On The Brink with Castle Island - Weekly Roundup 01/15/21 (Gensler in at SEC, the Spakkt, a new OCC charter) (EP.168)

Episode Date: January 15, 2021

Nic and Matt return for another explosive week. In this episode: The bike saga enters its final chapter Sci Hub tries Handshake Is Choke Point returning? We break down the Bakkt SPAC FinCEN extends the comment period for its notice of proposed rulemaking Gemini announces a credit card with crypto rewards What Gary Gensler as SEC Chairman means for the industry Prospects for a Bitcoin ETF under a Gensler SEC The OCC creates a national crypto bank charter One reason why Miami could make it as a tech hub We discuss the latest NYT article on losing coins Content mentioned in this article Nic Carter in Coindesk, Twitter, Trump, and the 'Private Company' Fallacy FinCEN extends its comment period OCC, OCC Conditionally Approves Conversion of Anchorage Digital Bank Brian Brooks in the FT, Get Ready for Self-Driving Banks  

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 the price is back. So people were panicking early this week, but panic not. We are flat week to week. Yeah.

Someone wrote an article on Medium saying the Bitcoin is dead or there was some Bitcoin obiturries written. Big mistake. Never write a Bitcoin obituary. I mean, if you're calling for a Bitcoin obituary when it goes from 40 to 34, like, come on really yeah ridiculous anyway those people got their just desserts because we're up about eight thousand dollars and 48 hours so well I'm just here for the underlying technology that's right well did anything happen this week well yeah something big happened in the

bike saga it might be the final chapter of the bike saga actually oh bike okay new fresh bike news all right let's hear it so you know as listeners of the podcast will know I have been working out of a we work, not our office every day. And my bike was stolen several months ago in a very peculiar set of circumstances where the security camera footage went out for about five minutes. And it just so happened to be the five minutes where my bike was stolen from the back where it was locked. And this we work is now shutting down. I got to notice that I need to be out within 10 days because the whole thing is shut down. So you're no office refugee. I mean, I'm not going to say that's like karma, but it's kind of karma.

That's what they get for really just not safeguarding bikes of the patrons. I've never heard about the bike. Well, that's not a very satisfying resolution, though. I mean, we still never found out what happened to the bike. Someone needed more Bitcoin and decided to steal a bike, sell it by some Bitcoin. It happens. I mean, I've thought about selling my daughter's bike for more Bitcoin. All right.

Well, you. had a good episode with Matthew Gold this week. That's very timely. Unstoppable domains. You couldn't have asked for better timing on this one. So we had Matthew Gould, he's the co-founder and CEO of Unstoppable Domains. So they're building a domain registration page, kind of like a go-dady for public blockchain addresses and domains. So this was a, I mean, this is an endlessly fascinating space. There's a bunch of public blockchain networks that are trying to do things in this area. And Unstoppable is a company that sits on top of. a few of them and it allows you to buy your domain. I think you own a couple,

a couple domains, right? Not an unstoppable. I have some handshake domains. Speaking of domains, we managed to brick our own website on the brink hyphen podcast.com. Yeah, that was a, we're not going to throw anyone under the bus here, but thanks. That was an enforced error. to the guy that told you to do a certain thing that took down our website. Yeah, we were, well, we can't leak what we were trying to do. It was very complex website stuff. And we managed to take our DNS offline. So I think hopefully by the time you hear this, it's fixed.

But it's been offline for two days. Well, we have some really exciting things that we're bringing out to the listeners. And this was part of that. But I'd say that slowed us down by about a week. Yeah, so we're really suffering here in our efforts to, expand this podcast and create really exciting new opportunities for you all. And so, yes, currently the website's down. So we're aware of that.

Stop DMing us. We know. I've been on support to name cheap. Okay. We're trying to figure it out. But yeah, I wish we'd used, you know, blockchain-based DNS. Maybe that would be better. There was also another scandal with blockchain-based domains this week.

Are you talking about Sci Hub? Yeah. which is one of my favorite resources for getting academic papers. I'm not sorry about using it. It's great. And that kind of information deserves to be free. So Syhub was banned from Twitter. And then Alexandra Elkabayan, the founder, went ahead and bought her handshake domain. But then she subsequently decided not to use it because she thought it was too centralized. So that was kind of a quick little round trip. But it sounds like she was mistaking namebase with Handshake.

Did I get that right? She was conflating kind of the coin base of Handshake, which is this company called NameBase, with the protocol itself. So, Alexandra, if you're listening, there's a lot of good in the world of decentralized domains. Don't lose heart. Well, maybe that's a good example of why we need more product managers

in the blockchain space. it's just so hard for people that are not in this every day to interact with these systems. It's really difficult. Yeah, I own some handshake domains, but I haven't figured out how to actually configure them yet, or really even navigate to a handshake domain on my browser. So there's some ways to go. Yeah, there's some usability challenges.

I mean, speaking of deplatforming and domain names, this was just a really active week in that category with that theme. We had Trump being deplatformed from all sorts of platforms, you know, Twitter, Facebook, Snapchat. You wrote a pretty provocative piece for CoinDesk on the topic. Yeah. No one even got mad at me about that one yet. Well, maybe because not that many people have read it.

But yeah, basically I'm arguing that there's no such thing as a private company. So see how that lands. One interesting point that I made was, of course, referring to top. Operation Choke Point, which is the subject of next Monday's episode. Very exciting. And that's all about how the state influences the behavior of private companies through the banks. I think that's going to sort of resume shortly, or I never really went away, honestly. Everyone in crypto knows that, you know, crypto itself was sort of redlined by the banking sector for a long time. So I think it's very timely to revisit Choke Point and to see what happened there

because it seems like the banks are probably going to get more politicized again. So I guess that's why we have Bitcoin. Yeah. Well, did you see Jack Dorsey's tweet when they de-platform Trump? He basically said, we'd rather not do this. We wish we were operating on internet architecture that was free and available to use to everyone and no single point of failure. And that's why I love Bitcoin.

Yeah, he brought a Bitcoin, which I think made a lot of people pretty upset, but that tweet swim was really good, I thought. Honestly, I mean, he was very kind of clear-eyed about the whole thing. That's why blue sky exists. But I feel like he doesn't have enough power at Twitter to push them through to a decentralized standard. I mean, he owns single-digit percentages of that company. Well, at some level, you'd be talking about cannibalizing your existing business. So it's just going to be hard for companies that are already data monopolies and sitting in the middle to do some of these things. Yeah, it's a classic innovators dilemma.

Can he really disrupt himself? That would be rare. But he seems to understand what is required. I mean, he's hinted at sort of federated models. I've been on Mastodon recently. That's a federated social media platform where you can run your own local instance. So there's no one single global terms of service. There's local terms of service.

There's a lot of Bitcoin is on there. So I think Jack Dorsey gets it. He kind of sees where this is going. All right. So do you want to transition to some deals? We had a ton of deals this week. Yeah. We're in a bull market for deals as well.

First one, huge, huge deal. The Intercontinental Exchange is taking backed public through a SPAC, which would value it at $2.1 billion. And there's a deck as well. if you want to get into the guts of BACT. Yeah, so this is an interesting one from a lot of perspectives. I mean, a lot of people chirping on Twitter about, hey, this is a pre-product company in the payment space?

Why is it $2.1 billion? Is that just because there's crypto in the name of it? So I think that's one thing. The other interesting angle here is, you know, since Bact is a custodian for crypto assets and there's this trading functionality as well, why isn't it staying on the inside of the intercontinental exchange? I guess that decision was made some time ago, but the effect of having it go public,

I would think would have a very positive effect on the intercontinental exchange just from a financial reporting perspective, assuming that there's a lot of cost drag with backed. So the unit economics, for instance, of intercontinental immediately look better with backed as a standalone public company, I would think. Did you read the deck that went

along with the offering? I did. I mean, it was kind of like an early stage venture deck. It was kind of like, here's what we're about to go do. And in five years, we're going to be enormous. There were a lot of projections. There were not a lot of sort of current figures. I mean, we're basically looking at a crypto on-ramp business and a payments business.

Obviously, they've done, they've made some progress being a venue to trade Bitcoin, to place to custody crypto assets. The rest of it doesn't really exist yet. custodying other kinds of digital assets. That's sort of the big vision. And then the payments business doesn't really exist yet. So there's a lot of sort of potential embodied in the price. If you actually look at the sort of cash flow analysis, they expect that the biggest revenue line would be their just crypto on an off ramp product, which I wouldn't say exists yet, actually. I think there are some cool aspects of that product.

I think, you know, one of the examples could be taking airline miles and converting them into a different digital asset that you want to hold. Maybe that's Bitcoin. That would be really interesting, I thought. But it's not out in the wild. So there's not much to appraise. The one thing that I got really a little bit triggered by this week was Gavin Michael, the CEO of Backed. He's fairly new.

He went on Axios Pro Rata, which is a podcast with D. and Primac. And Primac asked him about the Treasury rule and about this notice of proposed rulemaking around self-custodied wallets and really making it much more onerous for custodians and exchanges to interact with self-custody, which obviously self-custody is fundamental to this industry and self-sovereignty over your money. Everyone can agree to that, I think. And there was just a plethora of, and we'll talk about it later, just around comment letters

into treasury pushing back on this. You know, you had comments from fidelity, comments from square, comments from every company that matters in the industry. And when he was asked about this, he totally punted. He just did not answer, did not assert a position. And he was asked about three times. So I do want to know what does BACT think about this ruling, because if the Intercontinental Exchange and BACT are on the other side of this, then there would be like the only company in the industry. But they're a big, powerful company. So it would be nice to know kind of who's, who's pushing the agenda here. Yeah, that was something interesting

that Joe Wisenthal was speculating about whether the companies that are financializing cryptocurrency would be opposed, incentives-wise, to the regular users of these things. If their incentive, as big intermediaries, was to support rules that would trap Bitcoin in Wild Gardens versus regular Bitcoiners would support you know, less restrictions. So maybe that's a, that's an instance of that. Well, so I just think that's a

bad business decision then, because if you're a payments business, you're going to be attracting retail customers. The retail customers that want to buy Bitcoin and the one to engage with these systems are aligned with the ethos of this community and aligned with the wishes of self-sovereignty, I would think. So I just think it's a bad business decision to be against this if they are against it. I mean, so I would love some clarity on that. So, On that same topic of the rule, FinCEN has reopened the comment period. So that's a new thing. They kind of ceded to pressure a little bit.

And very interestingly, the comment period will go through the end of Trump's term and through to the Biden administration now. Yeah. So this is just breaking as we're kind of going through this. So it looks like FinCEN has extended the comment period by 15 days as it relates to one aspect of this, the reporting requirements, and has added. another 45 days of comments on the record keeping and counterparty reporting requirements. So there's kind of two aspects of this.

But I would think, you know, if you believe the incoming Biden administration, they're going to effectively halt all Trump executive orders here. And this would fall into that category, I think. It'll be interesting to see what the legal experts say here, but this could be a big win. Yeah, I'm not celebrating it just yet, but we have been signaled that the Biden admin's going to freeze all those Trump executive orders. So this would be in that category. And maybe they'll revisit it. But I would say this is conditionally very good news. That's a good job by the industry, right? Yeah. Everyone that submitted a letter helped because just fundamentally they would not have

been able to appropriately consider every industry letter. And I think this specific rule received more letters than any other rule in the last decade. So the crypto industry really, really stuck up for itself here. I mean, it's just a uniquely horrible rule. And Secretary Minookin goes down in history as being probably one of the most adversarial towards startups and new innovation of any Treasury Secretary. So it's a bad legacy. We'll see. Hopefully we're out of the woods here. So that's our first deal. We've covered one so far. There are a few more. So next, up we have coin switch which is a exchange and brokerage base in india they raised 15 million from ribbet and paradigm next one up is arca arca is a crypto asset management firm they raised 10 million

dollars in a round that was led by r re ventures and here's a company we've been talking about a lot on the show and i'm sure we'll talk about a lot more n y dig they have acquired digital assets data, which is a crypto data company. So Mike and Ryan Alfred, the Alfred brothers are joining as head and M&A and head of product. That's getting two weapons right there. The Alfred brothers are very talented. That is adding some talent to an already juggernaut of a company with Nidig. Yeah. Next up we have Buy Economy, which is a blockchain developer platform. There is 1.5 million from Eden Block and Fembusch Capital. Next one up is Zipmex.

This is a Singapore-based digital assets exchange. They raised $6 million in a round led by Jump Capital. This next one, we've had Ryan Rabaglia on the show. So this is OSL Group. They're publicly listed, actually. They're a market-make-it firm, exchange, trading company. They raise $90 million in a stock issuance. They're listed on a, on a market market market-making firm, exchange, trading company.

listed on the Hong Kong index. Yeah, and another one in that category of a publicly listed company in the crypto space is DigenX. They raised 38.6 million. So even the public companies are raising money this week. And we also have Gemini. So they acquired Block Rise, which is a sort of payment startup. They are, and they announce that they're creating a sort of crypto back credit card with rewards paid out in any crypto asset on the Gemini platform. So this segment is getting really, really hot. You have fold with their sort of debit card model where you're getting Bitcoin back. BlockFi is going to release their Bitcoin back credit card.

Now you've Gemini jumping into the freight too. I mean, with all this cash back payable in Bitcoin, I think we're going to run out of Bitcoin. We may be having a sell-side liquidity crisis here. This is the debate that we've been having for several weeks now is Bitcoin scarce. Oh, man. Did you do a podcast about this with Peter McCormick? Yeah, so I did a whole, I did two full hours with Peter McCormack and Francis Coppola. How was that?

Well, I think, honestly, so she's actually a lovely woman. So she gets a lot of flack on Twitter, but it's always better in person. I think people were actually misrepresenting her point. So because, you know, the straw man version of her argument was that, you know, Bitcoin's not scarce because you can divide it up more. So to be clear, that's not actually her argument. It's just that maybe she was a little clumsy when she laid it out. So we got to the bottom of it on that episode. All right.

Well, I'm expecting good things. I can't wait to hear that one. The last deal of the week is FileStar. So this is a decentralized storage and infrastructure company, very timely. They raised $5 million from Hashkey Capital. A lot of deals. Super hot. Web 3. I'm expecting a lot of good things from Web 3, especially as Internet infrastructure gets more politicized, more questionable.

It's Web 3's time to shine. If there ever was a moment, it's now. Yeah, I agree. So to centralize storage, centralized DNS. Let's see it. You know, shoot your shot. All right. Let's get into some news.

So it looks like we're getting Gary Gensler at the SEC. So President-elect Joe Biden will reportedly nominate Gensler as the chairman of the SEC. Gensler, of course, is a former Goldman partner. He was the head of the CFTC, and he's been over at the MIT Digital Currency Initiative for the past few years. He's been teaching a blockchain course. I don't think it's an exaggeration to say that he is

instantaneously the most knowledgeable chairman of the SEC that we've ever had on cryptocurrencies. That's, I don't feel like we're going out on the limb there. Now I guess it's what happens. Yeah. I mean, in my view, of all the candidates, Gensler is the one that is most likely to be sort of favorable to the industry, or at least understand it very well. So I think crypto folks should be pretty pleased about this, all

things considered. Well, I think there's two questions. So, you know, is it relates to a Bitcoin ETF, no one understands market structure within the regulatory apparatus, probably better than Gensler, I'd say. And so as the fact pattern gets better and better for Bitcoin ETF, I think you can count on Gensler being someone that will understand it and presumably act accordingly. To me, the big question is, you know, apart from the ETF, let's look at other assets in this ecosystem and are these things securities. So, ripple and, you know, anything that is raised with a SAF. To me, that's the big question is where does he come down on all of these venture-backed

projects that are trying to take a simple agreement for future tokens and move those into, tokens themselves. And does that represent the issuance of a security and can things transmutate? So we'll see. I mean, Hester Pierce has had the Safe Harbor proposal out there for a while. Maybe this is something Gensler gets behind, but I'd be curious to your perspective. Well, Gary Gensler has made his thoughts clear on a lot of these tokens in the past on the record. So you just have to go and look at his prior statements. I mean, he said that he thinks XRP was a security, you know, unambiguously. So I mean, XRP was already being sued by the SEC, so I don't think that's going to change. If people thought that he would come in and put an end to that,

that's probably not going to happen. I mean, I think they'll see that one through to its conclusion. But yeah, I think he'll probably mostly continue Clayton's agenda in terms of cracking down on these unregistered securities offerings. If I had to make a prediction, I would say, probably even be more aggressive, just judging by his prior statements about tokens, ICOs, and most of them being unregulated securities issuance. But as someone who understands crypto very well, I would hope that he would take feedback from the industry and do more for clarity to delineate what constitutes a decentralized project, codify the Hinman test, give entrepreneurs is the ability to understand whether they can issue a token at all and under what, you know,

under what parameters, under what circumstances. So I'm sort of optimistic about that, but if, if I'd issued a token, I would not be comforted by his, his assumption here. Yeah, I agree with that take. I think it's, the industry is by and large optimistic that Gensler is someone that they can work with, which is more than you could say about Chairman Jay Clayton, which I think was just openly hostile towards the industry and really didn't want this technology to work or flourish. So we'll see. It's still early. Yeah.

And on the ETF topic, I think Gensler will be persuaded by the ground facts at play, which are that improving an ETF would be a harm reduction issue because right now retail investors are forced to go through these trusts to get exposure. And the Bitcoin market structure has materially changed in the last few years. and it's more onshore, it's more regulated. It's flowing through increasingly venues like the CME. More custodians exist and more diverse array of qualified and really credible custodians.

You know, there's more surveillance occurring on exchanges. All these things are positive for the ETF bid. And if you look at GBDC, I think GBDCs in the top 50 ETFs if you were to consider an ETF by capitalization. So we're kind of primed for one. if we continue to get to Niles, at that point, I think it's a political decision and not a pragmatic one. Right, right. Well, in other regulatory news, so the OCC made some more waves this week.

So the Office of the Control over the Currency has approved the conversion of Anchorage, which is the crypto asset custodian. So they have approved them moving from a trust company based in South Dakota under a South Dakota charter to become Anchorage Digital Bank, NA, National Association. So this will open up the range of services that Anchorage will be allowed to engage in as a federally chartered bank if this holds up. I guess that's one question is, you know, does this hold up? Brian Brooks is leaving the OCC, but for now, it looks like this is a big step. Yeah, and if I had to kind of describe Brian Brooks's brief but extraordinarily productive tenure,

it would be, you know, he tried to create an array of new models for banks and I would say partially succeeded. And this is, you know, this is almost a crypto bank charter if you look at it. And this is different from the Wyoming charter in that this is a national charter as opposed to a state-based one. But the substance of it is actually relatively similar, I would say. So really exciting development. I mean, equipping a custodian with the kind of bank moniker is really, really interesting. And I'm sure there will be other companies that are attempted by this crypto bank charter, too. Brian Brooks has just had a phenomenal tenure there at the OCC.

So excited to see where he goes next. But he's done a lot. Yeah. And he, one of his last moves was he wrote an op-ed at the FT entitled Get Ready for Self-Driving Banks. quote, could the OCC grant a national bank charter to open source software that manages deposit taking, lending, or payments, even if it doesn't have officers or directors, not yet? And he calls the existing rules antiquated. Pretty interesting, almost sci-fi stuff right there. I love it.

I mean, it sort of reminds me of, you know, how bullish he is about the industry, reminds me a little bit of Hester Peres and, you know, some of her thoughts. You have these regulators that are really forward thinking. I mean, they could be venture capitalists. Did you see this Miami story? So the mayor of Miami, who is making a ton of news these days, Francis Suarez, he's looking to create a regulatory framework in that city and he wants to make it the easiest place in the country, he says, to start a business in the blockchain and crypto asset space. So some of the things that he threw out there was the ability to pay taxes in Bitcoin and

things like that. So I don't. Who knows about the details here, but you'll love to see it. I went to Miami to investigate, you know, it's suitability as a tech hub. And I found it to be very warm and sunny. And it was great. Did you get to the bottom of it?

Yeah, I mean, I went to the beach and I felt that that was great compared to Boston. So, yeah, I think Miami is good to go. the other thing to consider here is as we move towards this paradigm of full remote companies, your location as a startup matters less, right? So I think historically the issue with Miami that some people might have had was a relative lack of sort of talent from nearby universities. There wasn't as much. You compare it to Boston.

You compare it to San Francisco, of course. But I think that issue, sort of obviated if you're going to a remote first model. So maybe that objection doesn't really apply as much anymore. Yeah. I think everything is just going to be different. So, you know, people will be living in Miami and no doubt and working at startups. It's just, it's upon us. So here's a little plug. So the first Miami bit devs is on the 16th of January. So that'll be one day after this podcast comes out. So check that out. That'll be in person. in person really yeah yeah yeah so things are open back down there and and now there's a bit

devs chapter too which reminds us we should restart the boston bit devs one too yeah we need to start doing remote bit devs because i don't think we'll be in person anytime soon so did you read this new york times article which it feels like we have an article about losing passwords every time we have a big bitcoin run up here yeah much to my chagrin i read this uh this meritless article. I was sent the article by like a half dozen of my friends that are not in Bitcoin, which is how you know it's bad. Yeah.

If, you know, because it's always a good chance to get their jobs in. So basically the substance is that Stefan Thomas of Ripple also, I guess, mined a lot of Bitcoin. And then he put the Bitcoin on a hard drive and you encrypted it and he forgot the password and he only has so many attempts at the password before it's deleted and he's got two less. Well, classic thing you say when you're trying to not pay your taxes. So he's apparently lost the coins or is on the brink of losing them. And so it's a really material amount of Bitcoin.

The interesting thing is this story was told like five or six years ago in the Wired article about Bitcoin way back in the day. So it's actually not a new story. It's just that it's being dredged up again now that the financial value the assets is greater. And as a way, in my opinion, to kind of bash Bitcoin, make fun of Bitcoiners for losing all their coins all the time. Yeah.

What was your tweet? Something around losing a gold earring or something? Well, you know, it's sometimes, the fact that you can lose Bitcoin is often touted as, you know, a deficit of the Bitcoin protocol. But you can lose gold. That doesn't mean gold's any, you know, if you lose some buried treasure, that doesn't make gall to worse any worse of a monetary network. The whole point is that there's no recourse. If there was recourse, we wouldn't have good settlement assurances. But more to the point,

I guess my objection is, you know, Stefan Thomas was one, it was a very early bitcoiner. He created that site, we use coins. That was one of the first Bitcoin resources on the internet. He mined those coins when they were worth nothing. So the fact that he put very little care into his setup, it's proportional. It makes sense. So it's not like if you bought millions of dollars worth of Bitcoin today, you wouldn't configure your storage in a careless way like that. So this isn't exactly an issue that's relevant to Bitcoiners today because if you pay for your bitcoins, you're going to put some thought into your cold storage.

You can use CASA. Like, you know, we have great tools. So I dislike the fact that Popper kind of implies that all Bitcoin is really. were this sloppy with their setups. This is only if you acquired the coins when they're worth literally nothing. People take their security more seriously these days because they have a financial incentive to do so. Right.

Well, I'm sure it got a lot of page views and that's what it was after. Disappointing. Very disappointing. And also, the other thing is, Stefan Thomas made a ton of money from Ripple. So, you know, he's fine. He's doing okay. Yeah. Don't shed any tears for him.

All right. So I think that's it for the week. We had a busy one. Next week we'll have some more Operation Choke Point content. Yeah, we have one of the Prime Historians' Operation Chokepoint coming on to explain what went down. Ian Murray of the Competitive Enterprise Institute, one of the key chroniclers of the story. Really great episode. Very excited.

publish. All right, everyone, good job with those comment letters, and we will see you next week.