On The Brink with Castle Island - Weekly News Roundup 2/21/20 (Enigma SEC action, Fcoin, Tim Draper buy 2.5% of Aragon and more) (EP.44)

Episode Date: February 21, 2020

Matt and Nic from Castle Island Ventures review the top stories of the week in the cryptoasset industry. This week's topics include:  - Deals of the week - Enigma settles with the SEC - Fcoin lost user funds - Tim Draper bought 2.5% of Aragon - DeFi infrastructure - Neel Kashkari's thoughts on crypto and much more news of the week

Before we start, wanted to make an announcement. So the MIT Bitcoin Expo is coming up. That will be March 7th and 8th at MIT here in Cambridge, Massachusetts. The Expo, definitely one of my number one favorite conferences in Bitcoin. I gave a talk at the Expo last year is one of my favorite talks. It was on the Bitcoin security model. What else? I think I was on a panel the year before talking about how I don't believe in fat protocols.

Anyway, so I've been for the last three years. It's student run. It is Bitcoin focused, you know, unlike a lot of those blockchain conferences. It's also intersecting with the first edition of the conference for the Crypto-Economic Systems Journal, which is a new academic publication being hatched out of the DCI run by my good friend, Wasim, kind of bringing academic rigor to some of these questions around cryptocurrency. So the tickets are really cheap. You can also use our code. So our code is SIV 20, CIV-20. We get 20% off your ticket. This is not an ad. We are actually sponsoring the conference. I just happen to think that it's one of the highest quality conferences in Bitcoin. And we're very happy to be supporting it this year. And I have given the organizers of the conference feedback about the coffee from prior years. I have been told that the coffee this year will be better.

So now you really have no excuse. So if you are nearby, definitely come along. Hope to see you there. 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. Inzaling economy, the new round of concentrated 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. Welcome to On the Brink. I'm Matt Walsh. And I'm Nick Carter. And this winter just needs to be over. I'm officially sick. Can we get some global warming up in here?

I'm not going to say that this is the Jordan flu game of podcasting. It's not quite that bad, but it's getting there. Yeah, so Matt has me in a confined space while he's, you know, visibly ill. So if I don't make it, you know what happened to me. But we just have to get this content out because we love our listeners. Yeah, we do it for you. We do it for you. It's a, it's going to be a little bit of a spicy one this week. I think there's some hot takes. There's a lot of things that we just think are nefarious going on in the industry. And so this might sound a little bit negative this podcast. Yeah, you know, we're known for being among the more optimistic and kind of

utopian of the crypto commentators for sure. So we're going to make an exception actually kind of trash the industry this week, which is out of ordinary for us. Just stop doing stupid stuff is the general takeaway. It just turns out a bunch of bad stuff went down this week. Yeah. I mean, we're still optimistic long term, but there's a bunch of stuff. Speaking of things that are down, Iota, how about that? Still down. Iota's still down. I didn't know that. It's been a week and counting. Actually, there weren't a lot of, after we trashed I mean, just, you know, due to the fact that it's a terrible centralized network, no one really came at us. I think it's because, you know, there's no overlap between Iota fans and the very intelligent listeners of our podcast.

Oh, that's a good point. Yeah, you have to have an extremely high IQ to, you know, to appreciate this. So it's Iota, the gift that keeps on giving. So they've been down for over a week now. So, like, it makes you wonder, like, the folks at like Boch and Volkswagen that, like, quote-unquote partnered with Iota, are they, like, catching heat? internally. So do those cars work anymore that are transferring Iota tokens between themselves? They're stranded in the lot. They can't move. They don't have the IOT coins. That's terrible. Yeah. Oh, man. That's our brave new world. Thoughts and prayers to Iota get well soon. They can't use

their smart fridge. How is the smart fridge going to pay off its gambling debt to the toaster? Oh, can't eat. All right. Well, um, um, On brighter news, let's talk about some companies that got funding and some of the M&A activity this week. So, Copper, a London-based crypto asset custodian, raised $8 million from Local, MMC Ventures, and Target Global. Congrats to those guys. So BitGo, the crypto asset custodian has acquired Harbor. So Harbor, for those of you who don't know, is a security token platform. So they have a broker-dealer license and a transfer agent business.

So I guess the read here is that BitGo looks to be expanding beyond. commodity tokens like Bitcoin and Ethereum and into security tokens and has acquired a broker-dealer license and a TA business as a result of this acquisition. So it'd be interesting to see what happens there. There's a lot of nautical themes in crypto custody, Anchorage, Harbor. Yeah, I wasn't expecting that take from you. Yeah, that's all I got on this one. Oh, good one. Yeah. Deribit. So Deribit is one of the larger crypto asset derivatives exchanges. that's, where are they located? Panama. They moved to Panama. They were in Amsterdam.

Okay. So one of these unlicensed venues similar to Bitmax, they raised capital, it looks like, a 10% stake in the business in a round that was led by QCP capital and three arrows capital. So a lot of money being made in these derivatives exchanges, especially the ones that are located outside the United States for right now. They're probably the most liquid options exchange for crypto assets right now. It's always interesting how the ones which operate outside of U.S. jurisdiction have such an advantage in terms of being able to get liquidity. Yeah. They're winning the race so far.

Yeah. Well, I'll see how much longer that continues, but certainly the case right now. All right, let's transition into the news. And one of the headlines, there's a bunch of news this week. and not all of it positive, as we said at the outset. So one of the things that happened this week was that the SEC announced a settlement with Enigma. So Enigma is an ICO. It's an ICO team.

Has roots in Boston, but I guess technically based in San Francisco. Very high-profile team. So Guy Zizkind was the original founder of the project. They had written a white paper before they did the tokenized. network. The white paper was called Enigma. It was around multi-party computation, really groundbreaking at the time. And then that's about all you can say nice about what happened, because then they ended up introducing a tokenized platform that did an ICO. They raised $45 million in what was probably, in my opinion, one of the most egregious unregistered securities offerings we've seen

in a long time. And so as these settlements over the past few months and, you know, I guess over the past year have been trickling in. You know, a lot of them are these peripheral projects that I'd never heard of. Enigma was always one that I imagined would, you know, see the wrath of the SEC at some point. But it turns out they didn't really get punished that much, at least from what I can tell. So it looks like based on this settlement that they're being forced to rescind money to anyone who participated in the ICO and wants to make a claim and also pay a 500K penalty. But, you know, the interesting thing here is that a lot of people who participated in this ICO made a bunch of money because the token essentially 10xed after it was ICOed.

And so I don't imagine that a lot of those folks would be making claims. And the other angle here that I think is pretty interesting and is nowhere mentioned in the SEC settlement is that a lot of venture investors and a lot of their advisors got tokens at a discount and were able to flip them. on offshore exchanges like finance. And so, you know, I guess these folks basically just get to keep all their money and aren't even mentioned in this. And for that matter, none of the principles from Enigma are even mentioned in this SEC settlement, which tells me that they had outstanding lawyers. So I'm not sure what the takeaway is here.

Other than this is just one of the most egregious ICOs is one of those that had some really high-profile backers. It also had some high-profile advisors, including Sandy Pentland over at MIT. And so it was riding on this prestige wave and, you know, a little slap on the wrist, I guess. I think the takeaway is that the SEC is not interested in fairness. They're interested in, you know, upholding the rules that they are bound by, but they're not really interested in making things right, you know? I guess. I mean, I mean, no doubt that this... Like the story of ICO enforcement has been a story of erratic settlements. Some of them pretty punishing, like the one, the nebulous folks had to...

You know, that was a significant settlement relative to the size of the race. And then the EOS settlement was minuscule. Here we have about a 1% penalty. You know, with the other potential... punishments they could have met it out not really being present here. And yeah, you also mentioned the fact that a lot of VC funds made a habit of acting as unregistered underwriters or distributors of these tokens, which is a regulated activity. Obviously, none of them are regulated as broker dealers or anything. The SEC has not interrogated this at all, right? At all. I don't think there has been a single

enforcement action. What's interesting, though, is that this concept did come up in the SEC Telegram discussion today. Oh, did it? Around flipping coins? So the judge was trying to determine whether Telegram was effectively outsourcing the distribution of the coins to these funds that were acting as these informal distributors. And so that's not like the key question in the SEC Telegram case, but, you know, clearly some judges have begun to realize that this is the effective distribution method. that these ICO teams in order to, you know, hopefully escape liability or whatever, we're relying on third parties, if actually, you know, VC and token funds, to distribute these things to the public on their behalf.

Really crazy. You know, and then even crazier, the team came out with this kind of victorious blog post around how they're launching their main net. And you had a funny tweet around, you know, Boston-based team announces partnership with the SEC. That's kind of what it read like. It was like, hey, great news. Great news we settled up. The other takeaway for me is that there's basically a Clayton put now for buyers of token sales if you think about it.

So you have downside protection, the form of the SEC offering you potentially rescission. And I think most of those claims will be paid out in full probably because not everybody's going to claim their rescission. and a lot of those initial buyers made money, or initial sellers made money. So they won't be claiming here. So people made fun of like the Powell put, you know, the S&P 500. If it declined too much, the Fed would step in. That's kind of the same thing we have here for ICOs. The SEC is guaranteeing downside protection if you're a buyer of ICOs, which is incredibly perverse.

Yeah. Incredibly perverse. I have to say I really dislike it. It doesn't feel like a good solution here. I don't know what the solution is. I think maybe targeting the funds that are actually facilitating or historically did facilitate this kind of behavior would be maybe better, but at least it's a start, you know?

Yeah, I mean, we're going to see a wave of settlements kind of roll in here. It's clear that this was a well-negotiated settlement. The lawyers are keeping busy here. Yeah, and there's this, like, perversity to it, too. The larger, the better-funded ones can basically escape punishment for the most part, and the smaller ones just get nuked. Yeah, that's exactly right. Yeah, SEC, again, not in the business of fairness.

All right, so let's stay on this vein of kind of pessimistic up here, unfortunately. But here's another story about an exchange, basically just break. So F-coin, which is a China-based exchange, which would not be at the high end of exchanges that I would trust as a consumer. Let's just put it that way. They seem to have defaulted on $67 to $125 million worth of customer funds. They're saying that they weren't hacked and they're not scamming anyone and that the funds were lost as a result of a, quote, data error.

So, you know, that sounds... like something you might say when you are scamming someone, but what do I know? So I, my abiding memory of F-coin, the one thing I know about them is that they spammed the hell out of Ethereum, like in 2018. So they were the biggest consumer of block space on Ethereum for a long time because they had this fee mining thing, which required a lot of on-chain transactions. So for like a period of weeks, they were by far the largest consumer Ethereum block space with obviously all of that being a total waste now, you know, because they're dissolving.

But, you know, boy, I wish that there is some way for exchanges to prove to depositors that they were solvent. Unfortunately, no such thing exists. Like a proof of reserve, maybe. Yeah, that's a good way to put it. Yeah, someone, why don't people agitate for that? I'm amazed. Has anyone ever talked about this concept before?

I mean, it's just another reminder that you just have to be. have to be so careful. In the market infrastructure for this asset class is just so immature. We're going to have to see a widespread maturation of the exchange environment. I think proof reserves has a role there. Oh yeah. I mean, exchanges right now compete on what tokens they can list and what financial products they can create. But the time will come when exchanges are competing in credibility on trustworthiness. And that's when you'll see a select few exchanges. start to implement the equivalent of Bitcoin audits or proofs of reserve. Because, like, ultimately, we're dealing with an asset, which is innately auditable.

And you can literally prove to third party very cheaply that you own some of that asset. The fact that we as an industry have not demanded that, you know, these deposit-taking institutions prove their solvency to us is absurd to me, completely absurd. And like some people say that I talk about this too much. I think it's an absolute aberration that, you know, that we're not actually taking advantage of the cryptographic auditability properties. And it's because exchanges have been incredibly careless with the trust the users place in them.

Yeah, the tools are there and we should use them. Yeah, and it's not even that difficult or complex, you know. So there's a small exchange in London called coin floor. They actually just redesigned their website to give special attention to the fact that they do approve of solvency audit every month. Nice. 71 straight months. Wow. Good for you, CoinFloor.

Everybody else, take note. So there was another exchange story this week. So Binance, which is the largest crypto asset spot exchange by volume. They are apparently launching a service to allow other companies to white label their exchange technology, which, you know, that's a pretty common business in traditional. markets to have this white-labeled type of functionality. I thought it was kind of funny, though, and this is a little bit snarky, but Binance, actually, I don't know if you saw it, they paused their trading platform due to unscheduled system maintenance this week. So, you know, I don't know if that feature is included in the white-label thing, but it was funny that those announcements

were like a day apart this week. I was looking into recently, and Binance has been forging these partnerships with Fiat-on ramps. So there's something like 20, different sovereign currencies you can use to onboard onto finance, which is, you know, for all the stick the finance gets and we certainly give them a lot, I think it's pretty cool. Oh, I mean, these guys are like crazy in terms of execution. Things are moving really fast over there. So, you know, we give, certainly we can talk all day about some of the regulatory arbitrage going on there, but it's a very talented team.

You can definitely see that. Yeah, in terms of building tools for individuals, especially in, you know, you know, non-developed world jurisdictions to onboard onto Bitcoin and other crypto assets. Finance is doing a lot there. Yeah, I mean, they're huge. They're huge. All right. So let's move on to some other stories.

The IRS announced this week that they're going to have a symposium, a summit down in D.C. In the next couple months. And they're going to bring a bunch of startups together and a bunch of financial market infrastructure providers. And they're going to talk about tax policy and regulatory compliance. So it doesn't sound like the most exciting room to be in, but I think that this is long overdue, and it would be great to have some additional clarity just on taxation for these type of assets. Yeah, I'm really glad they're going to be listening to the industry.

I think it's about time that we get an exemption for smaller transactions in terms of capital gains. Yeah, Coin Center has been pushing for that for a long time. I think their number was $600 would be the de minimis exemption. That always made sense to me. Yeah, for sure. I mean, people treat it like a currency. You don't have to pay Forex transactions or capital gains when you are, you know, making normal transactions. Yeah, the dollar, like the dollar is always fluctuating in value, but nobody has to be aware of that.

Right. The other interesting thing will be to see if they address the proof of stake issue. I mean, to me it seems like proof of stake income would be taxes ordinary income. Right. Which would then constitute a significant. leakage to the government or to the tax authorities, which could otherwise be going to the security budget of the protocol. Right.

So the tax question there, if stakers are U.S.-based, that actually renders proof of stake less efficient in a way, which is kind of under-discussed. You could make the same argument, I think, for Bitcoin, except you have the depreciation of the V-A-6 to offset that. Yeah, I think there's maybe a slight difference in that you have physical. physical A6. You know, you have a capital outlay there, and they're depreciating. So another story this week was Tim Draper bought $823,000 worth of Aragon tokens,

which represents 2.5% of the total network. And the quote was something along the lines of he believes that what Bitcoin did for money, Aragon will do for governance. So to be honest with you, I hadn't really kept up on Aragon. It's sort of slipped in terms of total market cap. But the goal of this project originally was for operating decentralized autonomous organizations, so DAOs. And I think DAOs are fascinating, and count me long-term bullish on DAO's, despite the fact that the Dow had a really terrible conclusion to its life and resulted in Ethereum and Ethereum Classic, kind of the split there in the hack on the DAO.

But DAO's are really cool. Yeah, Aragon has definitely fallen out of the public eye in the last couple of years. They seem to be, you know, executing and building. I think my thing about DAUs is, like, it took us so long to figure out how to make, like, even something as simple as, like, the relationship between shareholders and directors of a company. It took us a long time just through trial and error to figure out how to make that work. I was just reading about the free banking system actually. That's my favorite era.

Yeah, there have been a couple free banking years. And in Scotland, in the 1700s, if you wanted to create a bank, you had to do it with full liability. So there was no limited liability. So you wanted to start a bank. If that bank became insolvent, the shareholders would then have to cover that shortfall, which is pretty cool. Yeah, that's tough. So, yeah, it certainly was tough, and there were a lot of people that lost money because they were clawbacks.

And so it, you know, it took us a long time to figure out, okay, actually maybe it's better to have limited liability so that people start businesses, so the risk isn't total personal ruin. So it's just negotiations like that that eventually gave us the firm in its modern, you know, form. And then I feel like we're going to go through this for Dow's as well. probably DAOs will work eventually but the winning DAO is going to be sitting atop a pile of 500 failed DAOs, right? Yeah, I think that's right.

What's your kind of bull case for DAOs in terms of what they would be used for? Do you think that the venture fund approach would be the first thing that gets adopted? So a DAO just to invest in startups or something? I was excited about the DAO back in the day. It was a cool idea. I thought it was very cool.

I think there's a lot of legal questions that need to be answered first maybe. Yeah, it's unclear what DOWs would be best suited for at present. I don't have a good answer. So anyways, I think Tim Draper is one of the more interesting characters in this whole industry, and him getting involved in a project always warrants a little bit of attention. So he's involved in Aragon now.

So let's talk a bit about this big story this week on BZX. And I sort of struggled with how to condense this into a newsletter tidbit for our newsletter that goes out on Fridays, which hit subscribe on that one, by the way. So here's the story. So, DFI, you know, for those of you who are maybe not familiar, stands for decentralized finance. It's a really hot area right now. There's over a billion dollars locked in DFI right now. And what these are typically, these typically are exchanges that are, quote unquote, decentralize. centralized, they're automated market makers, their lending services.

And the idea here is that you can build these financial products and these financial market infrastructure pieces without single points of failure and theoretically without a central operator. And so that's a big powerful idea. I think that that is, you know, it's worth just acknowledging that that's a very cool thing and that some of this stuff was not possible before. and that, you know, it should be applauded that there's a lot of great experiments going on there. And the use case is really allowing you to switch from one crypto asset to another without going through a third party.

You can earn. You can earn interest. You can earn interest on your crypto. You can lend. So there's all sorts of stuff you could do. And you could see why people are excited about this because the idea is that this could be a large industry, financial, services represents a big chunk of total GDP. What if you could do some of these things in a permissionless way?

So that's kind of the bull case. Have I captured that? I think my bull case for Defi is that by allowing virtually anyone to create financial products and derivatives and express them in the form of code, the pace of development will be sufficiently fast that something really compelling is built before. the regulators catch on. So mine is kind of like an adaptive bull case, kind of like from an evolutionary perspective. Because like for sure, if, you know, if like US regulators were attuned to this, they would have a problem with a lot of it. Yeah. But I think, you know, I think the

pace of development is just faster if you totally unencumber the people that are creating financial products here. So fair enough. So why don't I hit on what happened this week with this BZX project and then I want to run five takeaways by you in terms of what I think this means and get your reactions to it. So the news was that BZX, which is a lending project built on Ethereum, it was exploited twice in the past probably seven to ten days. And the perpetrators of this exploit made off with over $630,000 worth of Ethereum. And so the dramatic oversimplification of how this happened is that the perpetrators of this happened is that many of these defy infrastructure services have incredibly shallow order books

and they have automated market making behind them and so it's that in some cases they don't have order books like uniswap doesn't have order books fair enough um and so market manipulation becomes really easy and it's very uh it's it is trivial to take advantage of some of these things if you're uh acutely aware of how they work is that fair Yeah. So here's my general takeaway. So takeaways. So these platforms are promising, but they're incredibly nascent.

I think that there's a big breakthrough, but none of these things have really been tested in the wild, and they're not ready for prime time, and they're not ready for high-value transactions. I would not be putting a lot of money on these things. Yeah, the positive spin, though, is that this constitutes testing. It's just maybe it's irresponsible to test it in primetime with user deposit. But this is the gauntlet that they have to run.

Okay. So maybe it's good that we have a permissionless exploitation environment. I mean, whoever lost that $630K worth of Ethereum, that's tough, though. Yeah, it's not clear who actually lost it. The BZX team had his, they said something strange about how, like, no money had been lost. I'm like, well, someone absconded with money, so there's been a winner, so, like, there's clearly a loser or something. Yeah, I don't get that at all. It doesn't make any sense to me.

So that dovetails into the second takeaway here is that the people that are operating these platforms do not understand capital markets. So a lot of these things have been built by technologists who have, it has a flavor of technologists discovering finance for the first time. And it turns out that running trading infrastructure is really difficult,

and there are a lot of operational challenges. And so there exist things like circuit breakers and limit up down and limit up and limit down protections and like a variety of operational guardrails that don't exist on these networks. And the postmortem from the BZX team was just so laughable to me. So they had this postmortem that was basically started off with, well, we were at this happy hour at Eath, Denver, and we got back as soon as we could.

It's like, what are you talking about? Like, you're running this infrastructure that people have money on. Can you imagine if J.P. Morgan was like, hey, you know, sorry, we were out at a happy hour. but we fixed it as soon as we could. Like that's unacceptable. Yeah, I think that's like a fundamental problem just in crypto in general. I certainly feel as securely based on the coin metrics experience because like the crypto markets run 24-7.

So you have to craft a team which can monitor that infrastructure on a 24-7 basis. But yeah, so that's just the fundamental nature of crypto. That's why people like it. You know, you can transact at any hour. but it's also a significant challenge for the administrators. And lots of the teams building products are not planning for failure. They don't anticipate crises. So when they do occur, they're not prepared.

Well, so that dovetails into the third takeaway here is that there's a big question in my mind around how decentralized these networks actually are. And so if there is a central kill switch, you can turn off the network. If we're talking in the context of monitoring these things and taking, care of them. Just how decentralized are some of these things? And that's a big open question. Yeah. And so now we have this emerging discussion around flavors of decentralization. So Uniswap is held up as the quote unquote most decentralized DFI protocol because there really is no kill switch. Whereas, you know, something like compound and maker, there ultimately are entities

that are effectively administrators for that, for those systems. I don't even think people would disagree with that characterization. The question is what happens when those entities get challenged by regulators, you know, to say, well, where is your banking license kind of thing? That's this really big open question. I think there's Angela Walsh often calls this the veil of decentralization. Right. I'm inclined to agree with her on this front.

I don't think decentralized, calling them decentralize is even appropriate. I would call them non-custodial lending platforms, perhaps. Like there definitely are advantages here, which are not. captured by that word decentralization. Fair, fair. All right, so fourth takeaway. As the stakes grow, these attacks are just going to increase. There's a billion dollar bug bounty on this right now. And just think about the intersection of people that are A, knowledgeable about finance, be knowledgeable about computer science, C, knowledgeable about cryptocurrency networks, and D willing to do these exploits. There's a lot of smart people that are at those intersections.

and it's not even clear that some of these exploits are black hat moves. I mean, you could argue that this is just using the software for what it's designed for, is that, hey, there's a way to make the price crash on this venue and make it go up on this venue and take advantage here. And so similar to the Dow hack, there's kind of a question around if it's actually illegal to do some of these attacks. But people will do more of these as more money goes into these platforms. I think the BZX exploit would be considered illegal in the U.S.

That was my understanding, but that doesn't, you know, prevent it from occurring. And here's the interesting difference between attacking an exchange and attacking like a DFI system. Exchanges, like they have KYC, and in some cases they have legal recourse. If you reorg them, you know, and essentially rip them off, which is I think that's one thing that actually protects some of these. smaller proof of work coins from getting 51% attacked, just because exchanges generally practice KYC. So you have a legal labor protection. I don't know if that makes a ton of sense in the context of a crypto economic system, but it exists. In the case of DFI, that legal layer is not really present because these systems will pay out if you construct a valid transaction. So that hindrance is

removed. And so I think the willingness to potentially exploit them is greater. Right. Right. But I think that's kind of the trial by fire they have to go through necessarily. And that's going to be impacted by point number five here, which is that as these attacks increase, I think the other thing is that regulatory scrutiny here is going to increase as well. So a lot of these D5 projects kind of remind me of ICOs back in 2017 in the sense that there's a lot of attention on them. There's a lot of investment going into them. But there are some major, major open questions around just the legal impact of some of these and whether or not you can actually run some of these services because, as we've mentioned

before, some of them are centralized. And so you could argue that some of these things look like unregistered ATS venues, actually and should have to register with the SEC. So I just think there's going to be a lot more scrutiny on these platforms in the coming years. And right now the SEC is cleaning up the SEO mess. but, you know, these type of things could be in the cross-air sooner rather than later. Yeah, I don't know how persuaded I am by that.

I mean, I do think their cross-hairs will be placed on defy, but you look at it from a harm reduction perspective, like retail investors lost billions of dollars in ICOs. It's not clear to me if there's been a lot of money lost or misrepresentation in the defy space yet. So I don't think that it is like there's a moral case to be made for like the government to like crack down on DFI. But yeah, I mean, certainly under the existing laws of the U.S. at least,

some of the stuff may not be permitted. Yeah, and I don't want to sound overly pessimistic on this because I do think that there are some of the smartest people in the industry are working on projects in DFI and count me long-term bullish on some of the stuff working and actually making sense. But right now, this stuff is terrifying. And I wouldn't want to have any money kind of locked down. on these more than you'd be willing to lose.

And people often wonder why the yields for lending out USDC in some of these protocols would be like, you know, 600 bips above the risk-free rate. And I think the answer is the risk of failure. Yeah, I mean, they're risky on a lot of different levels. So that's your answer. There's lots of embedded risks. So there's a risk premium, which I think, you know, you probably shouldn't be representing this to consumers as riskless interest or riskless return for sure.

So hopefully we kind of thread the needle there on being optimistic long term, but really thinking that some of this stuff is scary going forward. Why don't we, so you mentioned USDC. I think that's a good dovetail into, you wrote an article this week for CoinDesk called Policymakers Shouldn't Fear Digital Money. So far as maintaining the dollar status. Let's talk a little bit about that. That actually wasn't the original title.

What was your original title? The original title was the prospects for crypto dollarization. You were being censored. Yeah, I was censored. So I'm a columnist for CoinDusk now. So I'm actually going to write every two weeks. Wow, no big deal, huh? Yeah.

So, you know, today, CoinDesk, next year. Financial Times. That's correct. Financial Times. I will never write for the Washington Post. Never forgive. Why? Well, they just trash Bitcoin one too many times.

But so did this Financial Times. Well, Alphabelle did for sure. But I think the rest of the financial times is okay. I think everyone has written bad things about Bitcoin. That's true. That's true. I guess we have to create our own, you know, mainstream media. Well, you could write for Nakamoto.

I think I might. I think I might. Good. Don't tell the Bitcoiners. But anyway, so I'm a Coin desk columnist, so that's pretty fun. It's also difficult because normally my average article length would be like $5,000. words so I'd say yeah it's you're averaging like a 45 minute read they're not they specifically said I could not do that so and I appreciate that so the the idea behind this

article is you know crypto is an effective distribution method for plain old dollars and in the last two years stable coins as a cohort have gone from nothing to six billion dollars outstanding IOUs existing on-chain, $4 in bank accounts, mostly offshore. And that's a pretty interesting phenomenon. I think it could accelerate. I think in a year's time, there might be $100 billion sitting in those offshore bank accounts. And I think of them like Euro-dollar. And if you haven't read up on Euro-Dollars, they're pretty interesting. So Euro-Dolars mean deposits which exist outside the purview of the U.S. banking system, outside the regulatory of the Fed. So they are considered essentially less restricted dollars. You can kind of do more with

them. So they have different characteristics of dollars that are trapped in the U.S. banking system. So if you think about stablecoins, stable coins are like the most high-powered version of euro dollars. You can send them to your friend with virtually no intermediation. You can use the Bitcoin or Ethereum infrastructure, which has been built up in the form of wallets and exchanges, to trade these things and move them around. And you don't have to interface directly with the issuer to get them either. You can just buy them on an exchange. So that's pretty interesting.

I think the point I made in this article is that there might be product market fit there for people in the developing world in high inflation countries that prefer dollars to their local currency. Now, of course, there's like a little bit of a chasm to be crossed in the form of the user unfriendliness of crypto. But we're kind of getting there. You know, there's wallets that are more user-friendly these days. Exchanges, Fiat on-ramps, or, you know, they exist in virtually every jurisdiction.

So I think we're on the cusp of potentially having a crypto-dollarization event. And I know that this is in the very earliest stages of happening in Venezuela. So Venezuela actually has effectively dollarized just in the last six months. There's been an acceleration of dollarization. And the problem with dollarization I talk about in this article is, well, bank accounts are often not trustworthy in these countries. So if we let users self-custody, the base money here in the form of dollars, that's pretty powerful. It's pretty empowering. I like the bent of this article because it really argues for a pro-block chain orientation on behalf of policymakers.

Oh, yeah. And, you know, this whole thing was motivated by the fact that the Libra hearings were, you know, at the time maybe I was cheering on some of the congressmen that were really trashing Libra and Zuckerberg and so on. But like upon reflection, I think they were a little harsh on crypto. Yeah, definitely. And I think it's basically in the interests of the U.S. to lean into this phenomenon, understand it better. you know, and I think it helps them long term. Yeah, I mean, if you think about it from the U.S.'s perspective, becoming a mass exporter of dollars just solidifies the role of the dollar in the global economy, and it makes just the overall

standing of the United States stronger. Now, what it does do, though, is impair their ability to enforce sanctions through something like Swift or the New York-based banking system. Not necessarily. Not under all designs. Well, right. But then, you know, there's going to be a negotiation in terms of, you know, how much ability they will have to enact policy through the stable coin issuers.

That'll probably be the next step here, you know, so there'll be probably some negotiation there. But I think, generally speaking, the U.S. is going to have to give up some of its power over the world's monetary system regardless. It's in their best interest if the dollar is still the global unit of account. I saw that you did a little hat tip to Larry White at the end of that article. Yeah, stay tuned. Stay tuned. I think I'm going to be exploring this concept in depth.

So we actually might even have our first mini series on this podcast. That was a pretty high profile. Thank you at the bottom there. Usually it's just like thanks to a couple like randos that you're friends with. Well, he, he was very kind. He actually proofread my article for me. He believed that. All right.

Well, more to come on that. All right. A couple odds and ends this week. I like this blog post by ErsX. So they wrote a blog on how pressure. metals might be a useful precedent for crypto asset market structure. Definitely worth a read. I think these guys have been really thought-provoking just in terms of looking at other asset classes and how the trading infrastructure arose to support those asset classes. And so this was an interesting read.

I also did you read Michael Bloomberg's policy proposal on financial reform? It's a riveting read. Pretty good, actually. So did you get the last line there was Mike will promote health competition in financial services by creating a regulatory sandbox where startups can test concepts in providing clear regulatory framework for cryptocurrencies. So the way I read this is it's kind of what Yang said a few weeks ago, just on the state-by-state process here is totally broken, going and getting money service businesses in every state when you can just go once at a federal level. That would make a lot more sense. So, you know, I wouldn't be surprised if we have more candidates come out and say this because it's just common sense. I was going to say it does look like

he got this from Yang, but regardless, I think federal regulation would be better than the state patchwork we have right now, which is a mess. Yeah, I mean, it's just, it's harmful for startups. It makes it more difficult to start a company. And it's also harmful for incumbents, especially in states like New York, which can't get out of its own way in terms of the bit license. So let's get something federally put in and let's get it done. Shout out Wyoming, though. Yeah, Wyoming. Big shout out to Wyoming. Yeah. Well, they're doing some cool stuff there. I'm excited to see if anyone takes them up on their offer to become a special purpose depository institution.

Well, I think that there will be some people. Yeah, yeah, so that requires, I think Caitlin Long said it would be a felony to run a fractional reserve under that law. So that's pretty cool. All right, well, I don't know how I feel about that. They're not messing around. All right. So Hasu had a good article this week in CoinDesk. Is he also now on CoinDen?

He's a columnist, yes. So they just started this program. Okay. So he wrote an article about some of the misconceptions around mining centralization on Bitcoin, which I thought was really good. Yeah, it was very clever. So the key point is that miners are incentive aligned

with Bitcoin long term. And so even if you treat miners like a single cartel, it's in their best intro. us to actually not misbehave. You know, I don't think that is the strongest thing causing minors, to be honest. I think the number one variable there is no minor in practice has discretion over the system because it is in practice the hash rate is reasonably decentralized. But it was quite an interesting contrarian take. You know, that's kind of one of the things that Hasu does really well is question the convention.

So I think it was a really interesting article. All right. So the last one I want to talk about is this article that Barron's had over the weekend. So I'm not a regular reader of Barron's actually, but I was out to dinner on Saturday night and three people sent me this article within 30 minutes. It was really interesting. And these people that sent it were, you know, of the institutional crowd. So the title of the article is Tesla's stock just had the ride of its life why Bitcoin could be next.

I thought the article was pretty bland and didn't really have much new news, but it gave the pros and the cons of Bitcoin. And one of the pros was just around the halving and maybe the price will go up. And then it had these Neil Kashkari quotes at the end, and just him hammering Bitcoin. And so he said, all that's emerging is burning garbage. Maybe five years from now or 10 years from now or 20 years from now, something useful will emerge from this. But so far, all that's emerging is burning garbage. So that's your industry right there. That's your profession, your livelihood.

Why is Neil Kashkari so mean? You know, that's what I want to know. Why is he so mean? It's just burning garbage. Has you considered just being like a little nicer? So I think that obviously we're on the other side of this trade, but I think that history will not treat this quote very well. I could see this quote being treated alongside some of the more famous prognostications

that did not go well. So a couple of those that come to mind. This telephone has too many shortcomings to be seriously considered as a means of communication. That was William Orton, the president of Western Union in 1876, just in case you were wondering. Another one that I really like is fooling around with alternating current is a waste of time. Nobody will use it ever. That was Thomas Edison in 1889. Turns out that was wrong, too.

I think there's a bit of kind of weird history around that. Wasn't there a bit of a war between the 80s? folks and the DC folks. Yeah, Tesla versus Edison. And didn't he like electrocute a rhino or to make a point at some point? Maybe. Yeah, I think he or an elephant. Yeah.

That got nasty. It makes like the Ethereum Bitcoin war look nice. Yeah, it does. Here's another good one. And you want to talk about regrets. So Horace Rackham, who is Henry Ford's lawyer, he decided to pass on investing in the Ford Motor Company in 1903. And his rationale was as follows.

The horse is here to stay. day, but the automobile is only a novelty, a fad. Who, missed a good ride on that one, huh? Yikes. And then the last one is Robert Metcalf. So Robert Metcalfe was the founder of the recomb. Also, you know, Metcalf's law, you know, has a little bit of crypto overlap there. So in 1995, he had a great prediction.

He said, I predict the internet will soon go spectacularly supernova. and in 1996, catastrophically collapsed. So I actually thought the internet was going to go down. That's a new one. So Metcalfe, he of the law, was totally an internet bear. Yeah.

How does that work? I don't know. But, you know, hopefully we can add Neil Keshkari to this list. So timestamp it, open timestamps. What's the date? The 20th of February, 2020, this is burning garbage.

Yeah, I think Neal's historical reputation is going to be tarnished regardless for his involvement in the Fed, which is corrupt. I thought you were going to say the TARP. He's the mastermind of the TARP. And TARP and the Fed. Well, the TARP kind of worked, right? Well, I gave us this high-velocity trash economy. So, you know, I think bailouts are just wrong. I don't think we should have bailouts. Oh, wow.

I was arguing. This is like the 50-minute mark of the podcast. and abolish the FDIC while we're at it. I'm also against the FDIC. Wow. Yeah. So maybe we'll explore that next week. What a tease for next week.

All right. So I think that's all the news of the week. A little bit of a downer week. Just we were zinging it this week. Yeah. And the number went down as well. Well, today. But I mean, I think it's up on the week.

So, you know. You know, you can't look at the number. Number go down. Number go down. That's all right. Well, all right, everyone, have a great weekend, and hopefully it gets a little bit warmer around here, but it doesn't look like it will. Yeah, we have some good guests coming up for you. We have five or six episodes already recorded, so pretty exciting stuff over here. A lot of content in the can. So stay tuned for Monday. Have a great weekend.