On The Brink with Castle Island - Weekly Roundup 05/19/23 (Texas PoR bill, the Hinman test revisited, what's up with Worldcoin?) (EP.426)

Episode Date: May 19, 2023

Nic and Matt return for another week of news and deals. In this episode:  Nic and Matt reminisce on the Bitcoin Miami conference Ripple wins a key victory over the SEC in the Hinman test Texas passes a proof of reserve bill The SEC alleges that Filecoin is a security  What's the deal with Worldcoin?  How biometrics and blockchain can help with AI  Regulating AI Tether is buying Bitcoin John Ray is trying to claw back more funds Is Michael Lewis an innocent bystander in the FTX situation? Sponsor notes:  Coin Metrics STATE OF THE NETWORK - Market Liquidity Review The current market environment for digital assets is characterized by complexity, owing to the presence of regulatory uncertainty, an onslaught of exogenous macro events, and continued shifts in the preferred exchange venues among traders. In this edition of State of the Network, the Coin Metrics team zooms in on essential trading volume & market data trends to contextualize the current crypto market environment.

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 into Britain's ailing economy with a new round of Concentive 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 this episode is brought to you by Coin Metrics. And here is the Metrics Minute. Today in the Metrics Minute, we look at Bitcoin trusted spot volume. That's Coin Metrics own estimate of trusted exchanges that surged around the collapse of SVB.

But it's since tapered, averaging about $4 billion in the last week compared to $20 billion per day in March. spot trading volume of ether has trended downwards to around $2 billion a day over the last week. This compares to $17 billion per day two years ago in 2021. Order book liquidity has suffered. We've seen market makers leaving the U.S. We've seen Sen and Signet go down. Bitcoin liquidity within 1% of the mid price is below 30 million on both sides of the order book in March. The bid ask spread has removed.

remained relatively stable in recent weeks, but has suffered significantly. On the on-chain front rising fees and Bitcoin have driven an increase in light coin usage, which saw a spike inactive aggressors of over 70% one week, leading more credence to the spillway theory that users are seeking transactional alternatives on low-fee chains. I think I actually coined that originally. Much of the activity can also be linked to the introduction of the LTC20 token standard, which mimics the BRC20. standard on Bitcoin, which is, of course, a homage to the ERC20 standard. That is your metrics minute.

A lot going on in that metrics minute. That was like a metrics minute and a half, I think. Metrics 90 seconds. Yeah. Wow. Good, good stuff. I had no idea that there was an LTC 20 standard. I didn't know until 30 seconds ago. Wow. Now we know. Now we know. All right. Good stuff. We did some coin metric stuff on the podcast this week. I had Tim Rice on. founding CEO of Coin Metrics, had him on with Chris Ellis from Faxet, fun little data nerd podcast. That's right. Great partnership they have over there. It's been five years of Coin Metrics as an incorporated company. Yeah, there are some really interesting stuff at Coin Metrics. So encourage everyone to check it out, Coinmetrics.io. Really, really interesting on-chain work they're doing.

So you know the expression hoist by your own Patard? I do. familiar with. Yeah, my dad says that all the time. A petard is like an explosive, and to be hoist is to be, I guess, thrown into the air. Yes. So you had one of those this week.

Are you talking about my tungsten experience? I was on the phone with you, so at least you can validate that it was true. So I'm on the phone with you. I'm walking around my office, and I'm juggling a tungsten cube. Thank God it was the one-inch tungsten cube. And I dropped it on my foot.

and I had a sneaker on, but it hit me right in the corner. You know, that bone on the inside of your foot? Metatarsal? Yeah, it clipped me real good. I'm amazed that you didn't break the bone. It wasn't, it was a glancing blow. It probably would have broken the bone if it was just a head-on hit. You sounded very distressed.

I was, I mean, you can attest. I was screaming. It wasn't good. I thought it was a bigger cube, and I was thinking there was just no foot left. I mean, if I had just dropped this cube directly on, I guarantee you I would have broken my foot. Those things are so heavy and they're pointy. Yeah, that's why we, I think the sphere is actually a superior shape for safety reasons. So I was just at the, I had a board meeting earlier today.

And the company, it's a company here in Boston in the real estate space called Groma, and they have a big tungsten cube. So I was basically just sitting in this board meeting playing with this enormous tungsten cube the entire time. It's really quite remarkable how much tungsten infiltrated crypto culture. Yeah, I think you're to blame.

Well, this podcast, Dan at CMS, it's a coordinated effort. But yeah, sometimes tungsten culture goes wrong and this is one of those times. You remember when we were all happy about these tungsten NFTs that Sam Bankman-Fried was touting?

Was it Sam? I mean, I know they traded on FTX or they, yeah, they were on FtX. And then you could redeem them for a physical cube, right? I think so, but did anyone actually redeem them? I don't know. I remember I got one and I was so happy. And I think they're worthless now. Yeah, for a time, the market value of the NFT was like hundreds of times more the value of the tungsten.

Now I think it's worth it to redeem the NFT to get the tungsten and sell the tungsten the commodity price. I need to see if I can do that. A lot of the NFTs on FTX disappeared. They were hosted on an FTCX and they disappeared. It's kind of a lesson in there. Oh, man. This guy, the reverberations of this evil man

just continues to just reverberate around the industry. It's terrible. So another incident this week, VESPA, my VESPA was tip. over who does that, who tips over a Vespa. Where was it? Was it in the garage? It was parked on the street. Oh, he's going to eat a nice restaurant here.

And some reprobate tipped over my Vespa for no reason. And the right side of the Vespa is just devastated. Really? Just scratched up? Scratched, lost the mirror again. Same mirror as before. Now I have to get a new mirror. Break, lever is all warped. It's all scratched.

Need to get the whole right side of the Vespa replace. It's like Harvey Dent. Have you thought about moving back to Boston? Because just a lot of bad things are happening to your Vespa down there. And they don't even have gas in Florida right now. There's a lot of criminality down here. You know, it's like a mini East Coast San Francisco or something. I don't know what's going on.

It's crazy. Yeah, I don't like that. I don't like that. I don't know what you can do. I mean, I think you need to just, it's a little scooter. I think you just take it in the elevator and bring it up to your house every day. Someone's got some kind of animus against yellow vespas. I don't see other bikes getting tipped over.

Not some of the shop. It's probably some Bitcoin maximalist who knows that you like other chains and just wanted to take it out on your Vespah. Daisy, that's her name. Daisy is being targeted and I won't stand for it. Okay? I won't. Well, that's no good. Well, it's a busy time down in Miami.

The Bitcoin conference is going on. I'm not there. You're there. What's the vibe down there? So I would say it's muted. And I was just reflecting about the conference last year. So two years ago, that was when Jack Mallor's made his announcement about El Salvador, I think two years on. Now the Buckele regime is mainly known for imprisoning people.

Is that with theirs? Yeah, but that was not like not good guys, right? Mostly bad guys. I think that some, I don't think it was that. It was somewhat indiscriminate, I think is probably the. the conclusion. It seemed to work, but it,

I'm going to have you handed. The Bitcoin story in El Salvador, I don't know. Maybe we should recap it or something. It doesn't seem to have gone that well. I mean, it certainly hasn't achieved penetration. I don't know.

People won't like to hear that. But it did a lot to elevate Buckele and the country. That's for sure. In terms of traction, two years on, I think the consensus is there's not a lot. of it. Is that fair to say? Yeah, I think that's fair to say. Not a lot of people using Bitcoin in a transactional environment, that's for sure. That's just not really what it's for, I think.

So last year, during the last year, you were here for the conference last year, right? Yeah, I think so. I think I was. Is this right before Luna collapsed? Yeah, so this is historically the time of year where we skip our episode because we are too busy and we can't find the time. So we did carve out the time this week to do it. Two years ago, I think we recorded the episode. I just forgot to post it. Yeah, that's right. It was a lost episode.

Yeah, those two were give out investment advice. We usually don't. But we made all of our Bitcoin Ether price calls in that episode. It's incredible alpha and it was just lost. So what I was thinking about was I gave a talk on the Friday of the conference last year, was in April and I had COVID. I didn't know that. It was at the fire in front of this big mast, the gold-plated mastodon sculpture. And I was, it was hot. I was in a suit and I was like on the verge of passing out the whole time because I had COVID, which I didn't know. Wow.

And that turned into super COVID. It was terrible. You had 105 degree fever, right? It was the worst. It was absolutely terrible. I thought it was poisoned actually because it came on really abruptly. I thought it had been poisoned. So I spent my whole talk just trashing Luna. And then in May, I think Luna collapsed. So I was just reflecting on that. And then, of course, the crazy year after that. But yeah, the energy around the conference this year has been muted.

Very muted. I haven't been to the venue yet. But, I mean, I kind of like it. You know, it's just the signals is much stronger, the people you meet are more serious. And a lot of the unsurious people have just moved on. Bare market conferences are better, I think. I was talking to someone this week around the MIT Bitcoin Expo during bare markets

is just a really good conference typically, where you just have the serious people showing up. 2019 was a good bear market. Bitcoin Expo, 2015 was pretty good. Yep. So, yeah, that's right. Luna collapsed on the 9th or 10th of May. So that was about a month after. All right.

So let's hop into some deals. First one up is in our portfolio, River, a Bitcoin technology and financial services company. They raised $35 million in a series B. It was led by Kingsway Capital, participation from Peter Thiel, Goldcrest, Valor Equity, M13, and others. So congrats to Alex and the River team. Next up, we have an acquisition. Ripple has acquired Medico, a crypto custodian for $250 million. Big congrats of the team over there.

Kind of like this by Ripple. So Ripple is sort of getting into a different business here. So crypto custody, that is a essential category. They're doing some of this like CBDC stuff. I don't really know what the business model is over there at Ripple. Obviously, it has been just selling XRP for. a long time, but a diversification of the business model. But the real Ripple story this week is it looks like these Hinman emails are going to get released. So a judge has denied the motion to seal

from the SEC. So what, you know, what Ripple's hoping for, I think, is that there is clear communication on the SEC side that says that ETH is a commodity and not a security and that there's maybe some facts in there. But who knows? It could just. just be nothing. This is a fascinating little subplot that's playing out. So of course, Hinman, I think he was director of corporate finance at the SEC at the time, maybe in 2018, gave a speech talking about the process whereby a security could transmute to a commodity. Do I have that right? Yes. And a lot of people at the time took that to be kind of an effectively official SEC communication as to how a security could become a commodity.

And actually, I asked him at the DC Fintech Summit, he presented and I asked him, does this constitute an official Hinman test? Does this mean that there is now a test in place? Because I told him people will interpret it that way. And he prevaricated on that question. Turns out there is collateral, there's supporting documents, detailing, I guess, what he really meant or his supporting evidence, his arguments. And now through this case, the judge Torres has denied the SEC's motion to seal those documents.

And so they will become presumably public evidence around this. So, yeah, I think a key win for the industry. I mean, if this is the SEC stance that we at least deserve to know what it is, deserve to know their intent. Well, I'm interested to see the timeline of when this comes out and then what's actually in there. You'd have to think that it's something the SEC really doesn't want to release since they fought it so heavily. So, yeah, we'll see. Yeah, I assume it must be somewhat exculpatory for the industry, or at least sort of a more dumbish stance towards tokens.

So honestly, Ripple say what you want about them. They're doing good work here, litigating against the SEC, frankly. people forget it was jay clayton that actually brought this ripple lawsuit j clayton of course now advisor to numerous crypto companies and funds so isn't it great how funny funny how that happens regulators turn pro crypto once they leave the government what's up of the sequencing there how about doing it before you leave the government ever considered that guys it's not exactly profiles and courage is uh maybe there's one or two people that are profiles encouraged. Hester Perth comes to mind. But yeah, I don't know. I don't know about that move

about being anti-crypto and then when the money is there, you just hop on board. It's genuinely infuriating. If they are able to see the merit of the industry, they choose not to when they're in a position of power and when they leave, now all of a sudden it makes sense to them. Did it make sense the whole time? Yeah. Come on. But, you know, as someone that I talked to this week about similar type of issues said, you know, the sooner you just realize that it's a corrupt system and you play ball, the happier you'll be, which is pretty pessimistic view. Wow. A black pilling take there. Next up, we have Paradigm, well-known crypto fund.

They bought 50 million in Coinbase stock last week per regulatory filing. Kind of an interesting move. You don't see a lot of crypto hedge funds going out in purchasing open market securities. that. So, you know, Coinbase stock has just gotten beaten up, not investment advice, but you can see why this might make sense. Coinbase today announced their Coinbase 1 subscription product, which I think gives you access to zero fee, trading, and better staking rewards. I was actually a little confused about the staking front and better support. So interesting product rollout from them. I thought that was already a thing. I thought they already had that. well, the press went out around it today.

So, Corpus 1. Next one up is AirStack. This is a Web 3 developer platform. They raised $7 million from SuperScript. Then we have asymmetry, an ETF for liquid staking tokens. They raise $3 million from Eco Capital, Anchor, and others. I think this is an ETF in parentheses. It's not like a real, or quotation marks, rather.

It's not a real ETF. but it's calling itself kind of ETF-like, which, you know, I hope for them that the SEC doesn't read some of these press releases personally. Yeah, I think that's one of those things where you actually need to be very clear.

Don't really call it an ETF, guys. All right. Next one up is Lagrange Labs. This is a zero-knowledge cryptography startup. They raised $4 million in pre-seed funding from 1KX, Maven 11, Lattice, CMT, and others.

LaGrange is one of my favorite wineries in Virginia. Really? Yeah, a lovely spot. I recommend it. Maybe that's why they called it, Lagrange. Then we have Red Beard Ventures, a crypto fund. They raised $25 million from Anamoka and others. Next is Cormant, a Bitcoin mining company.

They raised $30 million in a series A round. Then we have Oridine, a company developing effective, energy-efficient, Silicon and ZK technology. They raised 81 million from Celesta, Mayfield, Marathon, and others. 81 mil. That's a big raise. What a raise. A lot of deals.

A lot of deals. All right. So what's on tap for news? There's some movement in Texas on the regulatory front? Yes. I'm very excited because I was involved in this. This is a first for me, contributing to legislation granted at the state level. Wow.

Texas has passed House bill. Actually, I don't know what the number of the bill is. House bill 1666. I don't know about that numbering. Maybe we could have gotten 1667 perhaps. I don't know why they did one six six six. It is a bill focusing on exchange best practices for exchanges that have MTFs in the state of Texas. In particular, it asks for them to engage in prove reserves,

I'm going to get ahead of your criticisms peanut gallery over here. Proof of reserves includes liabilities. It includes liabilities. It can't be more clear on this front. You have to attest to both the assets and the liabilities. That's what reserves means, okay? Reserve doesn't just mean proof of assets. Talking about both sides of the balance sheet.

Okay, now we've been very clear about this. Don't ask me anymore. That's clear. This bill asked for exchanges that are doing business in the state of taxes to. Do proof reserve, which of course means basically all major national exchanges have to do it now because, of course, they want to do business in Texas. It also asks for some other best practices around, you know, segregating client and operating capital, things like that. It passed.

So when's it going to effect? Not 100% sure on that. I think there's a sunrise period. But I want to congratulate Lee Bratcher, the Texas Blockchain Council. And of course, Representative Capri Gleone and everyone from the industry, especially the guys of the network firm who contributed to this bill. I think it's a landmark piece of legislation. Here's another very interesting thing. It specifically mentions the AICPA, the accounting regulator, it asks for audit firms to be involved in the oversight of these proofs of reserve.

So it's going to be very hard now for the PCAOB and AICPA, which have historically been somewhat hostile to proof reserves because of pressure for. certain unnamed senators that we shall not name on the show. Now those out of firms need to realize, hey, the states are asking for this. So you can't continue trashing proof reserves. Okay. No more saying mean things about it. Texas has ratified. The process is a valid accounting procedure at the state level. It is now a legit thing. And you all have to support it. So I think it's an incredibly important piece of state legislation. It does underscore crypto is a state's rights issue and the states are taking the lead on it. Crypto is a state's rights issue is a very powerful narrative here.

That's true. It is true. I mean, we need a stable coin bill that allows state trust banks to actually issue stable coins. And certain factions just don't want that. So this is turning into a big issue. And we talked about the Wyoming stable coin last week, hoping to have a longer discussion on this show about that. Yeah, we're going to do it. A dedicated episode.

Yeah. So people often focus on the federal regs and generally how bad they are. But at the states, there is a groundswell. I would say mainly in the red states, to be honest with you. But either way, at the states, there are attempts to productively engage with the crypto industry. And it is happening. So really exciting federal mechanics at play here. Well, let's talk about some other federal mechanics at play with the SEC.

So, gray scale, which is, of course, the crypto asset management arm of DCG, they run this file coin trust. So it's basically like the Bitcoin investment trust, but it holds file coin. And they're in the process of converting this thing, I believe, into an SEC reporting company. So it's basically just another progression in the life of these things where they have increased filings and, you know, they eventually want to make ETFs out of all these things. Anyways, in the process of doing so, they got a comment letter on this application from the SEC, and they basically said, hey, we think the SEC said that they think that FileC coin is a security.

So if it's a security, that changes the calculus for Grayscale here. They potentially need to wind down this trust. They believe it's a commodity. So it's interesting that as far as we can tell, the SEC hasn't gone after a Filecoin. I mean, maybe they have. Maybe they're investigating them. But Filecoin ICO was in, I don't know, what, 2017? So you think the statute of limitations would be up or close to being up on that unless they did one of these deals where you extend the time horizon, which maybe they did.

But they didn't go to the issuer. They went to Grayscale. They said, hey, this thing is a security. Take it down, basically. So Grayscale is going to fight it. They're going to come back and say, here's our rationale for why we, you know, don't think it's a security. What do you think here? I mean, my two sense is that file coin was a security at one point. It's clearly not now, in my opinion. Well,

the file coin system doesn't work if it's a security, of course. No, it doesn't work at all. Provisioning. I mean, yeah, like a digital resource being a security, you can't file, you know, some disclosure of the SEC every time you use file. to store files on IPFS, that wouldn't work. So clearly the securities framework would be ill-fitting here for a token that governs a digital resource. I think this is actually the textbook example for where this fight should be had.

It's the textbook example where it can just point to, hey, what if Dropbox, every time you purchase storage on Dropbox, it was a securities law transaction. and you need to do all the permutations of what happens when you sell a security, but it was just when you were pointing and clicking and saving a PDF into Dropbox. So I think they have a great case to be made that at least some new framework is required here. But, I mean, to be clear, I think the ICO was kind of, you could have attacked the ICO under any number of angles, right? Like that's when the SEC should have taken a look at this.

Yeah, that is. I think CoinCenter has made this point, you know, the contractor on the sale can, be a security, but then the actual token itself once issued may not be. So, you know, distinguishing those two things. I think the SEC seeks to associate them, but conceptually, I see how they could be distinguished. Yeah. So this will be interesting new terrain in the fight here. There's just, there's a lot of bites at the apple here that the SEC has taken. This is going to be, I hope they're stuffed up for all these cases. I mean, these things are going to go to It's going to take years.

Speaking of other blockchains, weird transition there, World Coin. What's going on with World Coin? They've raised $100 million or they're in advanced talks to raise $100 million. Probably one of the most roundly criticized projects I've seen in the crypto space, especially because Sam Altman is also the architect of, open AI Testifying Congress The idea here is that everyone in the world

Can get WorldCoin In exchange for authenticating With their eyeballs as a unique individual Into the protocol So here's my question What happens if you get LASIC? Have they considered that? I am actually getting LASIC

Because I can't see And I don't like to wear glasses So I just walk around Blind basically Will my world coins disappear? No, you get double. You get double the coins. So you do it before, later.

And then after, yeah, you go back and you get it. Then you're like a new person. So for the low price of about $3,000, you can get new world coins. New world coins, yeah. So there was news on Twitter that it's going viral in mainland China, even though local Chinese citizens can't register for the app, I think. apparently, and look, this is unverified. This comes from a Twitter account that I don't know if the rumor is true or not, but it's funny.

The rumor is that people are renting irises from folks in Cambodia, apparently. And using that to acquire world coins. So, you know, everything is great in crypto land. you know. Can we just not have another huge scandal, please? This just seems like it's a little bit. Do we need to be doing this right now? I don't know. But I think I understand the motive behind WorldCoin. I think I get it. So let's say you're Sam Altman. You've a front seat to AI. You know that generating fake content is the cost of that is going to go to effectively zero. any kind of content, digital images, audio, text, video, anything at all.

We are, everybody knows this, right? But Sam Altman knows this especially. So how do you, you know, gain control of digital content and ascribe humanness to it? You sign content with a blockchain. you register hashes of things on the blockchain, you attach some biometric signature to it, now you can prove that you created some piece of original content, whether it's an image, text, video, whatever it is. So I understand why he is excited about WorldCoin. Is this precise implementation the good one? Maybe not. But I do recognize that there's

something there in terms of registering content on-chain hashes of content together with a biometric signature and a timestamp. That does seem to be one of the ways to solve the sort of trust crisis that we find ourselves in given AI. Yeah, I guess that's one angle to it. I think the other is just a fair distribution of an asset, which I'm less excited about where they landed on that. So the idea is, okay, with Bitcoin, anyone who had a computer could start mining this thing. You know, unfortunately, a lot of people didn't know about it. So you had some concentration at the start. You have similar issues with proof of stake.

But with this initial distribution, the idea is that everyone can just have some money out of the gate, which is sort of like a Russian voucher type of situation where, you know, you just give a bunch of vouchers to people. But what ends up happening is that people go around and they consolidate. And so you end up with these oligarchs and hedge funds that went into Russia and they just consolidated all the vouchers. So that's what that's what all inevitably happened with the WorldCoin. Yeah, to be clear, that was when basically corporate privatization occurred in Russia in, I think the late 80s, early 90s. So I think that's a very important theorem for people to understand. And the divide is between the utopian types that believe that they can create a credible civil resistant protocol for,

issuing a new currency to the citizens of the earth versus the sort of like, let's say, realistic types with knowledge of history who know that you can't just impose a new financial layer on the world and have it settle equitably. That just can't work because people have disparate resources. The people with more resources will figure out how to and, you know, break the civil resistance, such as what is happening with WorldCoin right now, with people apparently renting the irises of Cambodians. So I just don't believe. I think we have enough evidence to know.

There's no way to design a scheme such that every human gets an equitable share of some new currency. It's not possible. No. The market basically has to determine it. You can't cheat the market. You know, the market will mediate the new distribution. I still think Bitcoin probably did it in the best possible way because the miners, the issuers, basically, of the currency, they don't have that privilege of an access

to the system. If they did, the miners would have all the Bitcoin, and there would be these massive Bitcoin oligarchs. But if you look at the miners, they're break-even or some of them are going out of business. So there's clearly not that enduring of an advantage to be the issuer. You don't get that much privilege from it. So to me, that is the mark of a, quote, unquote, fairly distributed system. Then the new units are just distributed into the market and people purchase them or they don't. I don't think we've developed a better way to do it.

Remember Grin's attempt? Grin tried to do the fair launch. I think it was GPUs only, but people were trying to game it. That didn't work out well either. It holds for any distribution method. People with more resources will try and install themselves as privileged issuers

the new currency. So I think basically we need to give up on the idea of trying to, quote, unquote, fairly issue a new coin to the whole of the world's population. Following this debt ceiling thing at all, see what Circle did. They moved $8.7 billion into overnight repos away from treasuries that were maturing in the next few weeks. Smart. I mean, what a headline, you know, spooked by the potential insolvency of the U.S. government circle has now reduced their exposure to treasuries. I mean, incredible Z-keist a headline there. What a clown show. I saw that Biden's going to do a speech on Sunday night. Did you see this? I mean, both sides seem to be digging in their heels, to be honest. So the risk-free

rate, there is no such thing as a risk-free rate. There's always risk. Sovereign debt is never riskless. I think we can put that myth to debt to bed now. This is going to, markets are going to be in turmoil here. I mean, Bitcoin will certainly sell off as a risk asset if there's no deal struck here. It would be a significant unforested error on the part of the U.S. government. But, you know, even if we resolve, and I went on Bloomberg this week and I said the same thing, even if we resolve this short-term sort of manufactured crisis, there is still the long-term reality of debt to GDP being 125%. Yeah. And entitlements being real, I was supposed to nominal, right? You can't inflate away the real liability that the U.S. government has,

which is like healthcare spending, you know, Social Security, which gets cost of living increases, right? So those are real liabilities, not nominal. So you think about Germany during Wymar, their problem was that their debts were denominated in gold, not Deutsche Marx, right? They couldn't inflate away the value of the debt. So they basically entered this hyperinflation spiral. I'm not saying we're going for hyperinflation. But if you look at the line items, the spending that the U.S. government has to do, yes, their debts are denominated in their own currency.

But their liabilities tend to be pretty real defense spending. Interest payments on the debt, right? Interest rates are very high. You can't inflate those away. Social Security, Medicare, those are real expenses. Oh, it's like doctor's time, right? That's a real expense. That's a real thing.

It's drugs. It's stuff like that. So, I mean, look, the debt crisis will continue. Even if we somehow find some constitutional end around, we meant the coin, whatever. The fundamental reality is the world doesn't really want to buy our debt anymore. The debt is growing very quickly with extreme levels of government spending. And the structural level of the debt's very high. and the higher the debt is, the higher interest rates are, the worse the drag is on the real economy,

which is the ultimate revenue provider for the U.S. government. So there's a structural crisis. People think it's a short-term crisis. There is still the longer-term structural crisis that we need to handle somehow. Well, I thought we had some great ideas last week. I think selling Guam, selling Puerto Rico, these are real options here. I support. If any policymakers are listening, look, this is part of the,

of your toolkit here. Or it's like, what do you do when there's a proxy fight? Anyone ever seen succession? You just go try to buy a bigger company. So let's go, let's go buy Canada. Yeah, M&A. Let's see some wasteful M&A here. I mean, there's a lot of options on the table.

I feel like we just haven't explored any of them yet. I honestly think the best real choice is to lean into GDP growth. And I think AI is the cornerstone of that. The hearings this week, not to, you know, get onto the AI. topic again, but the hearings this week were very depressing because there was talk of regulating AI under the, in my view, contrived banner of AI safety. And that is a great way to retard the growth that we'd be getting from it. That's a very European thing to do. I don't think we should do that. No. Well, I think we should be trying to keep as many jobs here as well. So maybe

we should get a market structure bill in the U.S. while we're at it for cryptocurrencies. Elsewhere in news this week, Tether has announced that it's going to be using 15% of its net operating profit to buy Bitcoin. So now we see a transmission channel from very high rates, 5% plus, to Tethers, $80 billion hoard of U.S. treasuries, where they retain all of the net interest income to Bitcoin now. So basically the U.S. government is financing Bitcoin. with its interest payments on the debt. Crazy. I mean, I guess as long as it's part of the profits, but you know the optics on this don't look great,

that you have a cryptocurrency backed by Bitcoin at some level. But it's, yeah, it's, it makes sense if you're tether. To be clear on that, though, they're not announcing that they're going to back their reserves with Bitcoin, at least. I think they may have some small amount. Yeah. So this is sort of their equity buffer,

which is obviously distinct from the reserves. But in the noise, I think people basically announce. analogize it to the Luna situation where they were literally trying to denominate the reserve in Bitcoin, which doesn't make sense a dollar liability cannot be matched with the Bitcoin asset doesn't work In other news, the this John Ray guy very active. So FTX is trying to they're going to sue embed financial and the investors in embed financial so embed was this kind of brokerage clearing firm that FtX bought. I think they bought it in September 2022 for $250 million.

And the argument is that this thing was not worth $250 million. It was a fleece job. And so now they're trying to call back a bunch of money. So see how this goes. I don't know. That seems a little tough. I'm not sure that that's going to be successful. I mean, I kind of understand the intuition here.

I think it was $250 million acquisition. They had less than $20,000 in revenue at the time. the revenue actually pertained to an FTX entity as the client. The founder walked away with over $150 million. So I get that they are making the case that it was a immensely wasteful acquisition. I don't know what specific legal recourse they have if the prior management just made a bad decision on the acquisition front. But I appreciate John Ray's assiduousness.

I mean, the guy's, he's a bulldog, you know? Yeah, he's just going to go. after as many of these as you can. We'll see. Haven't heard much about the reboot. Yeah. My understanding is it's still underway, but not a lot of noise about it this week.

So good reads for the weekend. I thought Hut Capitals, blockchain VC landscape, 2023 edition was worth checking out. I thought CoinDesk's article about how France is actually welcoming U.S. companies,

U.S. crypto companies, who are seeking regulatory clarity. Definitely check that one out. We'll put that one in our newsletter as well. And then I also like this New York Times interview with Michael Lewis on his upcoming SBF book, which is going to break all book records, I'd imagine. So first of all, I'm excited to read the book. We'll just get that out of the way. I think he's a good writer. Second of all, I'm the biggest Michael Lewis hater on the planet. Why? I don't think it's becoming to be a

but I am. So I'm going to lay my cards on the table. I think Michael Lewis was brought in to FTX to write a hegiography of SBF. I think that he was specifically brought in to do that, to write his overly saccharine, favorable portrayal of the guy. I think he got very lucky being the embedded journalist there. And then now he got the story, right? But I don't think he was there for the right reasons.

we know that he worked with IEX to write Flash Boys, which most people that know about HFT hate Flash Boys, right? It was written with a very distinct editorial perspective. It wasn't really nonfiction. It was written, to effectively, for lack of better word, Schill, IEX and their ambitions. We know that SBF and FTX were in cahoots with IEX, right? They're a very close relationship. We know that. What I suspect happened was the IEX guys suggested bringing Michael Lewis to paint a very rosy picture of SBF. And so Michael Lewis got this cortisin style treatment. I mean, he was invited to the Super Bowl. He was, he went to FDX Bahamas. I'm sure his expenses were paid for, right? He got a very favorable treatment. And in return, I assume,

the deal was that he would write a somewhat favorable account of SBF. So he's kind of portraying himself as this like plucky outside of this sort of like investigative journalists who just stumbled upon the story. I don't think that's how that happened. I think he's brought into a job. I think that's fair. So I think he was a participant in the story. I don't think he was this neutral observer.

However, I think he was kind of, he lucked out because then the enormous scandal occurred. And so now he's going to write probably a very interesting account. But I think he was there for the wrong reasons in the first place. He's going to be laughing all the way of the bank. But it's going to come out right around the trial. So it'll be interesting to see what type of information he has. Obviously, there's a lot of people cooperating with this that are going to be on the witness stand, but he won't be able to get into any of that.

It's almost like he's going to have to do two books here. So here's my additional problem with Michael Lewis. What did he know? What did he know? Because he was embedded with FTX for six months prior to the collapse. Can you have that level of access and not know that something was amiss? Oh, I don't know, Nick. I mean, you got the head of product, didn't know about this.

You got the, you know, Samtram, Buclow, who is the head of, um, Al-Qaeda, he didn't know anything. I mean, these guys, how could Michael Lewis know? I mean, the head of the head of Corp Dev, M&A, he's, you know, he's negotiating this blockfied deal. He didn't even know. Come on. Yeah. So that's what we're saying. We don't believe that the other executives at FTX, we don't believe they're protestations.

that they didn't have knowledge, right? So ought Michael Lewis have to have tipped off regulators? Did he? I think you have a moral obligation if you're in the inner circle and you see that something is clearly awry? I don't know. I could actually buy. I don't think Michael Lewis knew that this was a fraud.

Maybe not. Maybe not. But that level of access, turning a blind eye, perhaps. I mean, he's probably just like, this is crazy. A bunch of kids down here with no experience in financial services somehow hoodwinked all these investors to put their money in. That's probably what he's thinking. Anyway, so despite being a big hater of Michael Lewis, I will read the book,

and I do look forward to it. I think he can redeem himself here. I'm looking forward to reading it, for sure. All right, well, I think that's it for the week. We will, hopefully, you know, there'll be a good Bitcoin conference down there for you. We'll be back next week. Maybe we'll record in person next week. It looks like we're going to have a bunch of stuff going on. So we'll do an in-person episode next week and everyone have a safe and healthy weekend. We'll see you on Monday.