On The Brink with Castle Island - Weekly News Roundup 3/6/20 (Zabo, India and South Korea positive developments) (EP.48)

Episode Date: March 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 - India's Supreme Court Ruling - South Korea regulation - OFAC issues - Treasury meeting with industry leaders 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 concentrated easing. You've printed a couple trillion dollars, and all of a sudden, people start to worry. So out of this worry, we have something. call the Bitcoin.

Welcome to On the Brink. I'm Matt Walsh. And I'm Nick Carter. And we are still recording these in person. Yeah, it might be a little foolhardy. Yeah, we're going to do a couple remote episodes. Travel is starting to get definitely impacted by this. I'm supposed to go to a conference next week.

That's canceled. People were supposed to come in town this weekend for the MIT Bitcoin Expo. I think that's still up in the air. The Expo is going to happen, though. Yeah, that'll probably be one of the last conferences. year. Yeah, it's going to be interesting to see how this plays out. So we'll keep an eye on it, but we'll always be able to do this podcast remotely, I suppose, if maybe next week we'll be doing it via Zoom. So we're going to start off with some deals and some fundraising, some companies

that are raising capital. So right off the bat, a deal that we did, Zabo. Yeah, so we participated in the Zobo round. That's a seed round. Zabo's Dallas-based. They are a company that helped helps financial services companies connect to blockchains, to wallet services, to exchanges. So kind of just a fundamentally important piece of plumbing that stitches the crypto industry together. You know, it's a business that exists in other industries and definitely needs to exist in crypto as well. So congratulations to the Zabo folks.

They raised $2.5 million. Run was led by Moonshots Ventures. We participated, Coin shares participated, participated, DCG, Tezos Foundation, blockchain ventures. So congrats to those folks. Another deal that happened this week was R-Weave. So this is a group building out a decentralized storage protocol. They raised $8 million from A16Z Union Square Ventures and Coinbase. They actually had some interesting marketing around how the coronavirus and some of the censorship that's happening in China would not be possible on their network.

Yeah, it's one of the oldest ideas in blockchains, you know, using these replicated ledgeros to storm. information, non-monetary information, people have been doing that since the very beginning. In Bitcoin, if you look at some of the first blocks in Bitcoin, you know, back in 2010, you can see people are embedding Aski images of Ben Bernanke in there. That wasn't even in the operative. That was actually with, they were putting arbitrary information in the addresses. Interesting. So that's how people used to embed information of Bitcoin.

And there have been so many other, you know, blind. chains devoted to file storage. Our Weave takes this to its logical conclusion, I think, specifically using the chain as this, quote-unquote, immutable permanent data storage mechanism. So we'll see how that goes. Moving on. So some news this week, there were a bunch of reports, including one in the information that you were quoted in that say that Facebook is changing course and they plan to launch

Libra with a number of fiat-backed stable coins as opposed to introducing their own currency. If this is true, I think as you point out, it's more of a conciliatory approach. It might be more likely to be embraced by regulators. It's actually not clear that that's the real story here. There was another follow-up to that where Facebook said, well, we're actually still doing the original thing. So don't get ahead of yourself. Yeah, it was funny because the journalist called me and I reacted to his interpretation,

which was that they'd completely jettical. and the Libra unit of account and they were going to just do stable coins. And I was like, oh, yeah, that's great. Like, I think that's very sensible. Yeah, that would work, right? I mean, that would get through. It's a good idea. Yeah.

And, you know, there are plenty of Fiat back stable coins that exist. And then a couple hours later, Libro was like, no, actually, we're still doing the Libra thing. We're very committed to that. Yes, I don't know if that's a trial balloon or what, but it's pretty clear if their goal is to get to market, then getting to market with a Fiat. back stable coin is definitely the fastest way. Yeah, and I think it's also like a potentially friction for users to have to reason about payments in a new basket of sovereign currencies.

It doesn't track the currency that they normally use. That's, you know, people, I think the world over have a sense of what the dollar is worth, but a melange of like the dollar, the yen, the Swiss franc, like that's a little bit more complex. So I don't think people have an intuitive sense of that. Well, the 10-year fell below 1% this week, so pretty soon these stable coins, you're going to be paying to use them. Yeah, it's a very interesting question about how you monetize them. You know, the Fiatbacks table coins, they're collecting interest on the deposits and the bank, but what happens when you have to pay the bank to custody your dollars with them?

They don't monetize anymore. I mean, how is this going to, what's the logical conclusion to this? You're going to get paid to live in your house? Yeah, I might get paid to take out a mortgage, right? This is, yeah, you wonder how much longer this can continue. Everything is upside down right now. It makes absolutely no sense. Well, let's talk about some bullish news, or at least I thought this was bullish news.

I don't think the market really reacted to this at all. But India, so India's central bank had historically made it very difficult to operate a cryptocurrency infrastructure business, whether that be an exchange or a custodian, really anything to do with public blockchains. And this had been probably about a year and a half ago where India's central bank had taken this measure. So this week it was announced that the Supreme Court in India has lifted that ban and really opened up the market. I am not an expert on this jurisdiction at all, but this would strike me as a huge deal for anyone who's trying to start a business in cryptocurrency exchanges or anything in the infrastructure standpoint. Totally. This is a really, really big deal. And what is interesting is the market didn't budge on this news.

And it didn't budge on the Korea news either. Yeah. So let's talk about the Korean news. So what was that? So similar situation in Korea, the exchanges had been operating for a while now. BitThum, coin one, upbit, I believe, were the main ones, Corbett maybe. But their bank partnerships had been effectively suspended. The banks weren't working with the exchanges because the government was giving them a lot of trouble about it.

This was effectively reversed. There was an act of parliament in Korea, which was power. unanimously, interest in Korea is in the absolute midst of this epidemic right now. They have it really bad. They still took time to pass a favorable bill about cryptocurrency. Priorities. And effectively said, you know, here's a regulatory framework for crypto exchanges. You can work with banks, but you need to, you know, comply in certain ways.

Kind of like, you know, Korean bit license type thing. Interestingly, there's a Korean fund called hashed that contributed some of the content content to this law. So congratulations to them. Their efforts definitely paid off. And so, you know, Korean-Wan to crypto pairs are now legal again in Korea. Talk about bullish news. I mean, from an infrastructure and an on-ramp perspective, these are now two countries where the rules of the road are potentially being defined in ways that will enable new businesses to be created and for legacy, maybe financial services, firms that operate in those jurisdictions to get in the game.

So I'm really excited about both of these. Yeah, I found out yesterday that there's a stable coin in Korea that has over 100,000 DAUs. It's a lot. Called Terra. And it's used for retail payments specifically. So keep in mind, Korea is one of the countries which has or had the highest levels of penetration in terms of normal folks wanting to get access to and trade crypto. It was definitely in a kind of slumber phase for a while there. But now the government has taken stock and said, yeah, you know, as long as you comply with our wishes, you're free to trade crypto and use the banking system.

So you know where you can't trade crypto? Where's that? Robin Hood on Monday. That's right. Robin Hood was down the entire day on Monday. It was the largest percent increase in the stock market's history, and no one who uses Robin Hood could access the site for trading for the entire day. If that sounds bad, that's because it's awful. Yeah, it's not great.

You know, people sometimes trash fidelity for their interface, but you know what? At least they keep the system online. It works. Yeah. I mean, what's wrong with the interface? I don't know. I don't have a problem with it. I think other people do.

But, yeah, this is not good. So the crypto stuff was down too. You can't just restore the database from an earlier phase because you have to do something about all the trades that were outside. Well, what about all these people that were trying to trade and they're like, how do you make this better? I think the funny thing is that with a couple days worth of hindsight, a lot of people are now, you know, calling up Robin Hood and be like, yeah, I was definitely going to like go long Amazon. I was going to buy some out of the money call options on this random stock that's making test corona. kits that went up 6,000 percent. You owe me the difference now.

Yeah. That's tough. A real bad day for, you know, basically fintech and for these burgeoning alternative brokerages. I mean, these things really get tested in periods of insane turbulence and that's what we had and that's what we've been having for the past couple of weeks. So some of these things just turns out they don't really work when they're tested like that. It takes a crisis to show the cracks in the system.

I think we're going to see a lot more of those. In other news this week, there's more and more countries are getting into the national digital currency game. So the Marshall Islands announced that they will issue their national digital currency on the Algarand blockchain. So the central bank digital currencies, this is going to be a big, I mean, this is already a big thing. Every country seems to be looking at this now, and we're aware of several RFQs that are out there right now being bid on by various public blockchains and private blockchain consortium. So it'll be interesting to see how this plays out, but the train has left the station here. It's kind of remarkable to see these things being issued on public blockchain infrastructure. Yeah, I want to understand more about this, and maybe we'll have one of the Al-Grand folks on to talk about it.

But my understanding is that they have – this one is on the public blockchain infrastructure. There's also a way on Al-Grand to almost have a liquid side chain type of a thing, and I think some of these would be on something like that. So we'll see. It's been interesting to see the CBDC debate develop in the context of the fact that there's already a whole bunch of private issuers of fiat currency on public blockchains, aka stable coins. So on the one hand, you have all this discussion over theory and what CBDCs are going to look like. On the other hand, you have entrepreneurs that just jumped into the mix and issued $5.5 billion worth of fiat currency on chain, which to me, that's, like that's the real quote unquote public, you know, monetary system is something that's like truly unencumbered. I mean, this is what Satoshi envisioned, right? This is the killer app for

blockchains, just dollars. I don't think he envisioned that. I think it'd be okay with it. It's a really, it's an emergent property. It's pretty clear that this is a huge use case for blockchains. It would be pretty entertaining if we just came full circle and this whole thing ended up being about state currencies after all that. The thing is, it's a, it's a Trojan horse because more and more of this infrastructure gets rolled out. The importance of a non-sovereign alternative just becomes more and more clear. I think this is supremely positive. On that same topic, the BIS released a really great paper on kind of the taxonomy and how

conceptually to think about CBDCs. The author was Raphael. I don't know how to say is in the last name. It's A-E-U-R-H-H-H-H-H-H-R-H. F. L. Hour. Anyway, he wrote a great paper on proof of work, I think last year, which I really liked. It was called the doomsday economics of proof of work. The BIS has historically not been a friend to public blockchains. They don't like him very much.

Who's that guy, the big bad banker guy who says... Carlston or something, right? Yeah, he doesn't like Bitcoin. No, they don't. But they have a very solid research department. So I give central banks credit for that. They produce some pretty interesting data, some good research. Like I find myself reading, you know, Federal Reserve research papers all the time. Yeah.

So there were some news out of the Department of Treasury this week, two things. So the Office of Foreign Asset Controls, OFAC, which for those of you who aren't familiar, OFAC actually publishes a PDF that you can get on their website of all of the banned actors that you are not allowed to send money to. Sometimes it's an entire government or a country, rather, but there are specific people on there, too. So no one who is under the U.S.'s jurisdiction is allowed to send money to anyone on that list. They came out this week, and they sanctioned two Chinese nationals for their role in a money laundering scheme tied to cryptocurrencies, and it was tied back to an exchange hack. So I think we're going to start to see more of these.

and this fad if travel rule stuff that's going into effect coming in October, it sounds like we're going to see some more enforcement actions. And Treasury is behind a lot of this from the U.S. perspective. So, you know, more to come, I suppose. Yeah, what's interesting is that, you know, if the prognostications around the travel are correct, we effectively have a situation where there is no cash-like standard for digital transactions. So effectively cash has been abolished in a digital context, right?

You don't have the travel rule for cash transactions under a certain threshold. Well, it's going to be interesting to see how it's interpreted. I mean, being compliant with the travel rule, you would think if you're a exchange, what that would mean is that you would need to know to who is withdrawing, basically. So if you're a customer on exchange, you would need to attest that this wallet is under your control. And so they're not violating the travel rule. I guess what you do with it after the user has self-custody is a whole different thing. You would theoretically, you would definitely be violating an OFAC restriction if you took that money on your treasur and you sent it to the Syrian rebel army.

But I don't think that there would be any kind of outwying of cash in the sense that I could send you something from my ledger or treasur and vice versa. That would still work. Maybe. Maybe. Maybe. Maybe not. Nothing I've seen would suggest to me that that type of a transaction would be illicit. You know, we'll see, I guess. We all rely on these service providers ultimately for Viet on and off ramps.

And when we buy things with crypto, we intersect with that with the regulated system all the time. Well, I think it's pretty likely that you're not going to be able to withdraw from exchange into a coin join, for instance. That doesn't make any sense to me, though, because, like, if I withdraw cash from an ATM, the ATM doesn't care about what I'm doing with the cash, right? Under $10,000, though. Yeah, so what about a $9,000 coin join withdrawal, you know? Well, that's a edge case that I think needs to be thought about. But I think the easiest way to imagine it from the infrastructure provider perspective is that they will essentially whitelist withdrawal addresses. and then what you do with it past there is really your business.

Well, I think actually it's up to the citizens to push back against this kind of nonsense because we can't just let the government run a roughshod over us. This crypto industry stands for something, you know. You should run for president of the public blockchain alliance or something. Yeah, I don't think think think tanks or lobbyists are really going to change anything either. It needs to be at groundswell. Well, speaking of that, so the U.S. Treasury had apparently, so they put out a press release that they had a working session with industry leaders to discuss the supervisory and regulatory challenges in the industry. No details at all on this. And we don't know who is there. We don't know what they talked about. But the fact that the meeting took place is good. You know, a couple weeks ago, Steve Minookin came out and made some comments that were definitely a shot across the bow on the industry. They were a little bit scary. I hope that people are pushing back. He was issuing some really dark warnings.

It was really, yeah, it wasn't great. But it's okay. He's busy protecting us against this epidemic because that's what the Treasury Secretary should be doing with his time. Well, I don't know. He's not the one cutting rates. Yeah, but he's on this task force. But yeah, they're central banks. It's okay.

You don't have to worry about the epidemic because the Fed is on top of it. We just keep on cutting. You didn't think that that was the move, huh? Well, I mean, it's just like the physical world. is going to impose itself in a very real way here. And the amount of money in circulation isn't going to do anything. We need to have someone on this podcast who can explain to us the overnight repo market because that's what I'm really worried about is it looks like the overnight repo market

is really teetering here. We need the Zoltan from Credit Suisse. He's the guy. So call out, call out. Come on the podcast. Shout out Zoltan. Did you see this UK financial conduct? authority warning. There's a lot of warnings this week, by the way. It feels like there's a lot of

warnings. This was interesting. So the FCA just came out with a little piece on the website saying, we believe Bitmax has the UK customers, and they're not allowed to, and we're not regulating them, and this whole thing is a little dodgy. So that was kind of an interesting thing to see from the UK securities regulator. So I guess you can get on to Bitmex without a VPN if you're in the UK. Yeah, it's not like the geo-restrictions ever really stopped anyone as well. Yeah. Yeah. So, uh, see how Bitmex is, uh, as Arthur Hayes likes to say, you're welcome to bring a lawsuit in the Seychelles. Yep. Yep. Um, all right. Anything else happened this week? Yeah, the FT wrote about the ripple moneygram relationship. That was kind of funny.

That was really funny. Did you see that they linked Preston Burns, um, blog post at the bottom, which is the best blog post. It's a great one. For the last time, Ripple created XR and it really goes into detail on how Ripple created XRP. Actually, Preston's wrong about that. XRP was discovered beneath the soil in San Francisco in 2012. Oh, it was fracked into existence, right? Yeah, the, you know, Brad Garlinghouse and Jed McCaleb and Arthur Brito, they were just, you know, mining one day and it's just sprung out of the soil. And they found it and they monetized it.

So that's actually what happened. So, yeah, don't listen to Preston about it. that so and you actually you were on a podcast this week with Chris Brummer fintech beat yeah so that's actually sort of outside my normal circle of competence I'm not much of a fintech you know people think that crypto is fintech crypto is not fintech yeah but I think most of that podcast was on the coronavirus you are an expert on the coronavirus well it might be an expert if I get it you know yeah get some real expertise yeah that was a good one I also did I went back on what Bitcoin did Peter McCormack's podcast that just came

out. I'm looking forward to hearing that. Yeah, so that's all for the Beginners Guide series. So I really like that exercise. You try and explain crypto concepts to people, you presume no prior knowledge whatsoever, and then you try to explain crypto stuff. That's the best way to actually know, you know it. Yeah. The best way to learn is to teach. It's true. It's deep. So that's my fourth appearance on what Bitcoin did. That's a lot of appearances. I'm racking them up. Yeah. It's always a good podcast. All right. Well, we're going to, um, we're going to call it on this week's episode next week. We'll be back. I don't know if we'll be in person, but hope everyone stays safe and stays, uh, not quarantined from this, this virus. This is getting pretty ugly out there. No more handshakes

no more handshakes. Just elbow bumps. Yeah, elbow top, foot tap, bow, bow to each other. You know, there's, there's other ways to show respect. I like the foot tap, actually. No one, no really doing that yet i've been doing the elbow because how do you indicate that you want to tap feet with someone well it's also kind of hard to indicate you're going elbow i just yeah i open the door and i go we do an elbow that's that's what i'm doing yeah it's just not as intimate you know there's something special about handshakes it's kind of sad i'm a little bit sad about that i don't know handshakes might be over i don't the handshakes really they're kind of disgusting you know i like handshakes that's the whole thing it's vulnerable flesh to flash contact it's really vulnerable it's a

way to get the coronavirus. Well, on that sunny note, we'll leave you to it. Stay safe out there, everyone. Have a great weekend.