On The Brink with Castle Island - Weekly Roundup 03/04/22 (Sanctions chaos, Ukraine's crypto fundraiser, remonetizing gold, web3 geofencing) (EP.293)

Episode Date: March 4, 2022

Nic and Matt return for another wild week. In this episode:  OTB theme music controversy Is Bitcoin a risk off asset Ukraine raises crypto to fund the war effort Why Ukrainians were better positioned to deal with a banking sector failure The U.S. cuts Russia out of SWIFT (mostly) Can the U.S. pull the SWIFT deplatforming again? Will gold be remonetized? Metamask, Infura, and Opensea are banned in Iran and Venezuela Why the cost of running a full node matters Can NFTs be securities? Is Russia evading sanctions with crypto? Powell's comment on multiple reserve currencies Content mentioned:  JP Schnapper-Casteras in the New Atlanticist, Here's why crypto won't save the Kremlin from sanctions Jon Sindreu in the WSJ, If Russian Currency Reserves Aren't Really Money, the World Is in for a Shock Sponsor notes:  Fireblocks is an enterprise-grade platform delivering a secure infrastructure for moving, storing, and issuing digital assets. Learn more at fireblocks.com  

Welcome to On the Brink. I'm Matt Walsh. And I'm Nick Carter. This episode is brought to you by Fireblocks. More on that company later in the episode. So it really feels like we're actually on the brink here. It's crazy. Yeah, I don't know why we changed our theme music. Just getting a lot of people. I'd say it's 50-50 on people. We got some good reviews on the new theme music. Some people like it. Some people don't. I think we're going to go back and forth. We're going to have some episodes with some episodes without. But we are on the brink. To be clear, this is, you know, it has escalated a lot in the last week.

Yeah, I mean, I don't know what it is, but whatever it is has escalated. Global conflict, yeah. I mean, chaos, monetary chaos, commodities are roofing. Like, bullish commodities is bearish humanity, you know? Yeah, unfortunately. It's not, like, oil price going up bad for everyone. Wheat going up bad, you know? These kind of things are like extremely bad.

for humanity. Crypto is kind of hanging in there. It's surprising. It's obviously a risk asset. You'd think that it wouldn't be performing as well as it has, but it's hanging in. Yeah, I'm going to go ahead and declare Bitcoin officially a risk-off asset. That's the official, we've officially changed it, and it's now risk-off. I don't know.

In a market where so much of this is just microstructure, I mean, if two retail brokerages tomorrow came out and said that they were going to list spot Bitcoin and spot Ethereum, it would just moon. So I don't know how much of this you can treat as macro play when there's just so many market structure things that could soar the price of these things. We just declared it. I'd love to know who was behind that bid on whatever it was last Friday on the weekend. Yeah, some oligarch or something.

So it was either an oligarch or some boomer sort of Tradfai hedge fund. believing that an oligart would buy. But that's almost as good as the former. It's been a while since we had a boomer macro manager go on CNBC and take a victory lab for being along Bitcoin. Aren't we do? Matter of time here. So Millennium is apparently getting in. Those are the rumors. Well, there's some Ken Griffin chatter. We'll talk about later in the episode too, Citadel getting more and more active. I mean, everyone's going to have to be active. if you're at one of these big macro funds or if you're at an asset manager

and you don't want to be active right now, you're probably taking a big career risk. I just don't know if we've run up from the lows sufficiently far for any of these legacy firms to take a victory lap yet. No, I don't think so. But if we regain all-time highs

and legacy markets keep selling off, then you'll see it. I think that's right. Which doesn't appear that unlikely. I don't know. I mean, it's all setting up very well for gold. You know, remember that. Remember gold.

Boomer rocks. Yeah. The thing about gold is that is a liability-free asset and that actually matters. That seems like it matters. It does. It's the only we could have a digitally native liability-free asset. Yeah, like something that was concealable, that was transmissible, that you could store in your brain, store is in the form of data, something that you could prove to a third party that you owned it, something you could program,

something that you could store in multiple places and sort of a multi-signature arrangement, perhaps. Well, I assume you're not talking about Monaro or Zcash, but yeah, I agree. Something like that, we do have that. I guess we might. So despite everything, there were also deals this week. Yeah, let's hop into it, some M&A this week. So the Giving Block, which is a crypto payments processing firm,

They work with a number of large charities. They have been acquired by Shift 4. So congrats to Alex and the Giving Block team. Yeah, huge congrats to that team. Next up, we have Polymer Labs. They are a company building an inter-blockchain communication standard. They raised $3.6 million from distributed global, our sister fund, North Island Ventures, and DCG. Next one up is Nested, a social platform with an NFT feature.

they raised $7.5 million from Brevin Howard. Then we've got Norey, which is a blockchain marketplace for carbon removal. They raise $7 million from M13 Toyota Ventures and placeholder. Lido Finance, which is an Ethereum staking project. They have raised $70 million from Andreson Horowitz. Then you've got Dialect. They're a Solana messaging protocol. They raise $4.1 million from multi-coin and jump capital.

And the last one is Zignali. This is a crypto investment platform. They raised $50 million from GEM Global Yield. Next one up is a fund announcement. Our friends over at Electric Capital have raised a billion dollars, $400 for a venture fund and $600 for a token fund. So congrats to Electric. Great to see that. So this isn't a deal per se, but there was a significant crowd fund and had to do with funding the Ukrainian war effort.

So there was a very significant amount of Ethereum and other assets donated to the official Ukraine handle on Twitter. They were holding a crowd fund effectively. It's incredible how much capital has been raised here. So as of the last time I saw this, I think it was over 6,000 ETH have been donated to Ukraine here. And there was a huge spike a couple days ago when it was announced initially that there would be an air drop. So there would be some sort of a token creation event here. And that really got the market flowing here. And then they canceled it, it looks like.

Yeah. And so apparently they'll be an NFT, but it's kind of incredible, really, that the accelerations picked up dramatically once they announced that there would be a token distributed to donors. which is like, you know, I guess it's not the first time a government has issued a sort of questionable security in order to fund a war effort. So it does have precedent. It's unbelievable to see cryptocurrency being used at this type of scale. How else would you have been able to get capital into the country to fund a war effort, a defense effort, not having cryptocurrency?

I mean, sending bars of gold, sending food. I mean, this just puts it directly in the government's hands in terms of, you know, being able to buy and redeem. This is truly a kind of a breathtaking thing to watch. It is, yeah, genuinely quite wild to see. I mean, people are donating NFTs. I think someone donated a punk to the Ukrainian war effort. Whether that translates into tactical victories is another question. It's wild to see the mobile.

globalization here. And this really outweighs any of these. Did you see Elizabeth Warren had another tweet this week around Russia is going to use crypto for sanctions. This means sanctions evasion. This means we have to hop all over this. But the real story here is just cryptocurrency crowdfunding being used at scale. There's no indication that crypto networks are being used by Russia to evade sanctions. That's a non-story right now. Well, the crowd fund is a story. I think not to declare a single story. There's many stories. But one important one that is overlooked is also the fact that there are over a million Ukrainian refugees now. And Ukraine, according to your analysis last year, was the fourth highest globally per capita in terms of crypto adoption. So they would have been, and I think the others

near the top of the list were like Vietnam, maybe Thailand, I think India. But Ukraine was right up there. So Ukraine would have been very well equipped from an individual standpoint to flee with a portion or all of your wealth intact in a way that was not possible before. I mean, the Ukrainian bank system is not functioning right now. And if you have to leave on short notice, as tragic as that is, having a digital bearer asset, that's a completely new possibility in terms of taking your wealth with you. So that's a fascinating story, and I'm sure we'll be hearing from a lot of folks that left Ukraine and were better prepared for it. Not that that's something that anybody ought to go through, but they were better prepared because they were already crypto-native. And there's a tremendous amount of developer talent in Ukraine. I mean, a lot of crypto startups have people that work at their companies that live in Ukraine.

And so this is a country that is very crypto-native to begin with. Yeah, I mean, many of the employees of our portfolio companies are Ukrainian and Russian, actually, for that matter. And in both countries, regular citizens are the ones going through dire straits right now because their currencies have depreciated. Their assets are frozen or immobilized or can't be accessed in both Ukraine and Russia. So I'm very sympathetic to regular individuals on the ground in both places. And crypto is a lifeline financially. Not for everyone, but for a portion of the population that was able to move some of their assets on the crypto rails, it's really showing its worth. One of the stories here related to this Russia issue is the reserves.

So I wanted to get your take on this Wall Street Journal article talking about Russian currency reserves. and if they aren't really money, what the potential second order impact would be here across the world? So are the currency reserves that are accumulated by the central bank of Russia going to be treated like money or not? Yeah, I think this is the biggest financial story, maybe of the decade, honestly. This is one of the most, I was just thinking about it today.

I think this is one of the most critical moments in the history of the U.S. dollar. period since the dollar, you know, since it emerged. Obama, I think in 2015, I want to say, deliberately walked back from a move like this against Iran with the pointing out that this would undermine global confidence in the US dollar system. And he warned that a move like this was pretty risky. And now we've gone ahead and done it. We effectively freeze up the reserves of a whole sovereign country, one with 150 million people, and one that is an enormous exporter of energy and commodities. Whether or not you think it's a good idea, it's a very critical moment. It is probably something the U.S.

will not be able to do many more times to adversaries like this because they will now be learning from this example. Russia actually was very proactive, believe it or not. So they sold most of their treasuries. They bought a ton of gold. I think they're the fourth largest holder of gold globally at a sovereign level. But it's still, Russia did still have many, many FX reserves. In fact, they'd been shoring up their sort of balance sheet preparing since 2014 when the U.S. first started threatening this after they effectively annexed parts of Ukraine. They'd have been preparing themselves, but I don't think they expected that the U.S. would work with other central banks and immobilize all of their foreign currency reserves

that were not Renminbi. But yeah, I think enormous milestone. own. And yeah, I think it will cause a lot of countries to reconsider the quality of reserves that are denominated in other fiat currencies. And when push comes to shove, the gold in the vaults in Moscow, that's very real and that's sort of marketable. Everything else is, is questionable. Everything else is someone else's liability. So it's a real sort of come to Jesus moment. for central banks. It feels like the type of card that you can't really play at scale more than once.

And if you combine that with the messaging aspect here on the swift side, you're kind of kneecapping the actual money and then you're kneecapping the financial technology piece that moves around the claims on the money. And to make both of the moves concurrently, you would have to think that this just forces rivalry here. And so this forces the emergence of the... the Chinese version of Swift in collaboration potentially with Russia. And I guess the second question is,

does this force the emergence of another reserve asset? And is there anything else that is viable out there now that can actually compete to be that reserve asset? And if not, then, you know, I guess it's less of a big impact. Yeah, I think the two immediate consequences here are gold is effectively remonetized. and there's a few strategists that have been banging this drum for a long time, including Luke Groman, who I read a lot, and so it's no coincidence. A lot of my takes sound like his takes, but he's been banging this drum for a long time.

That's why I feel sort of prepared to talk about this stuff, because it's all happening the way he expected. But I think gold getting effectively re-monetized is possible here. It might be the case that Russia has to resort to that if their currency. crisis worsens. And the other thing is just expect more trade to be settled in yuan. Now, is Bitcoin ready for any of this? No, it's still too small. Bitcoin is one-tenth. It's less than one-tenth the size of gold. It has a lot of advantages, and I think Russia is going to realize that their gold is sort of not that useful because it's a, you know, if they try and do a swap against some of their gold, would a creditor really trust that Russia would actually, you know, redeem the gold,

remit them the gold at the end of the period, right? Is that a very credible promise? You know, because nation states have had a lot of trouble securing gold physically, settling it. You know, great case study in 1971, obviously the European powers had an agreement they had a deal with the U.S. that their dollars were redeemable from gold and then they turned out not to be. So would a Russian currency swap using their gold as collateral, would that be a credible trade or not? At a minimum, I think we'll see a Russian-Chinese rapprochement. It could be the case that Russia becomes kind of a vassal state to China, but they're going to need to get goods and services from somewhere, they don't produce a lot of sort of high-end goods, and that's

going to mean a pivot to China for them. Yeah, I think they're going to have to lean into that. Well, it looks like they already have, right? It seems like there's also a report this week that China asked Russia to hold back on the invasion until after the Olympics were over. So I wanted to keep those TV ratings up, it seems like. One thing that's interesting that I saw today is certain Chinese banks are shying away from doing business with Russia because the sanctions right now are so far reaching that financial institutions and just general corporates are extremely concerned about falling a foul of them, even indirectly. And so Russian trade is, you know, even including energy trade, which was carved out of the

sanctions, you know, the Germans and the Brits sort of made pains to ensure that the energy was exempted from the sanctions. Russia, right now, they have huge amounts of energy that are going unsold, including to Chinese firms, because of the far-reaching effect of the sanctions. I'm sure there's a lot of oligarchs that would be willing to sell their boats at a discount here if you paid in cryptocurrency. Yeah, this actually directly affected my favorite soccer team, Chelsea FC, because the owner is now being forced,

Roman Abramovich is being forced to divest his ownership of the team. I saw that, and so it seems like that's, we're going to see more of that. I wonder what price he'll get for the team. Yeah, speaking of oligarchs, Usmanov, who I believe still has or had at big stake in Arsenal, keeping on the soccer theme,

his $600 million yacht was requisitioned. So, I mean, I don't know if Russia really expected this, this level of aggressiveness in terms of financial warfare being levied on them by the West? Well, everyone works for someone is the saying, right? And so I guess we're going to find out how much power these oligarchs really have in order to overthrow their own regime or whether or not Putin has really put a strangle hold on power here. Because you would think that these oligarchs feeling the pain, not being able to fly to London, not being able to have the yachts, they would start to put a little bit of pressure on them.

I think Putin's been consolidating power for decades now. I mean, it was a very risky occupation to be a Russian oligarch over the last decade. It's not really something you wanted to do for a living. A lot of them had pretty short life expectancies. But, yeah, I mean, I feel for ordinary Russians here, many of them don't support the war effort, but they've seen the value of, their savings in ruble terms get obliterated. There's a banking crisis there.

So if you don't support the war, it's a pretty tough lot, and I'm sure there'll be an exodus from Russia as well. When your business is scaling up and your portfolio is growing, you don't want to waste precious time on manual crypto treasury management or settlement. Fireblocks can handle that for you with smart custody solutions for your crypto business, along with industry leading security technology. Whether you're starting a new fund or expanding operations, Fireblocks offers scalable solutions for companies of any size. From day-to-day crypto transactions to the most advanced defy strategies, Fireblocks is here to give you a competitive edge.

They'll take care of the back end so you can focus on the big picture. Visit on the brink.link slash fireblocks to learn more. So I'm sure we'll be talking about that a lot in the weeks to come. and obviously it's the wide-ranging impact. Cryptocurrency is kind of the least of it. Why don't we move on to some other news here? DCG came out. They authorized another $250 million in share buybacks

as they attempt to bring these OTC trusts back in line with NAV. So the discount persists for GBTC. And I guess there'd be a couple ways to get rid of this discount. One of the most obvious ones would be if it were to be approved as an ETF. but doesn't seem like that's going to happen anytime soon, despite the fact that there's a lot of comments out there. Grayscale is running a pretty good campaign to drum up public support for their ETF proposal.

Yeah, feel free to chime in on that. I think we've probably said as much that can possibly be said on this podcast about GBDC and the premium or discount there. I don't think there's nothing new under the sun that we could say there. So we'll just leave it at that. that the next story, it looks like consensus is facing demands for an audit from 35 former employees over the corporate structure of the business. So it seems like there's some corporate transactions there that folks disagree with.

So more consensus than the news this week. Yeah. And speaking of consensus, pretty significant news item is Metamask and Infura have apparently banned users in Iran and Venezuela from using those software tools, which allow you, of course, to use Ethereum on a pass-through basis. So kind of a shocking development, actually, because neither is custodial. Infuri gives you access to read and write to the Ethereum blockchain. Metamask, of course, is a very, very popular wallet that you can use to manage your assets, but those are not in Metamask's custody.

They're not in consensus's custody. They are in your own custody. So those are just software tools to engage with the blockchain, but now they've restricted users in those countries. So are there Web 2 analogies here? I mean, do the social networks operate in these countries? I have no idea. So, yeah, I don't know.

I guess I'm not sure how to think about this. On one hand, it's not that surprising to me. I mean, OpenC banned Iranian users from their marketplace this week. That's a financial platform that transacts goods and services. So the fact that they would ban Iran when all other financial services firms have to ban them makes sense. I guess within Fura, though, that's a software tool. OpenC is non-custodial. It's non-custodial, but it is an exchange.

It's effectively a bullet and board style exchange. So, you know, I think you can make a strong case that financial laws ought to apply there. I guess with infura, you know, it's less clear to me, you know, how that should be regulated. But Metamask is an exchange aggregator ultimately. And so the primary use case for Metamask these days, at least, is making money on swaps. From their revenue line item perspective, yes. but I mean it's just a tool that individuals use to interface with their assets stored on Ethereum. I mean, to me it's troubling to see whole countries getting de-platformed from Web3.

And I don't know if there really are many good alternatives, frankly. That's why Bitcoiners always talk about the cost of running a full node. It's because if running a full node were cheap on Ethereum, then you could simply spin up your own alternatives. or use the blockchain directly and interact with your assets directly. In this case, I think this will have the effective outcome of de facto banning users in those countries from utilizing Ethereum-based assets, period. Yeah, it really shines a light on the fact that decentralized internet architecture is just not there yet.

I mean, there's no way to service these countries in a scalable manner with non-centralized internet service. So just starting with the internet itself, it makes it really difficult to engage with some of these platforms if you can't have strong internet services. I mean, this is why cost of node operation matters. You can still probably engage with Bitcoin those places. But I don't know how tractable it would be to run an Ethereum node with Venezuelan internet. Yeah, it seems like it wouldn't be. You know, there's a lot of regulatory stuff going on. in this NFT space as well.

So we mentioned OpenC being banned in Iran. The SEC, according to a Bloomberg report this week, is looking into several NFT issuers as well as exchanges to basically understand if certain NFTs are securities. I guess it'll be interesting to see how this one plays out. Almost certainly a bunch of these NFTs are securities. They have roadmaps that have been published that talk about how they're going to drive value to the token.

There's clearly centralized actions. So some are securities and some clearly aren't. So more work, I guess, ahead for the SEC to figure this out. Yeah, there's absolutely nothing about the notion of an NFT that would exempt it from being a security. Just because the tokens offered might not be in interchangeable with each other. That doesn't exempt it in any way from security styles, which was a disturbing view. that I'd heard repeated in the crypto space was if you offer, you know, an investment product in NFT form with images attached, then it's not a security. It's just a preposterous opinion to hold. So the Howie test still applies. Even if you attach a bunch of different images

to the investment offerings, still applies. Still applies. No surprise there. So we'll see how that one plays out. So Charles Schwab has a crypto ETF in the makings, but it is not a spot Bitcoin ETF. So I guess this is what people are calling innovation these days on the inside of Charles Schwab is coming out with an ETF that holds like Microsoft and Square and a bunch of stuff that's tangential to the blockchain space, probably. That's a big yon.

That's a big yawn. You're not. that's a lot of not going to make it vibes going on over at Charles Schwab. Starting somewhere might be putting Bitcoin on the platform, putting the ability to buy Ethereum on Schwab.com, putting together a fund maybe that gets you direct exposure to the underlying. Not really that impressed with that ETF. Not a lot of asset managers that don't have a crypto strategy these days, though.

Yeah, I mean, if you're an asset manager and you don't have a crypto strategy, you're kind of imperiling the future of your firm, I would think. So another thing that I noticed this week, so Ken Griffin, who's the founder of Citadel, didn't interview with David Rubinstein, founder of Carlisle, and talks explicitly about cryptocurrency, kind of does a mea culpa, maybe is the word? I don't know. He kind of walked back some of his skepticism. He said he's been wrong.

He said he's been pessimistic about cryptocurrency, but he's clearly been wrong, he says. and he outright came out and said that Citadel is going to start making markets. And in short, that's a very big deal to have Citadel come into these markets. They are in enormous market participant in non-crypto markets. And this is going to change the face of the liquidity landscape in the cryptofronts market. Big, big deal. And for all of you that are wondering why Matt sounds weird now, it's because he failed to buy batteries for his...

Zoom H6 audio interface, in case you're wondering. And we've had to switch now. There's nothing more nerve-wracking than being on one bar and just thinking you can make it through a podcast and just not being able to quite get there over the line. I just couldn't get there.

You'd think that after around 300 episodes of this podcast, we would have sort of figured out how to do them without mishaps. No, you'd be completely wrong. If anything, the frequency of our mistakes is somehow increasing. Yeah, but we are continuing to invest in the podcast. And we are going to be bringing on a new sponsor for the podcast,

coin metrics. So if you're 30 plus minutes into this episode, that's a little, we're tipping off the new sponsors coming. So that's an exciting development. Yes, that's right. We're investing the podcast, some new exciting developments planned. One thing that I wanted to cover briefly is, because we didn't really actually get to this,

is there's been a lot of noise in sort of the mainstream pundit world about, you know, crypto purportedly helping Russians evade sanctions or anything like that. The response from the industry has been pretty universal. There's no evidence that Russia would be able to at scale evade sanctions via cryptocurrency. And moreover, we would, it would be relatively trivial to detect if they were.

And it's not like there aren't blockchain analysis firms that couldn't detect this. Speaking of coin metrics. I thought there was a great article in the Atlantic Council of all places in their publication, The New Atlantisist by J.P. Schnapper Castro, entitled, Here's Why Crypto won't Save the Kremlin from sanctions. just laying out, you know, why crypto doesn't really solve the sanctions issue and why any tools that Russia would be employing here are most likely non-crypto. And so I know a lot of exchanges have received sort of informal requests to, you know,

blanket ban all Russian or Ukrainian users. I think they're rightfully not complying with the. those pretty ad hoc requests. If they received legal requests, they would probably, you know, consider complying. But exchanges are already beholden to sanctions, enforcement regimes, OFAC. Exchanges already comply with this. So the crypto industry has been painted as this sort of like crazy Wild West, but there just is no evidence so far that Russia is evading sanctions with crypto. Yeah, I'm glad people hopped on this quickly and started to point out some of the things that JP pointed out because that's not the narrative you want to take hold right now. That's just

not a true narrative. Yeah, I mean, regardless of narratives or lack thereof, like, it's just a reality on the ground. If Russia wanted to, you know, engage in, first of all, they're able to continue to engage in commerce with the West. That's explicitly the case. The sanctions aren't fully isolating Russia. There's $20 billion a month, I think, in terms of trade surplus that's flowing into Russia still. You know, on the first day of the invasion, Germany bought natural gas from Russia via Ukraine. So that corridor is still open. Second of all, if they really wanted to, you know, build alternative systems here, they would accelerate their Neo-Swift product. They would use the yuan more. They would consider using the gold in their reserves to trade with

other central banks. So, you know, they have options. Crypto is not something that is known that, you know, Russia has, nor would it be obvious that they would settle trade flows in Bitcoin. Now, five years from now, it might be a little different. But the status quo is, yeah, is no major crypto-based sanctions evasion. Yeah. So did you notice the Powell testimony this week? So two notable things to me. One is that he came out and said, you can have two reserve currencies. So that's interesting. I wonder what the second one he had in mind was. And then the second thing was he was asked about cryptocurrency. And he was, you know, I'd say pretty diplomatic, basically calling out that there needs to be regulation here in the same breath saying that there was regulation when it came to telephones and the internet, effectively putting it in a big technology paradigm shift bucket. And look, clearly there does need to be regulation here. There's a big turf war around crypto commodity spot markets right now, whether or not the

SECC should have jurisdiction, whether or not the CFTC should have jurisdiction. We need clarity there. So overall, I thought it was interesting and balanced from Powell. Yeah, a lot of people thought it was kind of cross the Rubicon moment when he said, said that there can be multiple reserve currencies coexisting at once. Now, he probably was thinking about the yuan. Right. The thing about reserve currencies is they do last for a long time. They're very sticky, but they also do change hands, especially to reflect new geopolitical realities, especially in times of warfare. And I think there's no question the world is revising its view of U.S. power,

Russian power, Chinese power, right now, as we speak. week, that reevaluation is occurring. Not saying that the dollar is doomed, but the dollar network cut out. It excised a huge node in Russia. That in Russia is no longer part of the dollar network. And there's a lot of other smaller nations that are probably thinking of themselves my next in terms of being cut out of the dollar network. Yeah. Yeah. I think that's exactly right. So I think that wraps it for this week. We've been aggressively pumping out episodes of OTB at a rate of three week. That next week will be no different.

We'll keep it up. All right, everyone. Have a safe and healthy weekend. We'll see you on Monday.