On The Brink with Castle Island - Weekly News Roundup 2/28/20 (Steven Seagal's Bitcoin2Gen, Ripple pays Moneygram, Deals and more) (EP.46)

Episode Date: February 28, 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 - SEC denies another Bitcoin ETF - SEC whacks Steven Seagal - Ripple Moneygram payments - Central Bank Digital Currency - Binance jurisdiction shopping and much more news of the week

Brought down by bad mortgage investments, Lehman, which has 25,000 employees, will be liquidated. The federal government loans American International Group, AIG, $85 billion. This is a different kind of market, and the Fed is asleep. The federal government is stepping it to stabilize Fannie Mae and Freddie Mac, the two mortgage giants that have been threatened by the housing crisis. The Bank of England has pumped 75 billion pounds more to Britain's ailing economy with a new round of quantitative easing. You print a couple trillion dollars, and all of a sudden, people start to worry.

So out of this worry, we have something called the Bitcoin. Bitcoin. Welcome to On the Brink. I'm Matt Walsh. And I'm Nick Carter. And we're remote. This is our first remote podcast. Yeah, we decided to, you know, cease all physical contact and shut down the office due to coronavirus.

You're kidding, but I hope that that isn't what happens over the next year. It's getting a little scary. It might, you know, it might come to pass. Wow. It's surprisingly hard. to do these remote setups, especially, you know, in a pinch. So request for startup to make this a little bit easier on podcasters everywhere. So we got some news this week. Some deals went down. Yeah, it was a busy week. Maybe not a busy week for deals, but there's definitely some

enforcement actions. But let's start it off with a couple of the fundraising stories here. So Coolbit X, which is a compliance company. Actually, did they start as a hardware wallet company? Yeah, I have their hardware wallet. It was a credit card. shaped hardware wallet that I think connected to your phone via Bluetooth, which is actually like pretty cool, I guess. But I guess they, they totally pivoted. Yeah, they pivoted. So now they're focusing on compliance, specifically I think the FATIF, the travel rule for exchanges. And so they raised $16.7 billion in a series B-Round that was led by SBI Holdings, had participation from Monax Group, BitSonic, as well as Taiwan's National Development Fund, sovereign one.

fund over there. So congratulations to those guys. A second one is a team that has some roots here in Boston, although they're not a Boston-based company. So Omniaks, a digital asset execution platform, started by a group out of State Street, Hugh and John, and those folks, they announced that Six, which is the Swiss Exchange, has invested in the company and they're going to be integrating the product, so giving six customers the ability to buy digital assets. So congratulations to the Omniaks folks. And then last minute one that we just put in, FTX, they also, it looks like they're raising some capital, right?

Yeah, FTX is raising, I believe they're giving probably non-U.S. folks with access to the platform, the ability to bite off a 250K chunk of equity. And they're raising in a billion dollar valuation, which, you know, they're maybe less than a year old, but they've had explosive growth. I think this one's quite interesting because they have a token. So they have a Binance BNB style token, FTT. And the token is a claim on something like 30% of the revenue from the exchange.

So we have a situation where the token is, I guess you could say it's junior to the equity. If anything, to me, the token seems like it kind of competes with the equity for the attention of the directors. So it's kind of a strange situation almost. I don't know if I'd want to own the token now that it looks like there's going to be a real outside base of shareholders. Right. Certainly in the liquidation, you'd rather have the equity. And it's a little unclear to me what the token, you know, what's sort of the purpose

of the token again, is that it's a trade discount if you can use it for collateral? Well, yeah. So the token is like kind of like buying a seat on the exchange so you can get discounts. So that's one, you know, very, you know, clear usage. And the other one is that there is a periodic buyback. But the catch is that the buyback stops at 50% when 50% of the supply has been burned. I'm of the opinion that this is not equivalent to a dividend at all. Lots of people disagree with me.

In fact, people tend to model these tokens, these buybacks as cash flows flowing to token holders. But I think that's actually wrong. And are these buybacks auditable on chain? That's a good question. I think the burns are, you know, certainly. But as with the buybacks, you know, finance was doing this. They claimed they were open market operations. So they claimed that they were actually buying back the tokens and burning them.

It later emerged that they were just. effectively burning tokens that were held inert in their treasury, which doesn't seem very deflationary to me at all because those tokens weren't even present, you know, in the active float of the asset. So, yeah, there's a lot of kind of disclosure issues that surrounds these tokens, which could be much, much better. Right. Okay. Well, so light week for deals.

Why don't we move on? It was not a light week for the SEC. So the first story to talk about is a denial of another ETF application. So the SEC has rejected the ETF application for Wilshire Phoenix. So this is a New York-based company. They're pursuing an exchange-traded product that would hold Bitcoin and U.S. Treasury bonds. And so the idea, it's an interesting product. I'm not sure really why you'd want to hold those two very divergent assets, but they had a rationale behind it.

And I think that they believed that the way that the U.S. Treasury bonds interacted with Bitcoin would address some of the SEC's concerns. Obviously, they haven't. So the denial came out, and it's the same basic reason why the Bitwise proposal was denied several months ago. So notably that the issue is market manipulation, basically. So a large percentage of the overall spot market is transacted on these exchanges like Binance and BitFinex. which are unregulated. They don't have surveillance sharing agreements between themselves either. And so this is clearly an issue with the SEC. So it's what we've seen with the Winkle boss denial. It's what we've seen with the Bitwise denial. And I think as we've said publicly, what we really think needs to happen here is that more of the market as a percentage, the overall spot market needs to come under regulated exchanges that have surveillance sharing agreements. I think you can get to that end state a couple different ways. One is that just more. institutional capital comes in, and that institutional capital does not have the ability to participate on some of these offshore venues. And so just as a natural forcing function, more of the U.S.

market with the coin basis of the world, the Gemini, the Aresaxes, become more important and more volume goes there. The second way is that you have some sort of enforcement action on some of these international exchanges, whether that be a banus or Bitfinex, and they cease to be so pervasive. So those are probably the two ways that it could get addressed, but it certainly does not appear to be an insurmountable problem. I thought the interesting thing was that SEC Commissioner Pierce published a dissent. So this was not a unanimous opinion. And her dissent was pretty interesting. And so there's two key objections that she raised.

One was that the commission applies a unique heightened standard under Exchange Act 6B to rule that filings related to digital assets are basically just more onerous. So her point here is that prior to Bitcoin-related filings, the commission did not require an exchange to establish any relationship between pricing on a regulated market and the underlying spotter futures market. So that's kind of interesting. It's basically what she objected to with the Winkleboss denial. Clearly, the rest of the commission is not on the same page. It's a very technical thing, objection. The second objection is that the commission's approach impedes institutionalization. innovation. I think the wording here is a little bit sharper, and it's certainly more of a political

stance as one might read. And so it's basically, she says, we do not protect investors by adopting standards that compel them to access novel products anywhere, but in our markets. We do not promote fair, orderly, or efficient markets when we prevent institutional players from bringing to already vibrant markets the benefits of their participation. And we do not facilitate capital formation when we greet innovation in a defensive crouch. And so what she's basically saying here is that this is going to happen elsewhere. Why don't we create a playground where people can actually do these type of things in the United States, create an environment, so to speak. So what was your takeaway here? Yeah, I think Hester's got a point, you know. I mean, look at the,

I mean, this isn't Bitcoin specifically, but look at the Ethereum, gray scale product. I think the ticker is ETHE, if I'm not mistaken. That thing is trading in hundreds of percent premium to NAV. So many retail investors presumably are buying this thing without realizing that they're not buying a claim on much Ethereum or they're only buying a tiny fraction of a claim on the theorem that they think they're buying. So to me, that's potentially very harmful, especially if the premium ever contracts to zero. And GBDC, the premium is trading at 20. 20%. So if the SEC, you know, they're often using this language of, you know, harm reduction and protecting investors. By not acting on this, they are, you know, funneling investors into

these really inefficient products that are probably going to be harmful to them in the long term. I think it's a great point. I don't know if this gets addressed while Clayton is the head of the SEC, to be honest with you. I, Hester Pierce has been really a staunch advocate for innovation. in this category. And I just don't see it coming from the top. And so my guess is that we're going to need to see a regime change, so to speak, at the top before we get this pushed through. And, you know, if you take the stance that some of these market manipulation,

things are addressable just by some of the math around the spot market, I think it's only a matter of time. Yeah, although if you look at small market volumes or even the synthetic market volumes over a majority of those are on offshore and essentially unaccountable exchanges. So hopefully much of it does return to the U.S. But right now the biggest exchanges are Benance, BitMex, Darabit. These are offshore exchanges. That's right.

Well, the SEC was also in the news this week for another settlement. So do you remember Stephen Segal's coin? It was called Bitcoin 2Gen. Do you remember this one? I remember it well, yeah. Classic celebrity ICO, you know, tried and true model. It turns out it was a scam. Turns out not disclosing that you've been paid to promote an ICO is illegal.

So, Stephen Seagall learned this. So it turns out he got 250K cash and then 750K worth of Bitcoin two gen coins, which probably didn't end up that well in terms of their performance. But who knows, you're going to take the cash in that. situation, Stephen. Take the U.S. dollars. You don't want two gen coins. Maybe he really believed in this thing, you know? The problem is that they didn't spell it right. So it was Bitcoin two gen, but there's two eyes in Bitcoin. Made it very difficult to pronounce. I don't even know if we're saying here, right? Yeah, it's more like Bitcoin, two gen. This was one of my favorite

celebrity ICOs. There's a couple others that are on Mount Rushmore of ICOs. Do you want to hear my other three. Go ahead. So Paris Hilton, number two, she had Libyan coin or something like that. My number three is Floyd Mayweather with stocks. I don't know what that one did either, but that was some. That was a classic, yeah. Yeah, he took a picture. I think he had an Instagram photo with a million dollars worth of cash on a private plane. He said, he was on a plane. I'm making all this money by buying stocks, S-T-O-X, I think. So that was a good one. And then, people forget, Jamie Fox, he did one too.

He had one called Cobben Hood. I think that's Robin Hood, but with a C. I don't know what that one was either. I think that was an exchange. Yeah, celebrity ICOs, you know, that was a real thing back in 2017. Well, Stephen doesn't have to go to jail, so I guess he just settles and I'm sure he pays him fine.

But it was actually a busy week for high-profile people in the crypto, ecosystem or around the crypto ecosystem. So this is my favorite news cycle where every three or four months, Becky Quick will have Warren Buffett on CNBC and inevitably will ask him about Bitcoin and he'll come away and say it's worthless and that he hates it and it's going to zero. So that happened this week. He came out and he said, this was post Justin's son allegedly giving him some Bitcoin, which I guess he did and Warren Buffett gave away.

He said it's worthless. It doesn't produce anything. cash flows, all the same usual stuff. But this just set off a firestorm where you had other influential people just jumping in and saying he's talking his own book and he's wrong, basically. So Tim Draper jumped in. They said it's hilarious, 50% of Buffett's holdings are in banks and insurance companies. They're not going to do well in the decentralized economy.

Of course, he's not going to like it. It's a huge threat to what he holds. And then he came in over the top and it reiterated that Bitcoin in his mind is going to 250K by the end of 2022. So that'd be nice. And then Shemath of Facebook fame and social capital fan, he also brought the heat. So he was on CNBC for about half an hour, really good seconds. And he said Buffett is completely wrong and he's outdated and everyone in the world should have 1% of their assets in Bitcoin. So we have one negative and that two really positive. So I guess they kind of net off, right? What I want to know is why?

Bitcoiners think that they need Warren Buffett's approval? Like this is not a guy who is known for being savvy about making, you know, tech investments. So why are we so desperate to get the seal of approval from Warren Buffett of all people? Yeah, it's like he's never going to like it, guys. Yeah, he didn't like Apple for the longest time. So why do we presume that he would like a wholly virtual currency? Yeah, it seems a little bit far-fell. that we're going to convince him.

I don't think we should try. What about Jamie Diamond? JPM published this long report on public blockchains, actually, which I thought was actually pretty good in terms of evaluating stable coins in particular. So, you know, JPM is, they're taking this asset class seriously, that's for sure. So I think that's certainly an evolution a little bit. Yeah, I read that report.

I thought it was really good. So they basically said that we're seeing the ground. work being laid right now for more mainstream adoption of blockchain technology and that it's mostly, I think they're big focus on just faster payments through stable coins and things like that, but pretty well done report, I thought. Yeah, one thing that was interesting was that they said for a stable coin to really function, it would have to have an extremely high turnover, turnover. So velocity in the kind of 600 range, which means, you know, your average unit of a stable coin

turning over 600 times a year. And they sort of implied that you'd need a central entity to inject liquidity to allow payments to clear really quickly, which sort of defeats the purpose of a fully backed, one-to-one-backed stable coin. It seems to me that you just have a central bank once again at that point. But their analysis was quite interesting for sure. Yeah, it's worth checking out. We'll link to it in our newsletter.

but pretty lengthy report on that. Did you see the Shopify news this week? Yeah, so Shopify has joined the Libra Consortium. So, you know, MasterCard has left, and Shopify has joined. You know, I think Libra is maybe having a bit of a second wind here. I mean, Shopify's great. It's a huge company. I mean, $55 billion market cap company.

Yeah, Libra. So apparently they're going to go fully dollar-backed now. instead of creating a currency basket of many different sovereign currencies, which seems like an extremely sensible move to me. So maybe Libra is actually going to launch. Well, I'd say I'm much sunnier on Libra than I am than I was three months ago. I think their prospects are actually pretty good. Well, yeah, I mean, they certainly have a window.

If there are other stable coins out there that are just backed one-to-one, then you would think that they would be able to get out if they were one-to-one, right? But Libra is much more high profile than all the other stable coins. So they have a more difficult regulatory job ahead of them. It's true. So speaking about regulatory, Malta's regulator, the Financial Services Authority had an interesting statement last Friday that they don't regulate Benance and they never have.

Yeah, this is kind of a strange one. It's kind of hard to untangle what happened here. It's not every day that you see regulatory. saying this company that claims its base in our jurisdiction is not regulated here and it never has been. Some are saying that Binance maybe was pursuing some sort of registration in Malta and that fell apart when the Maltese government fell apart, which it has. The prime minister resigned after the scandal where a journalist, a high profile Maltese journalist was killed in a car bomb, with links to the government.

So it seems like Binance being chased out of Malta is kind of linked to this rather sinister assassination, which kind of took down some key officials in the Maltese government. So hold on, run that back for me. So how does that have anything to do with finance? Because their allies who were pursuing the super open regulatory policy for crypto exchanges,

they'd created a framework for crypto companies to be based there. Bonance's allies left when the prime minister of Malta resigned. I see. I see. So it's interesting. So Bonanza's been, this is probably what, the third country that they've allegedly been Denghisalded in. They started in China, then they went to Japan, I think, and now Malta.

So is this just going to be like an every two years type of thing? We're going to hop around. One wonders how much longer they can do this for. And also the duplicity and just the mendacity is kind of vexing. If I were a Benance customer, I would assume, because they've effectively been lying by a mission about this for months. And they've been covertly changing the terms of service on the website. They had Malta on there for a long time. And if they were never regulated in Malta, then that was a lie, right?

So you just can't trust this organization. And that is just the basic default for all. almost all of these offshore crypto exchanges. You trust them about as far as you can throw them. So speaking of organizations that you cannot trust whatsoever, you want to talk about Ripple? Oh, man. Yeah, so I love this one.

So the Ripple business model is kind of becoming clear. So Ripple's MoneyGram investment made a lot of waves. People got very excited about MoneyGram using XRP for payments, achieving this ideal of XRP becoming a bridge currency. So that's all well and good. Of course, Ripple massively overpaid for the MoneyGram investment. And now they have this new liability in the form of MoneyGram's public filings because they're a publicly traded company. And so that gives us a little bit of insight into the way that Ripple works. So as it turns out that, you know, Ripple didn't just weigh overpay for the money gram equity effectively bailing them out. But they also have been directly paying them. It appears, to integrate XRP into MoneyGram, which is kind of backwards, right? Because like if you're a software vendor, normally you get paid by the people that you provide software to. In this case, Ripple is paying MoneyGram to use their product.

So they're effectively bribing them to integrate with XRP and to, you know, give the Ripple bagholders, you know, the sense that XRP is actually being used in commerce. This is what regulatory filings are for. this is great. So the 8K doesn't say why the payments were made, but I think you're right. They're definitely incentives for MoneyGraf to build products and services that have XRP integrations. $11 million worth of payments over the last two quarters. It's a lot of money. I mean, what a great deal for MoneyGraub. Yeah, so the Ripple business model is pretty clear. And if Ripple ever goes public as they've claimed

they want to, obviously they're not going to be able to because trends, Transparency is the enemy of their business model, right? But it appears that their business model is effectively securing partnerships with third parties like MoneyGram, in many cases by paying them, by providing them kickbacks. And then, you know, merchandising those partnerships by implying that it's going to cause XRP to get used or implying that these partners are going to have to buy XRP. And then they ride the wave of enthusiasm from retail investors that buy XRP on that basis. and that finances the whole thing.

So it's an amazing loop that it has seemed to work for them so far. Maybe we should have the podcast run on XRP. Yeah, I think they might, maybe they would give us a kickback for doing that. It's worth exploring. All right, into happier news, some cool projects in this crypto collectibles category. So Dapper Labs, which is the CryptoKitties guys, so they did a partnership with the UFC around building collectibles for MMA fighters. So I guess this is kind of like a provably scarce digital card, like baseball cards,

but for ultimate fighters online. Kind of cool, right? Yeah, you know, something is lost when you don't have the physical embodiment of these things. I don't think just having the provable scarcity is enough to make it compelling. You can see how this is a pretty promising idea overall. There's got to be a business in just figuring out a way, for people to showcase their digital assets. Because you're right, right?

With baseball cards or magic cards, it's all about showing people that you have them or like trading them, being able to brag about your rare cards. You can't really do that. Just having an asset on Metamask isn't quite as exciting, you know, even if it is, you know, counterfeit resistant and, you know, truly yours. Yeah, you've had some ideas around physical representations of these, right? how you might be able to show that you own certain things.

Yeah, my girlfriend hired someone to essentially create a felt version of one of my CryptoKitties two Christmases ago. So you could see how there might be a business here in taking digital, collectible assets and creating physical versions of them. It's kind of like the Nike sneakers from a couple weeks ago. So Nike has a patent around putting a provable scarcity into their supply. and kind of interesting. So moving on, what did you think of the Wall Street Journal op-ed?

Does the U.S. need a national digital currency? That one, two people that we know and respect in this op-ed. Yeah, I thought it was really great. I think everybody should read this. So we had Neha Nerula of the MITDCI arguing in favor, essentially saying that the U.S. should create, effectively a central bank digital currency. And then Larry White, the economist, pretty well known for his arguments on free banking and

dollarization, was arguing the other side. He was effectively saying, well, there's no need to privatize payments. We don't need the central bank to monopolize the whole system. The free market can do a better job here. and also pointing out that, you know, there's some, certainly some privacy issues that come with potentially every transaction being apprehensible by the central bank. But a really kind of great discussion from two folks that we really like. So highly recommended. I went to an event over at Harvard a couple, it was like two months ago at the Belfour Center.

And it was a role-playing exercise kind of. wargaming exercise around the creation of central bank-issue digital currency. And the whole premise was that China got there first, and there is turned into this alternative to SWIFT and all sorts of financing in North Korea was happening as a result of the Chinese central bank digital currency. And Neha played the digital currencies are for the United States in this role-playing exercise. And I actually wonder if she might end up being the digital currencies are for the United States and so forth. Yeah, I think she'd be one of the leading candidates if we ever do get a

role like that. You know, I tend to take Larry's side on this. So I don't know if I, I probably reject the framing whereby China creating this central bank digital currency in any way makes things more urgent for the U.S. I think the product you're selling ultimately is the monetary credibility. China does not really have that, you know. They don't have much of a track record, in terms of creating a monetary unit, which is credible and holds its value well. The dollar, on the other hand, people will impugn the integrity of the dollar, especially crypto people, but inflation has been fairly low historically. And, you know, the U.S. has never defaulted on its debt.

So ultimately, that's the core product. And, you know, I don't really buy this framing that if you create a more efficient rails to circulate the currency, that it's just going to inexorably win, that we might end up with a digital run MNBi if we're just too slow off the blocks here. I think the dollars can be pretty dominant for the foreseeable future. And it can also proliferate in a bunch of other ways. So stable coins are an example of private entities issuing dollars

in a kind of tokenized natively digital format, and they're kind of taken off. So I don't know if we strictly need the government to effectively nationalize payments and settlements for the dollar to retain its importance abroad. Yeah, I think you bring up a great point that there's a distinction between a payment network and a monetary asset, and those should be discussed separately, and certainly are not the same thing. The part I wonder is that would it make sense to try something like this in a purely institutional context first around the digital dollar? And the use case

that I would be thinking about would be just the overnight repo market. And maybe you try something like that in the United States where you have, I don't know, 10 financial institutions that are very frequently sending collateral and U.S. dollars just back and forth on a nightly basis. So U.S. treasurer is in U.S. dollars, basically, the two things that are moving. Could you create some sort of a network that allows that to happen more seamlessly? And could that be, you know, appraised basically to see if it works and to see if it actually makes things better. I don't see this being a retail implementation any time soon.

I think the kind of naive straw man version of the CBDC involves normal individuals having accounts directly with the central bank. I think in practice they wouldn't look exactly like that. There would probably be a multi-layer system. Yeah, we've never really seen many or even really any CBDCs issued in production with a possible exception of Ecuador. So we still don't exactly what it is that we're talking about here. So it would be helpful for some of these things to actually be created so that we could evaluate them. Yeah.

Well, I think the dialogue is certainly healthy. And it continued over into Twitter. So Neha and Laird and Laird really feel passionately about both sides. I thought they both had some really great points. All right. So I think that's it for the week. We'll see if we got through unscathed on our first remote podcast here. And I hope that we can do the next one in person.

Yeah, I'm currently making plans to flee to my remote Citadel. So maybe all of them will be remote from now on. All right. Well, stay safe out there, everyone. We have a great interview with Joseph Jacks from Open Source Capital coming up on Monday. And we will see you next week.