On The Brink with Castle Island - Weekly News Roundup 2/14/20 (BlockFi raise, JPM spinout, Iota is the gift that keeps on giving, and more ) (EP.42)

Episode Date: February 15, 2020

Matt and Nic from Castle Island Ventures review the top stories of the week in the cryptoasset industry. This week's topics include:  - BlockFi raise - Other deals - JPM spinout? - USDC 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 a Bitcoin. Bitcoin. Welcome to On the Brink. I'm Matt Walsh. And I'm Nick Carter. And we're late in the office on Friday doing this because we love our fans. Yeah, we couldn't deprive you of content for another week. So here we are.

Just grinding away. There's a lot of news this week. Yeah, we also won't be able to leave for like another hour because there's just so much news. It just keeps on dropping. New startups keep getting funded. The SEC is still going. Iota is in the news. It's the gift that keeps on giving.

Iota never stops providing excitement. So we're unveiling a news segment today, which is publicly traded companies worth less than Iota. And the reason that we're doing that just to jump the gun a little bit is that Iota was in the news again this week because it just stopped working. Yeah. More specifically, the developers or the Iota Foundation turned off the network. This is just the gift that keeps on giving. This is the definition of decentralization. Yeah.

Didn't know you could do that, but they hit the big off switch and it stopped. And it just stopped. So I have a good company that is worth a lot less than IOTA. All right. So we'll leave it to the readers decide. What is worth more to society, Iota or a public traded company worth under a billion? I'm going to go with J. Jill. It is an American company actually based here in Massachusetts.

It's in Quincy. it is a plus-size women's apparel brand. It is worth $50 million market cap. Okay, not very much. My entry is Southwestern Energy Company. It is a Texas natural gas and crude oil, I guess wildcatting company. They're worth about $890 million.

That's a good one. That comes in just shy of the IOTA market cap. So Iota is worth more than a fairly large mining company. This was a good side. segment. I think maybe next week we can do the things that are more valuable that are in our office than Iota from a functional level, in which case I'm going to bring in some old pogs. So yeah, just remember Iota, it's worth $900 million. Currently does not work. No, it doesn't work. It's in an off state. The network has been stopped.

The funny thing is every time we talk about Iota, people just get in our Twitter mentions. It's got a rabid fan base of people that don't understand blockchain. Or maybe they understand blockchains so well that they know that the future of blockchains is the tangle. It's possible. It's possible. Okay, so a ton of deals happen this week, and we always talk about these deals, both to let you know that these transactions have happened, but also there are a lot of people that are looking for jobs in the industry, and these are the companies that are presumably hiring. So why don't we kick it off with a deal that we participated in? BlockFi was in the news this week. All right.

We love BlockFi. BlackFi is crushing it right now. BlockFi is really an amazing company, really excited to be in business with these founders. CEO, Zach Prince, was on CNBC yesterday. So BlockFi is a crypto asset financial services firm. They have a brokerage product, and they also offer interest-bearing accounts, which is a huge differentiator right now in this market. I think that this is where the whole market is going in terms of just full-service brokerage.

Yeah, and a thing about crypto, like we're seeing a bit of a convergence, between exchanges or custodians and neobanks. And I think BlockFi was one of the earliest providers to realize there would be this convergence. And they're definitely way ahead of the game in terms of stablecoins as well. Stablecoins is something that, as you've written about, it's just really taking off right now. Yeah, interest-bearing stable coins too. You can get 8% interest on USDC right now on BlockFi. Don't know how long that'll last, but yeah, interest rates being so high on stablecoins.

It's puzzled me a little bit, actually, because I feel like if the interest rates get too high, people could just create more stable coins and push down the interest rates. Well, that'll naturally happen, right? It's just a supply-demand thing. But I guess, as you've kind of talked about, there's just an insatiable appetite for dollars,

especially internationally. Who did it think it? The crypto industry was a Trojan horse for creating more euro dollars, essentially. Yeah, killer app for now, might be dollars. Dollars on chain. Dollars on chain.

So anyways, congratulations to BlockFi. They raised $30 million in a round led by Valor Ventures with participation from Morgan Creek, Castle Island, Avon, PJC, CMT Digital, and others. So really excited about this and recommend that people check out the product, blockfi.com. The next deal was Elliptic. So Elliptic is one of these blockchain forensics companies similar to chain analysis. So they announced that they've raised an additional five. million dollars in their series B round and they've brought in Wells Fargo strategic capital.

So interesting to see a bank come into the fold on these products. I think the banks will very naturally be customers of these type of products. So it's interesting. I would only hope that maybe Wells Fargo would be rolling up the sleeves a little bit on the crypto asset game. Who knows? They haven't made any noises as far as I know about getting into the industry at all. Now, very few banks have and, you know, largely that's a function of the regulatory

environment and being regulated by the Fed, this is going to be a little bit of a tough put until there's some clarity on what it means to hold some of these digital assets from a balance sheet perspective as well as from just a custody perspective. And a lot of these issues are being felt by broker dealers too, but I guess that's the nature of the opportunity. So we've also got a deal for paystand this week. So paystand is a blockchain payments company. they raised $20 million from investors including DNX, battery ventures, and bluefin. So to round out the week, we had a couple of announcements from Circle. So they have sold their retail brokerage product line, Circle Invest to Voyager,

which is a New York-based crypto asset brokerage company. And there was also a report that they're seeking to sell their seed invest business unit. So does look like there's a concerted focus here on U.S. on Circle's part, they're kind of shedding a number of these legacy business units and tilting more towards the stable coin. So we'll see how this goes. Yeah, there's nothing left. Assuming the Seed Invest sale goes through aside from USC, right? I think that's right. I think the USDC really becomes the flagship product now. Although, you know, some people are riding Circle off at this point, and I would hesitate to.

So, you know, first of all, they're run by some extremely solid entrepreneurs. Second of all, I think the stable coin market opportunity could stretch into the hundreds of billions of dollars. I mean, this could really be a huge, huge industry. We went, like in the space of one year, we went from there being virtually zero dollars worth of stable coins to $6 billion. So this exploded recently. Who's to say it couldn't be $100 in a couple years' time? Yeah, and I think Jeremy Allaire is not someone I would ever want to bet against. And he's had a pretty clear vision for what these stable coins.

could offer from the outset. So we'll be interested to see what happens with Circle. Yeah, the big question I think will be, you know, will traders and, you know, come to trust, stable coin issued by, you know, a U.S. domiciled institution, which is more regulator-friendly than something like a tether, for instance. And we'll probably have a bifurcation there. Some traders will and some traders won't.

I think that we'll have a lit market and maybe a maybe not lit market. I don't want to say it's a dark market. not really necessarily a dark marketplace, but there will be some that always opt for tether and it has good product market fit around certain niches of this industry. And then actually the last late breaking deal that we didn't have in our newsletter this morning but came out this afternoon was that Amber, which is the trading firm based in Hong Kong, Amber Group, they raised a $28 million Series A in a round led by Pantera and Paradigms. So this is a trading and brokerage platform. Continue to see a lot of activity around trading and brokerage, the on and offer

amps being really attractive right now. Yeah, and Amber is pretty interesting. So they essentially pool liquidity between a huge number of jurisdictions and exchanges in Asia, particularly Southeast Asia. And since these liquidity sources are so fragmented, there's a huge opportunity for, you know, essentially brokerage or trading firm, not sure what you want to call them, to aggregate it all. So they've,

they're doing some pretty impressive numbers so far. Agreed. All right, let's move on to the news of the week. So we already hit on the IOTA stuff, but I guess we won't pound that into the sand, but we'll give you updates on some of the more nefarious projects like Iota from time to time. Telegram was in the news again this week.

So for those of you who are not familiar, Telegram raise about, I can't remember if it was $1.7 or $1.8 billion in a token sale, and that's being challenged by the SEC as an unregistered security offering. And so this week, the news was that a judge ordered the CFTC to actually provide an opinion letter in this case. And the court date is set for, I think it's next Tuesday in New York. So we might get some clarity on exactly how this case is going to unfold. And as I think you're on the same page with this is that the Telegram case and the Kick case, could be real bellwether events in terms of cases that set a precedent that either prompt

a number of these ICO teams to settle or potentially just dig them in and maybe they'll continue to fight based on how this goes. If I had to take a bet on which one would be more influential in terms of the fate of the industry, I would say Telegram because it's kind of more borderline. Like the KICC case, you know, KIC did a lot of things wrong. Kick didn't have the saft, right? Or did they? I can't remember.

But Telegram was a little bit later, a little bit larger. And the big issue there is can you transmutate from this convertible structure into a public blockchain asset? So it's probably a bit more systemically important if you look at it through the lens of a token issuer. Big time. Yeah. So pretty excited to see how this one plays out. So next Tuesday. Did you see this news about JP Morgan?

So they're in talks to sell or merge their private blockchain business unit, the quorum. Yeah, JPM, so many businesses, so many crypto or blockchain businesses spun out of JPMorgan. Very little talent left there, I guess. They've had some great talent over the years. But I think one of the things is that talented folks don't necessarily like to work at places where leadership is so pessimistic about the technology that they're working on. Yeah, one wonders what the purpose of emerging quorum with consensus would be. I guess consensus is a fair amount of kind of consulting revenue for permission blockchains. Yeah, maybe it's just that they want to get rid of it.

I'm not sure that quorum is necessarily something that they're doing much more than just R&D initiatives around. And there's, of course, the J.P. Morgan coin idea. And I'm not sure that that actually requires a blockchain to be functional. So it's not clear to me that there's much going on at JPM at this point. I remember the excitement over JPM coin. I haven't heard anything about it since. Yeah.

It's too bad. But I don't think that we're going to see a big, bold public blockchain strategy come out of JPM under this leadership regime. It's the innovator's dilemma. Yeah. So I think the innovator's dilemma is a really interesting way to think about this. I also think that you could look at the history of just other disruptive technologies. And one of the things that's been interesting to me, if you look at some of these disruptive technologies, there's been a really widespread divergence of really well-respected people

in terms of predicting what's actually going to happen and what's not going to happen. So if you think about the personal computer, so back in the 70s when the PC was being discussed as a concept, really just an experimental concept. It was years away from happening. but you had Ken Olson, who is the founder of Digital Equipment Corporation, which is by far the best and the brightest company in the computer space. He had this quote that said, there's no reason why anyone would want a computer in their home.

So this was 1977. He was the most respected person in the industry for computers. Kind of reminds you of Jamie Diamond at all. So in like three years before that, there was a science fiction writer, Arthur C. Clark, who was talking about home computers. and his quote was they'll make it possible for anyone to live anywhere that they like. Any businessman, any executive could live almost anywhere on earth and still do his business through a device

like this. So he's not only predicting personal computers and laptops, but maybe even the smartphone. And so if you look back at the history of the PC, it was the science fiction writer that had it right and the industry expert had it wrong. I think you'd just look at blockchains, right? Like you have Jamie Diamond who's out there saying it's worse than two levels. bubbles. It won't end well. One of his quotes was someone is going to get killed. So that's pretty stark. But then, you know, look at the other side of the argument. You have a lot of well-respected

people, also including some people that are in his industry, right? So we used to work at fidelity and leadership at fidelity is incredibly bullish on this technology just from the perspective of taking it seriously. So you do have this widespread divergence of opinion from very respected people. I think it's really interesting that Jamie Diamond is just so against this. I feel like we talk about this a lot, but we probably haven't talked about it on the podcast in a while. But go back and look at the PC era.

I think he's moderated his tone a little bit recently. Well, I think he had that issue where he came out really, when he came out and said that people are going to get killed, I think the people that work for him were kind of like not happy about that. And maybe he's like, like, people have been killed over Bitcoin.

That's true. I guess, but I mean, that seemed a little bit extreme to me. People have been killed over dollars, too. And I don't know that the tulip bubble is really the example here, because you can't really send tulips anywhere in the world in a censorship-resistant manner. They might have been worth a lot more if you could. They probably would have been. You know, what's funny is I never see those charts anymore comparing Bitcoin to these historical bubbles

because the thing is, it just recovered. So it doesn't look good on the chart anymore. Don't take my word for it, but I went out and I read all those books. about all the Celsius bubble and the tulip bubble and all these manias. And I don't think, for what it's worth, I don't think that that's what this is. Thank you for sharing. So I just saved you all a lot of reading. So Matt says it's not a bubble, so it can't be a bubble.

Yeah. My favorite historical mania is the Darian scheme. I don't know about this one. I told you about it before. It was a Scottish scheme to create a colony in Belize. Oh, I do know about this. is now known as Balees, which is still an uninhabited corner of Balees, amazingly. It's called the Dary and Gap now, I think.

And Scotland dedicated about 25% of its wealth to this households, individual households, contributed their assets to this attempt to create a colony. Back in, I think, the 1700s. And it failed. And then Scotland was so impoverished as a result of this that they joined England in the United Kingdom. So, you know, you ever think your bubbles are disastrous and bad? It can't get any worse than that. You lose so much money that you're forced to capitulate and join, you know, the next-door neighbors in an empire.

So I thought we were going to skip Iota as the next story, but you said you want to talk about it. Yeah, I like the Iota story. So, first of all, this isn't the first time that, like, the foundation has, like, requisitioned tons of funds. So there was actually a recent issue with Iota where there were just some early crowd sale funds. I guess, which weren't claimed. So then the foundation just claimed them for themselves. Classic. You see the token, you take the token.

Classic behavior. There was another issue a long time ago where they just had, their sort of seed derivation function had bad entropy or was just poorly written. And so I had a big issue with the number 13. Apparently, if you had the 13. That's a tricky number. Yeah, it's a scary number for sure. So they've had situations before where things, you know, accidents have.

happened and the foundation has essentially used that as an opportunity to claim what are user funds. So there's no respect for property rights on this chain. So this is another great kind of case study. So the Trinity wallet, which is the main wallet produced by the foundation, appears that it was hacked in some way. Maybe the GitHub was compromised. And so users were creating addresses with this wallet and those funds were siphoned off. And so in response, the foundation, panicked and turned off the coordinator. So Iota has this coordinator, which coordinates. Central coordinator.

It's essentially a replacement for proof of work. So imagine if instead of having miners, we just had one entity, which permissioned every single transaction. That's kind of the coordinator. And so they turned off the coordinator to stop the attackers, you know, continuing to monetize this attack. So, you know, if this has happened in Bitcoin, the entity that, you know, that, you know, created the poor entropy in their seeds,

those users would have lost money, but the chain would have kept on running. So Iota kind of made this issue much worse by turning off the chain or the tangle, rather. So it kind of goes to show, like, I don't even know what the lesson is. There's no moral to this story. We spent so much time talking about these terrible, terrible competitors for non-sovereign stores of value,

and this is just another one of them. Some people remarked that the price didn't move much. I think part of the reason is because Iota is the settlement network for Iota, so you couldn't move the coin to exchanges to sell it. So maybe they're going to keep the coordinator off forever, so no one can sell it. So let's talk some regulatory stuff this week. So the SEC has charged an Ohio man. He orchestrated a digital asset trading fund scheme.

So he raised about $33 million from 150 physicians and took all the money. So you hate to see that, but that's like, that's incredible. That's a lot of money to raise. That's honestly, like, yeah, that's an impressive amount. Like, I had never heard of this guy, and he just went out and raised a small fund and took all the money. Well, you're not an Ohio-based physician, so you didn't get pitched on the deal. There was another story out of Ohio. So this is the Dropbit CEO.

He was charged with laundering more than $300 million in Bitcoin through the now-defunct Alpha Bay Exchange. So Alpha Bay was one of the Silk Road-style Darkness. marketplaces. I don't know that we should really get too in the weeds on an opinion on this one, because I think there's going to be some back and forth. I've seen some other stories that say that he was not using Alpha Bay, but he was just mixing. So he was running this Bitcoin wallet and mixing transactions. So we might find more about this in the weeks to come. So I'm not sure if you have a take on this one. Yeah, I mean, I haven't looked into how drop bit functioned exactly whether it was custodial and non-custodial mixing.

Regardless, it does make me a little nervous for some of those Bitcoin wallets, which have coin join functionality built into them, with the major ones being Wasabi and Samurai. You know, I guess maybe there's a material difference there in that they are not taking custody of the funds. They're just providing software to users. Right. But, you know, you also overlay.

that against the dire warnings from Treasury Secretary Manuschen earlier this week, that FinCent is going to come out with even more guidance on Bitcoin, presumably more onerous. And it kind of seems like the U.S. government is stepping up its latest campaign against Bitcoin. So it definitely caused for nervousness among Bitcoiners. Yeah, agreed. So we'll keep an eye on the story and report back. So you wrote a Medium Post this week, Lessons from the Uneven Distribution of capital. What are the highlights there? Yeah, so actually in contrast to the latest news item, that post was actually arguing that overall the U.S. has taken a pretty sound view on crypto,

in particular tokens. So, you know, obviously the U.S. takes a dim view of ICOs and tokens for the most part. My argument is that what they're really doing is adhering to their standard of investor protection, which tokens really didn't meet that standard for the most part. And the post, you know, it's a lot of fun to write. I basically looked at some of the literature explaining why different countries have capital markets of various sizes. A lot of it has to do with the legal structure in place and, you know, the various laws around shareholder rights and creditor rights.

and it turns out these have huge knock-on effects on how big capital markets end up getting. And I think there's a lot of lessons to be taken from that. So I'm still optimistic that the U.S. is actually going to figure it out in terms of regulating some of these token issuances. And I think their line to date has been fairly reasonable, all things considered. Yeah. I think that there is a path forward there. And not sure if it's going to be the safe harbor that Hester Pierce proposed, but there's there does feel like there's some positive momentum happening there.

Yeah, and I really liked a response to Hester's proposal from Gabriel Shapiro, who is one of my favorite crypto lawyers, who I definitely want to have on the podcast one day. He wrote a kind of practitioner's response to Hester's guidance, so highly, highly recommended. Did you, so this is a non-cryptocurrency story, but did you see the Washington Post article? this week, the intelligence coup of the century?

I didn't because it, you know, the WAPO is like paywalled now and I refuse to pay the paywall. These paywalls are just becoming such a problem. Yeah, I think there's a business out there where you just take all of these articles and just put them up on IPFS or something and you charge 30 cents an article for it. Yeah, there's got to be a better way. Why has no one done that yet? Or some browser where you could have the payments made automatically. it's so frustrating to have to constantly delete your cookies.

Yeah, so I just don't want to subsidize the Washington Post after what they said about Bitcoin. What did they say about Bitcoin? We're getting totally off track here. I think they said that it was lame. It was tulips? Yeah, something like that. So anyway, so I would actually recommend people try to figure out a way to read this article this weekend. The company, so the story is basically that for about a half a century, governments all over the world were trusting this single company called CryptoA,

to basically encrypt, so to create encryption for them to use in their countries. And so the company, it turns out, was owned secretly by the CIA in the German intelligence group. And so for about 50 years, Germany and the United States were just decoding everything that was encrypted with technology that came off of crypto AG, which was a staggering amount of countries. five zero years? Yeah, for about a half a century. So it's really worth reading this article. So it was Intelligence Coup of the Century is the name of it. And so the clients of this company included Iran and a number of military jontas in Latin America, India, Pakistan, the Vatican.

So there's just like an insane story here. And I don't know that I have a takeaway other than to say it's really worth reading this story. and it's crypto. It's not cryptocurrency, but... That's astonishing. Yeah, it really makes you worry about some of these supply chain attacks that could potentially be possible.

It puts some of this Huawei stuff into perspective in terms of what if there's backdoors and some of the stuff. I think we can expect it as back doors. Yeah. So I have stopped using email and all electronic communication after this, and we will be corresponding,

via pen mail. I don't even know if I remember how to write words by hand. My handwriting is terrible. It's not good. I'm looking at it right now. It's really, really not great. Yeah. So that was the, that's like the read of the weekend, I think.

I think people should check that out. Do we have anything else to talk about? I thought Fred Wilson had an interesting post on USDA. Yeah, check that one out too. We put that in our newsletter, talking about the programmable money aspect of this and this idea that there would be apps built with stable coins. I wholeheartedly agree.

So I disagreed with it a bit. Which part? So I didn't, I don't believe that the programmability is actually the interesting thing. Well, it's about USTC. It might not be the only interesting thing, but it is interesting. I don't think it's the chief interesting thing. And as some pedantic people have pointed out with open banking APIs, you can achieve similar levels of programmability.

Yeah, so, so much more limited, though. potentially. But so I think the interesting thing about stable coins is that you can pretty much do whatever you want with them. You know, that is where they're differentiated from regular old digital fiat, in my opinion. And then if you look at USDC's terms and conditions, people don't look at this very often, they have a lot of prohibited activity classes. So I'm just going to read through some of them because I thought it was pretty interesting. So transfers to restricted persons or restricted territories. All right.

Makes sense. Transactions related to weapons of any kind. Weapons of any kind. Gambling activities, casino games, horse racing, dog racing, games that may be classified as gambling, controlled substances, any sort of Ponzi scheme. So really you shouldn't use USDC to buy tokens. To even buy tokens. Goods are services that infringe any copyright.

credit repair services, court-ordered payments, unlicensed money transmitter activity, annuities, counterfeit goods, any other matters or goods or services that we communicate to you that are unacceptable or that are restricted by our bank or payment partners. So basically, there is an enormous class of activity, which is restricted by USDA. The strange thing is, I can pretty much guarantee you some USDA users have violated this. You know, maybe they used it to do a gambling app on Ethereum or something. But it doesn't appear to me that USDA has blacklisted any accounts. So that's the strange thing.

They have these rather onerous prohibitions, and then they haven't actually implemented any blacklist. You can go look at the blacklist contract on EtherScan. Maybe they're just kidding about the T's and C's. Yeah, so I guess that there was. it was just a joke or something. That's fine. Yeah, so extremely onerous on paper and then on practice, you know, all bark and no bite.

Well, I don't want to cast this in a negative light. I think that the, I had not heard about those terms and conditions, but I do think the design space for programmable money here, by the way, in a bunch of contacts that do not include things that are on that list, is really interesting. And I do think that it opens up a interoperability play here for money transfer that is just not currently available. And so that alone is worth billions and billions of dollars, I believe.

I think that's fair. And I think if USDC can keep up what I believe to be a regulatory arbitrage where they're not imposing a PayPal tier standard in terms of surveilling the internals of the network, then they have something pretty interesting. So, you know, TBD on that. But, you know, pretty interesting post. All right, so I think that's all we have for the week. It's about two degrees outside.

It's about 104 degrees in this office. I think we need to end the podcast. Oh, we have a fun interview for you guys coming on Monday. We've been teasing this one for a little while, but this is a really good one. All right, thanks for listening. Have a great weekend, everyone.