On The Brink with Castle Island - Weekly Roundup 06/02/23 (Crypto-eurodollars, SBF's defense, debt ceiling debate) (EP.428)

Episode Date: June 2, 2023

Matt and Nic are back for another week of news and deals. In this episode:  The debt ceiling debate is resolved What happened to Paxos' / Paypal's stablecoin? Offshore dollar stablecoins are growing while onshore stablecoins are shrinking Stablecoin policy in the US is backfiring USD stables issued out of Hong Kong Tether reaches a new all time high The bad boys are back SBF's defense will reportedly claim he got bad advice from Fenwick Farenheit wins the bid for the Celcius assets Why Celcius' mining operation was a big red flag What does CZ mean by 4? Sponsor notes:  Coin Metrics STATE OF THE NETWORK - Zooming Out: A datonomy update In this issue of Coin Metrics' State of the Network, we leverage datonomy—a classification system for digital assets to zoom out and gauge the ecosystem and its underlying trends from a broader lens. Despite a slew of challenges over years, we explore how the market has shown resilience through an analysis of market returns, volatility and volumes across sectors.

Brought down by bad mortgage investments, Lehman, which has 25,000 employees, will be liquidated. The federal government loans American International Group, AIG, $85 billion. This is a different kind of market, and the Fed is asleep. The federal government is stepping it to stabilize Fannie Mae and Freddie Mac, the two mortgage giants that have been threatened by the housing crisis. The Bank of England has pumped 75 billion pounds more to Britain's ailing economy with a new round of 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. 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's Metrics Minute, we're looking at trends across sectors of the digital asset ecosystem using Daytonomy, which, if you're not familiar, is Coin Metrix's taxonomy for digital assets, together with Goldman and MSCI. Daytonomy. Deutonomy basically is a system whereby they divide up the crypto asset landscape into a bunch of sectors. So in 2023, returns for tokens in the IT sector have led with average returns at 89% followed by 44% for decentralized finance, 37% for specialized coins. I don't know what specialized coins

are. The correlation between Bitcoin and ETH reach a peak of 0.96 during the rally in early 23 and has since declined below 0.8. Meanwhile, the defy and the Metaverse sectors have shown a correlation of 0.95 recently. The 30-day volatility for Bitcoin and Eath has descended to historical lows in a challenging macro environment. The most volatile sector is defy at the moment. Spot volumes have also fallen off under 20 billion from a high of 40 billion at the start of 23. and on-chain derivatives have experienced huge reductions in volumes as well. That is your metrics minute. That was a good one.

Yeah, the spot volumes, I saw that. Coin metrics had this chart that Tom Dunle, via Coin desk actually retweeted. And I'm looking at spot volumes. In March, they were over $40 billion per day. Right now, they're sub-20 billion. So what does that tell you? It's got to be Jump and Jane Street and a few of these market makers.

pulling back, huh? Yeah, I like the metrics the block has are pretty good for sentiment, showing, you know, search volumes for various tokens, mentions, search volumes for Coinbase, OpenC, NFTs, they're just all down. They're all down. We're in the summer doldrums here. Summer doldrums leading up to a debt ceiling incident, too, though, right? So I wonder what will happen here. It looks like we have a deal. Hasn't been confirmed by the Senate yet, but by the time you listen to this, maybe it will be. One of the risk

will come back on, you think, or what do you think happens here? I think we've defrayed the greatest risk. I mean, there's no imminent default that we're facing here. Assuming McCarthy has the votes and it looks like he does on the Republican side. So it looks like we're kind of set here. It's not

much of a compromise. It's really just permissioning more spending, frankly. It's only a small part of the budget that they were even quibbling over. They didn't even touch entitlements, which entitlements will have to be touched. I don't know why they have this sanctified special status to these guys. Maybe it's politically toxic, but if you don't do something about it now, you're going to have to do something about it later. You're going to have to raise a retirement age to 80. You know, something's going to have to give. So, yeah, people talk

about just, we're going to start living longer, but you're sick. I've got strep throat right now. We I don't know. It doesn't feel like we're getting healthier. Yeah. Stress levels also shortening our lifespans, I think. Yeah, well, yeah, that's just crypt out. That's just, you've got to learn to live with it. Yeah, I mean, look, the deal I think is in place, and it's not good for the long-term debt situation, frankly. It doesn't look like the Republicans are actually interested in trying to achieve a balanced budget. They like to spend as much as the Democrats, frankly.

I mean, Trump spent enormously during his tenure. So I'm not seeing any faction in Washington that wants to get the debt to a serviceable level. There's certainly no desire for austerity or reducing the size of government. The only exit valve is the USDA via monetization of the debt. That's the only way. Print more dollars. That's the only way to get out, right? I did this great Twitter space with Linald and Luke Roman and Ballagy.

I mean, great because of them, not because of me this week. and I asked Luke what it would take to get the debt to a serviceable level, so sort of 70% of GDP as opposed to 125%. He said multiple years, maybe five to 10 years, have sustained 15 to 20% inflation. That's the Israel playbook, right? I mean, yeah, Israel went for the really sharp and short and sweet approach. They had more social cohesion.

than we do. In the U.S., I think it would be very difficult. I don't know if we would be able to tolerate that very well. I don't know. It's kicking the can down the road until after the election, clearly. So it's just not a, it won't be a campaign issue. Yeah. All right, let's hit some deals here. A big one out of the gate. So Magic, which is a Web 3 onboarding platform, they raised $52 million dollars from PayPal Ventures to Rubik, Synchroni, KX, North Zone, and Volt Capital. That's a big deal for PayPal and it's great to see PayPal continuing to invest in the space. That's scandalous what happened with PayPal's stablecoin attempt, just being on the precipice of launching that and having either the DFS or the SEC put the kibosh on that as they're about to go live. It's one for the scandal pages.

And they're not saying anything about it because I'm sure they want to launch it, but someone needs to do a little bit of investigative reporting into why they just got kneecap. and why Paxos, you know, was basically all tied up in this. So I think Paxos got done dirty and I think PayPal got done dirty. But it's good to see PayPal still investing in the space. I guess, you know, wallets just make all the sense in the world if you're PayPal. Yeah. It's actually fascinating to see how much investment is going into the wallet space right now.

It's very exciting because we had kind of for a time settled into this orthodoxy of just, we're going to somehow get mass adoption by getting everyone to write down C. phrases and that was insane. That was obviously not going to work. And now, somehow, recently people have realized, hey, we actually need better approaches to wallets. So the account abstraction with lots of very well-funded wallet startups, including magic monster rays here. So it's very exciting to see. I mean, these are the infrastructure developments that will actually power meaningful adoption going forward. It's also interesting on that Paxos PayPal story.

That's not something that's publicly known at all. I haven't seen virtually any reporting on it. Someone needs to get into this. So what happens is Paxos gets slapped down because of the BUSD, which I think that Paxos is a great case on that. I do not think that BUSD is not remotely security. We've covered this. Not even close.

We covered it. So, so, but then somehow PayPal gets a ricochet shot because they're about to use Paxos as their back end provider. Meanwhile, Paxos's US dollar of stable coin, their own thing, is still live. So I just don't understand this. Is the SEC trying to say that PayPal's stable coin was going to be a security? That seems like a dramatic stretch. Yeah, so I'm echoing your calls for investigative journalists to look at the role of the DFS, the SEC, the OCC and the Fed, and potentially the FDIC in harassing Paxos and PayPal here and preventing the issuance of the stablecoin.

I mean, and there's a lot of other stablecoin news this week. None of it favorable to U.S. regulators. It is all. All time high. Look at Tether. All time high. Good job. Elizabeth Warren. Good job. Barrett Rammermerty. You know, good job Sherrod Brown. You push the stable coin in his station. out of the U.S. you scared every U.S. institution away from stable coins. Now we have offshore crypto euro dollars. Is that what you wanted? Is that what you wanted? Is that success for you? It's incredible. God forbid we have PayPal and some of the more reputable companies in the United States that actually employ people in the U.S. issuing stable coins. But let's just crack down on them and drive all the money into the offshore product. It makes no sense. I mean, look at this

incredible piece of news from Hong Kong as well. I know we're getting it, we're getting ahead of ourselves, but first digital, which is a Hong Kong financial entity, they're issuing a USD stable coin out of Hong Kong. That is a crypto euro dollar. So we're not talking about some other unit of accounts. So it's still dollars, but it has no relationship to the regulated banking system here in the US. This is obviously what was going to happen as choke point 2.0 went ahead and regulators cracked down on stable coin issuers domestically. People still want dollars. Now this is a recap. This is the exact same thing as happened with the euro dollar market originally. People wanted more unrestricted dollars outside the US banking system. Now they're doing the exact same thing with

stablecoins, whether it's tether or other issuers. And the US is the loser in this. Because yes, dollars are being held, but they have no oversight, no ability to influence what's going on. No transparency. And we're not just complaining without recommendations here. Very clearly what we need is two things. We need a stable coin bill passed, which codifies how stable coins can be issued in the United States, and that gives a green light to the state trust model as a way to issue them. That's one thing. Second thing is we need a market structure bill to codify who oversees the spot market in the U.S. not going to 50 states and you don't have the SEC battling the CFTC for jurisdiction.

We need to have both of those things. What we actually have in Congress right now is just certain politicians just saying, well, we don't need to do anything. And stablecoins shouldn't even exist. You have Stephen Lynch, who's on the House Financial Services Committee in a very senior role saying, why do we need stablecoins when we have Fed now? And we have all these other settlement things coming out from the U.S. government directly. Why do we need stable coins?

That's not the thing, Stephen. You have $80 billion in Tether. It's the time to argue about whether or not this is a thing is long gone. Tether is one of the largest holders of treasuries in the entire world. So stablecoins are a thing when we talk about making sure that U.S. companies win that category. I mean, stable coins just have no, there is no comparing them to Fed now. It's not remotely in the same taxonomy. It's like saying, why do you need bananas when you have gerbils?

They're just not at all. all analogous to each other. Not even close. The market demand is there. It's revealed. The market has expressed its desire for digital bearer asset, final settlement online. You can't put the two-plays back on the tube, guys.

You're going to have stable coins. You're going to either have offshore and regulated ones or regulated by other jurisdictions or you're going to have domestically issued stable coins. Clearly that's better. for the U.S. Of course they would prefer it that way. Stephen Lynch would have been the politician that when electricity was being invented

would have just said, I don't think we should have that. I don't want these lines going above the houses. I just think, you know, candles would be fine. Yeah, we have whale oil. You know, that's perfectly good. We need to keep the whale oil. Yeah, we don't need to string cable. Someone might fall down from one of those cables.

We have paraffin. Yeah. Okay. Back to the deals. Next up, we have the Anoma Foundation. They're the entity behind the Anoma blockchain. There is 25 million from CMCC Global Electric, Delphi, Bishin, spelled Bixen, but pronounced Bichin, Spartan, and Anagram. Big deal there, new L1.

And the last one of the week is an M&A event. So chain analysis has acquired transpose, which is a blockchain data and infrastructure company for an undisclosed sum. Expect to see more M&A here in the coming weeks, months, in year, I would say. Definitely. All right, so we do have a bad boy segment here. We're actually going to play the music this time. We forgot last week. Yeah, let's actually play the music now.

Let's queue it up so well. Our editor, who's definitely not me, must have forgotten to do that. for you. Bad boys, bad boys. What you're going to do? What you're going to do when they come for you? All right. So bad boy news of the week. Bloomberg is reporting that SBF's defense here is that his law firms told him to do it, that he got bad advice from his law firms. I've been talking to people for the past few weeks just out of curiosity, and what would this guy's actual defense be? He is so dead to rights. There are so many people that have turned state's witness against this guy. He's just done so many evil things.

And so many people are just going to testify to that effect. And it's all in writing. They have the, even they have the encrypted messaging. And so what could his possible defense be around stealing all this money? And it looks like it's going to be, my law firm Fenwick and West gave me some bad advice. So I don't see that going very well for him, to be honest with you.

Yeah, I mean, I understand how maybe. some of the bad decisions he made may have been a consequence of bad advice. However, fraud is not something a law firm will ever advise you to do. Stealing money from your clients and gambling with it. No law firm would ever recommend that. I mean, maybe like the idea that they could start as an offshore exchange and come onshore, maybe the analysis around FTT, maybe there was some tortured analysis around that. I mean, certainly a lot of the incumbents had wrong ideas about that. But the core allegation, there's no way Fenwick told him to do that.

Also, he still did it. No way. That's not exculpatory. He still did do it. And you're going to have the lawyers will testify to that effect, too. Do you think it'll come out that Sam was chef Nomi? Do you think he was? I do think he was.

I think that there's a very good chance that he was. So I guess folks probably know who Chef Nomi is, the kind of key person in the sushi swap ecosystem. Bold assumption. So basically, I don't know, tee this up. So Sam, if he was Chef Nomi, chef Nomi was a key protagonist in the invention of sushi swap and rug pulled on that community.

And then Sam stepped in under his real name and quote unquote saved it. No one has ever been able to tell who Chef Nomi is. I think it's probably Sam. I mean, to be honest with you, I find all this defy and Dow drama completely inscrutable. So there should be some like entity or publication that tries to simplify it for regular people. I feel like there's just perpetually insane drama that happens in the Tao space and no one's ever aware of it.

And it just happens on the form. You do need some on-chain archaeologists in the defy and Dow space. And I think we have Zach XPT. That's pretty much the one. Yeah. All right. So that was the bad boys section.

Did you see this finance news? So it seems that CZ has announced that Richard T. Tang, who's one of the executives over there, is now going to lead all the regional markets outside the United States. So maybe this is just a non-story, just a promotion, but I thought it was interesting that CZ maybe stepping back a little bit and giving someone else the tactical responsibility on these markets. Elsewhere News Circle, we reported, exited all of their U.S. Treasury holdings, which was kind of incredible, is they lost faith in the credit of the United

states. And they exited in favor of cash and overnight repos. And it looks like they'll probably be going back now that things are somewhat resolved. So my question here, and this is above my pay grade, but let's say the debt ceiling thing goes through, it gets approved in the send. It's already approved in the house. And let's say it gets signed into law this weekend. On Monday morning, Are you just going to see a ton of AUM flowing into treasuries? And if so, does that create a liquidity issue for other types of assets? So, you know, these overnight repos, what's it, like $40 plus billion in overnight repos right now? It's not going to like crash the market, but will there be other assets that sell off here in favor of the U.S. government building back up that TGA, the general account there?

One thing that I saw was if the U.S. really did default, that would actually cause huge inflows into treasuries because they are considered the safest asset, which would be a pretty ironic thing. But, yeah, hopefully we don't get to witness that. Pretty prudent on circles part. I mean, they're coming out of this SVB thing from a couple months ago when USD shot down to 88 cents. and I think they're just being really careful. Yeah, that was an interesting one because USDC is typically the dry powder. And so a lot of people that would have bought the Circle Dip

weren't able to because their dry powder was in USDC specifically, which is super ironic. RIP, the people that sold that 88 signer. Yeah, I mean, because everybody's fighting the last war. So everyone thought it was Luna. Of course, it wasn't Luna. Yeah, people thought it was over for USDC. In other news, we didn't cover this last week.

So Fahrenheit, which is a group that is backed by Michael Arrington, USBT Corp, Proof Group, and a number of others. They've agreed to purchase the assets of Celsius, which is the drink I'm having right now. And it's also a bankrupt crypto brokerage. But they have bought those assets. So it seems like there'll be a little bit of a reboot here. And I guess there's a bunch of, it's a mishmash of assets over there, right? They have the mining assets. They have the brokerage.

There's a bunch of customer funds on the platform. So it'd be interesting to see what they make of this. So Voyager was the one where FtX was meant to buy it, then Bynes U.S. was meant to buy it, and then no one bought it, right? The Voyager assets. Celsius, I don't know if it's been a story like that with multiple bidders. Well, there actually were other bidders on this deal.

I think FTC is in the mix at one point. But yeah, there were multiple bidders on this specific deal. I think there was maybe three other groups that were looking at at one point. I'm not sure what the final bids looked like. One of the things that made me very concerned about Celsius some time ago was when I found out they had a huge mining operation, which made no sense because mining is not a form of yield. It's just not.

And it's certainly not something that can be liquidated in short, order. The maturity of an ASIC is long. The maturity of an ASIC is like three to five years. So when I found out they'd plowed 500 million to a billion dollars into mining, I thought something was deeply amiss. Yeah. Well, that didn't remember defy too. It was known that they were putting capital into defy, which that's problematic. Yeah, I mean, there were red flags around Celsius for sure. I guess I regret not having been more vocal on it, but yeah, that was kind of one of the badly kept secrets that Celsius was doing some just completely crazy stuff that in no way corresponded to taking client assets, obtaining yield responsibly, and then, you know, having these

assets that were available to be liquidated potentially on short notice. I mean, a mining business. I don't think they were forth read about it. They weren't saying it was customer of money, right? So it's, yeah. You could have come out and accuse them, but it's, they were saying they weren't doing it. Proof reserves, guys. That's why we need proof of reserves. I don't know. I don't even know if proof of reserves would have helped there because it was a lending type of operation. So if they were doing their jobs, they should have been lending to like market making firms, right? That's true. That's true. So actually, speaking of proof reserves, we told you about Texas House Bill 1666. I really wish they could have made it one bill later.

So it's not literally 666. But anyway, that's the proof reserve bill in Texas that passed. The Texas legislature has also passed two other pro-crypto bills, both focusing on mining. So three pro-crypto bills in the legislative session this time. Really? Anything that's going to be anything that will impact startups? I would say the proof of reserve one would. Anybody seeking an MTL will need to do that.

And then the mining stuff is, you know, in theory improves the economics of miners. It's active in Texas. But either way, it is good to see states actually taking crypto legislation into their own hands. It is going to be a state's rights issue, as I said last week at some point. So it is good to see some of these states coming out. Massachusetts has a blockchain caucus that is making some headway on things like Dow LLCs and things like that. So it is good to see. We are planning on having some coverage of the Wyoming Stable Act at some point.

We are. Yeah, that's underway. It's high-level, high-level Pauls in Wyoming. That's right. So, I mean, I think it would, as I said before, I think it would be cool to use the Wyoming stable coin. Why wouldn't you? I think it would be great.

I think Massachusetts should do that too. They won't, but I will certainly be a user of the Wyoming stable coin. Yeah, we should just go back to the free banking era where anyone could issue their own currency. Like, why not? A tough thing about that, though, is that, you know, you're in the free bank. era and you want to make a cross-country pilgrimage from Massachusetts to California, you're swapping in and out of like 10 different currencies on the way. It wasn't very useful. That's the beauty of it. It's a fun challenge.

Yeah, I don't know. I think that Wyoming thing could be a real revenue driver for the state, though. I mean, you have a, you basically have a money market fund that you don't have to pay interest on, and people will definitely use it because they'll perceive it as a lot safer than a lot of the alternatives. Would you rather hold tether or would you rather hold the Wyoming stable coin? Totally. It is interesting to see USDC supply draw down though and I think the very simple reason for that is obviously it pays 0%. And if you're a USDC holder, you probably have access to treasuries through some other mechanism. So it doesn't surprise me that as rates rose, USC supply declined, And we've said this before, USDT supply obviously back at all-time highs, even though Tether

also doesn't pay a yield. I think that's because tether holders are different from USDC holders and they just don't have access to treasuries the same way that Circle or USDC holders do. So I think it's definitely that. It's also just look at spot volumes. So spot volumes are down 50% since March and a huge trading pair is USDC, particularly on the U.S. venues. And so the need to actually hold stable coins is less pervasive.

And so you probably just have large market participants that are downsizing how much USDC they hold and just moving into traditional kind of fiat accounts. But we need an explanation that it answers why Tether is up and USDC is down. I mean, I have an explanation there. There's probably a simple one is that there's a perception that Tether is safer from some market participants, particularly outside the United States. There's the perception that if the U.S. government leans on U.S.D.C. then it could be frozen. And there's a perception that Tether would be less likely to play ball, I think. Yeah. And I think it's probably fair to say that offshore exchange volumes are down less than onshore ones. Yeah. Yeah, I think that's fair. You know,

Binance volumes are down, though. Binance did a 10% headcount reduction this week. They said, it was just underperformers. It wasn't like a broad-scale riff. Call it whatever you want. They cut 10% of their workforce. Yeah, CZ did dispute this, of course. It seems like his full-time role is fighting, quote-unquote, fud on Twitter.

I mean, sometimes the fud is true. You can't just call faxsy dislike fud. You keep saying four. You can just put four. Yeah, you just do four. So do you know what four is, what is four? Yeah, he had this tweet around four pieces of advice for the bear market or something at one point. And the fourth piece of advice was to like ignore the FUD, I want to say.

So that's what four means. Do you found it? Yeah. On January 2nd, he tweeted, we'll try to keep 2023 simple. Spend more time on less things. Dues and don'ts. Number one, education. Number two, compliance.

Number four, product and service. Number four, ignore FUD, fake news, attacks, etc. in the future, we'd appreciate if you can link to this post when I tweet four. Thank you. Okay. So four means ignore FUD, the number four. Ignore FUD, fake news, attacks, et cetera. Okay.

There is, I mean, to be, there's a lot of FUD. There's definitely a lot of fake news. And there's certainly a lot of attacks. Sometimes. We're doing some of the attacking. Sometimes you do want to attack. Sometimes the news is actually not fake. Sometimes there's just true facts.

that are bad, true bad facts. That is sometimes the case. Although I'll say these Reuters reports that are against Binance, they don't really have the goods. Yeah. He's sort of in the crosshairs of Reuters here, and it's weird dynamic that they're around the edges,

but nothing is dead to rights on any of these Reuters reports. Totally with you. And frankly, Reuters track record crypto reporting is actually super. poor in my opinion. So they keep on depicting these reports is breaking

news, special investigations, you know, real Watergate type stuff, but there's nothing there. Yeah. By the way, I'm looking at CZ's profile and it looks like he's in Dubai, which is increasingly

a crypto hub. I've talked to a few people that are in Dubai this week and they're just forming this new regulatory framework and there's all sorts of capital flowing into Dubai. One of the few corners of global finance that appears to be vibrant and bustling. Yeah, things are otherwise kind of slow, although the Fed has said, well, through the Wall Street Journal, Nicky, Tim Marcos, how do you say? Tim. Timoreas. Nicky Leaks came out yesterday and he said they're not going to do anything in June. They're going to sit out this

this one and maybe they'll hike again in July. So there's that. We'll take it. Tough break for the Celtics. You know, I actually did watch that game, believe it or not? Game seven or six? Seven. I watched game seven. That's the first basketball game I've ever watched from start to finish. That was very disappointing. That was tough. I would have thought that after game six with that tip end end it, which is one of the best games, best endings I've seen. and that they would have been able to pull that off. That was very depressing. I mean, coming back from the 3-0 down in the series, get forcing Game 7,

and then having a terrible lackluster performance in Game 7 doesn't make sense. I get way too emotionally invested in these things. Way too emotionally invested. Here's the thing, though. Boston has had so much delight from their sports teams historically. It just wouldn't have been right to give them this. Well, we deserve it. We deserve it.

I'm saying Boston's the least deserving city of this. We deserve the championships. It's a gritty, hard-nosed town and great fans. Boston has they've had more sports luck than any other city, I think. It's disproportionate. Yeah, it hasn't really been luck. It's just been great performance. We've been gifted to have Tom Brady, too.

It's Miami's time now. We're going to be winning the Stanley Cup and the end. NBA finals. I know, I know. And both of those teams beat Boston teams. Yeah, it's tough. Things you hate to see. My allegiances have changed. Yeah, so last weekend it was two Celtics games, one, one, one good one, one bad one, and then succession, which you somehow have not ever seen, so I can't talk to you about it, but that was a great show. I mean, feel free to weigh in for the sake of the listeners, but I, yeah, I don't know anything about it. I was, I was happy with the ending. I thought it was great. I would definitely

love to see a movie. I don't even, I don't know what it is remotely about. And I'm very content with that. Wow. That's no point of ruining it for those who have not seen it, but quite a good show. Well, we made it through another podcast, Matt. It's been

440 episodes or something. There's not breaking news on every single one of these, but Yeah. Maybe there'll be probably be a few arrests in the coming weeks on more bad boys, so I'm sure there'll be stuff to talk about. Yeah, the news is generally not good. Maybe no news is what we want from here on out.

Yeah, a little quiet on the enforcement action front would be good. So we'll leave it there. We'll be back next week and have a safe and healthy weekend. We'll see you on Monday.