On The Brink with Castle Island - Weekly Roundup 03/28/25 (MiCA Stablecoins, Gamestop, Hyperliquid) (EP.607)

Episode Date: March 28, 2025

Matt and Nic return for another week of news and deals. In this episode:  We reflect on our podcast with Paolo Ardoino The EU's MiCA rules make launching a stablecoin virtually impossible We explain the Ghiblification crazy OCC removes Reputation risk from bank supervision World Liberty Fi launches a stablecoin Hyperliquid suffers an exploit - are they decentralized? Fidelity is exploring the launch of a stablecoin ICE is looking to use USDC Coinbase is reportedly looking to acquire Deribit US Treasury lifts sanctions on Tornado Cash Sei is looking to buy 23andme

Matt Walsh and Nick Carter are partners at Castle Island Ventures. All of these expressed by them or the guests on this podcast are solely their opinions and do not reflect the opinions of Castle Island Ventures. Guests and host may maintain positions in the assets discussed in this podcast. You should not treat any opinion expressed by anyone on this podcast as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of their personal opinion. This podcast is for informational purposes only. Brought down by bad mortgage investments, Lehman, which has 25,000 employees will be liquidated.

The federal government loans American International Group, AI, $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 into 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 the Bitcoin. Welcome to On the Brink. I'm Matt Walsh. And I'm Nick Carter. Interesting week, huh? I got some SEC nomination hearing today. Did you watch any of that? I didn't see it, but apparently Atkins said his first priority is, I'm paraphrasing, but to create good rules of the road for crypto, is that right?

Is that what he said? Wow, I was not watching it. I did see someone that said that Elizabeth Warren went in pretty hard on him for owning crypto. You shouldn't be taking heat for owning crypto. Yeah, he owns a lot, apparently. I don't know. Yeah, he said his first priority was crypto, which is great.

And not in a bad way either. That's a low-hanging fruit item, though. Talk about a market structure that is completely broken. It is funny, the disproportionate focus crypto has. I mean, it's like, do you remember anything Gensler did that wasn't crypto? Maybe we just weren't paying attention. Yeah, he did some bad stuff. I mean, remember he tried to make instant messenger software qualify as a broker-dealer.

That wasn't great. Yeah. I mean, I guess they did a bunch of ESG rules. Yeah, the climate stuff was weird. had nothing to do with securities markets and they were doing climate. Yeah, he made a big push on payment for order flow. He had a big thing on the custody rule. He tried to change that.

That impacted crypto, but that had some broad-ranging negative implications for bank sub-custodians. So that wasn't great. All right. So what I'm hearing is that even the non-crypto stuff was bad. I'd say the objective score on his tenure was an F, I would say. Yeah. It didn't really get a lot accomplished and made a lot of enemies.

So have you been part of the Studio Ghibli AI image craze? Have you been on that? So I knew you were going to ask this, and I'm so happy that I cleared this up. So shout out to Sean Henry and White on our team. So we were at launch alert today. Did you have to ask them what Studio Ghibli is? Yeah, I said, what is this? Like, why is everyone tweeting pictures of animations here?

What's going on here? And they're like, Studio Ghibli. And I was like, yeah, I guess. They're like, you need to get with the program. Have you not watch any of these movies? No. So explain this to me. So what is this just a chat GBT output here?

All right. So chat GBT used to, when you used opening eyes suite of products, you used to be able to do the image thing separately, Dolly. That was a separate product from the chat GBT. But now you can do image generation in the video. the chat jbd interface with the new model 4-0 and they made the image model like wildly better like way way better than anything else i've ever seen and it does text properly like you remember when you used to do a i and there were text components the image it would be like all completely garbled

right so now it does text perfectly it does style transfer perfectly and so of course everybody started making images of themselves an anime style and studio ghibli has this really whimsical, charming style. And so that was the obvious winner. That's interesting. It seems like it's melting down the GPUs over at OpenAI. Yeah. Yeah, that's Sam tweeted that.

So I do recommend some of the movies not to be like an anime guy or anything. They are, it's like the Disney of Japan. So if you want to get started with Studio Ghibli, I would say spirited away. It's the very trippy movie, like kind of weird. weird. Princess Monanoika is good. Howl's Moving Castle, three excellent films. If you want to get into Japanese children. These are all on YouTube at this point?

No, no, no. You got streaming services. Okay. All right, man. The world changes fast. I had no idea what that was about 24 hours ago. Now you're up to speed. So we had a good podcast this week. You and Paolo from Tether, quite a, quite an episode. Yeah, a lot happened in that episode. I actually had forgotten. We interviewed Palo five full years ago. Can you believe that?

We've been doing this podcast that long. Yeah, I remember that. We've been doing this podcast since, what, 2018? 19, I think. 19? So that was on our first 100 episodes. We're on 600-something now. It's never runs.

And I remember, I looked and I was talking about the growth of tether, like the fast growth of tether in that episode. It was at 12 billion. That's crazy. 12 billion. Today it's 144. And he told me in the episode they got to 400 million global users. That's wild. 400 million.

And I got more insight into how do they got that number. And I believe it, actually. I do believe it. That's off-chain plus on-chain. It's clearly just a complete juggernaut. He had some really interesting things to say about Mika as well in terms of the, some of those rules just sound crazy to me. Yeah, so I hadn't looked into Mika deeply about stable coins.

Turns out there were all these last minute provisions put into Mika. And it's just like psychotically bad regulation. It's like written as if you just never want a, you are a stable coin to exist. 60% of the reserves, is that right, need to be held in just regular bank accounts that don't have insurance? Yeah, I mean, it's not like parts of it are insured, but obviously if you're talking billions of dollars, it will be most. on insured. And so yeah, depending on the size of the stable coin issue, it's 30 to 60%. So Tether would be 60%. And it's not just that. You have to split the exposure between a bunch of different banks, I think 10 to 20 banks, basically, if you're a large stable coin. And also from the banks perspective,

no more than something like 2.5% of your depository base can be a stable coin. So it encourages this, like, wild fragmentation and then as a stable coin issuer you have to somehow get a network of many many banks that are willing to onboard you and then your deposits are sitting in on insured cash deposits which is obviously incredibly fragile and just like begging for a crisis i i don't think you'll see a european stable coin ever work with that model so it goes i guess it goes way beyond just the fact that there doesn't appear to be a ton of demand for non-us dollar stable coins internationally but this is a market structure problem ultimately. Yeah, the euros are guaranteeing that euro stable coins

never launch and never get big. It's so weird that they're willing to completely surrender the lead to the U.S. and the dollar. I was talking to a few Europeans this week, earlier in the week, around just the stability of the European Union. I really wonder how long the EU is going to be around. Well, I don't know. It seems to be one crisis to the next. in the EU. Maybe they say the same about us, honestly. That's true. These Europeans maybe didn't have the best view of what's going on in our country right now. Yeah, a lot of mutual antagonism. The tariffs are going in. The tariffs are hitting auto tariffs. April 2nd? I was considering buying a new car. You're going to have to defer that decision, I think.

Got to buy American now. You just no choice. You have to buy a B-Y-D? You have to buy a Tesla. There's just no way around it. You're forced to. I guess so. All right. Next one. Let's get into the deals of the week. First one up is Rain. This is a crypto card issuer. There is $24.5 million from Northwest Venture Partners, Galaxy, Lightspeed, and others. This one's an acquisition. Nidig is acquiring Crusoe's Bitcoin mining operations. So of course, Crusoe started life doing digital flare mitigation. They called it.

So mining Bitcoin with flare gas. I had a pretty substantial fleet of Bitcoin miners using interesting energy sources. And NIDIG is acquiring it. So it allows Crusoe to focus on their kind of AI business as a pure play now. And then NIDIG has built this big diversified Bitcoin mining and Bitcoin financial services business. So huge congrats to both. Yeah, that's a pretty big deal there. Nydig's making some big, big moves there.

So congrats to both sides of that transaction. Next one up is Chronicle. This is an Oracle protocol that raised $12 million from strobeventures, Brevin Howard, and Robot Ventures. Then Fragmetric, their liquid staking protocol in Salana, they raised 12 million from RockawayX, Amber Group, and Robot Ventures. Stoffel Labs is a cryptographic infrastructure company that raised 1.6 million from

Aternava Capital and Robot. CoreSkyi is a meme launchpad. They raised 15 million from Taito Capital and Wagney Ventures. Meme launchpads, nice. Next one up is Tarda Games, a Web3 gaming studio that raised 4.5 million from Bitcraft, Spartan, and Hashkey.

KAPX is an AI agent platform. There is 3 million from manifold trading and luginodes. Then it's Warlock, a trading infrastructure platform that raised $8 million from polychain, Greenfield Capital, and symbolic capital. Decharge is a decentralized network for EV charging stations. There is 2.5 million from Lemnoscap, EV3, and Coliseum.

The last one is a fund. So Maven 11, a Crypto Venture Fund. They raised $107 million for their third fund. Congrats to the Maven 11 team. So not as many deals this week, but still plenty. A lot of news items. So I guess we have to address the game stuff. situation, first of all.

GameStop. They're running the sailor playbook here. So GameStop, what is their core business? They still sell video games, break and mortar. I guess they do. I mean, they've really transmuted over the years, though. I mean, now they're a meme coin company, meme stock company, sorry.

And I feel like they just do things that are flashy and play well on the socials. So they have $5 billion. plus of cash on their balance sheet. They've got a market cap of about $12.5 billion. And they just announced that they're changing their corporate treasury such that they can own Bitcoin on the balance sheet. And then they announced last night a $1.3 million convert.

Billion, right? $1.3 billion convert that is going to market, which by the time you listen to this, I guess that could be theoretically spoken for. So they're going to buy Bitcoin with it is what they said. So the market didn't like it at all. Yeah, the market did not like it on the GameStop stock. So it was down, I don't know, 12% after hours fell at 1.23% today. So people aren't treating this like the micro strategy play.

I mean, the first time it's done, it's kind of interesting. And then the 50th time, it's maybe not so interesting. I think if you're a game stock, game stop shareholder, you're probably hoping they do something more creative with their cash pile. I guess what's the, this is pretty creative, right? I mean, there's a couple of companies doing this, but obviously Sailor has just run the value of that company up with these purchases. This is going to potentially materially move the price of Bitcoin.

If they put $1.3 billion of new cash to work plus some portion of their $5 billion in cash, I don't see why they couldn't run this up again, do more converts. It's a lot of buy pressure on Bitcoin. What's different is, you know, I think Sailor did the arbitrage exceptionally well of raising debt creatively and then buying Bitcoin. But, you know, if you were looking at GameStop versus Microstrategory, wouldn't you just go with the guy that's sort of like got the financial engineering down? aka Sailor. What could GameSop do differently or better than micro strategy here? I mean, I guess a higher order question is why would you buy an exposure stock to Bitcoin

when you could just buy Bitcoin itself? Also that, yeah. And I mean, the micro strategy premiums come down precipitously from its highs. It peaked around 3x, I think. Yeah, so the argument, I guess, would be you would have like this Bitcoin yield factor where you think that you can own potentially more units of Bitcoin via this wrapper. But if it continues to trade at a premium, it's probably not the case. Yeah, yield is just another way of saying the premium expands, right?

Yeah, that's right. So, I don't know. I think it's probably really interesting in the convert market. It's a very unique piece of paper in the convert market. You can see it being an attractive thing to buy if you're a convertible purchaser. but this will have an impact on the Bitcoin capital markets, that's for sure. Elsewhere in public names, Coinbase is an advanced talks to acquire a Deribit, which the largest crypto derivatives exchange earlier this year,

they were valued in the $4 to $5 billion range. Is that right? Wow. They're valued private mark, $4 to 5 bill. I didn't realize that. Derbits, the options market is just a really interesting market. Derbit is by far the largest player in that market. You'd have to think CME would start to make some aggressive moves in the options market here at some point.

Yeah, before the election, I would have been kind of bearish on Derbitt's ability to come onshore, but I suppose anything is possible in this new world. Yeah, and I don't know. These are just talks, I guess, so not a done deal. It's a very competitive M&A landscape right now. A lot of firms trying to buy into the. crypto infrastructure categories. So on the lawmaking and enforcement front, the U.S. Treasury has lifted the sanctions that they'd place on tornado cash, which was, of course, the privacy

protocol that had been blacklisted after Lazarus Group used it and presumably other criminals. It's a pretty remarkable change. I would have thought that this would be something that would be in court for years, but ultimately this is a, I guess it's a speech issue. isn't it it's a piece of open source software how can you have sanctions on open source software as opposed to people so coinbase and coin center i think both had outstanding litigation on this issue yeah i think david hoffman did too right didn't wasn't he yeah he was involved in some capacity yeah so good for everyone for going after this i mean this is one of those uh you have to hold two truists one is that north korea is a bad actor the other thing is that open source software that is used by good actor shouldn't be tied up in the bad actor bucket.

Yeah, an interesting wedge issue. I mean, you find a lot of crypto people that would also say, well, maybe the treasury was within their rights to sanction the protocol. Yeah, but you could sanction the addresses, right? I mean, there's ways to try to get at some of this issue. I mean, the North Korea thing, we got to talk about need for more cybersecurity companies in this industry. These guys are just running amok right now. So Fidelity is exploring reportedly the launch of their own stablecoin.

Early this week, Fidelity also filed to list of Solana ETF. Yeah, making moves. Stablecoin bill is going to be a big catalyst here. So this is an FT report. Sounds like maybe a leak from one of their market makers or something. Big stablecoin developments here. How many more issuers of stablecoins do you think will be in this market? in the next 12 months.

I think a lot of folks, especially in TradFi and asset management, will try their hand at it. It's a tough market. I mean, Circle, I think USDA supplies at all time high. I believe tether supplies at all time high. Beyond that, there's not a lot. So it's challenging to break into the issue of market. I think there's a, it's a much bigger market than people think, though, because you have the, think about just running a brokerage platform and the amount of dollars that you have on

that platform, you could see stable coins is just fitting even within the Waltz Garden and being a really nice business, as opposed to bank cash in some ways. And so maybe that's a playbook that some of these banks and retail broker dealers are going to use. And then the other thing is, of course, just security settlement. So whose stable coin is going to be used to settle traditional securities? It's probably not going to be tether or circle, right? Well, on that front, ice, of course, the parent company of the New York Stock Exchange, they said they are exploring how circles UCC stablecoin and U.S. YC tokenized money market fund could be integrated into derivative products, clearing houses, or other related services. Yeah, and so that's a good

dovetail. And my question here is at what scale does a stable coin need to be in order to actually settle some of these contracts? So I could see this being kind of any stable coin if you're just posting collateral. I guess what I'm talking about is more on the DTC post-trade settlement leg of like an equity transaction or an overnight repo. But I think for the exchanges, it's, you might see more of these partnerships. And it's probably actually a good opportunity for stablecoin issuers that are coming into the market to try to cut deals with the exchanges. It's increasingly clear to me that USDC is currently the leading contender to be this sort

of institutional collateral type, as well as just the domestic state. of choice, whereas Tether is, I think, going to continue to dominate offshore, especially for traders and for retail. So you do see this kind of bifurcation in the stable coin market. I think the stable coin bill only entrenched is that. Yeah, I think that's spot on. All right. In other news this week, the White House Cryptozar David Sachs praised last week's move by the OCC

to remove reputational risk as a key factor in bank supervision. Do you think this is going to end up being an FDIC push here? So I believe the FDIC said they're done using reputational risk. The OCC followed up and said they're also eliminating it from their handbooks. The last remaining institution that needs to do that is the Fed, unclear. And actually Austin Campbell tweeted this week that the Fed is still harassing banks. that are serving crypto, so it doesn't look like the Fed is playing ball. But this development is very good.

It's nice to see SACS also weighing in. There is a bill from Tim Scott that advanced the Senate Banking Committee, which would formalize this and codify it as well. Basically, reputational risk was really just like a really bad thing. It was this totally circular thing where a bank regulator could go to a bank, bank and say, we think if you serve this kind of client, it's going to cause a reputational spillover to the bank. And the justification was, oh, it could like threaten the solvency of the bank. But the whole thing was super circular. I mean, the regulator could just determine that any

industry was risky and then say, yeah, we're giving you a worse camel score because they're serving this risky industry. So it's totally circular, kind of a catch-22 thing. And, and, you ultimately it should be up to the banks who they want to serve, not the regulators. Yeah, and I misspoke here. It looks like you're right. The FDIC did come out this week, and they are eliminating reputational risk. So that's a huge development. So now you've got the OCC and the FDIC backing off. Definitely, as you said, you need the Fed. The new head of the OCC, I think, has his hearing this week. Yeah. It might even be today. Yeah, Jonathan Gold. So there were three things that I'd asked for to end choke point.

And I think without even explicitly ending it, I think these three things would end it. So one was ending reputational risk as a factor in bank supervision. So that's basically done. The next thing is ending this confidential supervisory information doctrine. There's a way, you know, you could maybe, you know, have a grace period where things are confidential, maybe a year later. So that's the second thing. And the third is ending in four.

verbal communications from regulators to banks and forcing everything to be in writing so they can be audited later on for constitutionality. So one out of three, you know, I'll take it. Yeah, we're getting there. I mean, it's only what, it's less than 90 days into the administration, right? And we're still waiting for those rumors that there's a Trump executive order on debanking. So we were waiting to hear more. Really positive developments there. So World Liberty Financial, which I guess the Trump-affiliated DFI project, they're launching their own stable.

coin USD1. It will be targeted sovereign investors and major institutions to be used for quote seamless secure cross-border transactions. All right. A lot of stable coins coming into the market here. I think there'll be a bunch of these. So I don't have much to say about this one. And hyperliquid, the well-known decentralized exchange, they suffered some kind of inscrutable marker manipulation based on the price of a low volume meme coin to force the trading engine to realize a loss of $12 million and then I think the quote-unquote validators of hyperliquid, a.k.a. leadership just pretended that the meme coin didn't exist. I'm going to attempt to explain this, but I'm not going to be able to hit all the finer points here.

So hyperliquid is a decentralized exchange. I would say in name only. I think what we're about to say is that it's not very decentralized. But there was this meme coin that was trading on hyperliquid. And it was the same lesson meme coin. What was it called jelly jelly or something? Jelly jelly, yeah. So there was a coordinated market manipulation on jelly jelly jelly that was, and it was similar to what we talked about a couple weeks ago with the old Poloniacs clams attack. And so it resulted in some bad debt being created on the hyperliquid exchange to the tune of about $12 million.

And so the idea was based on the price of the asset, it would have been liquidated. that loss would have been suffered by hyperliquid, the protocol, potentially bankrupting the protocol. And with the hyperliquid team, I guess the, allegedly the team, that they would say the decentralized validators, but maybe the team decided to just ignore the price from the Oracle. And they force liquidated the position such that hyperliquid, I think, actually made a profit on it.

And so they didn't, they chose not to take this 12, million dollar loss. The obvious question here is how decentralized is a network when human beings can just intercede and force the collateral to be liquidated at a different price than it's actually trading. So not the best look to say the least. Yeah, this was controversial for sure. I mean, I think the whole point of hyperliquid is it's like sex style execution on a

dex and it's dubious, I think, that it's sort of credit. decentralized. Yeah. And so Zach XPT raised kind of the obvious follow-up there is so it's been known that some North Korean addresses have been engaging on hyperliquid over the past few months. And so if you can go in and you can edit the parameters of the protocol to make sure that the protocol and the team does not lose money on something like this jelly jelly token, why can't you also go into the protocol and just not allow North Korean bad actors to be on the protocol? So you're sure. sort of in a double standard there where you'll interject and you'll say that you're centralized to save yourself money, but you won't do something about a foreign terrorist organization.

It is weird. I mean, and that is the issue with being partially decentralized, I guess, is like what defines the standards such that you would intervene and you don't want it to be super ambiguous because now government's going to come and ask you, okay, well, you know, stop the chain like blacklist these guys. So you're either decentralized or not. And it looks like they are not. I mean, if you had a market structure bill here and you had definitions of decentralization or however they're going to do this eventually, this wouldn't be

decentralized. This is not a decentralized network as currently constituted. The other interesting thing about this to me was Binance listed the underlying meme token right in the middle of all this debacle. Well, this is that as deliberate, right? I think so. You could interpret that as Binance and some of the other. I guess it was a big get also listed.

Big gap. I would interpret that as the centralized exchanges really trying to push hyperliquid out of business. It does seem to be the case, right? Yeah. So it shows you, I guess, on that level that the centralized exchanges really see these, quote-unquote, decentralized exchanges as a real threat. It's a den of vipers out there in the exchange market. Yeah, I mean, there's got to be a way to fix this, but a lot of it would be fixed if you had KYC actually on these chains when you think about it. Not that that's a design parameter that anyone's interested in necessarily if you're on the hyperliquid side.

But if you actually knew who was trading on your platform, you would be able to cut them off and you'd be able to go after them for market manipulation. So here's a weird piece of news. they, I guess, L-1, S-E-I, say, they are announced that they're exploring the acquisition of 23 and me, which is the distressed, are they a public company, distressed public company that has tens of millions of people's genetic information. Why would we want to sell that to a blockchain? That is a terrible idea.

Well, I mean, it might be better than selling it to someone that wants to use the genomes. for something sinister. I think it's the idea. This will become a national security issue, this bankruptcy. This thing cannot trade to bad hands. This is why I never did it. I thought, well, one day this company's going to go out of business, and then private equity is going to buy them,

and God knows what they're going to do with everyone's genetic material. It's really scary now that we know what you can actually do with some of the genetic material. Maybe we didn't know that back then, but you could think about... I mean, yeah, talk about a bio-up, and targeting a specific group or nationality or something like that. Wonder what the, they just never could figure out a business model,

I guess. I guess you just charge once to get the. Yeah, because there's no recurring element to it, right? You just do it once. Yeah. You don't need to know what your genome is twice.

I wonder if that ancestry.com is doing well because that was a little bit, I think you could do some of the similar tests maybe, but it was more on, you know, like what's your lineage? edge. I wonder if that's more sticky as a business. So that's a weird thing that's going on. Yeah, we don't need that to happen.

In other news, I guess we should have put this in the deal section, but Napster, which I guess is a crypto company now, that got sold this week. Is that a crypto company? To whom? Some company I'd never heard of. Huh. Naps, didn't Limewire come back as a crypto company too? Did it really?

So Napster was sold for $207 million. Looks like a stock to a company called Infinite Reality. I don't know, man. I wonder where the corporate value is coming from for Napster, the IP. It was a really good product at the time. Yeah, I remember racing to download stuff on Napster before they were going to, Were they banned or something, or they lost a lawsuit? I don't exactly remember.

It's their lawsuit? What was that DMCA? Was that the violations where they were going after college kids and putting college kids in jail? That was ugly. Yeah, there was like a period, I don't know, when was this in the early 2000s, when everyone knew Napster was going to be illegal in a few months and just like, okay, well, we have like 10 days to like download as much music as we possibly can. Yeah, it's like we need the Dave Matthews catalog downloaded ASAP.

So in bad boy news, Bitboy apparently is in jail. Yep, I saw the mugshot. A lot of people are entering their sort of collapse arc right now, unfortunately. Yeah. I wonder why that is. Well, I think some people have lost faith in crypto. Not us, though. We're keeping them faith.

It's funny to see people kind of flame out right before. things start to get really good, right? Like the debanking starts to end. You start to get the regulatory stuff easing up. The SEC is starting to get with the program. And people are falling off the train right before it gets to the station. Yeah, this happens every cycle. People will spiritually sell the dip right at the low.

Well, I guess we won't be talking about him on the podcast anymore. But who knows? Yeah, BitBoy said more longevity than I think. thought he would. All right, everyone. So I think that is it for the week. We will be back on Monday with another episode. Everybody have a safe and healthy weekend.