On The Brink with Castle Island - Weekly News Roundup 2/7/20 (Mastercard backs out of Libra, US Marshall Auction and more) (EP.40)

Episode Date: February 7, 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 - U.S. Marshalls auction - ICE eyes Ebay - Crypto safe harbor? 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 into 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 with Castle Island. I'm Matt Walsh. And I'm Nick Carter. It's been a busy week. Yeah, a lot went down. You actually kind of went on a little tour of the local universities.

I feel like I've been on a speaking tour this week. We had some interesting meetings with some people from quote-unquote legacy financial services. We also, I was on campus a couple nights this week doing panels and discussions, one at Tufts and one at Bs. see and the future is bright. Like people are really into crypto on these campuses. They're a great turnout. What did what did these students have to say? So there's a lot of really good questions. I kind of went in not knowing if I was going to be doing a 101. Here's what Bitcoin is. Here's what blockchain is. But there were some really insightful questions. One was really funny. One of the Tufts students asked me, you know, I don't really understand how Ripple continues to get

away with it. Aren't they just selling a token to retail investors that has nothing to do with the software that they built? And what is this about them discovering XRP? It's a great question. And it's a really good question. Give that student an A plus. I didn't really have a good answer to it. I'd love to ask the SEC that as well. Yeah, but some coin metrics users, some people that are really into data, some people that told me that they get a lot of information from Jamison Lops resource. So all in all I'm really pumped. I think there's a lot of great talent out there. Someone asked me, someone pulled me aside last night and asked me about realized cap. Wow. Wow. Realized cap. Well, when you get questions about realized cap, you know you're in a good room.

The zoomers are going to take us to the promise land. Yeah. Yeah, so that was, it was fun. So we're going to get into the deals, but did you see one of the big deals was that Spotify bought the ringer, which has a huge podcast network. And some people are asking us, you know, the future of the Castle Island podcast. Are we going to sell? So we're here to announce that we are not selling to Spotify. We're not selling. We're staying independent and we will not be going behind a paywall. On that topic as well, you know, on a serious note for once, a lot of people have been actually messaging me and saying they enjoy the podcast. So, you know, thank you for that, I guess. Thank you for listening. When we started it, actually, I told

Matt, that no one would listen and that we shouldn't do it and that it would be an eternal liability because, like, literally a perpetual liability. And that's true, actually. You know, like, it's a, you know, a never-ending task, Cisophian in nature. The uptake has been actually way better than I expected. So thank you, I guess. People are listening to it. Please keep on listening to it. And we appreciate you. We love our listeners. All right. So let's get into it. Enough of the sappy stuff. Let's get into some deals. So we like to do these deals so you know what's going on in the industry.

And if you're looking for a job, these are the companies with money. So transparent systems, which is a company building a cryptographic payment settlement network, they raised $14 million in a round led by Pantera. It had participation from Square, Digital Currency Group, Future Perfect, IDO, CMT. This is Alex Fowler, co-founder of Blockstream, his company. So congratulations to these guys. Not strictly a crypto startup, but some crypto elements in there. I believe that's right.

Another one, so Digital Asset Holdings, this is formerly was run by Blythe Masters. This is a private blockchain company. They recently raised a $35 million series C. They announced this week that Samsung and Salesforce have joined that one. So that's a private blockchain deal. Moving on to a couple public blockchain-oriented deals. So really busy week for novel infrastructure being built. On Bitcoin specifically.

Yeah, on Bitcoin. So Lightning Labs, which is at the, you know, not surprisingly they work on Lightning Protocol, they raised $10 million in a Series A led by Kraft Ventures and had some great participation from Slow, Electric, Ribic Capital. I think John Feffer was in there as well. This is Elizabeth Stark and Co. So congratulations to them. That's exciting.

Certainly one of the most important companies building on Bitcoin today. And they also launched their Lightning Loop product, I believe it's called, which is a way to rebalance liquidity on Lightning. We're still coming to grips with how the system works, still just beginning to understand it. But obviously, service providers like Lightning Labs are going to be critical for that network to be fully understood and to work. And another one was Arwin.

So this is a company that's right here in our backyard in Boston, formerly known as Commonwealth Crypto, started by Sharon Goldberg and Ethan Heilman. So they're building infrastructure for non-custodial trading. And they raised $3 million in a round led by Slow Ventures, had participation from coin shares, collaborative, underscore, DG fund, and a couple others. So congrats to Arwen. And as listeners of the pod, we'll know, a big Lord of the Rings fan. So I definitely appreciate any startup that's named after a Lord of the Rings. ring's character or item with the possible exception of Palantir. Very naughty. Very naughty boys. You don't like that one. Yeah. You don't like that one at all. And then the last deal of the week is

ICE. So the Intercontinental Exchange. This, of course, is the parent company of BACT. They have acquired Bridge 2 solutions, which is a loyalty provider for merchants and consumers in the payment space. So we're going to talk more about this in this episode, but it seems to me that ICE is making a big push into payments and just is really cranking on all cylinders in terms of adding talent to that team and then right now making an M&A push. So those are the deals of the week. Moving on, let's talk about the U.S. Marshals. We got some clean coins coming on the market. $40 million in seized bitcoins will be auctioned this month. And these are the cleanest coins you can possibly get the number, aside from maybe, you know, freshly mined coins, even though, you know,

People think freshly mined coins are so-called virgin or especially clean. But if there's fees in there, the fees are commingled in the coin base output, so the fees could be quote unquote tainted. So even freshly mined coins are not that clean. These, on the other hand, these are the cleanest coins manageable. You seize them on the dark marketplace and they could not be dirtier. But once they hit the U.S. Marshall's wallet, they become clean. That's just the magic of the state, you know.

magic internet money. And I remember when the first Silk Road auction happened, there was, at that point there was still some discussion that you would hear people say is the U.S. going to outlaw Bitcoin. And at that point, it was very convenient to point to that auction, which I think Tim Draper purchased a good chunk of those Silk Road coins. But at that point, I started to point to that and I said, well, if they were going to outlaw it, they probably wouldn't be selling them. I guess that was a pretty good trade that Tim Draper made. Oh, it was amazing. Yeah, that was 2015. Right. very ahead of his time there.

Yeah, so maybe this will be a similarly good trade. Time will tell. Yeah, so fill out your paperwork. We've got $40 million coming on to auction. It'll be interesting to see how it prices. And then, so let's talk more about ICE. So I mentioned that they had bought a company in the deal section here. So there was a report this week that the Intercontinental Exchange had approached eBay with a $30 billion takeover offer.

And this is interesting to me from a couple different angles. One is that just Jeff Sprecker, who's the CEO of ICE, is like the real deal. So I wouldn't be betting against this guy. And it's important to call out here that there was some late breaking news last night that it actually looks like ICE is backing away from this deal after some pushback from their shareholders. And my initial analysis of this deal was that, you know, maybe ICE is looking at eBay. eBay is a marketplace. ICE runs marketplace technology.

Maybe they would bring their technology to bear on eBay. So that's one potential angle. The second, and I think maybe more exciting angle, is that it's pretty clear that BACT is making a big push into payments. And so they raised the boatload of money. They have the custodial business. They have the futures business. But they're clearly also pushing into payments.

And I think they want to become a payment network, in fact. And so this bridge two solutions deal looks like a push that direction. And what better way to get into payments and what better way to bootstrap a network effect around a new payment platform than get one of the top marketplace businesses on that payment platform to start with? I mean, you remember how PayPal really benefited from close alignment with eBay in the early days before they merged. And so to me, when I initially read this, it actually made a lot of sense, both from the infrastructure exchange technology standpoint as well as from push into payments. But I don't know, maybe the, maybe he didn't bring the

shareholders along for the ride with him. I was surprised that it kind of fell apart so quickly. Yeah, it looks like it's not going to be consummated now. Yeah, I wrote this big analysis initially for our newsletter and then I had to delete like all of it basically. So I said this guy's such a genius to get this. And then, yeah, I still wouldn't bet against him. I think he's one of the most talented operators in all of financial services. But we'll see what happens. there, I guess. And he's got an ally in Congress. He does. In the Senate, now Kelly Loeffler, the most junior senator, but she's actually making waves. Yeah, so that's his wife. Kelly Loeffler is his wife, who used to be in charge of backed. I can't imagine a better job than to run backed and then just

to be airdropped into the Senate. Yeah. That's just like, what a life, you know? Well, yeah, I wonder if I don't know if that's going to happen again. That's like a, pretty rare. I don't think that's on the career trajectory. You can't plan for that, but if it happens to you, it's pretty cool. It is pretty cool. One of the most, 100 most important people in the U.S. now. Well, it's great to have people that actually understand cryptography and blockchains in those seats. It's pretty rare, actually. Speaking of regulators and policymakers, understanding crypto and blockchains, this had everyone in crypto in a tizzy. So everyone's favorite member of the SEC, Hester Pierce, has proposed a safe harbor for token projects. I believe it's a three-year

safe harbor where, in which, you know, tokens can raise and hopefully become, you know, quote-unquote sufficiently decentralized. You know, I don't think the details are all fully understood yet, but it's very interesting that she's so progressive on this topic. Yeah, so Hester Pierce is very in tune with what's going on in the industry. She made a speech in Chicago where she essentially said if a project raised funds, and I think she was alluding to raising them under a registration process, actually. So if you just threw up an Ethereum address, I don't think this would apply to you. But this proposed approach would give you three years to achieve sufficient decentralization and not have that token be a security. So if you're a project that's looking to do

tokenized network, you know, it's no surprise that a lot of them were very happy about this. And I think a lot of the investors that are doing token deals are also very happy. I just caution everyone that this is just one person's opinion at this point. So it's not really speaking on behalf of the agency. And there's a lot of details to be worked out. And again, if you were one of these projects that did a huge raise and didn't actually register and KYC and do all those things, which is most of these projects, you're still not going to be okay. Yeah, this will not be your salvation, but it is definitely an olive branch to the projects that

are looking to raise under Reg D or something and potentially, you know, become compliant under U.S. securities laws. So almost universal praise for this in the crypto industry. Yeah, I mean, this is, if this, this could be a real path forward, right? Like this actually could. make some of these things launch. It's effectively impossible to launch a tokenized network right now in the United States if you want to raise money for it.

The fair launch is one thing. On the topic of Blockstack, actually, they announced that rewards to, I believe, validators would be paid in Bitcoin. Blockstack's always had a really close relationship with Bitcoin dating back to when they were one name.

Although I think they were doing a name coin for a while, right? Yeah, you could register your name on Bitcoin in the op return. Yeah. And then Namecoin, is that right? I might have been on Namecoin. Namecoin, I actually tried to use it the other day because I was doing research for a podcast. So Namecoin was one of the first DNS coins.

Namecoin has a newer kind of modern counterpart in Handshake, which actually just launched this week. Oh, they went, well, I've made that, huh? Well, so you can mine it, but you can't make transactions yet. So along the lines of regulatory developments, this isn't a huge development, but Federal Reserve Governor Lail Bernard made comments this week that the U.S. is studying effectively a digital currency, digitizing the dollar. So Lill Bernard is another one who's been really at the cutting edge of just trying to understand blockchains. Dating back to what, you know, probably like four or five years ago had been making speeches

and making the rounds at some of these startup events and talking about. digitizing the dollar for various use cases. So more to come on this. This is just a very, kind of like a throwaway line it looked like that we're studying this. Yeah, we were arguing about what digital dollar actually means before the podcast. So I was on the side of it maybe, you know, A, pointing out that virtually all dollars are digital in the first place.

I really doubt that the Fed would ever create a model whereby, individuals could have deposits directly with the central bank. I guess that was the kind of 1.0 proposed model of any of these central bank digital currencies. I guess this would be slightly more complex. TBD, I think having a individual access to Fedwire would completely disintermediate the commercial banks. And so the commercial banking lobby would never allow that to happen in my mind. but having some sort of a wholesale version of a digital dollar that made the settlement process for overnight repo and a bunch of other institutional transactions. That makes a lot of sense to me. So I could see tokenizing U.S. treasuries, which are used in collateral for those type of transactions, and maybe there would be some benefits.

It's not going to be as transformational as public blockchains, but this is a really interesting idea, at least. I think it's worth considering. On this topic, I have an article coming out next week. week, very exciting. It'll be a new series. I won't tell you where just yet. This is a theme that I'm going to be writing about a lot, so basically about the potential for crypto dollarization, which I've hinted at. And it seems to be an emerging phenomenon, stable coins being used for actual transactional purposes as opposed to just moving money between exchanges or holding risk capital for traders. And I think it's only going to accelerate as we have a greater diversity of stablecoin

providers, essentially private issuers of money, and piggybacking on the infrastructure built for Bitcoin and Ethereum. So this is honestly one of the most fascinating phenomena active in the markets today. And I think we might have this crypto dollarization long before we see a Bitcoinization event. No doubt in my mind that that's true. And I think that the second order effects of this will make the dollar much stronger. It will potentially, this is a technology that actually has the potential

to really increase the United States kind of geopolitical power here if this starts to happen. Although I guess there's a trade-off because some of these issuers like Tether, for instance, the U.S. is very little influence over. So they wouldn't strictly be able to use their soft or hard power.

to maintain sanctions if there was a network of private issuers of wrapped dollars. That's true. You know, even with something like Tether, though, if it were to be broadly adopted in second and third world countries, it would effectively crush the fiat currencies that it's displaced. Oh, yeah. It would be good in absolute terms of the dollar, but it might somewhat, you know, reduce the U.S.'s ability to use its centrality in the dollar system for strategic purposes. So both good and bad, I guess. Yeah, and that's a great point. So to the extent that these stable coins are surveillable by the U.S.

and they can levy enforcement actions against them, it will also create a second-order effect that there will be a push to an alternative in a lot of jurisdictions, whether that be another central bank issued digital currency type of thing or commercial. bank stable coin issued by the likes of a Chinese bank or something or Bitcoin. Yeah, regardless, I think we're reentering an age of free banking, which is pretty exciting. If you're George Selgan or Steve Hankey or Larry White, all of which I'm trying to get on this podcast. The free banking era, just a golden age of banking in the United States pre-Civil war. So MasterCard CEO, A.J. Banga this week made some big

waves in the financial times and just drop just a hammer on Libra. It was really funny to read. So he said that MasterCard pulled out of Facebook's Libra consortium over due diligence concerns, over anti-money laundering. And then he had this great quote, when you don't understand how the money gets made, it gets made in ways that you don't like. This is a really, it is great. Like he is a masterful CEO here because he really just piles on to Facebook and that was all the headlines, but hey, like, guess what? Obviously that this thing is not going to, you're not going to want to be in this consortium. This whole network is designed to get rid of the credit card company. So like, what are you doing at the table in the first place? Yeah, I was shocked the visa and

mastercard were involved in that. Like, come on, man. Like, what do you think they're getting after? Would you just get in the room for the third meeting? You're like, hold on. You look around the table and you're like, these guys are getting rid of me. Like the credit cards. Like, you got the best business model of all time. Of course people are going after you. Yeah. Speaking of stable coins, yeah. I think Libra, you know, has read the writing on the wall at this point, realizes they have to adopt a more pro-dollar stance if they want to get this thing out the door. That's great. So that's fine. I mean, let a million projects flourish. They can launch as a dollar-backed stable coin. They'll have the best distribution of any stable coin in the world on day one. Yeah, talk about crypto dollarization. Libra would be the number one catalyst for that if they were able to pull it off. Yeah, I've kind of, you know, I've been skeptical about Libra, but I really want them to get this out. And the more and more of these companies that are just abandoning the project, it's like have a little bit of spine.

Yeah, seriously. Yeah. Well, like a little bit of political headwinds and you're just ready to give up. Yeah, or you just, or one of these companies like MasterCard, they probably just joined this consortium because it was the, you know, hot, flashy thing to do. And then you realize that, you know, they're trying to crush your business model. I think Facebook actually, I would back Facebook on this one. I think they will have the resilience to be able to pull this thing through and actually launch. The big question for me is, will it be usable on third-party wallets in an unconstrained way? And will they be using the exchange infrastructure that's been built for cryptocurrencies to distribute this thing? Well, I would like to think the answer to both of those would be yes, but time will tell. It's a lot more interesting if it's yes.

But if it's a walled garden, then it looks like Facebook credits. I mean, if it's a walled garden, I think we're going to see more of these people in groups leave the consortium. I think a bunch of the people that are on the table are really staunchly public blockchain people and pushing for path to decentralization. I mean, we've had Nick Roseman from USV on the podcast. I think that he's ideologically in that camp, certainly. And they're playing a prominent role along with Bison Trails and a number of other companies. I was actually asked this week if I would invest in Libra if I could. And unfortunately, I think we're a little bit too small to satisfy that billion-dollar balance sheet assets requirement.

But, you know, we'll get there. Well, if we sell the podcast to Spotify, then we might get there. That's true. But we're not selling the podcast. That could tip us over the edge. That's right. So a couple odds and ends this week. So Justin's son, founder of Tron, he finally had his dinner with Warren Buffett.

He paid $4.57 million to have this dinner. What do you think they talked about? I believe he gave him some Bitcoin. Not Tron. He may have also given him Tron, but he definitely gave him Bitcoin, which, you know, this is one of the things I love. Hold on. He actually gave him Bitcoin? Yeah, yeah, yeah.

So, like, isn't that amazing, you know, like, regardless of which, like, all coin you like, you probably also like Bitcoin. That's, you know, Bitcoin is a big tent. Isn't there? There's, like, kind of a lesson in there, you know? we're all sort of like we all kind of need bitcoin to work for the crypto industry to work that's my thesis on this some people may not like to hear that but um we're all here because of bitcoin never forgot that's true well i i wonder what they talked about that might have been a long launch for

warren buphing seems like it would be extremely painful for i guess if you're getting you know your charity's getting paid 4.57 million dollars then you sit there and you listen to tron warren probably have made 10 times that in over the course of the lunch through the appreciation of the S&P 500. Yeah. So he, you know, I don't think he really needs to do these launches. He could just, you know, donate five million to his, his charity. Wow. Without doing a lunch.

That's true. So I think that was it for the news this week. A bunch of good podcasts out there. I listened finally to your What Bitcoin did podcast with your historical reviews of altcoins. That was really good. That was a fun listen. Thank you for listening to my podcast. That was a lot of fun.

Some of these just coins were so much fun back in the day. Yeah, like the crypto industry was significantly more entertaining when the stakes were way lower. And then, you know, things got really serious and like also unpleasant after a while. Yeah. Yeah. There's a lot of nostalgia for the early days. All right. So that's it for this week.

No football predictions to talk about until this time next year. and we're not going to be talking about baseball because the Red Sox have decided that they are not going to compete this year. So we got nothing on the sports front. Yeah, I have nothing out on baseball. I don't really understand baseball at all. So I'm going to veto that one.

So I think we're just going to talk about crypto on this podcast. Yeah, unfortunately, we're going to have to doubt on the sports talk because there's no good sports happening right now. Very sad. Well, I do like the Celtics. So maybe we'll talk about them at some point, as it heats up. But that's all we have for this week. Thank you for listening to On the Brink.