On The Brink with Castle Island - Weekly Roundup 06/30/23 (ETF frenzy continues, Prime Trust insolvency, how Stablecoins are like Eurodollars) (EP.434)

Episode Date: June 30, 2023

Matt and Nic return for another week of news and deals. In this episode:  The problem with SEC SAB 121 Pickleball is driving up American healthcare costs Microstrategy buys some more Bitcoin Fidelity refiles their Wise Origin Bitcoin ETF Why the Prime Trust insolvency is so bad Will there be Prime Trust clawbacks? The SEC is slacking with their document retention policies How stablecoins are mirroring the development of eurodollars How Prometheum's listing strategy might pose a risk to certain cryptoassets The UK law commission determines that digital assets are a new kind of "thing" Content mentioned in this episode: SEC Staff Bulletin 121 Odd Lots, Josh Younger on the Surprising Origins of Eurodollars and Petrodollars Laura Shin Podcast, Paradigm debates Prometheum The UK Law Commission: Final Report on Digital Assets Sponsor notes:  Coin Metrics' State of the Network: Bitcoin & the Rest  In this issue of State of the Network, we assess Bitcoin's resurgence and gauge market sentiment amidst a rapidly evolving digital asset landscape marked by regulatory ambiguity and external macro events.

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 Concented 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. Here's your metrics minute. Bitcoin has seen a resurgence this year, gaining 85% since the start of the year. Made a flurry of institutional interest. We'll talk about that today.

Bitcoin's market cap dominance has risen to 58%, the highest level since April 2021. The market cap stands at 590 billion, 150 billion greater than the aggregate market cap of crypto assets in the coin metrics, Daytonomy universe, excluding stable coins. Only Bitcoin Cash and Lido have yielded greater returns among tracked assets with 102 and 104% returns this year, respectively. I don't know why an earth Bitcoin Cash is rallying, but it is. Ethereum has been trailing. The ETHBTC price ratios dropped to 0.061 from 0.087 back in December 2021.

So after a challenging 2022, Bitcoin has rallied here. Of course, a lot of that has to do with the institutionalization and the ETF expectations. That's your metrics minute. Good metrics minute there. Recording this one late on a Thursday. So I was in New York, crypto capital of the United States, I think, down there in New York. What are the vibes like? Very good vibes.

Great vibes. A lot of building. So I went to this Galaxy event. It was kind of like a conference. Not really conference. It was like debates. Very well done. Shout out to the Galaxy team.

Saw a lot of New York entrepreneurs. Had a big dinner. A lot of entrepreneurs in our portfolio. Huge scene down there. Just a lot of people building and a lot of people waiting for the next SEC chair, I would say. The demise of American crypto has been much. much exaggerated, I think. Still alive and kicking.

And I spent a ton of time talking to, so I was down there for a few days, spent a lot of time talking to folks at banks that were leading big initiatives, that are leading big initiatives. And people are building. And people just universally think that the SEC is not handling this industry correctly. And it's not just on our token securities. It's on all sorts of fronts. And we can talk about it, I guess, later.

but some of the posture of the SEC against banks as it relates to balance sheet rules and things like that is just completely out of whack. So there are, there's a lot of things that have been built on the inside of some of these financial institutions that have not seen the light of day. And I think when the general public sees them eventually, they'll be shocked. So, yeah, you were telling me before we started recording about something called SAB-121, which I didn't even know how you, find this stuff. Yeah. So,

you know where you look. Well, I guess we'll put it out in the, yeah, we'll have to put it in the show notes. I think we've talked about this on the podcast. If we haven't talked about it, then, you know, let us know, get in our mentions and tweet at us. But maybe we should do a full episode on this. So it's staff accounting bulletin number 121 on the SEC's website. And when was it issued?

So it was, the effective date of this was April 11th, 2022. And, you know, it's a lot of words, but the gist of it is it has an impact on the balance sheet of the banks. And so if you're holding customer assets as a custodial bank, then it is saying that you need to have a high capital ratio on those assets. So basically in the taxonomy of things you could hold as bank, it's the most in the most expensive category. Is that fair to say? Yeah, it basically treats the crypto assets as if they were the assets of the bank. bank. And so, you know, if you think about large custody banks, they, they hold like effectively trillions of dollars, I suppose, of securities and cash. And they don't get hit with a capital

charge because that's not balance sheet capital for the bank. That does not belong to the bank. And so for crypto assets, the SEC has taken the posture that you need to, if you're a bank, you need to treat crypto deposits as if they were the assets of the bank, which is only going to mean that banks will either not do their crypto custody businesses or they will just cap the amount of assets that you can accept. So you'll have, you know, crypto custody businesses that can only take a couple hundred million dollars because you just can't take that capital charge. It makes absolutely no sense. And so if you compare this to any other asset under the sun, the SEC does not treat it that way. But this is holding back banks from playing in the space in a super meaningful way.

I mean, there's five or six banks that really want to be in the custody business and they can't do it. Now, it does not apply to New York trust banks, New York trust charter institutions. So the Fidelity of the world, NASDAQ is apparently going down this New York trust path. So, you know, basically what it does is just make sure the banks can't do anything in crypto. And I guess that's the intention of Gensler's. He just wants to slow this down. And this Sab 121 is really the thing that's slowing down the banks. So there's things in every category really that he's trying. But this is, you know, one of the more pernicious ones because I think it's just a total double standard. It doesn't apply to any other asset.

And I think it's illegal. I mean, I'd be interested to see if the banks actually escalate this to the point of a lawsuit. But it seems very brazen to me. More to come on Gensler as well. Some of his shenanigans later in the episode. Maybe we should do a theme song for Gensler wouldn't. I don't know. I don't know.

Chime in Brink Nation here. What should Gensler's theme song be? something foreboding and insidious, I think. Yeah, I don't know. I don't know if we should do that or not. But, you know, apparently, you know, if you say bad things about people, they sue you. Do you see the three arrows guys are suing Mike Dutis? Yeah, that's, I mean, just clownish in the extreme.

And creating a token to speculate on the purported proceeds of that lawsuit, which obviously no U.S. court is going to take seriously. I mean, it's just ridiculous. Yeah, they're liquid. Liquidators filed something this week that they're seeking to recoup $1.3 billion from Kyle and Suzu. That's just a subset of what they owe to creditors, but that's what they say has just been outright, you know, stolen, basically. Yeah. I mean, it's weird how slow that whole process is gone, but I think the facts are going to keep trickling out here. And it's going to be indisputable. It was a matter of fraud. As we said, a long time ago on this point.

podcast and not just bad trades or anything like that. So I think the big news of the week before we get into deals and fundraising is that pickleball is just a national nightmare. Did you see this article? It said that pickleball is responsible for all sorts of injuries. We have sprains. We have, you know, lesions. It's $400 million in aggregate exposure that is costing the taxpayer in the United States. I mean, what do you think? So, I mean, no fewer than 30 people sent me this article. So, Yeah, pickleball apparently is straining the nation's health care resources, the already burdened health care system. I mean, I could see it.

I could see some injuries, but it's got to be no more than running. I think it's because pickleball appeals to present company excluded, to be clear. It appeals to a demographic of folks that are not particularly active otherwise. And so they get into it, and then they're going from zero to 100, bang, their Achilles. pops. Yeah. Yeah, that's my explanation. But I don't know.

What are we comparing that number to? Basketball's got to have a lot of Achilles pops too. Yeah, I mean, in fairness, in pickleball, you know, you're dashing up to the kitchen line. Us pickleballers, you know, that's a little piece of jargon for you. So there is a lot of actual, like, stopping and starting so I can see why there'd be injuries.

You know, what's funny, though, is I tweeted about this. I said, I'm built different because I haven't been injured playing pickleball and literally mere hours ago, I went to the pickleball court and I rolled my ankle. Oh, no. And it's rather swollen right now. How long are you out for? I don't know, but I'm, you know, I'm adding to that $400 million tally. Yeah, ice and ibuprofen.

Yeah. So nobody's, nobody's invulnerable. You know, pickleball comes for us all. Yeah. Stay safe out there. A lot of key man risk there with pickleball. I didn't realize it was so dangerous. Yeah.

All right, let's hop into some deals of the week. First one up is mythical games. This is a Web3 gaming company. They raised $37 million. It was a Series C extension. It was from Skytale Digital with participation from Anamoka, Arc, and Indrisen. Next up. Also in gaming, we have Pixion games, another Web3 gaming company.

There is $5.5 million from Avalanche's Blizzard Fund and Shima Capital. Then we have Earned Network, which is a marketplace for lending and state. they raised 2.7 million from Shima, Bixen, Marana, and others. Then we have Hutt 8, Bitcoin mining company. They have secured a $50 million loan from Coinbase. That one's kind of interesting, huh? So it looks like there's a, you know, Coinbase has custody of some of these crypto assets.

So it looks like a pretty safe loan. It's almost like the loan that Silvergate gave to micro strategy. So maybe a new business there for Coinbase. I was not aware they did this type of thing. Yeah. Then we have one trading. The business formerly known as BitPanda. They have spun out and raised $33 million from Valar Ventures, middle game, and winter mute.

Last one up is Superstate. This is the defy company. It's building on compound Robert Leshner's company. They raised $4 million from Parify, 1KX, Cumberland, and distributed global. Those are the deals. So tons of news this week. I mean, we have the ETF mania continues. Where to start.

We're going to be talking about this ETF for either a while or Gensler's just going to deny them all. I mean, Bitcoin is trading like all the ETFs are going to be approved. I mean, I guess. But also, so micro strategy bought, what was it, 12,33 Bitcoin's this week for just under $350 million. So, I mean, he is a big player in this market. Yeah. And people ask me, okay, well, where are they getting the money to do this? to be clear, it's not from their analytics business.

It's because they've a perpetual at the money offering of their equity. And when the equity trades richly, I suppose, relative to the underlying, they sell it and they turn that into Bitcoin. And then I guess if for whatever reason it ever started traded a discount for a long period of time, then they would sell some of the Bitcoin buyback the shares. So it's kind of like a, you know, kind of like an ERSAT's ETF, I guess you could say, is how that's working. Is that a fair explanation?

Yeah, I think so. I mean, he, so they just create more shares, basically. So they're just selling more equity and they're buying more Bitcoin. I mean, I guess what do you think he does if and when there's a Bitcoin ETF? Yeah, I mean, because right now they're, yeah, like they're an ERSAT's ETF. I guess there is certain kinds of allocator that would rather own micro strategy. for the Bitcoin exposure as opposed to some other vehicle, I suppose, so that's why there's a kind of a convenience factor there.

You would think that the ETF would basically eliminate that need that those allocators have to use micro strategy. I mean, I think what he needs to do if the ETF gets approved is double down on investing in Bitcoin infrastructure companies. And you have to build out an actual Bitcoin. You have to be like the consensus of Bitcoin or something. Yeah, I agreed. They'd have to go more into being kind of a studio.

And I could see that. I think there's probably a need there. And you see some of the stuff that Nidig's doing around lightning. That's very positive. I could see there being a place for micro strategy to incubate ideas and to maybe do partnerships, join ventures with lightning companies, things like that. Yeah. So maybe that'll have to be soon because, I mean, everyone seems to think there's an

ETF on the horizon. Fidelity has refiled. Is that official yet? Yeah. So Fidelity refiled their ETF application. So as of the time we are recording this, which is 9 o'clock on Thursday night, we have Fidelity, BlackRock, Arc slash 21 shares, Bitwise, Invesco, Wisdom Tree, and Valkyrie. So I'm rooting for Bitwise and Fidelity and then Wisdom Tree in that. No love for Arc.

Yeah, Arc. No, I like Arc. I'm of course biased. We're investors in Bitwise and we're Fidelity alums. I mean, you would have to imagine they would all have to be approved. I mean, isn't that what the SEC has historically said? They wouldn't want to be particularly biased towards one issuer. They don't be a kingmaker.

I mean, yeah, so seriously, if they approve one of these things and not the other ones, it is the biggest scandal ever. So I think they'll either approve them all or they'll deny them all. Those are the two options. So I have a little bit more on this. So, you know, we talked about the surveillance. agreements. It looks like a bunch of these companies that are filing have put surveillance sharing agreements back into their documents. So people saw that BlackRock tried it. Everyone's

going to try it now. My question is, is Coinbase a market of sufficient size in order to justify, you know, the SEC's posture on this? And it was talking to someone who's quite smart about this and they're saying, yeah, look, it's not a market of sufficient size. If you just look at the overall spot market, but what if you strip out stable coins? So what if you look at the Bitcoin US dollar pair? So that would take Binance completely off the table. Binance doesn't have US banking. And so your stable coin pair is really what you're looking at there with Tether and USDC. And then even some of the US exchanges, a lot of their volume is against stable coins. So I think if you were to look at Coinbase just against US dollars, you know, it's actually a lot

bigger as a total proportion of the market. Now, does that actually matter? Do you treat US dollars the same as stable coins? I mean, they're pretty similar, but I don't know. What would the SEC think about that? Yeah, that makes sense to me. I mean, I think we said this last week as well. This is a global market. So you're never going to be able to surveil and capture 100% of the volume for the commodity anyway. And it's never seemed like that was the test that other commodities were subjected to was 100% of the volume has to be trading on U.S. exchanges. So if the ICC continues to maintain that not a sufficient portion of the volume is sort of onshore, it seems incompatible with prior standards for commodity ETFs.

Yeah, I agree. I mean, look, I've always thought since Bitwise got denied, since Grayskill got denied, that even back to the Winklevost days, you could argue, that this product should have been approved. Who knows? I mean, at this point, we're going to be talking about it every single week for the next six months, probably. All right. So back to FTX, of course, never ends. FtX chief executive John Ray has released a report alleging that a senior lawyer assisted Sam Bankman Freed in siphoning out customer deposits.

the WSG reported that this was Daniel Friedberg. Friedberg was apparently involved in a prior online poker scandal, believe it or not, has apparently already flipped on SBF. What's going on here? I don't know. I mean, did you read this report from John Jay? This thing just read like whoever this lawyer was and WSJ says it's Friedberg was very in on it. I mean, just setting up all sorts of shell companies, moving the money,

moved the money to the unknown person that donated a ton of money. So they did not say that was Gary Wang or Neshad or Caroline. So I mean, to me it looked like maybe that was Ryan Salem. And Freiburg sort of set that whole thing up. This looks pretty bad. And so I wonder what Freberg's deal is with the government. So he's already flipped. It seems like he's cooperating.

But how does it work when something like this comes out where John J. Ray obviously has all of the emails and he has a bunch of the communications that we're not on signal at least. And he's laying out this book report on this lawyer number one. So does that make your government deal go away? I mean, talk about ugly. This lends more credence to my general theory that most, if not all of the executives, are not blameless here. I mean, I don't see how an enterprise like this with fraud and misbehavior on

this scale takes place without the senior folks having knowledge of it. No, I mean, there are so many executives at this company that knew exactly what was going on. And it's a real shame that they have not been brought to justice yet. I mean, some of them have cop deals, but there's a lot of them that are still free people. So I think this news broke after we recorded last week, but the prime trust situation is incredibly messy. I mean, they received a consent order from the state of Nevada where they're regulated as a Nevada trust company. And it appears that they've lost a sizable amount of customer funds. Apparently, in a case of key mismanagement, the dates all the way back to 2021, which they

subsequently concealed and papered over. Is that right? This is what a clown show this is. I mean, this is the stuff of nightmares. So it says in January, February 2021, Prime Trust reintroduced legacy wallet forwarding, and they did so because of some of the limitations on the Fireblocks platform. So they believe that these legacy wallets existed on Fireblocks or they were configured to forward the balances to the new addresses. However, on or about December 2021, Prime Trust discovered that they were unable to access those legacy wallets in the crypto therein. And so as a result, between December of 21 and March of 22, in order to satisfy withdrawals, they purchased additional crypto using customer money from

their on the bus customer accounts. That is so illegal. So it basically looks like in 2021 in December, they realized that they had this massive issue on fireblocks where they just could not get access to the crypto. And in order to make customers hole on the withdrawals, they just turned into a Ponzi scheme. So it looks like the hole is roughly $80 million. I didn't even know. There's so many things that went wrong here.

There is mismanaging the keys. There is the fact that they didn't tell anyone about it. There's the fact that they raised capital after this happened. Yeah, so they raised $100 million after this. And apparently they must have just used that $100 million to plug the hole. And this is, this kind of reminds me of Kodriga a little bit. I mean, where you had Kudriga executives trading to try and make up the hole. in this case, they ended up with a lot of the Audius token, I believe.

So that explains it, right? So I was trying to think, how were they actually thinking about like plugging this hole? Because they're a custodian. They're not a trading firm. And then you see that they have a ton of Audius. So you actually think they were just trading. Yeah, yeah, yeah. So I don't think it's that they just happened to be cusseting audits.

I think that they were trying to make it back by trading. Oh, my gosh. So this is actually a catastrophe, though, because hundreds of firms were using Prime Trust as their whole backend infrastructure. Many of the sort of well-known Bitcoin interfaces, Bitcoin buy and hold apps. A lot of them move to Fortress. That's also questionable. Some of the same people involved in Prime Trust as Fortress. So I don't know about that.

There are a lot of FinTechs use Prime Trust. they were a Nevada trust company. This is a huge blow for that state model. That's going to be tons of ammo to federal regulators saying, hey, we can't trust the states to regulate these crypto companies in orderly manner. It has to be federalized. So I think that's one of the worst things of this,

is Nevada didn't have an adequate supervisory regime in place. They didn't have anything on the books like Texas does now with the proof of reserve law. where if you have a Texas MTL and your custodial institution, you have to literally cryptographically prove that you have the assets and that you have access to those keys, right? If that had been in place, we wouldn't have had this problem. So not only is the bad for the firm's affected,

and I suppose we'll find out what the exposure is there, it's just also a really big blow to sort of the state model of regulating crypto custodians. This is what happens when you combine low IQ with low integrity, basically. So it's one thing to mess up your fireblocks instance, and these guys should have been using a disaster recovery. I'm actually pretty skeptical here until I actually see the wallets. So show me the wallets with the crypto in them that you can't get into. But, you know, I am reserving judgment.

This could be far more pernicious. But the second you realize you don't have access to them, you have a fiduciary obligation to go to the proper authorities and to wind this thing down. Right. I know. And it's particularly bad. they were a custodian as a service. And so there are potentially hundreds of firms affected by this. Many of them, I suppose, got out left. We don't exactly know, will there be clawbacks? Unclear. Can you have a clawback on this? I mean, a lot of these firms that moved over to Fortress

Trust, they were, I mean, basically Fortress Trust is Prime Trust with a different name. All the customers moved over. These firms that move may have known. And so the, You know, the prime trust estate now. Maybe there'll be a case to make for clawbacks. There's a big debate about this on crypto Twitter this week. Caitlin Long seems to think clawbacks are actually on the table. She had a threat about it. Yeah, I mean, this is ugly.

I think Nevada needs to take care of this pretty quickly. Not good. All right. What's next? Did you see this House Financial Services Committee? They have sent a letter to SEC Chair Gary Gensler criticizing his record-keeping practices, inadequate responses to their inquiries.

Do I read this right that Gensler and people in the SEC are corresponding on Signal? Yeah. So this one is particularly ironic, I think, because if you are a regulated financial, if you're an RAA, for instance, you registered, you have to have an ironclad document retention policy, communication policy. You're not really allowed. If you've ever worked at the Wall Street firm, you know, you're not really allowed to communicate out of band.

It has to be on whatever, the Bloomberg terminal chat. It has to be on, you know, some platform where there is retention. It seems that the SEC themselves are not following this. So the House Financial Services Committee sent a letter. They found out that SEC had met with CalPERS talking about climate-related issues, apparently, 13 times. But then in the disclosed... in the disclosures, the SEC only disclosed, I believe, two meetings with CalPERS. So basically, there's a lot of meetings that they're having that are off the books where there's no record of them happening.

Why? And for the regulator, this is unconscionable. Why would you do that? Why would you do that? They're not adhering to the standard that they ask of the firms that they regulate. So did you see Jake Clayton was on CNBC? and you know I love how the whole industry is like oh jay clayton great i mean this guy was terrible as an cc chair as it really he hated crypto yeah i mean now he's perfectly willing to go

accept paychecks from venture capital funds and crypto companies but the guy did the guy was a total joke as an cc chair what's he's got the worst timing in the world he hated crypto when he was in a position of power and now he loves it yeah he's a complete hypocrite however he had some good And he had some good points on the SEC's current posture towards lawsuits. He basically said when he was the chair, they only brought lawsuits that they really thought they could win. And under the current leadership, the SEC is very willing to lose a bunch of lawsuits in court. And so that's not how it should operate because you're bringing these lawsuits not with just taxpayer money for the staff, but also all these external lawyers that you're hiring, which is an unbelievable amount of lawyers.

And so there's a lot of taxpayer money going into this. And so he's right to point out that this is kind of ridiculous. So the SEC is just willing to lose all sorts of lawsuits and just waste taxpayer money. That's not really what you want out of the SEC. Well, frankly, I'm okay with them going for these marginal cases if they think they have a case. I just think politically it's not a smart strategy because if they start racking up L's, then Washington is going to be like, well, what are you doing here, SEC? Why are you losing cases and you're spending all this money?

So whether or not it's the sort of right move for them in terms of their mandate, politically it's going to start to look really bad. And they do seem to be on the verge of losing some of these cases, right? Yeah. So when's ripple is coming soon, as always. We've been saying ripple's coming soon for the past six months. There's the gray scale case. I think people.

Yeah, they should lose. The SEC should lose that. They'll lose that one. And as a reminder, that doesn't automatically mean, GBDC gets to turn into an ETF, even if Grayscale prevails in that case, the SEC could just go back to the drawing board and find another reason to deny the GBDC conversion. So that's not necessarily slam dunk even if Grayscale wins that case in court. Agreed.

So more on the SEC. So House Financial Services Committee Chair Maxine Waters. I guess she's not the chair, though, actually. Yeah, minority. Minority. Yeah. So I guess that was wrong in this publication. but so Maxine Waters in any event has sent a letter to Gary Gensler it is dated the 23rd of June

and it's asking him to delineate how the market structure proposal would impact the SEC's existing authorities she sent a similar letter to Yellen basically asking for how it would work with the Treasury's posture on this so for those who are you know living under Iraq I guess the digital asset market structure proposal is from McKenry and Thompson. So McHenry is a Republican out of North Carolina. Thompson is a Republican out of Pennsylvania. And I think it's a step in the right direction in terms of how this market should operate in terms of which tokens are securities versus commodities, who has oversight, what it takes to move a protocol from a security to a commodity. And I'd like to see that move forward. I think as an industry, we should be pushing for it.

I think it is, it's probably a good sign that Waters is asking for input. And the theory would be on the stable coin bill last year, when Waters was working on it with McKenry, that bipartisan bill that actually did not go anywhere, people say that Gensler behind the scenes was one of the reasons that that did not get off the ground, that he was posturing that, hey, they had it under control. This would actually not be good. And so that's why it fell apart. And so people think, some people think.

that this is water is just trying to get Gensler on the record in terms of what he actually thinks so that she can take a stance one way or the other. So do you think it goes anywhere? I'm probably more optimistic that the stable coin bill goes somewhere because I think you look at stable coins, it should be a bipartisan issue. If you want to proliferate the dollar internationally, you want to get more entrenched as a global reserve asset, you do stable coins. And you really have to be pernicious, Elizabeth,

Warren type of person to be against stable coins. I mean, there's really no reason to be against a stable coin bill that just makes it better for the U.S. government to export dollars, really. On the market structure bill, I'm less optimistic because I, right now it's just the Republicans that are on board with this thing. And I think you need Democrats. You're going to need some Democrat votes here. I mean, the market structure proposal, to be clear, would do more for this industry than any other proposal that we've ever had in the history of this industry. It would clearly say what's the security, what's not. It would clearly say which regulator is in charge of the spot markets.

It would allow broker-dealer's and banks the ability to enter these markets. It would allow tokenized assets. I mean, this thing is super comprehensive. And I think you would have a 10x type of capital formation environment that would be akin to the Telecommunications Act of 96. if you look at it through the internet analogy. However, the Democrats just can't be moved on this so far. So I'm pretty bearish on the market structure proposal.

On the stable coin front, my podcast recommendation for the week, aside from this podcast, is Odd Lots with Josh Younger, who I think is currently a JPM or former JPM, which was on the history of the development of the euro dollar market in the 60s and 70s. and I realized listening to this that the development of stable coins is mirroring the way that Euro-Dollars came to exist. So Eurodollars are basically dollar liabilities issued by non-U.S. banks, right? And a convoluted system of swap lines emerged to link these banks to the Federal Reserve

so that the banks didn't get too offside and having an asset liability. mismatch. The reason this happened was because people wanted to pay higher rates of interest that weren't necessarily payable under the U.S. regulatory regime because they wanted transactional privacy. They wanted more freedom, basically, transactionally, and they were more able to do that from a European base of operation, still using dollars as opposed to using the Federal Reserve system. That's what's happening with stable coins. Our regulatory regime is sclerotic. You can't have an interest bearing stable coin and frankly regulators are waging a war against stable coins here in this country. So people still want dollar liabilities, right? They want to use dollars

on chain, but now they're starting to issue them from offshore banks. They want to pay interest on stable coins that has to happen outside the U.S. So it seems to me that the same factors that drove the creation of the euro dollar market, which now bigger than the offshore dollar market, are also driving the development of stable coins. So strongly recommend that that Odd Lots episode. It was very, very edifying. So the Odd Lots podcast, I thought you were going to say that your podcast recommendation was Laura Shin's Prometheum debate, which was pretty awesome.

That was very revealing as well. That was, she did a great job with that. I mean, that was not an easy interview. So they had Rodrigo from Paradigm who equipped himself quite well. And then Aaron Kaplan, who did not. Yeah, so he was saying that, You can fill in the requisite disclosures for a crypto asset if you're treating it as a security on the exchange. And you just put not applicable in every field.

Yeah, you just put NA. And you still can't list any assets. This guy has no assets on his platform. It just doesn't make sense because none of these crypto tokens are acknowledged as securities. It doesn't make it. So you're going to live in a world where EDX is listing Ethereum as a commodity. and Prometheum is going to try to list Ethereum as a security and just put N.A. on a bunch of the forms. Like, what are we talking about?

But here's an interesting angle there that I saw, I don't know who was the source of this. So sorry for not crediting you. You would basically have at this point Prometheum alleging that various crypto assets are securities if they carry out this process. And at that point, that can be perceived as kind of precedent setting. and at that point, you'd want to see the foundations or the folks behind some of these L-1s and these tokens really aggressively pushing back at Prometheum's assertion that they are securities. So I think you'd actually see litigation. Of course.

You'd see litigation in a heartbeat. And the other thing that Prometheum is trying to do here is they're trying to get an exemption under Rule 144, which is basically a lot of this applies to private securities, but you have to hold the asset for a year, prove that you've held it for a year, and then you can trade it on the secondary market. It's similar to how GVTC, I think, originally operated. But you can't, there's no precedent for doing that with a crypto asset. So some of these questions that some of the members of the House Financial Services Committee that were asking, have you gotten a deal with the SEC? Like, do you have exemptive relief on anything? I think the path that they're going down is

They want exemptive relief under 144. They'll try to apply it to crypto. And you just can't do it. I mean, it doesn't make any sense. So speaking of taxonomies, actually, the biggest taxonomy news of the week, this kind of flew under the radar a little bit. The UK law commission, which I believe is a body that advises parliament, they came out with their final report on what a digital asset is.

under British property law. And it was absolutely fascinating, to me at least, and very encouraging. So basically the complete diametric opposite stance that the SEC is taking, the SEC is saying existing law is suitable. There's nothing new happening here. We don't need to carve out a new taxonomy.

All these things that you were created, they are fully accounted for under existing law written in the 1930s, right? Yeah. The UK is taking the complete opposite position. So let me briefly summarize this. It's a very long report. In British law, there's two kinds of things that have property rights attached to them.

So they're literally called things. So there are things in possession, so like a physical thing that you can possess. Or a thing in action, which is basically a legal claim. So it could be intangeload. but you still have sort of a legal claim to that thing. And they considered it and they thought, well, digital assets aren't actually either one. So they're not a thing you can possess that easily. You can't really possess it that clearly.

It's intangible. But it's also not a legal claim, but it's still effectively a form of property because you can use it if you have knowledge of the keys. And so they defined a new third type of thing. That's interesting. They called it a third thing, literally. They called it a third thing. thing.

Wow. Which just brought me a huge amount of mirth, honestly, the fact that they were like, well, we don't know what we're going to call this thing, so we're going to call a third thing. I like what I'm hearing from everything that's going on in the UK right now. Yeah, honestly, a rare W for the UK, I would say. So basically, they are now basically recommending to Parliament that they carve out a new type of property law. And so this kind of mirrors what we were talking about on that Wyoming podcast with Chris Rothfuss, where they formalized what a digital asset is under the uniform commercial code. This is the UK doing something similar.

So I think Parliament still has to act, but from what I understand, this body is pretty compelling. And so, you know, in the report, they say they want to reduce regulatory uncertainty as opposed to what the SEC is doing, which is create as much uncertainty as possible. They took industry feedback. They actually consulted with the industry. They acknowledged that crypto introduces a new challenge that's not necessarily captured under existing law. They want digital markets to flourish. They said in the report, quote,

we should try and avoid the creation of a new legal and regulatory regime that will discourage the use of new technologies rather than provide the foundation for them to flourish. They also say we conclude the detailed and technology-specific guidance will facilitate clear logical and consistent applications of legal rules and reasoning over time. So we'll put this in the show notes. It's a little bit esoteric and kind of hard to read.

But from what I can tell, there's good things brewing in the UK. I love it. I'm ready to go. Are we going? Yeah, I'm fired up. Rishi Suneck, he's doing something right. Isn't it, do they, what do they have, like warm beer? Is that the thing in the UK?

Yes. They drink their beer warm. Yeah, I don't know. All right. There'll be some things we have. I just too. Speaking of beer, I went to Pubkey last night. Pubkey is the Bitcoin bar in New York City.

That is by far the best bar I've ever been to in New York City. Maybe with the possible exception of Professor Tom's, which is a Patriots bar that was just the best, that was actually the best bar, but now it's out of business. Pubkey is now the best bar. So you wouldn't know, though, that Pubkey is a Bitcoin bar if you just walk in off the street, right? Well, it's not that there's like a Bitcoin ATM or anything there, but it's just filled with Bitcoin people. It's owned by Bitcoiners, owned by Thomas Pachia and some of his friends.

And it's just a great vibe. I mean, there's Bitcoin stuff all over the walls. They want us to go down there and do a live recording, which I definitely think we should. Well, we'll make it happen. We'll make it happen from Pubkey. We'll do it. A lot of former Fidelity people actually there. I saw there's all sorts of Fidelity alumni there that you just bump into randomly a Pubkey in New York, which is just, I guess, the greatest crypto city in this country right now. So any plans for 4th of July? I was going to grill. I think that's what you have to do on 4th of July.

Yeah. Grill meets, yeah. That's, yeah, what about you? Parade and grilling, I think. I was thinking about doing a road race. Like running? Yeah. What kind of distance?

I think it's a 4.5 mile road race, which is a little bit of a weird distance, but I did it a couple years ago with our partner, Sean, and might do it again. People don't know this, but you were actually a collegiate runner. I was, yeah. That was like 25 pounds ago, but those were the days. But you can still run four and a half miles.

Yeah, I can dial it up when I have to. So I might do that. Enjoy some grilling. Happy birthday, America. We have a new episode coming out on Monday on lightning infrastructure in emerging markets. Stay tuned for that. Well, it's a dangerous weekend.

Careful of those fireworks. Have a safe and healthy weekend. And we will see you on Monday.