On The Brink with Castle Island - Weekly News Roundup 11/22 (Field Goals, Fidelity approval, Binance and more) (EP.20)

Episode Date: November 22, 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 - Fidelity NYDFS approval - impact on ETF applications? - Binance - Ethereum Block Times

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 a Bitcoin. Bitcoin. Welcome to On the Brink. I'm Matt Walsh. And I'm Nick Carter. And Nick, you missed the 42-yard field goal. So this is the big news of the week, everyone. I did not kick a 42-yarder.

I'm sorry. It's actually pretty hard. And so to catch everyone up to speed last week on the pod, Nick's claimed that he could kick a 42-yard field goal. You actually went back to. your childhood home over the weekend and you bought a football, you went to a football field, and you attempted. How many attempts did you actually do? I did like 10 and then I realized that 42 was probably going to be too far.

You did kick a 30-yarder. Yeah. So, you know, to my credit, I kicked a roughly the extra point distance. So, you know, that's something. That's something. I think you could do it. It was probably windy that day. It was windy. It was cold. There was a bit of a deflate gate situation going up. We don't talk about deflategate on this podcast. Matt's a Pots fan, so he has a visceral reaction to the notion of deflategate. Well, I just don't like to see innocent people get railroaded by malevolent dictators is really all that comes down to.

A real travesty, yeah, miscarriage of justice, truly. Yeah, yeah, yeah. Similar miscarriage of justice playing out in various aspects of the crypto space. But, yeah, it's really, really bad. You know, it's tough to be a Pats fan. It's like really, it's been a tough 20 years. It is. They hate us because they ain't us is really what that comes down to.

All right. I guess the other thing that people are talking about is right now the coin metrics, Bitcoin reference rate is 71.45. So the number's going down this week. Yeah, a number go down in a big way. Yeah. Well, not sure why, but we'll talk about some of the top stories of the week and maybe can pick your poison on the reasons why the number's going down.

Why don't we start with the deals and the fundraising as a way to showcase some of these companies that are probably going to be hiring soon. So Canaan Creative, this is the crypto asset mining company, they raised $90 million in an IPO on NASDAQ selling American depository shares. So big IPO news this week. That was kind of below the radar. Yeah, totally. Kind of a smallish IPO.

And so they joined Silvergate as the other publicly traded in the U.S. crypto company. Right. Another deal was Bison Trails. So we like these guys, Joe Loo, out of, New York. So they are a company that's providing hosting infrastructure for public blockchains. They raised a 25.5 million dollar series A led by blockchain capital. So congrats to those guys. And if Lieber does go ahead, these guys will be very well positioned to be the default node operator for Libra. Yeah. Mythical Games.

So blockchain-based games. So hot right now. A blockchain-based game studio. So they raised $19 million. round was led by javelin venture partners, had participation from Avon Ventures, Alumni Ventures, Galaxy EOS, Struck Capital. So another big fundraise in this category. So this is an application layer category that people are really liking right now. Yeah, Mythical Games really interesting startup. The team consists of industry veterans from the gaming industry. So I would say kind of a departure from a lot of the blockchain game teams out there. these guys are gaming veterans as opposed to crypto natives.

So they came at it from that angle. You know, the thing with a lot of the blockchain games is the designers forgot to make them fun. You know, just having a blockchain element in there alone isn't sufficient, in our opinion. So this is kind of a new phase of some of these blockchain gaming startups with people from the game industry that actually know their stuff. And then they have a blockchain integration. In this case, because they want the seamless integration of commercial. commercial elements, you know, branded elements into these games. So that's their, that's their angle on this one. The next one that we saw was TRM Labs. It's a company that's focused on

crypto asset compliance. So they raised $4.2 million in a round, including initialized capital, blockchain capital, and PayPal Ventures. Hadn't seen PayPal Ventures investing in the space, so that's notable. Yeah, TRM is also an interesting company. They started off doing business intelligence, on blockchains, kind of in a similar sector to flipside crypto, and then I guess decided that the compliance angle was more suitable for them. So the next one is probably the worst name of a company that you could have for a U.S. regulator. So this is Bet Protocol. So it's combining two things that regulators aren't crazy about betting and public protocols. So this is a company that aims to be the Ethereum of gaming. They raised $3 million in a token sale from Neo Global Capital.

So might want to change that name if you're coming to the U.S. And then the last one was actually an acquisition. So Gemini, the Cryptoasset Custodian and Exchange has acquired Nifty Gateway. So this is a platform for selling non-fundable tokens, which, you know, as you know, could be used in gaming, could be used for collectible cards. but really, really interesting acquisition here. Yeah, non-fungible tokens are all the rage right now. The probably the number one consumer of Ethereum block space in the last couple of days has been gods unchained, the kind of re-skin of Heartstone with all the in-game assets existing as non-fundables.

So we would expect that this would continue. Non-fundables have been talked about for a couple of years now, but it seems like the first real applications have finally begun to, bear fruit. It's exciting stuff. All right. Speaking of exciting stuff, Fidelity news, and this in my mind was the biggest story of the week. It didn't get covered as such. I guess a lot of people knew that this was maybe in the works. So Fidelity's subsidiary,

Fidelity Digital Assets, has been granted a limited purpose trust charter by the New York State Department of Financial Services. And so this is a trust charter that also includes the BIT license. and this basically allows them to operate their digital asset custody and execution platform in the state of New York for institutional customers. This is a big deal for sure. So think about this, I think from a couple different perspectives. One is just that now Fidelity does officially have that qualified custodian tag on it.

And the reason that that matters is that there's just a range of institutional clients, whether that be hedge funds, family offices, other types of institutions that need to be. to hold their assets with a qualified custodian. So it would not be sufficient, for example, for them to hold their assets with a company that does not have either a broker-dealer or a trust or is a bank. And so you get the idea there. So now Fidelity moves into this class of qualified custodians in the state of New York. I believe, you know, Gemini is won, it bid.

I believe Coinbase has moved into that. But Fidelity from a brand reputation standpoint and a quote-unquote legacy financial services firm becomes really the first mover there, which is a big deal. So I thought that was, that's to me the biggest story here. And do you think that this meaningfully advances the prospects of an ETF for Bitcoin? Yeah, I mean, I think it's, you know, we could probably argue this point. And I know that people, you know, feel like the ETF is never going to happen or the SEC is just never going to move. But what we've seen in the Winkle voss denial and the Bitwise denial is really an articulation of some of the shortcomings of this market structure.

And the two things that were called out in both, and especially in the Winklevoss denial, was one is the lack of qualified custodians. And two was the lack of a properly robust spot market with regulated venues that have surveillance sharing agreements between themselves. And so the language in the Bitwise proposal was a little bit softer around qualified custody. There's definitely been more firms that have met this criteria since the Winklevoss denial. But, you know, this regulated spot market story still isn't there.

So I guess if I were to summarize, and this is totally shooting from the hip, and there's really no way of knowing this, but in my view, qualified custody is really solved the problem at this point and only reinforced by Fidelity's entrance, but we still have the issue around the manipulation of the spot market. and the fact that there's so much volume happening offshore on unregulated venues, I think we're going to probably need to see more regulated venues in the United States that actually have sizable market share in order for the ETF to get approved. And it doesn't help that a huge fraction, if not a plurality of all Bitcoin volume,

is on these exchanges like Binance, which are questionable in many ways. Yeah, and there's no way that that is going to, It's never going to be 100% market share for regulated venues, nor should it be really. But there ought to be a way for the SEC to get comfortable with the market structure that is, you know, in the surveillable regulated landscape in order to get comfortable. Whether or not they get comfortable under Clayton, I think, is a big question. And there's definitely people that are, you know, investing in startups in the blockchain space and starting companies that have the view. that nothing good is going to happen with the SEC until the end of Clayton's term, that he's really not motivated to be making any wide-ranging decisions here that benefit the industry.

And there's this perception that he's just going to crack down on all the unregistered securities offerings, and that's really all he cares about. And maybe that's true. I think certainly the SEC under Clayton has shown really no propensity to do anything, pro-innovation as it relates to public blockchains. On that token, there is an interesting paper published this week about the SEC's policy towards ICOs, arguing that it has actually been more effective in terms of using their resources to send a message to the industry than other commentators might have suggested.

So it was called Regulation by Selective Enforcement, the SEC and Initial Coin Offerings. So this counters some of the language we've seen coming out of some of the larger law firms who've been really critical of the SEC's policy on regulation. And they're arguing that the SEC has actually been relatively successful in establishing their authority over ICOs while not necessarily having to expend too much resources on the problem and being able to resolve some of these in a relatively quick manner. Yeah, look, I mean, the SEC is obviously in a tough spot here, right? I mean, because you have a battle that's being waged on multiple fronts. You have this ICO nonsense stuff that just happened,

and you have large venture funds that are fighting against the SEC and hoping that certain tokens are not securities that probably are security. So that's one battlefront. You have another battlefront around security tokens, and you have broker dealers that are lining up and trying to get approval from FINRA in order to hold in custody digital assets. so they're trying to figure out what to do there. And then you have this issue around exchange traded products

and whether or not there should be a Bitcoin ETF. And so they're coming at this from a lot of different angles. They have, you know, their role is to provide consumer protection but also promote capital formation. And it's a tough tension right now in the industry. The other agency people aren't really talking about as much as FinCun. And FinCent has been making some extremely ominous noises about the crypto industry.

recently saying some of the tune of, yeah, stable coins are not exempt. We're still going to be looking at them very carefully. So we might see some more one-two punches between FinCent and the DOJ at some point. Yeah, so there's been murmurs that, you know, FinCent is essentially going to say that if you issue a stablecoin, you must be a money services business. I think most of them are, though, right? I mean, certainly Circle and Coinbase, Paxos and Gemini. All of these, quote-unquote, regulated dollar-backed stablecoins, I think, would be not impacted potentially by that.

Unless I'm reading that wrong. I don't know. I actually disagree with that. So, first of all, some of the big stablecoin issuers pretend that they're not issuers or administrators and say, well, actually, we're decentralized. So you probably know who I'm talking about. Yeah, but so we're talking about a different thing if we're talking about Maker, right? So it's the dollar-backed stable coins are already operating under that regulatory regime. I would actually contest that.

I would contest that. So with something like USDC, there's obviously the ability to enforce and create a blacklist, right? But that is kind of a reactive approach. You have to selectively blacklist addresses that you think are engaged in some sort of malfeasance. But you have no ability to. really police those hops on the chain in real time. So I'm kind of shocked that something like USC operates on a blacklist as opposed to a white list basis. So I think really these federal agencies have not really realized how little control issuers like USC have over the circulation

of those units. So I think there could be a reckoning there. And then I think there's absolutely guaranteed to be reckoning when it comes to Maker, although they could, you know, try and acquire whatever, you know, regulatory license is required, but then they're going to have to compromise in terms of saying, yeah, we have absolutely no control. And we, you know, this token is absolutely sensor resistant. There's a huge contradiction there. Yeah, I guess the Maker thing, we could go on another slight tangent here. If we live in a world where Maker is forced to register as an ATS venue and essentially fall under SEC regulation as an exchange, essentially, then does the value proposition of the network go away if everyone needs to be fully KYC'd

and known? And not just that, but if the Maker Foundation is understood to be the administrator of this project, are they then responsible for the people to use Dye in the eyes of FinC? So there's some really significant tensions there that need to be unwound when we're the other. Yeah. So I guess we could keep on going on a regulatory tangent, but I want to bring us back to this fidelity thing, just a couple other points. So, you know, we talked about the impact on potential exchange traded products. I think the other story here is just we're really, it's shaping up, and we're obviously biased here. We used to work there. We love the company. But this is really an

exercise in organizational persistence. I don't think you see a lot of companies out there right now that have senior management that's bought in at the intersection of public blockchains and regulated financial services. That's a really tough wedge to be operating in. Now, to be clear, it's a wedge where there will be enormous value creation. If you think that blockchains are going to be an enduring part of financial markets, and we do. So this is going to be setting the ground for really exciting business opportunities on the custody and execution front for any digital asset, really. But the ability to actually push this through in a large organization is something that definitely should be commended. And the ability to stay the course. It's been at least five years now

of evaluating crypto and Bitcoin and the message, even though there have been some deviations in terms of evaluating private blockions and so on the message has been fairly consistent the whole time. Yes, definitely. So something to be applauded there, that team should be really proud of the work that they've done. And then I think the last point that I have on this is that to be clear, we still think that this bit license thing is a total joke. I don't think that there's any worst place to be operating a public blockchain-oriented business than the state of New York. And it's comical that you have all of these products and services that are related to

blockchains that come out and say users in North Korea, Iran, Sudan, and New York cannot use our product. That is a telling situation right now. This is a process to get the bit license that is extraordinarily expensive. and hard for startups to comply with. And it is also equally hard for big companies because the law is not clearly written. It has requirements for personal disclosures that are way above and beyond most regulatory bodies, even at a federal level.

And it's just not clear. It's not clear to the point where the guy that wrote the law, Ben Loski, is now cashing checks and providing consulting services to companies who are trying to actually figure out what the hell this thing is, like, meaning. And he's sitting on the board of directors of Ripple, who has one. They were the first recipients, right? Yeah, I think that's right. So this is just appalling stuff.

I think that the fact that companies need to go through these hoops is hurting innovation in the United States. It's certainly hurting innovation in New York. If I was starting a company focused on crypto assets, New York is not somewhere I'd want to be operating. But there's a lot of people in New York. There's a lot of money there, so you kind of have to. So the net net, I guess, is that I'm really excited about this. We're going to close on a negative note that the bit license is a joke, but you kind of have to have one.

And if you're a regulated financial institution, there's going to be a lot of value capture by being a qualified custodian that can actually serve institutional customers. And this is what Fidelity figured out, basically. If the government wasn't involved in the bid license, you'd call something like that racketeering. Yeah, that's a strong, strong words. So we'll just leave it there and congrats again to all of our former colleagues at Fidelity.

All right. So next piece of news here, do you want to talk about this? This is kind of a weird Benance story here. So there's a block article that came out on Thursday that said that Bonance's Shanghai office had been raided and shut down. And so that was out there for a few hours. Price of Bitcoin was going down, by the way, during this whole time period. and people were saying that that was the reason. Who knows?

I mean, the number goes up and the number goes down. But then CZ came out, the CEO and founder of Bananz, and said that it's not true. So I don't know what to make of this. Yeah, that one was a mystery. And it does remind us in so many ways of still how amateurish this market is. I mean, the most market moving events are questions as to China's attitude to these exchanges like Binance,

which are basically on the run on a perennial basis. And I've had multiple finance employees tell me that they don't have a home base that they are decentralized. I mean, there's got to be a bank account somewhere, you know. You can't be a decentralized corporation, unfortunately, you know, in this day and age. Maybe we'll have Dow's that will work in 10 years, but that's not the case today. So the fact that they are hopping around from jurisdiction, jurisdiction seems like it cannot last forever. I'd be shocked if they were operating in two or three years. Yeah, I want to dig into something you just said there around just how this market trades in a very event-driven manner.

And just remember that some of these pieces of infrastructure around the exchanges and the custodians, bad things happening to them really move the markets here. And so if something like a bonance were to go down in a certain jurisdiction, it would be a massive impact. It would be similar to an exchange hack or a custodial hack. And yeah, I guess Benance is blitzscaling, though, right? Yeah, the weird thing is that it seems like both parties are actually possibly wrong in this. So if Benance is to be believed there was no police raid explicitly, you know, in the Shanghai office. However, Benance also seems a little loose with the facts when they say that they don't have and they never had a Shanghai office, it's pretty clear that they did have a presence in Shanghai at the

same time. So it seems like neither side is 100% right on this topic. The quality of discourse is incredibly weak right now with both sides slinging, fodded each other, and so on. So it's a shame that this is what the industry has come to, just disputing these very basic facts, like whether or not finance has an office in Shanghai. Yeah, I'll be the first one to say I don't care. The market cares, though, so we can't ignore it. All right, why don't we talk about something a little bit more interesting, maybe not interesting for some folks. So the coin metrics chart of the week this week in our newsletter was talking about Ethereum blocks per day. So this number is on the decline in terms of how many blocks per day Ethereum is processing. Let's talk about

this. Yeah, so Ethereum has a strange feature built into it called the difficulty bomb or the ice age. What it's meant to do is over a period of time, it's meant to slow the number, it increased the difficulty, basically, of mining blocks, which has the effect of slowing block times, reducing a number of blocks that are produced per day. And this was initially inserted in order to encourage the stakeholders to move to proof a stake when Ethereum was first launched. However, it took them a little bit longer to get to proof a stake. I mean, To be frank, they still haven't moved to proof a stake. And so they had to essentially diffuse the difficulty bomb.

And so this became a routine thing that Ethereum did on several occasions. And so the difficulty bomb is starting to kick in again, which comes at a bad time because Ethereum utilization is basically at capacity right now. And so Ethereum fees are fairly high today because it's at full capacity and the actual bandwidth has begun to become throttled because of this, the onset of this difficulty bomb. So this is the kind of thing that will probably be diffused in a subsequent hard fork. But it's like one of those vestiges of the creation of Ethereum, which is kind of interesting that it's still part of the chain today, although its purpose is sort of obsolete in some ways.

And so what do you see playing out here over the next few weeks? It'll get worse. That's what it does. I mean, slowly. People are aware of it, so it's not exactly a crisis. But it is strange that there's a mechanism in Ethereum which makes the chain unusable if it's not upgraded through a hard fork within a given period of time. In some ways, it compels you to adhere to a relatively fast or even frantic pace of hard forks, which, of course, many bit corners would be against that kind of. kind of approach to development. And is this the type of thing where the devs are talking about taking action at all? What's the current community sentiment here? I haven't been monitoring the chatter, but they should be talking about it if they're not. Yeah.

All right. So that was the chart of the week. So to close out, we've got a very exciting episode coming out. I think we're going to be able to release it on Monday. It's our longest episode ever. It's about two hours. It's very substantive. and with one of the deepest and most potent thinkers in all of Bitcoin,

we can't wait to share it with you. We can't tell you who it is, though, right now, right? It's a secret. It's a secret. It's going to be a really good episode. We're really excited that we were able to get this person to do the pod, and we will drop it on Monday morning. This will be the episode that will rescue Bitcoin from the doldrums in the 7K range. Maybe by Monday it will be 6K.

Who knows, but this will perk you up. for sure. All right. So everyone, have a great weekend.