On The Brink with Castle Island - Weekly News Roundup 1/10/20 (AMA Fallout, Telegram, Deribit, SEC news and more) (EP.32)

Episode Date: January 10, 2020

Matt and Nic from Castle Island Ventures review the top stories of the week in the cryptoasset industry. This week's topics include:  - AMA predictions fallout - Deribit moves to Panama - Telegram blog post and much more news of the week

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. Bitcoin. Welcome to the On the Brink podcast. I'm Matt Walsh. And I'm Nick Carter. And Nick, we are back after the AMA episode. I think that went well, except I had a terrible prediction at the end of it that the Patriots not only going to win the wild card, they're going to win the divisional, the F.

championship game, the Super Bowl, and that they were going to beat the Eagles in the Super Bowl. And it turns out that that is not going to happen. Literally both of those teams lost. And we recorded the episode on a Friday, released it on a Monday. So by the time the listeners heard this, it was already wrong. You ever make a prediction so bad that by the time it makes it out to the public, it's already been invalidated? Yeah. That was the first time that's happened to me.

My prediction, I'm still sticking with it. Ravens 49ers Super Bowl. Ravens to carry it. Lamar Jackson, Super Bowl MVP. Well, I just have more time to read Reddit cryptocurrency forums and not pay attention to sports for the next few weeks. I got to say, though, I'll give Matt some props for actually coming into work on the Monday. Normally, Matt will take the week off after the Pats lose. When the Pats lost the Super Bowl, both times actually to the Giants, I was living in New York City, and that's a tough, that's a tough time.

That's a tough Monday. Tyree helmet catch. Yeah, I don't want to talk about it. But next year, we just need to resign Brady. let's just run it back. He's going to be approximately 53 years old at that point. He will be 43 and that is fine. He's playing great.

The other thing that came out of that AMA is it turns out that the IOTA people don't like us very much. We were talking negatively about their asset. We said it doesn't make any sense. You know, it's just so unlike us to trash a like third tier token. We would never do such a thing. We're normally so charitable towards these things. Usually very charitable about companies that have issued a token that sort of looks like an unregistered security that probably is going to have a lawsuit coming at some point.

Usually we're pretty good about those. Yeah. So I don't know why we provoke the IOT Army. What did we even say that was so bad? I think we made some comments about the fact that they rolled their own hash function and the DCI incident and the fact that their whole army of trolls basically is just a bunch of narrative wills. I think we also called the token incoherent by its very nature. But, yeah, I don't know why they'd be offended by that. Yeah, I'm not sure.

So, guys, you know, no offense, but, you know. What does Iota, what does it even stand for? I think it stands for, I objectively think a lawsuit is coming. Anyways, I think the AMA was generally well received. Yeah, we'll do more of these. Why don't we roll into the week's top stories? A couple deals this week. So as I thought a bunch of these deals were kind of sitting, waiting for the new year to come around.

Tax Bit, a cryptocurrency tax software company based out of Utah, raised a $5 million seed round from TTV Capital, Dragonfly, Collaborative, and a number of other funds. Securrency, which is a security token compliance platform, they raised a $17.6 million series A that was led by Wisdom Tree. and it had participation from the Abu Dhabi Investment Office and RRE and a few others. So this is an exciting development to see Wisdom Tree leaning more and more into the crypto asset game. There was a coin desk article that talked a little bit about their exchange traded product ambitions, both in the United States and internationally. So I continue to think that there's a huge opportunity for investment products in this space. And it seems like Wisdom Tree is leaning further and further into it.

Yeah, that's a very wise and arboreal decision overall. Moving on. Really good pun there. So a couple of SEC items this week, small ones. There's a company called Longfin, which is a small cap company who stock sord back in 2017. They had some news at the time that they were acquiring a blockchain company. There was a settlement reached this week with the CEO of that company. to pay $400,000 in penalties related to a reggae offering that they did that year.

There was also a lawsuit filed against a guy named Donald Blackstad for a cryptocurrency mining scam. It's how many of these have we seen over the years? And so it seems like this guy raised a bunch of money and spent it at casinos, restaurants, and hotels. And turned out he was not mining cryptocurrency with it. So cloud mining, just don't do it. Don't do it. But, you know, this use of funds actually seems pretty consistent with all of the other cryptocurrency mining scam companies that I've seen over the years, you know, casinos and restaurants and hotels. That's kind of the use of proceeds that you'd expect there. Sounds about right.

In other news, Deribit, which is a Dutch crypto asset derivatives exchange, announced that they will now be operating out of Panama. And the reason is that there are some EU regulations going into effect around anti-money laundering, What did you make of this story? Yeah, Derbid is, I'd say, the most popular crypto options exchange by a large margin. They were based in Amsterdam, as I understand. Traders really seem to like them, but, you know, it seems like that the honeymoon period has basically come to an end here.

Very much unsurprisingly, a lot of people forecasted that this EU anti-money laundering directive, which is due to drop in February, I believe, was going to have a lot of shockwaves. and, you know, Derbitt's one of the first casualties. It'd be really interesting to see what happens to Binance, actually, based in Malta, which is part of the EU, whether they can kind of escape the, you know, some analysts are actually forecasting that Binance might be chased out of Europe. Interesting. Thanks to this anti-money laundering directive, which appears to be quite onerous.

Yeah. I wonder if we'll start to see more and more of that. I mean, this category of exchanges, obviously, is not necessarily gearing towards a an institutional customer base per se, although there are actually a lot of institutions that trade on them from offshore entities. But it's, you know, it's an unregulated exchange and to some extent they're just going to be playing this regulatory arbitrage game as their local jurisdictions become more and more aware of those activities, I would imagine. My favorite thing about Deribate is that they hired Hasu and Suzu to write content for them. Those are two of the best content.

producers in the game. Yeah, and their work for Deribit Insights has been really solid so far, so definitely check it out. You know, similarly, Bitmex, which is in this category, I mean, they put out outstanding research. I think BitMex research is the best sell-side research desk in the industry. Yeah. The number one. And BitMex also sponsors Bitcoin Core development. So BitMex sponsors Fanquake, aka Michael Ford, who actually just got upgraded to being a maintainer of Bitcoin Core. I had the chance to meet him the other day because he passed through Boston. So Michael not only writes code for Bitcoin Core, he also runs a farm in Australia in kind of the Perth region, which is like absolutely the middle of nowhere, literally thousands of miles from the near city

because it's the west coast of Australia. And he also has a business which creates software that farmers use for their tractors, I guess. I did not know that. So you're real like salt of the earth guy. And it's, you know, it's like funny because you have the, the farming, which is like, you know, actually creating food for humans and then a very abstract career in terms of Bitcoin core development and then bridging the gap in terms of creating software for farming. So I kind of like that. I like how you pieced all that together. But what an idea meritocracy of this industry is, right? Totally. Totally. Just rising up, you can just start contributing to these open source projects and, you know, can just go from there. Yeah. And I think the bit

MX model is great because they obviously benefit from the existence of Bitcoin. They have a strong interest in making sure the Bitcoin is stable and works and so on. So not only do they produce really great research, they also run some reorg monitoring through BIMX research. Johnny over there does a great job pretty much as a one-man show and obviously sponsoring CORE dove. So I think that model makes a ton of sense. I think some of the other big entities that benefit from the existence of Bitcoin could

definitely take note and consider doing something similar. Sponsoring core development is just one of the most important things going. We sound like a broken record. We talk about this all the time. But some of the work that chain code is doing, some of the work at the DCI is doing Square Crypto, a number of other entities. What's interesting is, you know, I will often talk to, you know, core devs that are active on the mailing list and whose ideas get a lot of currency in Bitcoin Core.

and they still can't find sponsors for their work on Bitcoin. So, you know, it's funny because, like, oftentimes businesses will complain that there's a shortage of devs to sponsor. But I honestly don't think that's the case. I think there's more than enough to go around. There seems to me maybe a coordination problem there. Yeah. Why don't we talk a little bit about Telegram? So Telegram, as a lot of the listeners will know, is the messaging company that conducted a $1.7 million pre-token sale, so a SAFT, simple.

agreement for future tokens. They did this in early 2018, really at kind of the height of the craziness, maybe towards the tail end actually of the craziness. And they released some guidance this week on how the network would work. And it was, to me, it just sort of read like a response to the fact that the SEC has issued that injunction, that order to halt their public launch of their token sale. And really, the post is attempting to define what this cryptic asset will be and what it won't be. And so in my reading of this, they sort of took the how we test and they tried to methodically define how their asset would work such that it would not qualify as a security. And I think this is going to be interesting to see how it plays out with

the SEC. Obviously, this is an ongoing lawsuit right now and there's all sorts of depositions happening. And by the way, if this thing had launched, this is a huge potential retail dump that could have happened with the VC sellers coming into the market. So SEC, I think, was probably right to slow this down a little bit and to let it play out. But did you read anything into this blog post other than the company just trying to make sure that they do not qualify as a security? Yeah, to me, it really gets to the heart of the paradoxes involved in a token sale. Because you read this post and telegram saying stuff like, you know, we have, no commitment to support the network in perpetuity. And, you know, we actually will try and

remove ourselves from authority, positions of authority in the network post-launch. So we're not committing to support the network in perpetuity, which is clearly designed to diffuse this efforts of a third-party prong of the Howie test. And then there's also, you know, passages in there about how the blockchain, their telegram, the Grams blockchain, won't actually be natively included in the telegram messenger, which is actually kind of baffling because, well, maybe not baffling, but it kind of contradicts a lot of the narratives that are going around back when the token sale was going on, that telegram would be able to leverage their enormous distribution network.

And ultimately, you can definitely tell that this is crafted to avoid Howie issues. the paradoxes might be too difficult to bear because if you take this messaging from them at face value, they're essentially saying, you know, we're not committing to develop a software, we're going to seek to quote-un-unquote decentralize, we're not even going to include it, and we're not even going to give it the benefit of our distribution network that we have here. It's like they, you know, imagine if you were looking at the IPO prospectus for an actual startup, and they said, yeah, you know, we're actually not going to work on the product. after the IPO and, you know, we're going to cease R&D efforts and we're not going to do marketing and so on.

I mean, it's like Telegram's kind of hamstrung by the restrictions here, but it's also speaks to almost the impossibility of launching a new blockchain in the U.S. or, you know, a VC-backed chain for which you've sold, you know, rights to those future tokens. So it might be the case that that window has closed for new launches. Yeah, I just don't, like, how are these things? actually going to launch unless there's some clear delineation from the SEC that there's a path forward. I don't know that any of these safs are actually going to be able to transmutate until we get past this kick and telegram fight and figure out what the rules of the road actually

are. I'm increasingly of the mind that EOS might be the last big smart contract platform to get the safe harbor. They might be the last ones. Remind me about EOS timing-wise. Was that before the Dow report? The sale began before and lasted for a year. So from what I recall, it went from spring 2017 to spring 2018. Yeah. I mean, that one... So it began before the Dow report, but it continued after. The networks that started and did their ICOs before the Dow report,

you could imagine a world where they get grandfathered in and get the Ethereum treatment. Yeah, totally, totally. Yeah. But of all of the ICOs that took place after July 2017, I think they're really going to struggle here. Yeah, I think so. And one path that some people discuss is just becoming securities, actual securities, and that's just realistically not going to be possible on these networks. Not with a globally distributed token holder base.

No. That's completely unrealistic, which is why I think you start to see a lot of these venture firms that have invested in them being quite active and trying to push the SEC to do something. So we'll see. But I wouldn't read too much into it. There's definitely some people on crypto Twitter that were panicking, and you could tell that they were investors

in the token, and they were panicking that the team's not going to work on this, but they were just putting out that to make sure that they're not a security, I think. Well, keep in mind that Telegram sent out a proposal to their investors to get the money back. Yeah, something like 70 cents on the dollar. And they all said, no. And you know, that really made me think about prospect theory, you know, where you become risk-seeking when you face the prospect of loss. Right.

Kind of the infamous behavioral economics finding. So the investors were looking at a guaranteed loss, and they essentially said to telegram, no, roll the dice. Yeah, I think they did that within the band of a certain amount of time. And so there's still going to be that option to get some sort of a refund if this thing doesn't launch. We'll see. It probably won't be as high. Why don't we talk about Cracken a little bit? So Cracken released their 2019 Global Law Enforcement Disclosure Report.

I really like this report every year that they basically come out and they say we had X amount of information requests. They're from these countries, these agencies, and here's what they were asking for. To some extent, they don't get into a ton of details. But the headline numbers here are that there was a 49% increase in requests. over year, a total of 710 total information requests, IRS, FBI, all sorts of state agencies, DEA, DOJ, certainly a big increase year over year, and to me highlights some of the compliance overhead that is necessary to run one of these regulated exchanges, certainly in the United States. it looks like it's expensive.

Yeah, this is kind of a staggering amount of overhead that they have to incur. I mean, these requests cannot be cheap to honor. Yeah, 62% of all requests resulted in data that was provided on the clients. 28% according to Cracken were requests that were, quote, not valid. So they did not meet the local legal requirements. and basically they felt that they should not have to honor them. So I hope that Cracken continues to do this report. I think it's very informative and at least gives you a little bit of a pulse

onto what's going on at the agency level for some of these agencies in the United States that years ago we didn't have this type of a pie chart. It looked a lot narrower where you had potentially just the FBI and the DOJ, but it's certainly increasing across the board. Yeah, this makes me think that the kind of the mom and pop era of launching an exchange out of your basement is totally over. You know, you kind of need a compliance officer from day one now. Oh, definitely. No doubt about that.

And the expectations and just the regulatory overhead are much greater these days. And I think that, you know, says something about the maturity of the industry. And, you know, as we're finding out, a lot of these exchanges that we're kind of jurisdiction hopping are going to find it much harder to operate. I think so. Did you read Fidelity's 2019 Bitcoin Retrospective written by Director of Crypto Asset Research Rehobatoria? Yeah, I thought it was just fantastic. By the way, what an awesome title, Director of Cryptoasset Research. I think that this is a title that every asset manager will have in five years and just a lot of them don't know it yet.

Yeah, it's a job that what? Fewer than Half Dozen people have in the world right now? Yes. But probably every major bulge bracket financial institution will have one in a couple of years would be my guess. Agreed. So we have the link in our newsletter, but the piece gets into infrastructure developments, investment product landscape, goes deep on that. Talks about the on-chain usage of Bitcoin. It's really data-driven. I thought it was super well researched. So we'd definitely recommend reading that. It's about 20 pages. So carve out some time to check that out this weekend. Yeah, it's quite refreshing, you know, because Ria has a capital markets background.

but she's also a crypto-native. So she really takes a holistic view of the system, which is quite rare and also very challenging. So a lot of coin metrics data in there as well. Yeah. Shout out coin metrics. But yeah, I think she did a really fantastic job. So another post that I really like this week was on Nick Grossman's blog.

So Nick is a partner at USV. He had a post that was titled Just Work Equals True. And he talked about some of the usability improvements that are on the horizon for crypto assets and public blockchains. One of the examples that I talked about was a killer app in the form of a browser that basically allows a user, and I'm going to start to paraphrase a little bit, but my interpretation of this would be a browser that has identity and payments built in so that you can seamlessly log in to any website.

So picture being able to just log in with your identity and not have to sign up for a username and password on individual sites and also picture being able to just jump through paywalls and make micro-transaction payments in order to access content. Talk about a killer app. I could see this really being the... I mean, it's funny because the browser moment for crypto might actually be a browser.

That's pretty good. You know, the other day I ran into this kind of alpha website called Brick Break, which is about busting paywalls with lightning. So it works with the Washington Post, so I went to the Washington Post. They have the hard paywall now, super annoying. And I actually didn't have a lightning wallet up and running. So I got Marty, Marty bent to send one for me.

And it worked. So, you know, obviously a lot of these websites won't like that necessarily. I think eventually they might go this model that it was it. Forbes went. Forbes had the crypto integration with the unlock protocol. Oh, right. Which used Metamask. Yeah.

But I think this is a really, really sensible idea. This notion of busting paywalls with a micropayment. I know a lot of publishers don't like it because they want to push you into those subscription methods. And I think users are just going to route around it. So you'll have services that have these subscriptions and then you'll be able to pay, you know, 30 cents for an article and they'll be able to make it up on volume. Make it up on volume. The age old make it up on volume. Yeah, but I mean, just think about how on play.

pleasant the experience of browsing the web is today. Oh, it's terrible. And not to mention the fact that people have so many usernames and passwords that they can't even remember over time. It's abominable. I think a paywall aggregator and buster where you just periodically refill your lightning balance or BTC or something else, that means a huge, huge amount of sense. It makes a huge difference. You could imagine a company like LastPass being really close to being able to do something like this in the sense of they have all of your username and

passwords anyway. Now, it would be great to be clear for that to be user controlled and not have a company have access to that. But you wonder what the minimum viable ecosystem required to put something like this into the wild would be. But I think that this is an idea that, as Nick points out, it makes all the sense in the world. And this technology really does enable that at a foundational level. So request for startups, I guess. I think we're already there. I think both the Bitcoin and the Ethereum user base are big enough that it's already viable. There's enough users out there that are ready for something like this. So let's see it.

And if anyone who's listening knows of anything in that space and that we should be highlighting as we talk about stuff like this, we're happy to give them a shout out on the pod next week. For sure. Did you see that a new journal called Nakamoto was launched by Balaji Srinivasin this week? He's the founder of Earn and former CTO of Coinbase. So totally not controversial launch. Yeah, launch to absolutely no drama whatsoever.

Just, man, people in this ecosystem can get really angry sometimes. You know, the thing that disappointed me about Nakamoto was that it's not a citadel because I'd heard that Bellagia was working on a citadel. Oh, that would be interesting. And instead of a citadel, we got a web magazine. But maybe somehow, you know, step six. will be to create a citadel in the desert. Yeah, maybe an unpopular opinion here.

Like, I really enjoyed reading it. I liked Lops piece. I thought Lops was great. I thought Ballagie's piece, Bitcoin becomes the flag of technology. That was great. Brian Armstrong had a piece, Dan Romero.

There's some good content up there. So Vitalik's piece I thought was good in that he correctly identified, you know, a big problem with these systems, is that if there's a lot of arbitrariness in them, in terms of the administrators of the systems making particular decisions which privilege certain individuals and disempower other individuals that that undermines

their legitimacy. I think this is a key point. However, it's incredibly ironic the Vatalic wrote that because this is the exact argument a lot of people made about the Dow. It's true. If you bail out the Dow holders and a lot of Ethereum Foundation folks, then that undermines the credibility of the system because you've essentially created a wealth transfer to a specific set of individuals that are protocol proximate. So that is the critique I have of the Dow that many

others had. And in fact, I can think of a lot of other cases where people that have protocol access have actually abused that power in order to privilege certain entities, not just in Ethereum. There are actually cases that's happened in Bitcoin. I think I'm going to write about this at some point. Anyway, I find it strange. The Vitalik wrote that post just because that is one of the main critiques of Ethereum, that there is too much discretion in that system. You have lots of hard forks, lots of changes coming all the time. We're talking about a monetary system with billions of dollars. If you change something in the protocol, you can really disempower a certain group of individuals or empower a certain group. So that discretion is definitely a problem. I think his diagnosis is correct.

Yeah, and I think we're starting to see that on Ethereum with some of the token standards already in what potential impact sharding would have on some of these. Not just sharding, but some of the recent forks, one of the forks killed a bunch of contracts at Aragon had written. Yeah. You know, this is something that Bitcoin developers absolutely agonize over. So you can definitely contrast the design philosophies here. But as you point out, some of the colored, it's happened in Bitcoin with colored coins.

So that was a scandal, though, when it came out, in fact, partially thanks for our podcast who did with James Prestwich, you know, it came out that it seems like Luke Dash, covertly change the transaction standardness rules to make multi-sig transactions for various token transactions more difficult on Bitcoin, counterparty, Omni. And this ended up basically being the death of some of those counterparty tokens. But this was overlooked, and when it finally came out recently, there was actually kind of a minor scandal. I mean, we certainly talked about it at Boston Bitters, right? So something as minor as that, well, I don't know if you call it minor, but these kinds of discretion when it happens in Bitcoin

scandal, and then in some other chains where there's a much looser approach to this, it's considered, you know, business as usual. Yeah. Well, we got a little bit in the weeds there, but I'm going to keep on rating Nakamoto. Yeah, I mean, I certainly, buy the idea that not all the contributors are genuinely pro-BTC, but I definitely like some the articles. Yeah, I'm still looking for the IOTA article. All right, so a couple odds and ends this week. So did you see that there was a piece in the Asia Times that revealed that Carlos Gosen, the Nissan executive, that escaped from Japan, is friends with Mark Carpellis? Yeah, so I watched the press conference where he triumphed.

infinitely returned to Lebanon. And it was actually incredibly impressive. He gave answers in five different languages in that single press conference. Wow. Which, you know, regardless of the purported fraud, made me really like the guy. That's impressive. I also found out how to pronounce his name. How do you say it? So it's Gohn. Gohn. So it's a Lebanese name, I guess. So it's not Gosen. It's not Gosen. I repeat, it's not Gosen. But anytime Mark Carpellis's name comes up, it's always I always read the article. Yeah, I just love the Bitcoin somehow worms its way into absolutely everything. We have an interview coming with Ryan Selkis.

I actually recorded it yesterday. And we talked a little bit about the Gawks, the fact that he broke Gawks back in the day. And he did not get into the full story, but apparently he will be revealing who his source was on Charlie Sherem's podcast, which is coming up in a few weeks. So I'm eager to hear about that. I'm betting that it was T-Bahn, the cat. Oh, the cat. It could be the cat. I've never thought of that. I have some sad news on the cat. The cat actually passed away recently. Oh.

So for context, this cat is a historically important cat. Gox was actually, the Gox parent company was named Teabon. I did not know that. Mark Carpellas's cat. And also one of the things Mark Carpellis said was the reason that he'd been neglecting Gox was probably due to the kidney treatment for Teban, the cat. Really? So, you know, direct your eye or this cat. But he was a good cat.

So, rest of peace. These are the things that you learn on this podcast. Yeah, this was in Digital Gold by Popper. Oh, was it really? Clearly haven't read your Bitcoin literature. I've read Digital Gold. That's one of the best. Which Popper doesn't really like Bitcoin that much, though.

He wrote a whole book on it and he doesn't like it. It's amazing. Yeah. There's so many stories out there to be written. I can't wait for some more of these books to be published. But so to wrap up the Ghosn thing, so he's, you know, Lebanese speaks French, Mark Carpalis, French guy, of course. So Mark Carpellis was held in pretrial detention for 11 months because he was wrongfully

accused by the Japanese police of having stolen the Gawks funds. And only later, with the help of the American investigation, which the Japanese police did not assist with, was he cleared? And it became clear that actually the funds had been hacked. So Carpellus presumably told Gosen or Ghosin or however you pronounce it to get the hell out of Dodge. Yeah. And I mean, Gown had actually spent a lot of time in detention too.

And I think he realized he wasn't going to get a fair shake. And for context, the conviction rate in those federal crimes in Japan is extremely high because the police will interrogate you without a lawyer for our. hours and hours on it. It's kind of barbaric. You don't think about that when you think Japan, you know? No. Huh. But so don't commit a crime in Japan. Don't be accused of a crime in Japan either.

Yeah. If you can help it. But if you are, I guess, traveling via musical instrument box, that's the way to get out. Honestly, I'm so grateful that this going saga actually took place because in my view, it just adds a certain amount of mystery to the world. you know we're talking CEO of the largest auto conglomerate in the world who there's a coup and he gets tossed in jail and then he escapes and resurfaces in Lebanon and has a triumphant press conference what an amazing story I love it that is an amazing story all right so I think that's just about it

for the stories of the week unless you have any predictions that you want to make oh about the football this weekend yeah I'm out of the prediction game I predict that the skis We'll be the offseason champs. Okay. All right. So as far as I'm concerned, we're already the champs. We got Ron Rivera. He's ex-Panthos coach.

I think he's going to take out the playoffs in two seasons. That's a good ad. That's a good ad. All right, folks. So we'll be back on Monday with an interview with Ryan Selkis, the founder and CEO of Masari. And everyone, have a great weekend. Thanks.