On The Brink with Castle Island - Weekly News Roundup 6/19/20 (River Financial, Microsoft ION launches, a new Bitcoin ETF approach) (EP.92)

Episode Date: June 19, 2020

Matt and Nic cover the top stories of the week. In this episode:  An update on our office plant River Financial raises a seed round, and our thesis on Bitcoin financial institutions Microsoft ION launches on mainnet Private keys as private property Wisdomtree's commodity ETF... feat. Bitcoin Another ICO bites the dust Former CFTC chairman Giancarlo says Ripple isn't a security XRP... was it created or discovered? What cryptodollars mean for utility tokens

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 Concentive 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. And another week in the books. Yeah. I've been enjoying Twitter's new voice product. Instead of sending a tweet, you just on an audio tweet, so that's a new fun thing.

I heard yours last night. It was a little weird. You just told a story about a tweet, basically. It was kind of a strange idea. Well, I have all this practice podcasting, so now I'm putting those skills to work on Twitter. It's great. There was a weird kind of audio quality to it. Were you in like the microphone?

Did you professionally record that? No. So, you know, I was going to use my actual equipment that I have here. But the whole thing is through the iOS app. So you can't actually really connect like a high quality microphone. So my gear was worthless. It's funny that it's, took this long for Twitter to get to audio files, but I could see that catching on. Yeah, it's like,

it's quite good. It's like it humanizes people, you know, I think it has the potential to render Twitter into a less harsh environment. You do hear that about our podcast as people say, I feel like I know you because I listen to you so much. So it's, it's a humanizing medium. Yeah. And so a lot of people were worried about OPSEC if they started doing these voice notes on Twitter. But, you know, I've already voice doxed, as they say. Yeah, people have our voice out there. Yeah. I mean, they have enough of our

voice audio that they could make an ML bot, which says any words in our voices. That technology exists. It does. Before we get into the news, I have a little bit of news that unfortunately I have to break to you. I went to

the office and your plant is dead. Are you sure? I'm pretty sure. It was brown and wilted. It's a succulent, so it actually, it should be okay. They're meant to last, in the desert. It's a desert plant.

It's, well, it's in the desert. I didn't take it out of there, but it's not looking good. So you didn't, you know, try and resuscitate it or water it or anything of that nature? I did put a little bit of water on it. And I don't know when I'm going to be back in the office, but I don't, it doesn't look good. Let's just put it that way. Well, it wasn't really in great shape to begin with because it lived on a diet of seltzer water. It's true.

Which I don't think is ideal for succulents. So it was kind of, that plant really never had a chance, you know. It didn't. It was a shame. It was a shame. We'll pour some out. So on that topic, this week's episode is brought you by CASA, which is one of our portfolio companies. Be honest.

How confident do you feel about the security of your Bitcoin? We always hear about exchange hacks, exit scams, people losing their pens, hear about people passing away and their family can't figure out how to get their coins out. The best way to keep Bitcoin safe is to hold it yourself. Kasa is the easiest and safest way to do that. They have one of the most respective teams in the industry. They have really quality of design and 24-7 support to help you every step of the way. Premium memberships include Bitcoin inheritance planning, white glove support for large Bitcoin purchase. purchases. These were services previously only available to the ultra high net worth. So if you're ready

for a security upgrade, you can get started with a membership for as little as $10 a month. And as a special offer, use the code Castle to get 10% off. So go to keys.casa and use our code Castle. That was good transition. Dead plants right into key management. Very well done. podcasting is an art which I believe we've mastered. We had a couple good podcasts this week. You had one with Ryan. How do he say his last name, Rabaglia? Yeah, Rabaglia.

Yeah, that was a really good one. Ryan is, you know, he has a pretty unique perspective being in Hong Kong and seeing the Asia side of this market. So it was pretty great that we got him on the show. Yeah, that was an interesting one. He had a lot to say about Tether. then I had one later in the week with David Nage, who's a principal over at ARCA, which is a crypto asset management firm. So David has a lot of experience in the family office channel.

So we're talking about his experience. He has a conference, too, called F0-256, which we link to in the show notes of that episode, which actually I'll be speaking at in a couple weeks. It might be next week. Why don't we move into deals, a Castle Island deal this week? Yeah. So River Financial, a Bitcoin. financial services company announced a $5.7 million raise, you know, featuring Polly Chain, us, slow ventures, IDEO, John Pfeffer, and a bunch of others. So really, really excited to back this company. We know the team very well. They have a pretty fresh take on Bitcoin brokerage and Bitcoin financial services.

so I'm super, super jazzed about these guys. Yeah, I was talking about this a little bit this week with a friend of the firm, and I was making this comparison. I don't know if it holds up perfectly, but if you think about the early days of the Internet, the very, very early days, a lot of the value accrued to ISPs. And so it was really all about getting people into the Internet.

You know, how do you connect? And eventually it migrated up to, you know, browsers and things like, that and eventually to Web 2.0 services. And I think if that is the historical analogy for blockchains, then I think right now the ISPs are the brokerage in the exchanges. You know, that's where the most value I think will be captured over the next few years is just onboarding folks into holding these assets and being able to safely transact in them, whatever the use case is. So that's kind of how I think about it. Yeah. And, you know, some people who probably think that the best time to back the brokers and the exchanges and the on ramps was

five years ago. And certainly that has yielded a huge amount of enterprise value. But I think what we're seeing now is kind of a new breed of financial institutions, building on top of Bitcoin. You know, really exploring the technical capabilities, taking a really deep look into the protocol. building in interest-bearing products, asset management and brokerage tools that people are used to in the traditional space. There's kind of a bifurcation happening. Some of these venues are becoming, you know, very token-focused. But I think there's definitely room in the market for a financial services company that treats Bitcoin as a savings device and is very creative about giving users lots and lots of options for how to use it.

So I think now is about a good time as any to back these companies. Agreed. So River is going state by state here with their rollout. So check outriver.com and see if it's available in your state. But I think you'll find it's a really good user experience. So we use the product and obviously we like it. Yeah. And they're aiming to be kind of, you know, they're not a bank,

but imagine a private bank for Bitcoiners, especially folks that maybe aren't as sophisticated about Bitcoin want to talk to, you know, an employee directly. They want a phone number they can call. They want support. You know, they want their hands held. River is good for that, you know. So they're going to be targeting those kinds of clients. In the press around the announcement, they said something like 77% of their volume since March

came from users that were over 50, which I thought was pretty cool. Yeah, I was surprised by that. Did you see this Microsoft announcement this week? So Microsoft released additional details about their decentralized identity project, Aon. Have you been following this much? Yeah, I mean, I've been following this for what seems like years now. So it seems like they have finally launched two mainnet.

There's no token involved, but they are using Bitcoin as an anchor for their information, which is pretty cool. Yeah, I was trying to think about the best way to describe this for our newsletter, but I guess the way I think about this is it's a huge ambitious project if it's successful. It still seems like it's really, really early. And we have a lot of people that have talked about identity being a great use case for blockchains over time. But to bring that to life a little bit, I guess the way that I think about this at least is you have traditional kind of Web 2.0 identities that are owned by other companies. So we have Gmail accounts, we have Facebook accounts, we have Twitter accounts. And those handles, we kind of pick those handles. We pick the names of them. But they're effectively, they are controlled by those central, you know, companies. So they can de-platform you at any time.

They could go out of business. So we've seen that in terms of email providers going out of business, hard to get data off of them. And you don't control, you don't actually own your data on those platforms. And most importantly, you don't own your social growth. And so there's a lot of value, and you've written extensively about this, there's a lot of value just in terms of the work that you put in on these platforms in terms of building your social network, who you're connected to, who you're friends with, who you're following. That's actually a valuable asset. And so if you wanted to go to a competitor social network, you would have to rebuild that from scratch. You wouldn't be able to port over all your friends and actually just copy and paste your connections.

And so Microsoft's angle here, it appears, is that they want to make a universal identity system that is effectively owned by the user. And so as a user, you would be able to control who you're connected to, control your data, and then bring that with you to these platforms. So you would still be able to use them, but you would come in with your predefined social graph, your friend group. I think this is fascinating. And the blockchain piece of it is seems really minor, but it's very important. And as if you design one of these systems, you don't want Microsoft to just own it. That has completely defeated the purpose of a decentralized identity system, just have a new intermediary. But it looks like what Microsoft is proposing to do here is to anchor that identity in a large public database that is not controlled by anyone.

And at this point, that large public database that is not controlled by anyone, they've made the decision. that the most secure one is Bitcoin. I mean, do I have that right? Yeah, I think that's about as complete an explanation as we're going to get. You know, I think Ballagy has a great tagline around this idea of owning a digital property. He says private keys or private property. And that's kind of the way things are going. You know, private key is information which is proprietary to an individual.

you can safeguard it and manage it yourself. And now we have the ability to tie our digital identities and selves to private keys, whether it's through ion or something like Blockstack, even, or Urban. Urban property exists kind of in a similar manner right now on Ethereum, maybe not in the future. So the kind of virtualization of the world, it, it requires a way to, you know, truly own this digital property in a genuine sense, as opposed to us just being digital serfs where we're renting out land from some completely unaccountable landlord like Jack Dorsey or Mark Zuckerberg.

And I think there is this dawning awakening that we are the genuine owners of our, of our digital plots of lands. You know, they're not, we're not borrowing space from this platform. platform, the value is contributed by us, by the users. That's the only reason there's any value there at all. So, you know, Microsoft, they've had a real turnaround. They were the villain in the 90s, and everyone hated them. And Linux was kind of made as a reaction to Microsoft. And here they are. They're one of the biggest patrons of open source now. And they're building decentralized as Denny on Bitcoin. I mean, it's a hell of a turnaround. Well, it's, yeah, and if you think about it from a business model perspective, Microsoft, you know, they're very well equipped to handle this. They don't monetize through advertising. And so they're trying to sell software services to people. And this is this type of solution that I think could expand that surface area. I mean, they are building suites of products and services that you could bring this digital identity into. And, you know, it would make those products and services better. So unlike a Facebook or a Google,

If those companies were to design something like this, it would cannibalize their entire business model. But Microsoft seems really poised to do it. The interesting thing to me here is that this is something that could totally transform how the Internet works itself. It sort of goes back to, you know, we always like to use the quote that Abby Johnson used in 2017 around this technology, really having a huge change on market structure and even replatforming the Internet itself. this is the type of project that could do it. Now, how far away that is is a big question. And I think one of the things that is going to stand in the way of some of this adoption is people are really bad at managing their private keys. And so that was an interesting thing to me that one of our

portfolio companies, CASA, which is making it easier and safer for folks to manage their private keys, is one of Microsoft's partners here. So it looks like Microsoft does see that if you are going to come out with a system like this, you wouldn't want people to be be accidentally losing their identities and having these disaster situations where you have people dumpster diving for their, you know, Bitcoin hard drives. That's that's not a world that people will want to live in and the technology will not catch on if you don't have that custodial key management infrastructure built in pretty, pretty well. Yeah, that's a key and I building piece here because these private key systems are so fragile. And I don't think, you know, some people say,

well, it's just a matter of time until the private key management problem is solved. I don't know if it can be solved per se. It can definitely be ameliorated. You know, what Kasa has done with on-chain multisig, splitting the keys up into multiple devices, that is much better than the standard configuration. But fundamentally, we're talking about keeping a piece of information safe and secure and not exposing it to the outside world

even while using it periodically. That's just a challenging situation by its very nature. Yeah, it sure is. So we'll keep an eye on this project. I would say it's very early at Microsoft, but hey, this could be transformative, so worth keeping an eye on. In other news this week,

we had a couple of asset managers that applied for SEC approvals for crypto products. So Wilshire Phoenix, which is a New York-based asset manager, they applied for approval for effectively a Bitcoin Investment Trust style product that would be listed on the OTCQX. So it looks very similar to the gray scale of Bitcoin Investment Trust and also the product that Bitwise has out there.

So I don't see, I guess, any reason why that wouldn't be approved. Now, the one that might be a little trickier here is that Wisdom Tree has applied for an ETF that would hold up to 5% of net asset value of the ETF in Bitcoin via the CME Futures contracts. So that's, that might have some issues. I mean, they might run into some of the same issues that Bitwise and, you know, the Winkelvoss twins ran into with their ETF approval. You know, I might go on the record here and say, I think this could be the one, actually. Really? What makes you say that? Because of its positioning. So this is the Wisdom Tree Enhance commodity strategy fund. So the assets are just a bunch of commodities, basically energy

metals, precious metals, agriculture, and then Bitcoin is potentially up to 5% of that. I think it's pretty clear that by and large regulators do understand Bitcoin as a commodity, effectively a synthetic commodity. It would be a small piece of this fund. The fund is full of a bunch of other commodities. That whole thing makes a lot of sense to me. That makes a lot of sense. So maybe this is the one that slips through.

I don't know. Yeah, who knows? this comes down to the market manipulation and whether or not the SEC can get comfortable around how the spot market is engaging with these CME futures contracts. So it is all about the surveillance sharing agreements. And Bitwise went pretty deep on this topic. And I think they're close to, you know, close to something that would work. But we'll see. Hopefully it does. It would be great for the industry. I mean, the, the growth in liquidity and on that CME product has to be pretty helpful in terms of advancing the cause here.

Oh, man. That CME product is really growing. You're right. Yeah, so that is pretty useful in terms of that dialogue for the regulators, I'm sure. Speaking of regulators, another fraudulent ICO news. So Centra, I remember this one. This was a Florida one. I think they had either Floyd Mayweather or DJ Caled as a celebrity promoter. This was a big one. So they were intending to, I think, be a better form of Visa or MasterCard or something, and it was all a fraud. So the person who started it has pleaded guilty to his role. It looks like he might be facing up to 20 years. So don't do ICOs.

Yeah, I'm reading some of this. The purported CEO and another supposed member of the executive team were fictional people who were fabricated to dupe investors. they fabricated partnerships with Bank Corp, Visa, and MasterCard. They did not have license in states that they claimed they had licenses in. All pretty egregious stuff. I got to say, if you're thinking about doing something like that, just don't do it. Yeah. There's probably some of these that got away with it because there's just so many.

And then speaking of regulators, so the CFTC, former CFTC chairman, Chris Jen Carlo, who's a huge advocate for the industry. doing a lot of good work around central bank digital currencies, raised some people's ire this week. So he came out, there was a paper that he co-authored with his law firm, his law firm is Wilkie Far and Gallagher. So the paper essentially says that Ripple's XRP cryptocurrency is not a security, so he doesn't believe it to be a security.

The disclosure in this paper was the more interesting thing, maybe. It was a footnote in the report that's, said that the firm itself, Wilkie Far and Gallagher, is counsel to Ripple Labs and that they relied on certain factual information provided by Ripple in order to prepare the article. Huh. Yeah, got to say, I'm feeling a little betrayed by this one. You know, Cryptodad, he was meant to be the chosen one. And then he went ahead and said Ripple is, I guess, a commodity or whatever.

People got really worked up, but hey, it was a footnote. So all you can do is read it and react to it. You know, it's important to remember that contrary to this account, Ripple was actually discovered gushing out of the earth, a torrent of blue gold, they called it. Yeah, so for the listeners who might not be familiar, Ripple claims that they discovered XRP, their cryptocurrency. It was not something that they started and sold.

It was something that they discovered. So they think of it as a, they were like oil wildcatting on the internet. And all of a sudden they just bumped into XRP tokens. Yeah, so we're actually not exaggerating here. Brad Garlinghouse frequently compares them to Exxon. So they're the Exxon of Ripple. And they own a lot of the commodity and they have it. But apparently it didn't exist.

somehow beforehand. I think if I combined all of the hours that have answered questions about Ripple over the years, I would have a really nice chunk of time that I could have been perfecting a hobby. Maybe I could have learned how to play the piano or something. There's a great blog by Press and Burn entitled something like for the last time,

Ripple created XRP. Yeah. But weirdly enough, that wasn't the last time. people keep saying that they didn't. So, you know, what can you do? Well, what you could do is actually just send that article when you get asked about it. So we've probably burned enough time on that, but maybe we'll put the link to the article in the show notes or something.

So we had Matt Hogan on this show a couple weeks ago, and they've now written, Bitwise, has written a new nice piece. explaining why Bitcoin is valuable, which actually echoes some of the points that he made on that show, which was pretty cool. That's one of the clearest thinkers in this space. I think he's a real asset. And he's also one of these people that is spending most of his day going out and speaking to institutional investors and talking to them about how they view Bitcoin.

So I thought this article was great. There's a longer form piece of it in their June 2020 letter, but he wrote a piece for Forbes that gives the Cliff Nose version. So he talks about, and he talked about this on the podcast, it talks about some historical comparisons with oil. You know, when oil was first discovered, it didn't actually have utility. People didn't realize that you could use oil to, you know, run cars and things like that. It was, when was oil discovered, like the 1820s, 1830s, something like that?

So it was pre-kind industrial utility. And he talks about the emergent use cases. Obviously it would have been great to hold oil back then. But there was, you know, you'd have had to. store it and wait for that future utility to emerge. And so no one really did that. And he compares that to kind of a digital commodity like Bitcoin, where we see some clear utility here, and whether that be for a digital store of value, something like digital gold or a savings mechanism, something like offshore bank accounts, or for the myriad of other use cases around just being a digital notary in the sky that

anyone in the world can use. And so he makes the case that it is the type of commodity. where you're pulling that value forward. You're kind of discounting the future value attributable to those use cases, and you can actually, you know, own it now, which I think is a really clever way to describe it. Yeah, it's kind of an underappreciated point because the supply schedule is guaranteed and fixed, whereas with every other commodity ever, if a very valuable use case for that commodity was discovered,

people would create more of the commodity. They would mine more gold. They would pull more oil out of the ground. And so there would be a supply response every single time to a demand shock. But in Bitcoin, that supply response is impossible because of the difficulty adjustment, because we have a predefined schedule here. So demand is expressed in the exchange rate in really pure and direct way. So you can get exposure now to future demand them.

materializes. And I don't even think, you know, there's that much future demand being expressed in the price today. You know, the Bitcoin has, it's not like just a story of waiting for the future to come. Bitcoin has utility and genuine usefulness today. You could definitely argue that the market is, is actually not discounting enough of the future. Those expectations aren't really fully, fully price in. Yeah. Yeah, I think that's right. So a very thoughtful case and one that we haven't really heard in that format before. Yeah, I think it's a very unique line of thinking, very original thinking by Matt there. So worth checking out for sure.

All right. So I think we're going to keep it short and sweet this week. But maybe as a little preview, we have a big project underway on crypto dollars. Yeah. So they're not called stable coins anymore, by the way. We're calling them crypto dollars. Yeah. And actually, so we're going to publish something on this topic.

It's our first kind of firm-wide publication. Very exciting for CIV. And once this comes out, you are all strictly prohibited from saying stable coins. The new term is crypto dollars. That is our dictate that we're handing down to you. I am pretty excited about this. I think that people will enjoy reading this. It's a good contribution to the,

the community, I think. Yeah, we wanted to create something enduring with lots of value, lots of data, lots of little anecdotes as well about how people use these things. So, you know, it's not just about Bitcoin. There is this parallel phenomenon here. Fiat currency on chain, even though it's received a lot of attention this year, it's pretty big. It's definitely something that I overlooked the importance of it first.

And you know who loves it too is the blockchain, not Bitcoin people. They love crypto dollars. I hesitate to endorse anything that vindicates those people. But yeah, I got to say it's definitely a real thing. I mean, I think there's a way to approach it in a way that works for Bitcoin. I think the future of crypto dollars and Bitcoin are actually pretty tightly linked. And the only reason crypto dollars work is because all this infrastructure was built for Bitcoin. I guess we shouldn't go too far into this because we'll release it and then we'll do

maybe a dedicated podcast episode on it. But I think if you look at the surface area for potential use cases for crypto dollars, it could be that any of these ICOs that we're proposing to do really elaborate utility token schemes, a lot of these things are actually possible if you use a crypto dollar. Yeah, and I think this is something that the industry hasn't recognized yet. people aren't going to use utility tokens if fiat's stable versions of those tokens, which are just as useful and just as integrated with crypto financial rails exist. The rise of the crypto dollar, the decline of the utility token. All right. So I think that's it for the week. We'll be back next week.

We have a bunch of episodes queued up already. So we're working through a backlog. Yeah, we have some really great podcasts. One of them on my favorite topic in the world. I think you can guess what it is. That's coming Monday. Oh, that's a big hint. Some of the smarter listeners will know. Are you going to tell people or are you just going to leave that hand? No, they have to guess. They have to guess.

Yeah. All right. So listen in on Monday. You won't be disappointed. I think that's it. Have a great weekend, everyone.