitcoins. This guy's not doing anything other than buying Bitcoin, by the way. He buys Bitcoin. He tweets about it. He's never once invested in a Bitcoin infrastructure. structure company that we know of. If I was a shareholder of micro strategy, which I would never be because it's just a Bitcoin

tracking stock, I'd really question, what's this strategy here? I mean, shouldn't you be investing around the edges of Bitcoin into companies that actually make Bitcoin more usable and bring more users in? And, you know, I don't know if this tweeting strategy is really the best thing for shareholders. I think there's a school of thought in the Bitcoin industry that the success of Bitcoin is just preordained. So it's like Bitcoin Calvinism, you know. So like why even bother building any infrastructure for Bitcoin to make it more usable or, you know, sidechains or anything? Because Bitcoin is just guaranteed to take over from a monetary perspective. I really think

Sailor probably subscribes to that school of thought. It's like a Bitcoin madrasa just brainwashing. I don't really get that. Yeah. And, you know, it's nihilistic. I mean, like Bitcoin. is code written by human beings, and the code sometimes has bugs in it, and, you know, relies on a whole financial infrastructure. Yeah, just buying Bitcoin alone is not enough, in my opinion. So the other story I want to quickly hit on is NASDAQ has come out this week, and they said that they're launching a digital assets business. It will start with crypto custody.

It looks like it will also involve exchanging. assets unclear if that's a central limit order book or if they're just running an OTC brokerage service on top of their custody platform, they're starting with Bitcoin and Ethereum. No one really talked about this week, but seems pretty bullish to me. It's interesting seeing the trend of this broader sell-off in crypto markets versus the real institutionalization. I feel like we say this every single week, but BlackRock is now in crypto in earnest. rumors are the fidelity is finally turning on spot trading at least for maybe Bitcoin.

NASDAQ is in Franklin Templeton is jumping into the fray. B&Y Mellon is now acting more aggressively. You know, like half of Wall Street is now pursuing active crypto products. It's, you know, I would say it's quite different from even a year or 18 months ago. Jimmy Diamond very much not in, though. He had some great comments around a range of issues yesterday when he was testifying, but he said that he thinks that decentralized cryptocurrencies are Ponzi schemes. Yeah, decentralized Ponzi.

Yeah. Which is funny because Jamie Diamond, he fluctuates because sometimes he'll say really hostile things. Then he'll walk it back a little bit, but then now he's walking back his prior walk back. And now he's fully against crypto again. I mean, he has a team that's working on Bitcoin custody, and he's saying these things. It's just like, how are these people still working there? Yeah, I mean, JPM has been active in the crypto space for five years. It's incredible.

I mean, so if you think it's a Ponzi scheme, why are you offering it to your customers? Okay, today in real world adoption news, helium now has struck a deal. The helium network, which is a decentralized network for basically telecoms based on this crypto protocol. so you get paid to put a little helium router in your home, has signed a deal with T-Mobile. Are there any helium miners in the crowd? I knew it. There's always helium miners.

People on helium. You run into people all the time that are mining helium. Well, I mean, it was a great business to be in for a long time. So basically, helium network doesn't cover the whole U.S. Not even close, at least for 5G. And so now they are patching into the T-Mobile network. and through their forces combined, you'll be able to get wireless.

The T-Mobile network doesn't have good coverage where I live, so I hope that this improves it. Well, you clearly are going to need to put a healing marauder in your home. You can't buy one. They're sold out. It's crazy. Really? Yeah, it's the supply chain issues. Wow.

All right. So why don't we open it up to some questions from the audience? And we'll riff a little bit. And I think we'll just repeat the question so that it gets it into the final transcript here. So the question is around the SEC's posture and whether or not this is part of a broader strategy to classify securities.

My view on this is that the SEC is going to regulate through enforcement until further notice. They believe that the Howie Test is ultimately how you would determine whether or not something is a security. And Gensler believes that everything is a security besides Bitcoin, is my view. I don't believe that that is ultimately going to be where we're going to land as an industry, but I think it will take an act of Congress to come in and say, put the safe harbor or something like it in process.

Now, to be clear, the SEC could run wild for the next five years just on the crazy ICOs and scams that happened in 2017 and 18. So you expect to see a lot more of this, I would say. But what we really need to know is what is uniswap, what is compound, what are some of these public good that are out there that a lot of people are using, that to a lot of people in the industry don't look like securities. We need to get clarity on those. Getting clarity on whether or not some IOT coin that was issued by a company that was failing in 2017.

Like, everyone knows that those are scams. Yeah, I'll just add that, you know, according to Gensler's interpretation, it's very black and white. He, you know, he likes to say the crypto industry wants clarification, but we, you know, we, the crypto industry, don't need clarification. clarification, the rules are pretty clear according to the SEC. It's just that we don't like the rules, which I disagree with. But, you know, I think if you look at the substance of what

crypto assets are, you know, it's fundamentally a different thing from like equity, basically. And if you look at the spirit of securities laws, you know, why do they exist? It's because investors deserve to know what they're investing in, and management teams have to be on honest about the nature of the company and the cash flows and the governance and so on. So clearly we need something like that for tokens, given that many tokens look to be more corporate. You know, not everything is fully decentralized. I think that's fine.

And that doesn't exist. You know, the securities apparatus doesn't pertain well to the like crypto industry. So, you know, a new, you know, interpretation of a disclosure rule that's fit for purpose is definitely warranted, but the SEC can't just define that on their own. They probably do need Congress. We need legislation for that.

Is this Congress going to come up with that? Definitely not. They don't have really the desire or the political capital to do something tricky like that. So maybe be the next one. But yeah, you know, basically under the

current situation, we're not going to reinterpret securities laws. and we're going to be in the stalemate against the SEC. I mean, you know, the interesting thing is the crypto industry can still win legal battles against the SEC, and I think they probably will do so. But ultimately, it's going to require, you know, basically new legislation to be written. So the question for our listeners is, beyond defy, what applications of crypto show the most promise? To me, the very obvious one is simply just stable coins.

I know that's not very exciting. but for folks in emerging markets where there's enormously high inflation and the banks aren't trustworthy, getting access to U.S. dollars and being able to exit the local financial system is really critical, and I think you'll see a lot of that. We're actually seeing it in countries with sort of political instability. You see stable coin usage pick up. So that's like the equivalent of being able to get access to U.S. bank account, which was a luxury good for non-Americans.

for a long time, and now anybody can do that. So that's one very addressable thing. Beyond that, I would say, actually the NFT space is really interesting right now. You're seeing, you know, this isn't something that's going to save anyone's life, but you're seeing the emergence of physical NFTs, which is basically, you know,

merchandise, products, luxury goods, collectibles, which come embedded with chips, which are linked to an NFT, That means that that, and, you know, Adidas, Nike, Gucci, Dolceo and Gabana, Prada, they're all doing this, so it's very active in the luxury space. And this means that those products can now be traded on a peer-to-peer basis, and the authenticity of the product is totally knowable and guaranteed. So it gives you strong anti-counterfeiting properties. And, you know, it's a way to demonstrate your ownership of the product digitally as well as in the physical world. So that's actually kind of exciting, I would say,

even though the NFT sector overall is selling off and the NFT markets are down, we're seeing real-world adoption by major brands of NFTs, but with much more utility. So that would be my answer. Yeah, I was going to say the physical NFT space as well. There's a few Boston companies that are working in that space. N-State is one.

Another one is Dust Identity. That's doing some interesting stuff. I think the bigger kind of more academic things that excite me the most are just the breakthroughs in privacy technologies. And so I think the blockchain space is really on the cutting edge of zero knowledge systems and things like that. And so if you look at it through the lens of where will this have the most impact on the 20-year time horizon, I think it's just financial privacy and giving people more discretion over

the types of transactions they want to make. That's a really good question. So the question is around TradFi versus Defi and basically what do you? you the most bullish on. We invest in both, so we're playing it both ways, I guess I would say. It's very clear that in the near term, traditional financial services are coming to the blockchain space in a very meaningful way around things like custody and trade execution. And so it's really just responding to customer demand to want to hold Bitcoin with a bank of New York Mellon or want to hold it with a fidelity. It's hard to imagine that that's

going to quiet down at any time. I would say the more exciting projects are definitely on the defy space in terms of just net new financial products and bringing financial services to people that historically have not had access to them. There are way more regulatory considerations on that side, though. So from a risk perspective, I think there's a lot more risk of things being deemed to be securities. Obviously, we talked about winter mute and the hack this week. And so it's sort of the wild west on the defy side, but probably pound for pound where we're seeing the most interesting startups. I, yeah, I think the question was, uh, about whether TradFi can't actually embrace Defi.

And, you know, I think there's no lack of willingness. You know, we certainly talk to these investment banks, and they're very interested in getting deployed on public blockchains and maybe deploying client assets into defy, but they are unwilling or unable to do it in this country because basically bank regulators, the OCC being really one of the main ones, tell them not to do it.

So there's no law that says, you know, a large investment bank can't touch, you know, defy. They can't put assets into uniswap or compounds. But they get informal guidance from their regulators saying, don't do it. And they're all pretty frustrated. So they're all, you know, getting into crypto, dipping their toes in. They're investing in crypto firms. they're building, you know, centralized approaches to touching crypto, but they're not really

deploying fully into it because it's still considered far too risky from a regulatory standpoint. And I don't see that changing immediately. So I would say, you know, the interesting developments I'm seeing are more from the DFI side in terms of trying to appeal to legacy finance. The way they're doing that is they're building permissioning back into DFI so that you can know who your counterparties are in a pool, you can know what the nature of the liquidity is, and you can have institutional pools of capital in DFI. So, yeah, from my perspective, the bet is more on the DFI side, the Web3 native side,

being able to actually institutionalize and put a few more guardrails around DFI. So the question is, as a venture back company, would you put strategic capital on the cap table from the DFI? or the legacy space. I think it's still worth it, you know, raising from traditional financial institutions. We certainly see a lot of that. That's one place where they haven't been shy. And, you know, that tends to be worth a lot as a financial services company, I would say.

I would say both. I think that you've seen successful stories from both sides. I think some of these large D5 projects are investing in venture-back startups that are building in their ecosystem. there's capital being deployed there. And then on the traditional financial services side, obviously there's distribution there at large scale. And so I don't see a downside of exploring both. Last question.

Yeah, so the question is, you know, what's the state of Bitcoin scaling and how's it matter our expectations? Yeah, you know, probably I would say it's much less well developed than I would have thought. four or five years ago, I thought that we would have a really robust ecosystem of side chains. You know, most of the side chain development is happening, well, they're mostly called roll-ups now. They're mostly happening on other blockchains. And there's very few that are deployed in production on Bitcoin.

I think one of the things that I hear from developers is Bitcoin doesn't support a ZK roll-up, for instance. It doesn't have the right kind of op codes such that you could build a roll-up all. on top of Bitcoin. Lightning is obviously a great network that's getting mature and more robust, but I actually don't see lightning as a scaling solution. I don't think it services one pretty narrow kind of use case, which does very well.

But it's not, to me, a generalized scaling solution. So overall, I'd say I'm disappointed at the pace. If you look at Bitcoin itself, we've had one update to the core protocol in five years. And that gave us taproot. And tap root adoption is less than 1% of all Bitcoin transactions. So the pace of development on the base layer is very slow.

And I think what does need to be built into the base layer would be more suitability to build side chain products on top of Bitcoin. If you look at Liquid, that was one of the most popular projects or one of the most touted sidechains that has very little adoption, unfortunately. So I would say where I see promise is actually in rendering Bitcoin portable to other blockchains such that you can take advantage of the local scaling solutions.

And that is what I would encourage builders in the space to do, create better ways to make Bitcoin portable such that you can use it on Ethereum, Solana, and any of the L2s on those systems. I think that's how we're going to get this convergence of being able to take advantage of technology on other blockchain. because Bitcoin itself is not going to change very much. Well, I think we're getting rained on here. So why don't we bring it to a close?

Thanks to Ian and John, the cubic team. And thanks for all you for coming.