On The Brink with Castle Island - Weekly Roundup 01/08/21 (Banks can use blockchains, best FinCEN comment letters) (EP.166)

Episode Date: January 8, 2021

Nic and Matt return for another week of ATHs. In this episode:  Coindesk acquires Tradeblock The OCC says that banks can use public blockchains and stablecoins We digest the OCC letter Potential drawbacks to the new OCC guidance Has Brian Brooks had the most successful regulatory term in recent memory? The Treasury's comment period expires Does the Treasury even have the authority to pass these new rules? Our favorite comment letters in response to the Treasury rules Does JPM's price call make them hypocrites on the topic of Bitcoin? Ripple's series C lead investor is suing Ripple Strike announces Strike Global How crypto-based fiat-to-fiat remittances work Our favorite quarterly investor letters Content mentioned in this episode:  Coin Center, Supplemental Comments to FinCEN Neha Narula and Patrick Murck, Letter to FinCEN Fidelity Digital Assets, Letter to FinCEN Bill Miller, Q4 2020 Market Letter Stone Ridge, 2020 Shareholder Letter Matt Hougan and David Lawant, CFA research brief on Cryptoassets

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.

Bitcoin. Welcome to On the Brink. I'm Matt Walsh. And I'm Nick Carter. And what a week. All time highs again. Every week is what a week. We can't have what a week every week.

We say that a lot, or I say that a lot, I suppose. You always say what a week. I can't remember the last week when we didn't have a big week. I mean, it's always a big week. But Bitcoin's about 40,000 as we're recording this. I just saw Pomp on CNBC, the coin metrics in the background. Love to see it. Yeah.

The current coin metrics reference rate is 39-836. That's insane. How did Bitcoin get up there? Well, it's all kind of happening. It's been a pretty wild week. So you had an interesting podcast release on Monday. Yeah. Speaking about the price of Bitcoin, so I had Travis Schwab on, so he's the founder and CEO of

Eventis Systems. So they power trade surveillance technology in a variety of asset classes. And this was a, you know, I joke about this because we do a bunch of podcasts around market structure and legal, but these things really matter. And if you care about getting a Bitcoin ETF in 2021, how trade surveillance works is actually at the top of the SEC's concerns around how this market functions from a spot market basis. And so Travis was really instructive and kind of pointing out how the market structure works today, how he sees it progressing. I think the punchline is that he thinks that all of the,

all of the parameters are there in order for us to get an ETF approval. So that was exciting. So is that the final box to be checked in terms of, because the SEC really asked for three things, right? Well, so what are the three? I mean, there's qualified custody and then a robust kind of surveillance sharing agreement and functionality for the spot market. Those are the two that I really think of. What's the third? And I would say they asked or implied that they wanted more U.S.-based volume for the asset or more American-based kind of price formation. I guess that falls into this surveillance idea that I'm talking about. I mean, if it's, if price discovery is happening on unregulated exchanges and Malta that don't have surveillance sharing agreements, then I don't know

if we're going to get there. Well, it certainly helps that the CME futures product is now the most liquid and voluminous product out there. Yeah, it sure is. It sure is. How times have changed that launch at the tip of the last bull market, and now it's one of the biggest venues for Bitcoin. Yeah. It's also been an exciting week on the deal front.

So we've had some consolidation starts to happen here in the industry. So we had CoinDesk, a subsidiary of DCG. They acquired Tradeblock, the crypto asset data and infrastructure company. So Tradeblock, of course, was, started, I think back in 2013, was one of the original infrastructure companies for the crypto asset space, went through Y Combinator early, received early VC investment. It was really the first VC investment, I think, in this category you could argue. Certainly, you know, really early. And they have a trading infrastructure platform that facilitates RFQs and over-the-counter

type of trading and also have an index, which powers DCG's asset management. management business, which is the XBX index. So CoinDesk really building out that data practice. So congratulations to the trade block team. Yeah, I think it really makes sense as an acquisition. I mean, CoinDesk is already quoted for market data very frequently. And this is just going to harden their offering. So, you know, the block is getting into more data lines of business too. I think it makes sense for these media businesses to to build out their data competency. They have the distribution. Another acquisition here was Coinbase acquired a company called Route Fire,

which is a trade execution company, also for an undisclosed amount. But more and more consolidation. And not surprisingly, a lot of that consolidation is at that intersection of financial services and public blockchains. It's a space that's really exploding. Next up we have tax bit, which raised an undisclosed amount from PayPal Ventures, based ventures and they raised from Winklevoss capital their existing investors. So they're a tax automation software. It's going to be a very ugly year for people paying taxes who have been doing

defy things. Talk about just onerous. I mean, some people's tax returns will be entire textbooks. I mean, I don't know how you really start to account for all these things. How do you account for returns from yield farming, for instance. Where do you even start? I don't know. I think if I even try to explain defy to my tax guy, he might have a heart attack. I get a last, I get asked a lot for referrals to good tax attorneys and accountants. So if you could track the average price of those services, there would probably be a bull market in those as well.

Yeah. My tax guy is a lot better at golf than he is at, like, D.F. but he's good. Yeah. I don't know if defy, like the defy DGens, so to speak, are the kind of people that are particularly fastidious about their taxes? It's funny. I was listening to Hasu and Suu on their podcast, which is really good.

And they were talking about, you know, they were doing a run through of all the top defy projects. And Suu at one point just said, yeah, I don't think people that are active in defy are really paying taxes right now. And you have to, you have to probably agree with that. it. Yeah, and until there's a platform which is highly automated in terms of pulling your kind of blockchain data out and aggregating it, and even then, I mean, it's going to be such a challenge. Well, we're conflicted here, but I use Zen ledger. I think that's a really good platform,

hooks up to a lot of defy projects. Yeah, so do I. So do I. So next up we have Furu combo, which is a defy aggregator. They raised 1.85 million from 7X Ventures, Defiance Capital 1KX, and multi-coin. Furu combo. That kind of rolls off the tongue. I think they're running out of names because there have been so many Dexas funded in the last year. It could be.

It could be. Well, why don't we get into the news? I mean, this is a regulatory podcast at this point. I think it's safe to say that the bulk of what we talk about is things that are happening in the regulatory environment. But it's not like we intended that to happen. It's just that so much of the stuff that happens is being imposed from above by regulators. It's true.

Well, why don't we start off with something that I think is good news? I think we'll see. So the office of the control over the currency, the OCC, led by Brian Brooks, who's an interim, who's probably done more in six months at the OCC than anyone in the history of the OCC has ever done. He's been really active to the benefit, I think, largely of the crypto asset space. So they issued an interpretive letter, the OCC did, that clarifies that U.S. banks can use public blockchains and U.S. dollar stable coins as settlement infrastructure. So effectively, I guess what they're saying here is that public blockchins are in a category

of technology with ACH and Swift and Fedwire as being systems for moving around information and value for financial settlements. My initial reaction to this, I'd be curious to get your thoughts, is that this seems really positive. I think that the full ramifications here will see. And they're obviously yet to have been felt. But it feels to me like this is opening the door for U.S. banks to be more actively participating in blockchain ecosystems and facilitating payments, accepting stable coin payments, and doing all sorts of things. So curious to get your take. Yeah.

I mean, my first reaction reading this was, wow. The OCC is legitimating public blockchain transactions as an alternative settlement infrastructure for banks. Unambiguously, that's positive for the industry that legitimates the kind of things we've been working on for the better part of a decade. The letter mostly focuses on stable coins, but it doesn't really seem exclusive to stable coins. I didn't really see any language in there saying, you know, banks can't transact with the native tokens of these networks. unless I misread it. So, yeah, I mean, this is something that people have been dreaming about forever, is the full legitimization of large financial institutions using public blockchain open networks.

That's unambiguously good. However, I did talk to a few practitioners that were actually kind of perturbed about this, which I thought was interesting. Do tell. Yeah, so there wasn't a lot of, there weren't a lot of folks in the crypto industry that said, huh, maybe this is not as good as we thought. I think it really depends on your perspective.

But one interpretation is that this immediately opens the door for larger banks to issue their own stable coins. So the JPMs of the world. Whereas they probably couldn't do it before. Whereas there is a lot of entities that are kind of going through this process of obtaining some state licenses or some of these newer bank charters that are trying to issue stable coins that might get beaten to the punch here because basically this opens the floodgates to anyone. So there is a concern, I think, that this would really benefit incumbents

at the expense of established stablecoin issuers or newer banks that are just starting up or the community, the smaller community banks, which might want to. to issue a stable coin. So that was an interesting contrarian narrative that I heard from a couple different corners after the dust had settled here. That's interesting. Well, I mean, that might be right, but I guess what I'd probably say to that is, you know, just because a bank can do something, doesn't mean they will do something. And historically, the startups have been really advantaged when it comes to new technology. So the existence of Coinbase and BlockFi and all these great infrastructure companies in the crypto assets space is really testament to, you know, the banks being

slow movers. They could have built a lot of these businesses. Yeah, that's absolutely right. The other language, which was a little more concerning in the letter, had to do with, you know, kind of standard language around risk, which I think could be used to potentially marginalize smaller issuers as well. Honestly, it's very hard to forecast how this will play out. The OCC is not the sole kind of banking regulator in this country. They don't have unilateral power. It's always kind of a mosaic trying to put together the pieces here and I understand the interplay between the states. They're different regulators and industry. Anyway, the bottom line is it still legitimates public blockchains as a totally valid settlement network alongside all the established ones.

So that's good, I think, just in general. Yeah, it's great. I mean, Put this in the category of things that if you had told me two or three years ago, we're going to happen. I probably would not have even believed you. Yeah. And in 2020, what did the OCC do? They said the banks can hold Bitcoin and other crypto assets. They said the banks can custody funds that are used to create stable coins. And they also said, hey, you know, large banks, you can't sort of arbitrarily de-platform people, you know, which is kind of a call.

back to Operation Choke Point, which we're doing a podcast series on right now. And now this didn't make it into 2020, but now they've also said, hey, banks, can basically use public blockchains. So that is just such an active year for that regulatory body. I mean, and not to mention, there's a bunch of these national kind of fintech charter things that are still hanging out there. If Brian Brooks can close it out by approving a few of these, I mean, this guy will have had the most productive stint as the head of the OCC of all time, I would argue. I mean, I guess I'm not

familiar with prior OCC administrations. It was not something I ever paid attention to before. Yeah, I mean, I can't say I'm a, maybe, you know, we have listeners that can point out some really effective OCC chairman of the past, but I can't think of any. Yeah, so it's been a good year for the OCC. You know, it's like, I don't remember who tweeted this, but someone said Bitcoiners find out about these regulatory bodies and stages based on when they start to interact with the crypto industry. So, honestly, I would say FinCen was the first one to really make their mark with some of the enforcement actions they did against Bitcoiners back in the day, really early on. The IRS has obviously been really present, really active. And then, you know, Bitcoiners learned about the CFTC and the

SEC has, you had some of these enforcement actions about ICOs. And now last year, we finally learned what the OCC was because they started to do things too. Yeah. Well, I'm sure there's a lot more to discover. Yes, we got the full regulatory education. So speaking about regulatory, the comment period here for the U.S. Treasury's rushed notice of proposed rulemaking on cryptocurrency transactions expired at midnight on Thursday. So we're taping this actually before midnight. But the comment period, by the time you hear this will have been over. And there's just an overwhelming amount of good comments here, I think, is my general takeaway. The last time I checked, there was over 5,000 submissions here.

I think there have been some really good ones. We submitted one. I wouldn't say that ours is like the best one out there, but we raised some very specific concerns that we had issues with, and we can certainly talk about those. What's been, I guess, before we dive into some of the specifics here and what people are objecting to. What's been your take just on the process here? Well, it was rushed for sure. It's really not typical to have a 15-day comment period for especially something which introduces really dramatic changes and especially not over the winter break and holidays. But to their credit,

the crypto industry pulled through and it got in some really great comments over the holidays, which kind of speaks to the, you know, how hard people in this industry hustle, but it was really impressive to see. We kind of got one in at the last second here, right? We beat the buzzer. We published ours or submitted ours today. So that's on our medium page, if you'd like to read that.

But I've been incredibly impressed by the thoroughness of the reactions here. Coin Center published two responses. They just published another one, which was really quite something. was actually kind of pretty aggressive saying they don't even think FinCEN has the authority to make some of these changes, believe it or not. So they're not just saying these changes would harm the industry. They're saying you may not have the authority to do that.

So they're kind of stepping up the aggressiveness here, which was pretty cool. I saw Jill Carlson over at Slow gave us a little bit of a backhanded compliment, said, better late than never. But we got it in under the time. We were a little bit late on the homework, but we got our comment. it. Yeah, turns out we had three extra days more than we thought. But yeah, so I would recommend that you read the Coin Center letter.

They said some really sharp things. In the letter, they say the public was misled into filing comments earlier than necessary because FinCEN basically misstated how long we had to make comments. Then they also said, here's a quote, we believe the Treasury Department does not have the statutory authority to promulgate this regulation. And I won't exactly go into the specific details of their authority or lack thereof, but we'll put the letter in the show notes because it's worth reading. Yeah, so there's a few comment letters that I guess I'd recommend people reading. You highlighted the two from Coin Center. I thought those were really good. There was a bipartisan group

of nine members of Congress that wrote one. It was a joint letter. That's also on, you know, part of Coin Center's dump here. Square wrote one. Jack Dorsey specifically signed it. They called out the rule being disadvantageous towards financial inclusion. I thought that was a really strong letter. ErisX highlighted a number of data security issues, the fact that this would potentially create a bifurcated market between self-custody and also would result in some very high compliance costs. I thought Ben Davenport had a great one. He talked about some physical security concerns, which we also had in our letter. Ben, of course, was the founder of BitGo and also over at blockchain capital. And then lastly, I guess Fidelity Digital Assets had a really thorough one.

I'm sure that the Treasury will see Fidelity's name and take special note of this and at least read this one. But what was interesting about the Fidelity one was they called out the fact that Treasury has said that they have done this in conjunction with industry and have, you know, sat down with industry. And Fidelity basically says, well, we were in those meetings and you were talking about something else. So they're saying we had meetings with Steve Mnookin and it was about the travel rule. It was not about this rule that's being proposed here. So really interesting, I would say. I mean, it's quite disturbing. I would even put forth. Yeah. I mean, it's just duplicitous from from treasury. I was getting fired up reading the Fidelity letter. I mean, you almost never see

language that strong in a public comment from a large institution like that. But in this case, they're calling out treasury on some of their nonsense. Another letter that I wanted to highlight was the Patrick Mark and Neha Nerula letter, which I thought was really excellent. Their point is really, and I think this is something that Matt Corallo said as well, the rule as constructed misunderstands the way the blockchain addresses work. And this is something we talked about on the last podcast, and Neha also expressed her a surprise that this hadn't been a feature of more of the responses. But basically, the rule relies on this premise that an address and a payment is one individual to one individual or one individual to an entity, but multi-signature, completely

blows that assumption eye. And so the rule is just not constructed in a way that takes notice of how public blockchains work. So we're going to hear more about this. I don't know what's going to happen. A16Z and Coinbase have already said that they will be filing lawsuits. A number of industry groups that we've been in contact with are already mobilized and starting to fund some of those lawsuits. We'll see. I mean, I thought Fred Wilson's blog post, which was called How to Not Regulate Innovation, is definitely worth a read and was another one in this category similar to Fidelity, where it's just a very strongly written rebuke of the Secretary of Treasury. Fred Wilson says, the Secretary of Treasury in his last month in office is giving us a textbook

case of how not to regulate important technology innovation. And that really kind of summarizes how I feel about it, Arna, about you. Yeah, it seems like he's just throwing a grenade on the way out of his room and trying to lay ways to an industry, which he just has a personal animus against. You know, if this was a good faith negotiation, we just wouldn't be seeing these tactics. And, you know, I don't think minutiae really has much credibility at this stage in the game, unfortunately. So I hope that Jenny Allen does a much better job of engaging with the industry.

Yep, hopefully. All right, so why don't we move on to some more upbeat topics? J.P. Morgan put out a report this week that suggests that we're going to be seeing 146, thousand dollar of bitcoin yeah you know honestly i'm going to defend i'm going to defend jp morgan here a little bit i don't like it when people treat these enormous organizations as monolithic so i don't see that as really contradicting anything that jimmy diamond has said about being skeptical of bitcoin it's clear the jpm's going to eventually create stable coin probably some other blockchain related products um you know one one sort of forecast from the commodities group i don't i don't think

you know, renders them into being hypocrites or anything. Well, that's the very, that's like the fair and accurate take, but you got to get your pitch forks out. I mean, this is a guy that said he would fire any employee that used Bitcoin like two years ago. Come on. Yeah, but he did say that. That was strong. And probably there were hundreds of JPM employees that were buying Bitcoin in their PA,

if not more. Here's another twist in the ripple tale, Tetragon, which was their lead in this $200 million Series C is now suing Ripple and looking to get their money back. So this is obviously in the wake of security laws violations from the SEC. So I guess bad things stack up on you. Well, I'd be curious what the story is here. I mean, is there, there's no way that as a lead investor of a $200 million series C into a company like Ripple that you haven't done due diligence on it.

And you don't know that there's a high risk. of it being deemed a security. I would think. I mean, everyone in the industry thought that this was a security, except for the people on, you know, Ripple, Twitter. So maybe there's some language in there that says if you're deemed to be a security, we get our money back. I'm not really sure what the basis is for the lawsuit. Well, honestly, I don't think everyone thought it was a security. I thought there was a lot of complacency in the industry. And a lot of people felt that Ripple had received a de facto safe harbor from the SEC because the SEC had never really done anything about them. And the only entity they never settled with was FinC in 2015.

So, you know, while we were obviously both firmly of the opinion that it was and remains as security, I think there's a lot of complacency in the industry around this. I think a lot of people were shocked that the SEC would finally go after ripple. So it might have been this de facto bias. There's a lot of that in the industry. If the SEC fails to do something, people presume that that constitutes tacit assent of that thing. But as this shows, that assumption is not true. Yeah.

Well, in happier news, Grayscale has named Michael Sondichene as CEO. So congratulations to Michael. I actually thought he was already the CEO, but I guess technically he wasn't. But he's been doing a great job over there at Grayscale and just what a juggernaut. just an enormous franchise. Yep. This one was pretty cool. Strike announced Strike Global or rather Jack Mallors announced Strike Global

in partnership with Bitrex. And so effectively it is a way to transact with Fiat on a sort of frictionless basis using Bitcoin as the settlement network as far as I can tell. I think what strikes doing is really cool. And I don't understand all of the mechanics of it, but I've been listening to a lot of, a lot of people are actually talking about strike on Clubhouse. So I've been getting educated on how it works on the back end. But one of the cool use cases here for strike is let's say that you want to send Bitcoin to someone, but without buying Bitcoin. You can actually do that through strike.

So it's almost like they're a, they must have a pretty significant liquidity operation behind the scenes in terms of moving fiat currencies into Bitcoin. Bitcoin and into the Lightning Network and just moving them from peer to peer jurisdiction to jurisdiction and really serving as that on and off ramp. So one of the interesting use cases that really kind of struck out to me was that if you wanted to move, if you want to send someone Bitcoin without actually having to buy that Bitcoin yourself, you could do it through a strike. Yeah, the remittance use case, which is what the announcement post focuses on, has been possible for a while using crypto financial infrastructure. And in some cases, it's cheaper than

regular old remittances that rely on correspondent banking. And this is something we've seen in a number of different startups. And it basically works because exchanges are so ubiquitous now. And if you have fiat on and off ramps to an exchange in the sending and recipient jurisdiction, then you can send funds using effectively three hops as opposed to using the correspondent bank system, which might incur many more hops. You know, regional banks in, you know, sub-Saharan African countries don't directly tap into the large dollar clearing banks in New York. You have to go through a number of hops to get there. And each hop adds fees and risk. So if you can just go from fiat to Bitcoin or another cryptocurrency at an exchange, then engage in settlement with another

exchange, and then, you know, at that exit point going back into the local fiat, that's in some cases a smaller number of hops than these transactions would take in the traditional financial system. So that's really the core intuition behind this. And we've seen founders do it in a number of different ways. but the point is that blockchain is global clearinghouses for value and you get a really flat topology as opposed to the way that the banking system developed,

which is extremely hierarchical. So that's basically why it's cheaper. Yeah, I think it's a very interesting insight. Jack Mallor's done some great things in this industry, Zapp Wallet. It's another one of his project. So I'm really excited to see where strike goes. Yeah, and the challenge is retaining that fiat liquidity at the end

it's always the last mile, which is the challenge. And so this would be more challenging in a jurisdiction that didn't have robust fiat on and off ramps, for instance. But in that case, you can still use the peer-to-peer markets, which is what some of these providers do. That's true. I mean, a core competency for the business has to be around the trading and the, you know, the FX and getting in and out of these positions. And Jack actually comes from a family of traders. So I'm sure they've had that on lockdown. That's right.

So it is the season of investor letters, and we've seen some good ones. So Bill Miller put out one, legendary Bill Miller of Legamason fame, put out a Q4 letter. It's definitely worth a read. It's pretty short. His last paragraph is all about Bitcoin, and he talks about how bullish he is. He's been bullish for years and years since 2013, maybe. The last sentence says, Warren Buffett famously called Bitcoin Rat Poison. He may well be right.

Bitcoin could be rat poison and the rat could be cash. That's a pretty great line. The other one that I really loved was the Stone Ridge shareholder letter for their annual report. I mean, it was so impressive. It is pretty much a complete breakdown on Bitcoin from a high level. It's written with a bunch of rhetorical flourishes. It's kind of a joy to read. this one instantly entered my canon of sort of Bitcoin introductory materials.

It shot right to the top of the list. I read that Stone Ridge letter and I just thought I wish I wrote this. It was so well done. It was really funny and witty and the prose was good. And it hit all of the key points about why Bitcoin matters, presuming no prior knowledge. It was amazing. We're going to link it in the show notes. We'll link it in the show notes.

I'm sure people will be passing this along. it'll be like the Feffer the Feffer paper that just lives for years Yeah I mean people still talk about the Feffer paper

They talk about the interview Feffer did with us That was really one of his only podcasts By the way Yeah It's a good interview So speaking of Things that were written

Like that transition The CFA It's a terrible transition The CFA The CFA Institute has published a 64-page book, and it was co-authored by Bitwise CEO Matt Hogan and Bitwise researcher David LaWant. And it's called Crypto Assets, The Guide to Bitcoin, Blockchain, and Cryptocurrency for professional investors. So to my knowledge, this is the first time that the CFA Institute has published a full research brief on Bitcoin or crypto assets and made it free to download for everyone. So, you know, I think the big, like, why this matters is just that the CFA Institute is enormously

reputable. So many people in traditional financial services pay attention to it and have CFA designations. And this really puts this technology and these assets, specifically Bitcoin, on the, on the radar. This, I think, is a very, very fair treatment. I read the report today. It's very well done. It's pretty even keeled. And it's kind of a complete introduction to the asset class. All right. I think that is it for the week. Next week, we will see what happens with this Treasury story. I think that will be the big news is what happens with all the comment letters and, you know, will we get a 60-day period?

What's going to happen? Will Secretary Manukin still even be there? Yeah. I mean, we have a government in crisis right now. So, you know, do they have the authority to really push through very stringent new rules? on this American industry. I don't know. I find that to be pretty questionable, but we'll see. We'll see.

So we'll be back on Monday. We have an exciting podcast with actually Matthew Gould of Unstoppable Domains, which is a really exciting company building in the blockchain domain space. So we will see you on Monday with that one. Everyone have a great weekend.