On The Brink with Castle Island - Weekly News Roundup 10/11 (Deals, Bitwise ETF ruling, IRS, Xapo, Ripple) (EP.07)

Episode Date: October 11, 2019

Matt and Nic from Castle Island Ventures review the top stories of the week in the cryptoasset industry. This week's topics include:  - Deals - Bitwise ETF Ruling - IRS Tax Guidance - Ripple - Xapo hire - Flipside Crypto and Placeholder VC - State Street

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 quantitative 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. Welcome to the On the Brink podcast. I'm Matt Walsh.

And I'm Nick Carter. It's the 10th of October, and we're taping this early on a Thursday because I'm going to the Patriots game. Matt's a Patriots fan. And for those of you that want to banter us online, I'm a Redskins fan. I have the misfortune of being a fan of DC sports teams. That's all right. No one can have as good of a run as we've had over the past 20 years. But let's dig into it. So not as many deals this week. So for those of you who are just listening to the first time, we like to start this podcast out on Fridays with a rundown of all the deals that got announced this week.

And partially it's because a lot of people are asking us, how do I get into this industry, what companies are interesting. And this is just a good way to see which companies are raising money and which companies presumably will be making some hiring decisions in the next couple months. So not too much to report this week. There was a lot last week. This week we had a company called New Cypher. So this is a smart contract platform that is focused on enhanced data privacy. They raised $10 million through a SAFT. For those of you who don't know what that is, that's a simple agreement for future tokens.

It's based off of the Y Combinator of Safe, a simple agreement for future equity, but essentially allows you to buy tokens before they were issued, pioneered by Marco Santori when he was at Kooley. So these guys raised $10 million. It was backed by Polychain, Y Combinator, BitMain, Bitfury, Arrington XRP, Notation, and a bunch of others. The second one is not really a deal, but I think we should probably just spend a couple minutes talking about it. So in Fura, so this is the Ethereum developer platform API company. Basically a central piece of the Ethereum infrastructure. They announced that they are going to stay within consensus, which is the Ethereum studio, started by Joe Lubin.

What do you make of this one? So a lot of bitcoinsers like to poke fun at Ethereum by saying that it's really dependent on an infura. I guess I have a little bit of a different opinion. You know, I think these kinds of, this sorts of tooling is really essential, actually, for developers to pull data from and use public blockchains. Especially through the coin metrics experience, we use and pull data from, you know, 40, 50 chains. And being able to double check your work by pulling it from these kinds of ectherons. API companies is really useful. And, you know, virtually all developers will ultimately come to rely on these kinds of services. You know, I guess a lot of Bitcoiners critique Ethereum for

being costly to run a full node, which is true to some degree. I think it's important that the option remain there. You know, so it still ultimately is, doesn't price out retail individuals with commodity hardware from running nodes. But the existence of companies like inferior is probably positive overall. Essentially, do you see it as a subsidy for people that are building on Ethereum that they can access infura? Yeah, that's an interesting point that they're internalizing a lot of infrastructure costs, which might be externalized otherwise. Yeah, there's a couple interesting angles here.

There's definitely some startups they're starting to compete with Inferra more directly. Alchemy comes to mind, Bison Trails. There's a company in Boston called Pure Stake, started by Derek U. So there is some competition now. And Infura was free for a long time. It was, yeah. It just recently came out with a business model. So now they are charging, but I'm not sure.

Maybe they're not charging consensus spokes. I'm not sure. It'll be interesting to see if the nature of the way developers use Ethereum changes now that Inferior becomes commercialized. Yeah, it's also going to be interesting to see if they do other chains. Some of these other chains, particularly EOS and a few of the other ones. are very difficult to run a full node on. Yeah, that's kind of the dirty little secret of crypto.

Most normal people don't run full nodes, that's for sure. But just most users of chains like EOS in particular don't run full nodes because it really is actually quite challenging to run an EOS full node, let alone Ripple, which we'll be getting to later on the podcast. That's very difficult to run full node on Ripple. Okay, let's transition into the news. The big news this week was Bitwise. So BitWise, the ETF proposal, the Bitcoin ETF proposal that BitWise had been pursuing

has been formally denied by the SEC. And so this happened last night on the 9th. There's a lot to unpack here. So I guess the first thing is we'll just say that this is not a surprise. I think a lot of people were expecting this. And in some ways, this is a really positive because what the SEC has done here is release a 112 page explanation of why it was denied. And so essentially a full rundown of the facts and circumstances. They make reference to a number of the public letters, which were written. Full

disclosure, I wrote one of these letters in support of the ETF. We're investors in BitWise. So just to disclose that out front. And I think that this is a lot different from the Winklevoss ETF denial in the sense that the facts and circumstances on the ground are a lot different. And there's been incredible progress made in the eyes of the SEC, it appears, with some of those facts and circumstances on the ground. So if I were to summarize the main reason here why this was denied, it comes down to the spot market and the market structure behind that spot market. If you remember when the Winklevoss ETF was denied, the two big things that were called out were the lack of qualified custodians to hold the underlying, and then the lack of surveillance

and sharing agreements between spot market participants. And the custodial play is less of a concern in this denial, and it's really all about the regulated spot market. So let's dig into this. Were you surprised to say this? No, and I think a lot of the ETF watchers, you know, they've been disappointed time and again, but most of the pundits were not really that optimistic on this one getting approved.

So this isn't that much of a shock, and also there wasn't a lot of a price impact to the disapproval. So I don't think the market believed it to be a shock either. So let's dig into some of the some of the more interesting things about this denial. I think there's a couple sections that we are worth talking about. So in the letter, there's a quote that says the commission also notes that NYSC ARCA, which is the venue that the bitwise ETF were to be traded on, has not stated it has entered into or will enter into surveillance sharing agreements with those quote real spot market platforms that utilize surveillance tools. Moreover, even if NYSC ARCA did enter into such

agreements, it is not clear what ability NYSC ARCA would have to compel the sharing of surveillance data. Unlike national securities exchanges, the Bitcoin Spot Market platforms are not self-regulatory organizations and therefore do not have the legal power to impose discipline upon their participants. What did you make of this? It's interesting they called out SROs. So there is, to my knowledge there's one jurisdiction where exchanges have banded together and created an SRO, which is Japan, and you can see that they've collectively undertaken some actions like delisting privacy coins, whether or not you think that's good. You know, the SRO structure enables consistent policy to be imposed on exchanges. And of course, in the U.S., things are pretty different. There are

some touted organizations that have been set up that would like to become an SRO one day. But exchanges are still sort of warring with each other to some degree and haven't really coalesced around a single framework and for the most part are not cooperating. So the other interesting thing here is just the explicit calling out of the surveillance and agreements. So in another section, they say that six out of ten of these venues, the 10 platforms that Bitwise has identified basically lack. internal and third party market surveillance tools.

So six out of the 10 exchanges that Bitwise's analysis called a real. And so to me, this really calls out the fact that if you're a regulated exchange in the United States, you know, you should really be building towards some of these surveillance sharing tools. And it's a big hole in the market that companies like Aresax are building towards. But it's going to take a year or two, I think, to get to a point where they're alive and a sizable piece of the market. So, Matt, for those who don't know, what does surveillance sharing actually entail? So there are platforms out there. Nasdaq has one, the smart system, which essentially share data between exchanges to identify market manipulation activity. So this is not the type of thing

where I think we're going to have to see a major technology leap. This is not an impossible thing to imagine. It's really just a sign of maturity that in the crypto asset spot market, we don't have these robust platforms. A lot of these exchanges had been started as kind of retail brokerages. They're not even really exchanges. And we're just now starting to see the evolution of real technologists from the capital market space entering the space. And I think that we will see that maturation. I'm actually pretty optimistic when I read some of these things because it almost reads like a playbook for here's a great business to start. Here's a, you know, start a regulated spot market in the United States with surveillance sharing agreements. That's what we need in order to have the ETF.

So I'm pretty uplifted. And I guess the really large thorn in the side of Bitwise and the other applicants for ETFs is the simple fact that the largest spot market where Bitcoin is traded as Binance, or Binance, not sure how you're meant to pronounce it, and the largest synthetic market where Bitcoin is traded as Bitmax, which is based in the Seychelles. So the two most liquid and largest venues for the exchange of spot and synthetic Bitcoin, are outside of the supervision of U.S. regulators. Yeah, so that is clearly something that they have a problem with.

So I'll read another piece here. So Benance based in Malta in the single largest Bitcoin trading platform among the platforms that the sponsor identifies as, quote, real, representing 39% of the purported real trading volume has not registered with either FinCEN or the New York Department of Financial Services. Four out of the top 10 platforms that the sponsor utilizes accounting for 69% of the purported real Bitcoin spot volume to not have bit licenses or NYDFS standing. So this is clearly an issue. This part is going to be a little bit tricky because I don't see a world where these unregulated venues just go away. I think what we're going to have to come to is some sort of a realization

that there will be exchanges outside the United States that are not regulated. They just need to be less of a percentage of the overall market and less important is what I hope at least. And I would say crypto markets are kind of unique in this respect. that the actual clearing houses and settlement venues themselves are the blockchains. So Binance can interface with traders and other exchanges thanks to the usage of Bitcoin, Ethereum, and stable coins, which makes them super liquid and available, even though, you know, they're not connected by traditional rails. And so there's always going to be opportunities for starting up exchanges to operate totally outside of the scope of regulation because the ultimate settlement

mechanism is the blockchain itself, which is permissionless. That's right. So it's a very novel asset class in that regard. So Bitwise did put out a tweet storm, which I thought was overall very positive. We'll put the link in the show notes. It calls out that the SEC did have some issues with some of the analysis that they had presented as part of their support for why this should be approved. I think that all of those were constructive and they'll presumably take that feedback into account. There were some issues with the gathering of comprehensive market data that made it difficult to prove the existence of real versus fake volume. The SEC called out that some of the volume on Hwobi, you know, is legitimate. The data scraping methodology broke down frequently,

but, you know, a lot of that is due to the fact that the API connectivity to a bunch of these on licensed venues is difficult. Maybe the only part of this SEC denial that I really had a big issue with was how much importance they put on coin market cap. So I'll read this part. The commission also notes that while the sponsor asserts that coin marketcap.com is the most widely cited source for Bitcoin volume as of October 6, 2019 coin market cap does not separate real versus fake platforms and prices.

This shows that the focus on the sponsors identified real platforms are. a subset thereof to the exclusion of the vast majority of platforms with reported volume on data aggregators such as coinmarketcap.com is not necessarily shared by those participants in the Bitcoin market market. And to that, I would say who cares what coin market cap does? Yeah, this is pretty vexing because the SEC here is focusing on coin market cap in their belief that the kind of junk data being aggregated on coin market cap is somehow influencing the Bitcoin market. And this is a little bit preposterous to me. me. I mean, coin market cap is a website which does not really abide by any standard, as far as I can tell.

And they exercise very little discretion in terms of what data they include, which means that some of these really shady exchanges like to populate corn market cap with junk data to advertise their purported liquidity. and with the ultimate objective being to charge listing fees to token issuers and to attract traders. And so, you know, this has been the state of affairs as long as crypto markets have existed. And the fact that these shady exchanges have an incentive to pump fake data and corn market gap doesn't really change anything material about the market. It just means that coin market cap is not to be trusted and, you know, shouldn't be taken too seriously. It shouldn't be taken seriously at all, and it's not a data business. It's a portal that makes money through advertising and makes money through charging exchanges to have their site kind of connected. And so, you know, it's just not a data company. And the less emphasis that they have in the market, the better. You know, there's also issues around crypto hedge funds that are still using coin market cap to mark their P&L at the end of quarters at the end of months, which is a huge problem. I mean, that data is so easily manipulated. So that shows a lack of understanding of what's actually going on here with real institutional caliber data sources.

Yeah. And the fact that, you know, a significant fraction of the data reported by coin market camp is fake does not render, you know, the trading volume fake. The volume never existed in the first place. So we just have exchanges reporting false numbers and everyone is shocked when someone like a bitwise says that 95% of that is fake. it just reflects on a mistaken assumption in the first place, as opposed to the markets being somehow invalid. Okay, let's move on to the next story. So IRS in the news this week. So the IRS published guidance this week on virtual currency transactions. Mixed bag here. I think the guys over at CoinCenter did a nice analysis, Fortune also covered the story, a few things to dig into. So right off the bat, fair market value and cost basis. So it looks like we got some clear guidance here. This part of the guidance seemed to essentially just say how you would mark your

cost position on cryptocurrencies that you've purchased. Pretty non-controversial. Haven't seen too many people have an issue with that overall in that positive. There are some other language in there around accounting standards. So the guidance is that taxpayers can use specific identification in terms of, you know, you'd mark individual crypto coins coming in. So if you have 10 bitcoins, you account for them individually. You can use that specific identification path, or you can use first in, first out, so FIFO method, to determine gains or losses. So that's a pretty sensible clarification. I think that's been kind of a pain point for people in the past.

Now, where this gets really tricky and where people have an issue with it is the guidance on hard forks and on airdrops. So did you take a look at this? Yeah, and people have been gnashing their teeth over this. I will add the caveat that the lawyers are still somewhat hashing it out to determine the full scope of this. But the gist of it seems to be that you have a taxable income the moment that any new coins from a hard fork or airdrop are recorded on the blockchain. And can we just start with defining a hard fork? Well, it's not exactly the easiest thing to define. But just so folks understand.

what a hard fork is. I mean, this would essentially be a crypto asset that has a community shift, which results in two versions of the underlying asset being created. So historical examples of this have included Ethereum versus Ethereum Classic, where a group after the Dow decided to keep the main chain going, and, you know, Vatelic and the rest of the current Ethereum crowd forked off, and that became Ethereum. Similar thing has happened with Bitcoin and Bitcoin Cash. And so the guidance here from the IRS is, and I guess maybe before I dive into the guidance, it's important to note that in the event of these forks, if you have an asset on the first chain, you will also have the same amount of the asset on the second chain. Unless the developers program it differently, but that's the standard way.

Fair enough. Fair enough. And so you have one Bitcoin, you also have one Bitcoin cash. What the IRS is saying, is that in the event of a fork, you will have taxable income at the time of the fork, which, okay, fine. So you get one Bitcoin cash, that's taxable. Fair enough. However, a lot of complications. Yeah. So the first one is that there have actually been hundreds, if not thousands, of Bitcoin forks.

So what the IRS is implying here, and this is coin center's interpretation, is that you, the taxpayer, are responsible for somehow a cashier. counting for all those forks. And those are all, they all constitute taxable events. So you can't just ignore them. Yeah. And there is no barrier to entry for forking, which is the other issue. So say that we get off of this podcast and decide to fork Bitcoin and create Castle Island coin. And everyone that has a Bitcoin has a Castle Island coin. And then we find some shady venue to trade Castle Island coin. And the first trade goes off at $200 a coin. Everyone who has the Castle Island coin, by the way I read this interpretation would have a taxable income of $200.

So we have just thrust a taxable event on everyone who holds Bitcoin just by virtue of us creating our Castle Island coin. So my guess is that the IRS will eventually realize that this is far too owners as standard and this will not become the default because you can have imposed upon you without your knowledge a taxable event. And there's a lot of issues here. So one of the issues is that it's hard to define which side of the fork is the original asset and which one is the new one. So in fact, people really, really disagree about this stuff.

So with Bitcoin and Bitcoin Cash, lots of people on the Bitcoin Cash side, you know, think they're more consistent with Satoshi's original vision and so on. And that they're the true Bitcoin and the other Bitcoin is, you know, the imposter. The same with Ethereum and Ethereum Classic. Ethereum arguably was the fork in that instance because they made this somewhat arbitrary ledger change to invalidate the Dow hackers' coins. We're not getting into that right now. And Ethereum Classic basically kept on with the status quo with Ethereum being the fork in that instance. However, you know, Ethereum ended up being worth a lot more than Ethereum Classic. So that would have been a really monstrous taxable event if you were an Ethereum Classic fan.

So that's one issue. It's that there's no, you know, stable ontology for blockchains. These things can be pretty malleable. And it's actually open for debate, you know, which side of the fork is the legitimate one. Obviously, I think the Bitcoin that trades under the ticker BTC is the sole Bitcoin, but lots of people disagree. And in the case of other assets, which have a less stable kind of social consensus and value system, there are very legitimate disagreements to be had about this. So the IRS, I don't think has given money. thought to the fact that these, to some degree, are social institutions, and it's not 100% clear which side is, you know, the legitimate side. Yeah, I think that's a great point. Preston Byrne, who is a lawyer, I thought had some interesting comments on Twitter just around. It would really come down to like the activation of the fork is kind of the most common sense way to go about this, is that you should not have that tax imposed upon you unless you have chosen to participate in said forked network and done in economic. transaction, which my guess is, like, that's probably what the IRS was trying to do here. They just

weren't very clear. Yeah, there's the letter of the law and the spirit of the law, I guess. And Preston seems to think that the common sense interpretation here is actually a lot more likely to pee the outcome. Yeah. So overall, I mean, people are up in arms about this, but this is pretty good, right? I mean, the IRS is not like they're coming in and saying that Bitcoin's illegal or, you know, Bitcoin is taxable in some crazy way that makes it difficult to comply with. This is not super clear, but all in all, it's not terrible. What I would have liked to see would have been a carve-out for kind of, let's say, petty cash transactions to exempt them from taxation, say if you're using Bitcoin in a

transactional way to buy some good or service under, you know, some threshold, like $500. Yeah, Coin Center was pushing for $600. And we didn't get that, unfortunately. So that does mean that your Bitcoin purchases are still taxable. You have to look at your capital gain when you make a purchase and you sell your Bitcoin for good, essentially. Yeah, good for the crypto tax prep companies. Okay, moving on, PayPal was in the news this week. So PayPal has become the officially the first company to withdraw from Facebook's Libra Consortium. So Visa and MasterCard were rumored to be on the edge last week, and PayPal is the first defector. We were surprised? Well, maybe a little bit given that David Marcus is a PayPal alum and showed in theory, have had warm relationships with those guys, even though he's still at Facebook now. But to some degree, you know, PayPal and Libra are kind of competitive.

I was always a little bit surprised that they're in the consortium to begin with. Yeah, I wouldn't be surprised if PayPal has a couple things up their sleeve here. They have a leadership team that's been really close to the action on a bunch of these projects. they seem really well-informed. You know, they could have an interesting play here with some sort of a stable coin themselves at some point. And I think the original vision, so to speak, was for them to be more than just a payment processor,

but to actually create a kind of a global currency. Sure was. Yeah, that's exactly what it was at the outset. So you could interpret Libra as the fulfillment of that vision. Yeah, that's an interesting way to think about it. I think that's right. So it looks like we have some congressional hearings coming up and Zuckerberg will be testifying in the next week or two here. Did you see that?

And all of the congressmen are going to get their chance to get their Instagram moment and get their lumps in on Zuck. So there should be some fireworks. Yeah, we'll have some good sound bites for sure. We'll have some good podcast fodder when that comes up. Did you see the news that Zappo hired an open source Bitcoin developer this week? Yeah, and this is really encouraging. They've had, I think it's Anthony Towns on staff there for a while with his mandate being to contribute to Bitcoin Core. This is more commitment to, you know, just contributing to the project without trying to exert any deliberate policy in terms of how the developers are spending their time.

And I think this elevates Zapo into the tier of organizations that employed multiple Bitcoin core developers. I think they're about six of those now. So it's actually quite distributed. Yeah, so who else? So we've got chain code, of course, Blockstream, MIT. TDCI, Square Crypto, and also Digital Garage. People don't know this, but the Japanese-based digital garage employs a couple Bitcoin Core Devs. So a lot of people used to complain about Blockstream controlling Bitcoin. The reality is that, you know, with the emergence of Square Crypto as well,

it's becoming more and more distributed, the organizations that employ core devs to contribute to Bitcoin. Yeah, and those groups that you mentioned are doing such good work for the overall ecosystem here. MIT DCI had a great conference last weekend that we took part in. Chain code labs actually put out an outstanding open source curriculum around Bitcoin protocol development this week. So we linked to that in our newsletter, but just some great work happening at all these places. And some of the corporations that really benefit from Bitcoin also indirectly contribute. So Fidelity contributes to the DCI.

They don't employ developer directly. You know, I'm a little disappointed that Coinbase, for instance, I know they had a developer on staff whose mandate was to just work on Bitcoin, but he left. So Coinbase right now does not, to my knowledge, actually give back, really, to the Bitcoin core developer community. Oh, is that right? I thought that they were trying to backfill some of those positions, but yeah, it would be nice to see really anyone who's building critical market infrastructure in the space. You should think about hiring some of these folks and supporting them. Yeah, I mean, ultimately, these organizations are dependent upon the underlying open source projects, and to some degree, they owe these projects debt.

And I'm a little bit shocked that some of the larger exchanges haven't created a sponsorship program yet. The best thing about this is that these people are so accessible. I mean, they're really, some of these developers will just, you know, hop on the phone with you, get into a room. and they're really helping people that are building some of that infrastructure. John Feffer is actually another one that I guess we should call out. So he's sponsored some great work in the open source community. And that group has done some excellent work, particularly with the exchanges and the custodians. And if you haven't read John's seminal piece on Bitcoin and how to value crypto assets,

that comes strongly recommended. Definitely. So let's transition from companies that are doing awesome. things to the ecosystem to companies that are just doing terrible things for the ecosystem and talk about Ripple. What an intro. So you all know Ripple. Ripple is a company that ostensibly sells software to, I guess, do something similar to Moneygram or PayPal, but they also sell this coin called XRP, and they've sold it in bountiful quantities since inception. And, Ripple isn't really decentralized the way that Bitcoin and Ethereum are, unfortunately.

I know a lot of people will disagree with that statement, but in practice, the ledger itself is on the order of terabytes. I think it's north of 10 terabytes now. And most people that query the Ripple ledger, they do so through the official Ripple website. So Ripple is undergoing this process of trying to sanitize its reputation to some degree, especially as Libra has come of the fold and a lot of policymakers have started to wonder whether there should be corporations that mint their own form of money. You know, the interesting thing is that they were fixated on Libra, but they sort of ignored Ripple so far. And Ripple is a U.S. corporation that is minting their own form of money, namely XRP. And XRP has been super volatile. I think it's about 30 cents

right now, down from a peak of about $3. And in fact, it hasn't really recovered all year. So it hasn't shared in the recovery. So Brad Garling hosts the C.E. CEO of Ripple did a fortune interview this week where, you know, he bashed Facebook for a while and said how a bunch better Ripple was than Facebook's Libra, so, you know, whatever. And then he casually asserted at the end, the XRP ledger existed before Ripple, the company. Certainly, we are an interested party in the success of the XRP ledger for sure. We own a lot of XRP. But it's a little bit like saying Exxon owns a lot of oil. That doesn't make oil a security. So that's an awesome sound bite. Like Brad really rehearsed that for sure, but totally not true. Yeah, it's just,

I mean, it's just not the case. And even if it were the case somehow that they'd stumbled upon the XRPs, you know, maybe they found the private key in the woods or something for the 100 billion XRPs, that wouldn't really materially change anything about the fact that they sell XRP to retail investors the world over. And the way they induce them to buy XRP is by essentially bribing companies, to put out press releases saying they're going to use Ripple for something or other, but then you discover beneath the surface that they're not going to use XRP at all. They might just be using the Ripple software. So this is their model.

They pump the price of XRP by putting out these favorable press releases, which are paid for with XRP grants or investments for these companies. And the outcome is that the price reacts favorably much of the time because it's like a constant stream of dopamine hits for the Ripple investors. And, you know, it's like a never-ending cycle. It just goes on and on. So there's this great scene in The Godfather when Michael is taking K for a walk and he says, in five years, the Corleone family is going to be completely legitimate.

That's all I can tell you about my business. And, you know, that's Ripple. They're trying to diversify away and become a legitimate franchise. they'll probably end up buying a bunch of companies, but it's not like they discovered XRP. Like, what is that about? So let's go through the timeline. Preston Byrne laid it out. So we strongly recommend you read his article on the topic.

And he says, you know, the gist of his piece is that, you know, actually XRP, you know, was really created by the corporate entity, which later became Ripple. But there absolutely is continuity there. So let's look at the timeline. 17 September 2012, Arthur Brito, Jed McCaleb, and Chris Larson sign an agreement saying that they'll divvy up the, they call them credits, the 100 billion credits in a future ledger. So this is put in the future tense. So it's basically they're agreeing collectively to split up the credits that they ultimately create. And then Ripple is incorporated, but the company is first called Newcoin, then it's renamed to OpenCoin, then it's renamed to Ripple Labs.

And then Ripple Labs is actually folded in as a subsidiary into the thing that's currently called Ripple Labs. So there's absolute continuity there in the corporate sense. And then a few months later, 1st of January 2013, the first official ripple XRP transaction occurs. This is when the ledger is incepted. This is when it's initiated. And if you want to double check this, you can go to Coin Metrics, open the Ripple, ticker at the bottom there. Look at transaction count. The first transaction is on the second of January 2013. So that's when the ledger began. And then the XRPs that had the agreement had existed for the

assignment of those XRPs, you know, was triggered because the ledger was created. So the ledger was created subsequent to the creation of the corporate entity. It was not, as Brad Garlinghouse says, just discovered or it was not a donation. They're not just an interested party in the success of the XRP ledger. They don't just happen to own a lot of XRP. The Ripple leadership, the current leadership were the ones that initiated the entire thing. And it looks like that is subsumed within the standard corporate activity there. So unfortunately, I think these guys are probably going to get away with it. I mean, given at least if you look at what happened with the EOS, I wouldn't be surprised if this ends up being a mild slap on the wrist.

They have Mary Jo White, former SEC commissioner, working as their external counsel. I mean, these guys will probably just get away with it. Yeah, that's the default assumption that we're working with right now. And we see these guys at fancy events in Washington all the time, you know, rolling out the PR people and the lobbyists. Ripple is also intertwined with New York State in that, They were part of the reason the bit license was created in the first place. So trying to raise the regulatory barriers to entry.

So we could go on and on about Ripple, but suffice it to say that we just found this fortune interview to be completely a joke. It's just absolutely comical. Like, regardless of whether XRP is ultimately described as a commodity or not, they did not discover XRP flowing out from the ground beneath their fields. XRP is a virtual asset, which was created at the behest of the ripple leadership. Yeah, and don't interpret this like we're just trying to bash a company that we don't like in this industry. There are so many good actors in the cryptocurrency space, and having instances like this just really brings the whole industry down, where you have someone who's outright just posturing something that's not accurate. A lot of bad actors, too, unfortunately, and we've seen that

countless times with the BitConnects of the world and a lot of these ICOs that were just unregistered securities offering. So our stance is that we'd love to see innovation thrive, but under the right circumstances and with good actors. And that's not what we're seeing. But let's move on. So maybe the last story to cover this week. So there's a good spirited debate between a couple of our friends the past week here with Dave Balter at Flipside Crypto and Chris Berniske at Placeholder. Did you catch that one? So Chris stepped into the friend. here wrote a blog post called Protocols as Millie Extractive Coordinators. Yeah, it kind of started with Dave's post, actually. So he wrote a post called Decentralized Network, Question Mark, Protocol,

question mark, foundation, question mark, blockchain organizations or businesses. And he basically argues that public blockchain networks that are centrally launched need to figure out a path to monetization if they're going to remain viable. And I think, you know, part of this was, you know, him seeing some of these platforms like steam that really are collapsing because they don't have an economic model to support themselves, despite the fact that they're protocols. And so what Dave's arguing is like you need to think like a business in order to be long-term viable. And there's a big tension in the industry between the people that want to believe that a lot

of these protocols are truly, you know, truly, you know, Dow like as in their decentralized autonomous organizations. They don't need a corporate entity to steward them. and the tokenomics themselves can be sufficient fuel for the network to work. And then there's maybe a slightly more pragmatic bunch, of which Dave is in the latter camp, you know, believing that actually if you think about these in business terms, that's maybe more conducive to long-term success. Yeah.

And so Chris is trying to make the point, I think, that, you know, these are not businesses. We, you know, he says Bitcoin doesn't have a balance sheet. So, you know, agreed on that. a bunch of these protocols, particularly the ones that are trying to be money, Bitcoin being the leader, are clearly not businesses. But I think where I disagree maybe with Chris's assertion that they're minimally extractive coordinators and not businesses is that these things, a bunch of them are being invested in as if they were businesses. So they're going to have to, absent just becoming a global money that people use, a global private money, if a venture fund is buying 10 to 20, 20% of the tokens for a pre-launch for a tokenized network, like they're going to expect a return there. And that looks like a business to me. And if they believed that any extractive or rent-seeking

mechanisms would be forked out by the market, then they wouldn't invest. Yeah. But we've seen a lot of investment. I think most of these venture funds are aware of the fact that many of these protocols do have business models, essentially. So, you know, some mechanism to extract or, you know, siphon value, not to say pejoratively, but it absolutely happens. So compound, I think, has a tax in every transaction, you know, like maker, there's a kind of a cash flow element or capital return to the holders of the MKR coin. So for the most part, the really successful quasi-corporate entities or protocols here do have some. some intention to reward themselves financially. I mean, otherwise, why would you create these

things? And I think that's with the understanding that network effects actually make it very difficult to fork out, you know, to just say, okay, we're going to create the maker Libra or the alternative to compound here. In fact, you know, most of these systems actually do require stewardship of some type. You know, there's often oracles to be maintained. Someone actually has to negotiate with regulators much of the time. It's definitely been the case with Maker. These things aren't quite yet ready to just to live as code. I think they do require some stewardship much of the time. All right. We'll be back for another episode next week. Keep an eye out for Monday. We're going to have an interview with John Betcha. I butchered his name terribly when we interviewed him. I felt

really bad. Known him for a while. But John Betcha from FS Vector, formerly, the General Counsel and head of regulatory at Circle. We'll join the podcast on Monday for a great interview. So we look forward to that. And everyone, have a great weekend.