On The Brink with Castle Island - Weekly Roundup 01/01/21 (XRP delistings, OFAC fines BitGo, 2021 ETF prospects) (EP.164)

Episode Date: January 1, 2021

Matt and Nic return for the first roundup of 2021. In this episode:  Why some funds might be buying Bitcoin at year end Are Ripple fans buying Bitcoin? Are fair launches obsolete? Vaneck files for a new Bitcoin ETF CME futures are officially the most liquid futures market BitGo pays a fine to OFAC Exchanges start delisting XRP Will exchanges face repercussions for listing securities? Why being a security dooms the cross-border settlement use case for XRP Which Bitcoin skeptic we'd like to flip the most

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 a Bitcoin.

Welcome to On the Brink. I'm Matt Walsh. And I'm Nick Carter. And happy new year, 2021. Yeah, this is, it's the first of January today, right? As we're recording it, it's the 31st, but we're coming at you on the first. Still 2020 currently, but when you hear this, it'll be 2021. And the price of Bitcoin just decided to go on a tear over the past week. Yeah, it was keeping up with the calendar days of December for a while there for like four consecutive days.

Not anymore. So there's a lot of, you know, there's just a lot of activity here. I think there's a bunch of funds that are getting into Bitcoin so that they can have that Q4 position and they cannot necessarily go into the end of the marking period with a like a big markdown on Bitcoin, is my guess. So there's just a bunch of firms that want to get on board, want to have that Q4 letter saying, we've got into this Bitcoin position and it's roughly flat. Oh, that's an interesting theory. What's the theory about tax selling in January?

There's some notion that January is bearish for Bitcoin. Have you heard this? I haven't heard that, but is the theory that, you know, do some selling so that you can pay your tax bill? That could be it. I guess tax season is in April. So I don't know why it would affect. January, but I keep hearing this for some reason.

Yeah, I don't know. This is all speculation. I mean, the other thing that's probably going on here is other than just more awareness, more participation in the market, more institutional plumbing. There's so many things. But, you know, ripple holders moving into Bitcoin potentially. Do you think the kind of people that bought ripple are the kind of people that would turn around realize the error of their ways and just buy Bitcoin? Well, maybe if you're holding, holding it on an exchange or something like that where you're either going to move it into a stable coin or move it into Bitcoin, maybe just move it into Bitcoin and figure it out later. I mean, you have to remember the whole Ripple narrative was that it was the anti-Bitcoin, right? So Bitcoin was the unregulated scary coin and Ripple was meant to be the Bankster regulated coin, although I don't think they would have wanted to be regulated in this manner.

and you know bitcoin was the boiling the oceans coin and ripple was the green coin uh you know so like and and you know ripple was like sort of had this rapprochement with the davos class and they tried to get all the financial development organizations on board and everything so i feel like it was sold in a way that if you were positively disposed towards bitcoin you would have never bought ripple and vice versa. Well, somehow there's still a bid for Ripple, which I just, I don't understand that. These things take a long time to die.

They do. They do. And there's also uncertainty. Who knows, maybe the case could resolve in their favor. So before we get into some of the week's top stories in Ripple, is certainly part of that. Let's talk about the podcast this week. There's two good episodes.

Yeah, some really popular episodes this week. the first one was very well received Craig Wormke. He is a philosopher. I think the first philosopher that we've had on the show, a professional philosopher, as opposed to my amateur philosophy. And he had this great paper about where he claims that Bitcoin is a fictional substance

in a massively co-authored story, which is pretty cool. You have to listen to the episode to really understand what he's talking about. though. Yeah, that kind of broke my brain a little bit. Are you persuaded by that? Do you buy the explanation? Yeah, I do. I guess where I struggle with that is in an applied context, like, who cares? But we cover that in the episode. I mean, this does have a lot of practical consequences. I think Bitcoin always struggles with its identity. You know, that was what the

fork wars were about, you know, which chain is the original chain? It's always this debate of, you know, originalism and a strict constructionist approach of the white paper, etc. So I think these are totally, they totally have applied consequences. So that's often the critique you hear philosophy. I don't think it necessarily applies in this case. But I thought that was certainly in terms of original thinking. That was quite unique. I haven't heard an argument like that before. Yeah, and then we also had Brian Venturo. So we're on a streak now where we get these really big miners to come on. So we had Mustafa and that was a total hit.

And so we paired it up now with a large Ethereum miner. These guys core weave have 50,000 high-end GPUs. And so lots of questions about how protocol changes in Ethereum affect the miners. Spoiler alert, they're not happy. with the changes that reduce the issuance rate. Like the miners and the developers here are definitely at odds. I didn't realize it was as contentious as it is. Yeah, it's very different from Bitcoin.

I mean, there was, we, Bitcoin had one conflict of sorts between the miners and developers, but in Ethereum, it's like this constant warfare between the two camps. The other interesting thing there was on just fair launches. And it made me really wonder if we start to see more regulatory enforcement actions against companies that have issued a token, will we start to see innovation in the fair launch? And will we start to see more of these things in 2021 and beyond? Well, I was disappointed that fair launches had got such a bad rob the last few years.

Although in fairness, 2020, there were a lot of quote fair launches, although not with mining, but with, you know, like synthetic mining. So using liquidity and DFI protocols is a way to distribute. So we might have just moved beyond the era of the proofwork fair launch entirely. Yeah, Brian wasn't too keen on those D5 fair launches. Yeah, unsurprisingly, he doesn't like the ones that don't involve mining. All right, so why don't we move into some news? First one up is Bitcoin ETF talk. So Van Eck has refiled its application for Bitcoin ETF.

This is the third time that the company has filed for this product, which is a Bitcoin ETF, and it doesn't actually say who the service providers are on this. So that might be the only difference, but it doesn't really spell out who all the, like the custodian and some of the other component pieces. But good to see another application. We'll see where it goes. Certainly, I think our view is that the facts and circumstances on the ground here are a lot different from the last time that we saw an ETF denial.

When was the last denial? So it was the bitwise denial, which was, uh, early 2020, right? Well, dare we say that 2021 is the year of the Bitcoin ETF? Well, I guess it depends on who has the top job at the SEC at the end of the day. I think, you know, Hester Pierce is on record saying that the facts and circumstances warrant an ETF. I think the market structure is just a lot different.

I think the liquidity landscape is a lot different. The custodial landscape is improving every month, it seems like. So I would say that the, I would say that the, I would say. say it would meet the criteria at this point. It just kind of matters who's in charge. Here's something interesting. The CME futures product for Bitcoin is now officially the most liquid and voluminous futures exchange for Bitcoin. So that's the first time that's happened. And previously that was Bitmex? Well, it kind of cycled between them, you know, Bitmax, Hobe, Binance, OECS, all had the top spot at one point or other.

But for the first time, it's a regulated onshore U.S. domiciled entity that's accountable to the CFTC, etc. I think that makes a difference. Big time. I mean, this is really what the SEC was asking for, and they got it. In other news, the Biden administration said on Wednesday that they will halt or delay any midnight regulations that the Trump administration has put out. And so on January 20th, when the administration comes in, they will effectively do these halts or delays. And so I guess the big question is what will happen to the Department of Treasury FinCEN rule proposal around self-custody wallets and custodians, the one that we were talking about last week. This is in a 15-day comment period right now that goes until the fourth, I believe.

And so if there's a delay there, it's likely to me that there would be a further delay and maybe even just talk. halt of this as the new administration takes over. And it kind of seems like a lot of the lobbying efforts in the crypto industry are focusing on extending the comment period, which would hopefully get us out of jail on this in terms of getting over that threshold to the new administration. But as of right now, it's still scheduled to close under the Trump admin, right? Yeah. The 15-day period will be up with time in order for them to jam this through.

But there's been a lot of really thoughtful comments. And we'd encourage anyone to check out Coin Center. Jake Trevinsky has a good tweet storm around how to craft a comment. The DC Chamber of Commerce is very active here, at Blockchain Association. So if you have something to say, definitely get that on record. I like Ben Davenport's comment that he left. James O'Byrne also left a thoughtful one. I think Coinbase actually has a form maybe that you can use to submit a comment.

Yeah, so get those comments in. Yeah, I mean, you know, some people say it doesn't move the needle, but if FinCen is getting thousands of comments from informed crypto commentators, I think they have to acknowledge that. I mean, especially in terms of just procedure, a 15-day period is absurd. It really is totally out of the ordinary. Yeah. Manukin doesn't look great here on the way.

out, that's for sure. I don't think he's going to be finding a lot of job offers to serve on the boards of publicly traded crypto companies. That's right. So on more regulatory news, it seems like that's all we ever talk about on this show. I don't know what that means exactly. But OFAC, the Office of Foreign Asset Control, settled with BITCO. BICCO has agreed to pay $98,930 penalty, concerning 183 violations in which individuals residing in a bunch of sanctioned places were using BICCO's non-custodial wallet product. So this was quite interesting because they're not using BICO's custodial service. They're using their software for making transactions.

Yeah. So, you know, the Office of Foreign Asset Control is a department within the Treasury they maintain a list of sanctioned countries and sanctioned individuals where if you are a U.S. company, you're not allowed to facilitate a transaction going to anyone on that list. And what happened here, it looks like, you know, there's not a ton of detail, but it looks like there was a, Bicco has this multi-sig, so two of three multi-sig. And there were residents of Crimea, Cuba, Iran, Sudan, and Syria that were accessing this non-custodial product. unclear if BitGo actually signed any of these transactions or if the two of three went around them. But, you know, the OFAC rules, I guess, are pretty clear here that if you're facilitating one of those

transactions, it doesn't matter if you're in full custody or you're just in a partial kind of multi-sig workflow. There is strict liability there. $98,000, you know, not a huge penalty, frankly. And it looks like BitGo was very cooperative and revamped their. compliance process. So previously, it looks like they had a, um, the customer had to attest to where they were. And so one of these, you know, many of these transactions were probably people saying they were not in these jurisdictions. But now BitGo has implemented, um, IP, you know,

services to figure out exactly where people are. Um, but interesting nonetheless. I'm not exactly sure these. I mean, you also look at the FinCEN proposed regulation. To me, the recurring theme is the regulation is increasingly getting out of step with the technological reality here, whereby you can have dozens or hundreds of thousands of people, you know, collaboratively, collectively controlling the ability to spend from a key, especially as multi-party computation gets more sophisticated, you can have probably an unbounded number of people collectively controlling a key. With multi-sig, you can have a whole bunch,

and as Taproot gets in, you'll be able to have effectively an unlimited number of entities controlling a signature. So I think it's just going to become more difficult to square these regulations that presume an asset is owned by a single person with just the technological reality of how digital assets work. Yeah, well, that's definitely true.

And even, you know, with some of these upgrades, you won't even know who's signing, I think, right? In some of these multisigs, it would become very difficult to figure out who the parties to the signature actually were. Yeah, and, you know, you read these regulations and you think to yourself, you know, are these people familiar with something like Peda Scriptash, you know, where you're not, there's no notion of individuals and humans and passing around. bills. I mean, you're talking about spending to a hash of a contract. It's not necessarily a conventional transaction between two individuals. I mean, you look at the defy liquidity pooling. I mean, there's an acceleration here where we're breaking the linkage between human identities and individual payments. And I don't think we're going to reverse that any of these times soon. Well, it'll be interesting to keep an eye on this.

I don't think this is that big of a story, but I guess the bigger story will be just around how the regulation keeps up with the really quick pace of innovation here on the technology side. So the big regulatory story that's still rumbling is, of course, the ripple case. And there have been some new twists this week. Well, this week was all about exchanges and OTC firms rushing to delist XRP. which, again, is the currency that was issued by Ripple Labs. So this is on the heels of the SEC charging Ripple Labs, Brad Garlinghouse, and Chris Larson,

with issuing an unregistered security and effectively issuing that over a seven-year period continuously and dumping it on retail investors. So I guess these delistings are not surprising to me in the least. I mean, there were definitely, there were a lot of exchanges that never had XRP up there in the first place, like Erasax, Gemini, a bunch of the New York-based ones. clearly had the view that this was already a security and didn't really need the SEC to opine on that. But this week we saw BitStamp and Coinbase and many others start to delist. So to me, it's just shocking that everyone hasn't delisted yet because, you know, the implication of

being an exchange here and having an unregistered security is that you are breaking the law in facilitating the trading and settlement of an unregistered security. So you would think that every exchange would rush to delist it. Yeah, here's a question. Have we seen any enforcement actions against exchanges for hosting the trading of unregistered securities? It's a good question. None immediately come to mind. I mean, the Dow was on, the Dow was traded on a number of exchanges in the U.S.

And to my knowledge, there was not an enforcement action against, like, I think Cracken might have even had the Dow. Yeah, I want to say Ether Delta, the Ether Settlement, had some language about that. That's one that sort of comes to mind, but, you know, the thing that shocks me is that all these exchanges listed XRP in the first place. Just because there was ambiguity from the regulators didn't mean there was ambiguity in real life

about the facts of the issue. We're talking about a currency issued by corporation, which was clearly conducting entrepreneurial efforts, which they admitted, to increase the value of the currency. So it satisfies all the four prongs of Howie, no problem. You don't have to be a securities lord to figure this out. And I admired Coinbase's reticence to list XRP for many years, but then they capitulated, which I was so disappointed by.

Yeah, the discovery on this is going to be really interesting to see, you know, what the payments were to some of these exchanges, the incentives to list, that type of thing. I think XRP and Ripple will be the gift that keep on giving in terms of news updates. Yeah, I've seen this described as potentially bullish for XRP because at the very least, they're getting this catalytic event where there'll be a decision one way or the other on whether XRP is a security. So there have been some somewhat optimistic takes on the matter floating around. The other interesting thing would be if exchanges have to delist XRP in the U.S. and it's branded as security, but if it keeps trading overseas, like it's very popular in Japan. for some reason. It's like a band that's really big in, like an American band that's big in Japan. So that's Ripple. It's very popular in Japan. Don't know why. So could it still circulate on those

overseas exchanges, but not in the U.S. and enter a kind of a twilight existence? I mean, so maybe, but is Ripple and XRP are they ever going to be facilitating cross-border payments for banks? Are they ever going to do what they said that they were originally built for? I mean, no chance. Absolutely not. And banks won't settle payments in securities either. That would be absurd. That's not to say that they currently use XRP to settle payments.

I was talking to some bankers about this. I wish more bankers would go on the record. And they were saying that XRP is kind of treated as an intangible asset for account. owning purposes, which is, you know, goodwill would be another intangible asset. So that is a very difficult thing to actually hold as a financial institution and account for the financial value of that thing. So there's all these impediments to banks holding cryptocurrencies directly and settling transactional flows with them, even if they wanted to do that. So there's plenty of reasons why banks wouldn't use XRP to settle payments.

And if it gets branded a security, there's just absolutely no chance. Yeah. So I'm sure more to come on that. Two more SEC items. SEC, man, having a busy end of the year for sure. So they obtained an emergency asset freeze against a crypto hedge fund called Virgil Capital that is apparently facing a number of allegations around securities fraud. And then in other news, they ordered Tyrion, which is a company that did a $25 million

ICO back in the day to pay back investors for that unregistered security's offering and to pay a $250,000 fine. So, you know, more enforcement actions. Yeah, they keep coming. And these are like their bread and butter now with, you know, settlements like Tyrion one. The SEC has a template here that they're just carrying out. and plenty of precedent and accumulated case law now. So it seems to be getting easier and less frictional to basically deal with these things. Tyrion's an interesting case because there's a product,

which is basically time stamping data to various blockchains. It works pretty well. It just doesn't need a token. That's all there is to it. So I think just yet another piece of evidence that successful products don't require tokens, and they also don't necessarily imply that value will flow back to a token, even if the token is sort of associated with a product in the same way.

So basic attention token or brave, that would be my number one case study here. Great product, millions people use it, the token doesn't really, there's no purpose for the token, even if the token is sort of artificially injected into the system. So I would love to see some evidence that the utility, token theory is true. I haven't seen any in the last five years. Nope. All right. So moving on, hackers have gained access to certain systems. It looks like a GoDaddy this week. GoDaddy, of course, the domain registrar. And it looks like this access allowed them to initiate phishing emails and to capture the domains of a number of cryptocurrency companies, including Celsius and a couple of

crypto hedge funds as well. So this is a pretty scary development. So as always, I guess, just be on the lookout and Do not send Bitcoin to people asking for Bitcoin, even if you look like you might know them online. The fact that value can be saved as information and sent over the Internet has exposed so many weak points in our internet infrastructure with domains and DNS being one of them. Anything that can be socially engineered will be. And there's so many things to keep track of where you have to have 2FA, non-SMS-based 2FA. involved. It's really difficult, though, to protect every single aspect of your online life. I mean, we're talking about domains here. Yeah, there's a lot of bad guys out there. So keep the 2FA on. I'm not sure what else you can do other than to be vigilant around 2FA and don't send money to people unless you're

absolutely sure that it was them who was asking for it. Yeah, this week I've been fielding in the last month or so, fielding lots of calls from friends or classmates asked me about Bitcoin again. And the number one piece of advice I give them is, if you're going to use Coinbase, disable SMS-based two-factor and use Google Authenticator. Yeah. That's what I always tell them. I've been fielding a couple of phone calls from people that have told me over the years that Bitcoin was a scam and that was only used for criminals. And now all of a sudden they're interested. Yeah, I get those two, but I, you know, I don't rub it in their face. I'm just glad that

they finally came on board. Yeah, I don't rub it in their face either, but there is some, I do take some pleasure in it. Who's the, which, which critic, which current critic of Bitcoin would you most enjoy them flipping to becoming a Bitcoin ball? either Jamie Diamond or Nouriel Rubini, I think. I don't think Noreal can ever flip. His heels are dug in too much. Well, Noreal Rubini, I guess, is just a one-trick pony. I mean, he's predicted 10 of the last three recessions, I think.

He's only got one schicks. I don't expect him to come around anytime soon. For me, the holy grill of Bitcoin skeptics to turn pro-Bitcoin would be Radalio. by far. I think he's coming around. I think he's already demonstrated an open mind and he could be a 2021 case. Yeah, I think so. And if he flips, people listen to Ray. I mean, they listen to all of these hedge fund guys, but especially Ray because he's super thoughtful. He writes a lot. He's got that historical perspective. I think that would be one of the biggest ever coups in terms of getting a former skeptic on board.

Yeah, yeah, he would be a good one. Well, speaking about use cases for cryptocurrency that do not involve illegal things, did you see Russell O'Coon, who is the Carolina Panthers offensive lineman star NFL athlete. He is getting paid half of his salary next year in Bitcoin, facilitated through Jack Mallors' company strike.

Yeah, this is really cool. I saw some critical takes that he was still getting paid in dollars and, you know, it's just that he's converting it into Bitcoin, which totally misses the point, honestly. I mean, unless it's not that unplausible to imagine that the Panthers themselves could acquire Bitcoin for working capital payroll purposes.

But to me, this is effectively the same thing, just instantly converting fiat into Bitcoin. I don't see a difference there. No, it's a really interesting use case. This is, you know, people have, always ask me, you know, at big companies, what they can do as a pilot or a proof of concept. If you work at a payroll company or if you work at a, you know, company that has the ability to do proof of concepts, you know, taking 10 employees and seeing if you can get a pilot

off the ground in the next six months around getting some percentage of their salary denominated in Bitcoin and held at a custodian in like a fidelity or a coin base, that'd be pretty compelling, I think. I remember asking to have my salary paid partially in Bitcoin at Fidelity. Yeah. But I don't think it was possible back then. No. I mean, I'm not sure if that's possible at almost anywhere yet, which is kind of the nature of the opportunity. Now, payroll businesses historically are not, you know, super attractive from a margin profile. So this doesn't scream to me like a great opportunity necessarily from just a pure financial perspective, but I think it's a service that people want for sure. And so, you know, I think if you were offering this, you'd get a lot of

people signing up. So the big new fund, which has declared a Bitcoin position, there's one of these every week. There's probably more than one of these every week now. The latest one is Skybridge, which is Anthony Scaramucci's fund. So apparently they have... have $182 million Bitcoin position now. Yeah, so these guys are new to the game as of a couple weeks ago and have already gotten into that $182 million Bitcoin position. So good for them. They'll be able to go into that.

They actually write really good letters at the end of the year. So it'll be interesting to see what their take is on Bitcoin now that they're on the board. Anthony Scaramucci already has Bitcoin in his Twitter bio and his banner image. So he is a full-on member of crypto Twitter now. Yeah, he's one of these guys who will go on CNBC and go on all the talk shows and talk about it. So he's a good person to have on the team, I think. Yeah, welcome aboard, Anthony. Please stick around longer than 11 days this time.

Did you see that BlackRock is hiring a VP of blockchain to build and execute strategies around, quote-unquote, crypto-related offerings, which noticed it did not say private. blockchain-related offerings. Is BlackRock doing stuff? Well, Larry Fink didn't dismiss Bitcoin out of hand last time. So that's an improvement. But it is telling that all these hires are now have to do with public blockchains or crypto assets as opposed to private blockchains or capital B blockchain with no article. I mean, if you're a large asset manager and you miss a new asset class, that would be a real shame. And it doesn't look like BlackRock intends to miss it more than they've already sort of missed it for the past few years. So getting in the game and

getting in the game at a time when exchange traded products, by the way, are becoming closer and closer to viability. Yeah, it's okay. They still have time. We still don't have an ETF. So we're still in the pre-financialization era. We're still in the equivalent of 2002 for gold, right? We didn't have a gold ETF till maybe 04. So we're still in the early days here. So they're getting in the action, which begs the question, if you're on the inside of one of these large asset managers, and you're not in the action here?

What are you doing? Yeah, it must be panic stations over there right now. All right. So I think that's it for the week. This is the first one of 2021. I guess we're recording this as the last one of 2020. but hope everyone had a safe new year. And this will be a busy year.

There's a lot going on. And I'm sure that we're going to have a newsworthy first quarter of 2021. Yeah, it would be cool for us not to talk about the SEC every week. And maybe we can get back to talking about people building stuff. So either way, I can pretty much guarantee that 2021 is going to be better than 2020. Although it would be hard to top Bitcoin's price action 2020. Well, we definitely have some interesting developments, some exciting news on the podcast front to share over the course of this year, putting more resources behind the podcast, coming out with some interesting upgrades. So more to come.

We're going to leave that as a tease. Who knows what it could involve. Could be anything. Could be anything. Well, thank you for listening over the course of the year, and we're looking forward to 2020.