On The Brink with Castle Island - Weekly Roundup 07/09/26 (BonkDAO exploit, Choke Point 2.0 extended to audit firms, Kraken v Mazars) (EP.729)

Episode Date: July 10, 2026

Matt and Nic are back with another week of news and deals. In this episode:  Strategy sells $216m worth of BTC Where does Strategy go from here with STRC? Kalshi's case faces the ban of sports contracts in NY TeraWulf signs a massive lease with Anthropic BonkDAO's legal hack Vanguard hires a head of digital assets Kraken wins arbitration against Mazars for de-auditing them in 2022 Vitalik lays out a new four year plan Polymarket's 5 minute BTC markets are being manipulated Content mentioned: Settlement Manipulation in Prediction Markets  

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

The federal government loans American International Group, AI, $85 billion. This is a different kind of market, and the Fed is asleep. The federal government is stepping it to stabilize Fannie Mae and Freddie Mac, the two mortgage giants that have been threatened by the housing crisis. The Bank of England has pumped 75 billion pounds more to Britain's ailing economy with a new round of quantitative easing. And 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 Brinkum, Matt Walsh. And I'm Nick Carter. I watched my first full soccer game. the USA Belgium. USA Belgium. That was awful. I mean, are we always that bad?

It was really bad. It was terrible. It was historically bad. No, I mean, actually, it was a surprise because in previous World Cups, the U.S. has been really scrappy. You know, actually played Belgium in a previous World Cup. And even though we would typically lose,

we would push these better teams to the limit. In this case, we actually brought the best team we've brought, the most skilled team, and just fell apart. Yeah. Horribly. I mean, it looks like we weren't even trying. That Pula Sitchka, who everyone says is the best player in the world, he looked terrible out there.

He actually looked like he wasn't trying to play soccer. I mean, he's pretty good on his day. I mean, he's certainly the most skilled player the U.S. has ever had. But, yeah, he was injured, I think. And then the defending was just horrendous. Tim Rehm in particular, the central defender. I mean, that third goal we conceded where the keeper came out. Yeah, what was that?

It was one of the most embarrassing goals, I think, I've ever seen conceded. Yeah, I mean. Really, really bad. It's a pretty small country we were playing against. What is it, the size of, like, Connecticut or something? And it's remarkable that we couldn't put together a better team to give them a run. Yeah, I was a little shocked by it. Even though the Belgium team is, you know, better,

skill for a skill but yeah so have you for sworn the rest of the world cup are you going to see it out i think i'll watch the finals i guess but it's not that exciting to me it remains pretty uninteresting generally i don't understand the hype the this world cup has actually been pretty thrilling i saw a little i saw the penalty kicks in that game a couple nights ago what was it switzerland oh yeah penalty kicks are fun penalties yeah the whole game should just be penalty kicks honestly it's way more exciting But yeah, all right. Well, I'll watch soccer again in, you know, four years. So we haven't converted you.

No, but I think football season starts in like 65 days, something like that. So we got some stuff to look forward to. Yeah, I will be at the England-Norway game this weekend. Oh, awesome. So the whole world is rooting for Norway. So everybody likes Norway. Because what are the big-time underdogs here? They're underdogs, but they have arguably the best striker in the world.

this guy Erling Holland. Who's this enormous, he looks like a Viking. Really? So everyone likes them. And I guess people like to root against England, which is they're right. All right, let's hop into the deals of the week. First one up is Paradigm, the Crypto VC Fund. They have raised $1.2 billion for their fourth fund,

and they say they will be focused on crypto, AI, and robotics. Yeah, congrats to the Paradigm team. Next up we have Mercado Bitcoin. They're a Brazilian, Crypto Exchange, they raised 20 million from Tether. Then it's Gontlet, a DeFi Risk Management platform and vault infrastructure company. They raised $125 million from SBI Holdings. That's a big raise.

M1X Global, they're a tokenized sovereign debt platform. There is 5.5 million from Paradigm and Breed VC. Then it's extended, which is an on-chain perpdex platform. They raised 12.5 million from Eturo and Jump Crypto. Fia is a behavioral AI network building on Salon. There is $8 million from Maven 11, Spartan Group and others. So not a ton of deals this week. Generally, kind of a quiet week.

It got started with an 8K filing on Monday from Strategy that they have sold $3,58 Bitcoin for $216 million. It's the largest sale of Bitcoin strategy has ever done, bolstering up the cash there. although it was a little confusing because there was a good post that suggested actually that this does not count against their cash reserve. So they haven't actually bitten into that number that they filed last week in terms of building up the cash reserves. I don't understand how they're counting this. But in any event, they sold $216 million worth of Bitcoin.

It's a good start. but you were suggesting they should probably sell a bit more, right? I mean, that's what I probably would have done, but Sailor could easily just take the posture that he has enough cash on hand to service the preferreds, and he can just hope the price of Bitcoin goes up. So that's definitely a strategy. It seems like the one he's taking.

Price of Bitcoin has gone up. It's interesting. Usually execution quality is not what micro strategy is known for, but they were selling as the price of Bitcoin was going up here. So it didn't have a ton of market impact. It also seems like there's a lot going on behind the scenes. So Bloomberg had a report this week that there are a lot of distressed debt shops that are buying up STRC in the hopes of swapping them out for either an additional preferred from strategy or common shares.

It sounds like there's bankers on this. So it's possible that they're going to figure out this preferred situation, this overhang, in a structured way. And you've seen that with STRC running up a little bit. Yeah, it has recovered. I mean, the low a couple weeks ago was 71, it's back to $85. It hasn't fully regained par at all. You know, I saw some takes saying that the sale of Bitcoin makes strategy more credible

and able to issue even more STRC in the future. I don't know if I really agree with that. I mean, I guess what it does is it kind of makes the case that they're not completely irrational and that they will right-size the Bitcoin hoard as necessary. But I don't know if selling Bitcoin makes a future STRC buyer that much likelier to buy STRC. I agree with that. I think they're 8K from two weeks ago where they said that we will be buying Bitcoin,

we'll be selling Bitcoin, will be accumulating cash, will be. accumulating cash, we'll be dispersusing cash, we'll be buying our equity, it'll be selling our equity. It basically just said, hey, we're going to actively manage this balance sheet, as opposed to being religiously long Bitcoin, which I think some people thought that's what they were. Yeah, and it was advertised as it was, the point was meant to be just accumulate Bitcoin. Yes. I don't see how this really wins them that much praise with the hardcore fans. I don't either. I mean, I think the fact that they started with the converts was very logical, because if the price of Bitcoin goes up, you can have the conversion into equity. It seems like that could be less dilutive if you think that Bitcoin will continue to go up. These preferreds just create a kind of an overhang. I'd be pretty surprised if they can continue to issue STRC. I wouldn't be shocked if it gets towards 100 again under certain circumstances, but I just don't know how much appetite there will be. Yeah, I agree. If I were them, I wouldn't issue anymore.

Yeah. I mean, they've gotten themselves into a huge pickle with it, and now it's been off peg for almost two months now. Yeah. I don't, I'm not seeing a ton of appetite in the market for more SDRC at all. I'm not either. So Tara Wolf, the Bitcoin miner, turned now, I guess, AI infrastructure developer. They signed a 20-year lease with Anthropic, which is expected to,

generate 19 billion in contracted revenue. Congrats to Paul and the rest of the team at Terowulf. Wow. That's a huge contract, huh? It shows you that these Bitcoin mining companies really just had it all figured out in terms of the infrastructure. I don't know if they had banked on AI happening, but when it came time to look towards who had the infrastructure to stand up and service some of these hyperscalers, they were in the right place, the right time. Yeah, well, I don't think they planned on AI bailing them out. I mean, I think it's just called getting lucky. But not every Bitcoin miner was able to do the transition as elegantly.

Terowulf has done an incredible job of turning itself towards AI. But it's interesting because now you're seeing these AI labs going directly to power providers as opposed to the neoclouds. So it's almost like they're trying to disintermediate the neoclouds. If you started from a blank slate and you could not have to deal with local regulations, I think nuclear would be the winning strategy here, don't you think? I saw a chart today showing the cost to build nuclear. And in the U.S. is just going up and up and up since the 70s.

And then in China, it's collapsed, which shows that it's not fundamentally expensive to build nuclear. It's just the regulations that make it expensive. So we've chosen to make nuclear expensive in this country. And I get it. I mean, you wouldn't probably want a small nuclear reactor in your backyard. But, you know, putting it out in the middle of nowhere somewhere, that's probably a little bit more appetizing. We've had small nuclear reactors on ships for decades. It's true.

Right? And they work just fine. A perfect service record. Yeah. It just makes people nervous. But I do think that that's the technology that could really be. be driving a lot of this AI adoption, but unfortunately, we just probably won't have it in this country for many years. So I thought maybe the, it was a kind of a tragic, but also comedic story,

is the Bonk exploit this week or Bonk Dow transaction. Did you see this? Yeah, so this is crazy. So the Bonk Dow, and for those of you who are not familiar, Bonk is a project built on top of Solana really was kind of post-F-TX. This was kind of one of the projects that pulled Solana out of the doldrums, I think. But they had a big treasury. Apparently, someone came in and just started accumulating the tokens. Someone spent $4.4 million worth of cash, U.S. dollars, on bank tokens. And then they introduced a governance proposal to essentially send $20 million to themselves.

and the thing passed. So there's no code exploit. This was just people being asleep at the switch and they voted themselves the tokens. You can't make this up. Yeah, I mean, now Bonk is trying to explore, you know, legal reactions. I don't know what they can do here.

But it's a completely valid thing to do. I mean, they bought 1% I guess of the Bonk tokens and submitted a proposal to give themselves $20 million and it passed. Only seven of the 18,000 members of the Dow voted. There was no exploit. This is a valid proposal. And to the victor goes the spoils.

Do you do it over like the Fourth of July weekend here? And I don't know. Maybe people that hold bonk just generally aren't in the governance forums. But I've never seen anything like this. I mean, I guess there have been governance attacks in the past. It's just kind of hard to pull off. I mean, normally it's like some affiliated company that controls governance just votes

to pay themselves a lot of money, so you get corruption that way. But this is much more explicit. I mean, I think Dow governance is at a low point. I mean, even Dow's themselves, you know, aren't as active these days. I don't know if the solution is to have, like, AI monitoring or to have activists getting more involved.

I mean, I think that's part of the problem is there's no professional entity that's monitoring or managing the bond of treasury. Yeah. No one's watching. Did you see this Kalshi story this week? So a federal judge has denied Kalshi's request for an injunction in the state of New York. That judge has ruled that the Commodity Exchange Act does not preempt local state gambling laws. So now this case is going to go back to the state level where I would think that Kalshi could lose and see its sports event contracts banned in the state of New York is my guess on where this is going. So quite interesting here.

And this goes counter to obviously what Kalshi and Polly Market have been pushing for. And actually what the CFTC has kind of come out and said that they have authority on these markets. Yeah, I mean, it's a tough potential result for Kalshi. and also in theory probably a precedent that will matter in other states. And I think it could well end up being the case that they just have to turn off sports betting. We should have someone on talking about the legal path here because it seems like this will go to the Supreme Court. And I don't know if it'll be this case that moves its way up to the Supreme Court or if it'll be another path. But inevitably we're going to have to have some higher court.

Ideally, the Supreme Court just rule on how sports gambling. ought to work in the context of prediction markets. So there was an interesting paper on prediction markets this week, written by David Dye and Shehow You, and it was very, very clever. They found that the polymarket, so Polymarket has these five-minute Bitcoin contracts. So you bet on up or down.

I mean, I don't know who in their right mind is doing this. That's a true D-Gen activity right there. So if you do do that, you really shouldn't. All right. And this paper says why, because, you know, whoever it is, traders are manipulating the underlying reference price on, I think, Binance to basically banging the clothes. No way. So right as this, every five minutes, they non-jop or down the price of Bitcoin. and this is statistically proven

if you look at it on the chart in any given five minute period of Bitcoin's price it should be basically flat or like whatever slightly up or slightly down right if you average it altogether but if you chunk all these out

and add them together you can see that there's a massive spike at the end that's crazy so they don't have an index reference rate methodology they're just referencing one exchange for the pricing yeah so the

Polymarket five-minute contract just references finance? Well, that's a mistake. I mean, that's easy to manipulate in that case. So this should just have a... Well, I mean, it's the most liquid market. In theory, you could manipulate 10 markets a once. I guess it would just be harder. I mean, you should probably just do it

the way the ETFs do it, right? And just have the index built around a constituency of exchanges, ideally ones that are not manipulated. Can you stop someone doing this? Maybe not. I think you need to just change the derivative. Don't sell a five-minute up-down product. Oh yeah. I mean in the first place it's

just a totally it's catering towards professional gambling addicts. Yeah, whenever there is a derivative that's very liquid and option-like and there's money to be made on by manipulating the underlying index, it's going to happen. So you have to change, I think, the settlement methodology for the five-minute contract to maybe a window, a 30-second window or something. So make it much more expensive. But, yeah, anyway, don't trade the five-minute Bitcoin product on the polymarket. Just, yeah, go for a walk if you're thinking about doing that. Just do something else.

Yeah, don't do that. Here's an interesting story this week, Vanguard, which I would say, safe to say, the executives at Vanguard hate blockchains historically. they're definitely the last of the big asset management firms to get on board with anything here. I guess State Street's been very delayed too. But in any event, Vanguard posted a role. It's for head of digital assets. It is an executive who would build out a multi-year roadmap, spanning tokenization, stable coins, and custody.

And then everyone kind of got up in arms on Twitter and said, oh, look, they bent the knee. They apparently then released a statement saying, no, we did not bend the knee. but we are continually continually evaluating emerging technologies including blockchains and tokenization. So I don't know. Someone's trying to do something over at Vanguard, which I thought was kind of interesting.

I mean, it sounds like they've bent the knee, right? You know, how could it not be? You have a role that says head of digital assets and you historically have said, we're not doing anything here, so you kind of bent the knee. Unless you're going to pointlessly pay this person

to twiddle their thumbs. Sounds like you're doing something. Look, those roles exist. We know. So for sure. We know some great people in this industry who are doing those roles. So there is such an interesting thing this week with Cracken. They won a $22 million arbitration award against their former auditor, Mazars.

Is it Mazars or Mazars? I have no idea. Well, they abandoned them, I guess, days before their audit opinion was due, I think, back in 2022. Yes. and this was another aspect of Operation Chugpoint 2.0. There's so much to talk about here. So first of all, good for Cracken for putting this all out in the public domain and good for them for getting $22 million from Mazzars or however you pronounce it

because they got done so dirty here on this one. And if I'm Mazzars, and we should get into this, do you just send the $22 million bill to Elizabeth Warren because that's the reason they dropped them? Yeah. I mean, I actually feel bad for Mazzars a little bit because for background, FTX collapses in late 22. Choke Point 2.0 begins in earnest.

Basically, the senators start writing letters to all the banks and the regulators saying don't support crypto companies, don't bank them. At the same time, they write letters to the regulators who run the audit side of the industry, the PCAOB, AICPA, and they say, basically all crypto audits or shams. Elizabeth Warren was writing a lot of these letters at the time. It's the exact same pressure campaign. They target the regulators to get the service providers to de-risk an industry.

Happened with banks, happen with the auditors. No one talked about it at the time. I complained about it a little bit because I saw it happening. And then all these audit firms sort of de-auditing the crypto industry. and the big four were really very unwilling to serve crypto. Some of these boutiques were serving crypto, but then the boutiques quit, like Arminino quit, Mazars quit.

I think Grant Thornton was doing it a little bit. They quit. So in particular with proofs of reserve, the proofs of reserve came under a lot of scrutiny. Yeah. So I think Mazur's South Africa was doing proofs of reserve for Binance. So, you know, finance generates the proof and then the auditor looks at it and issues and agreed upon procedures,

which is basically saying, we looked at it, it looks good. It's not a full financial statement on it. And I think that is what brought them under significant scrutiny. Yeah. And so then Mazur said, okay, we're actually just going to quit all crypto entirely, including Cracken. And this is a big problem because if you're a serious company, you need an auditor. Totally. I mean, they left Cracken in such a tough spot here. Here's a company. that was gearing up to eventually raise growth equity. They're on a public path. Having their auditor walk away with no notice is a huge problem.

They deserve probably more than $22 million. Yeah, and Cracken wrote a post about it saying Mazard confirmed in writing that they had no issue whatsoever with Cracken, no fraud, no disagreement, no nothing. But they had to abandon the audit. So obviously they were under pressure basically from Elizabeth Warren. And I remember the letter very clearly. Yeah, we talked about it. We did.

And it's just such a disgrace, man. It really is a disgrace what these wayward senators can do. I mean, try and find every possible pressure point to harass an industry. And it's so awful to try and persuade audit firms to not service illegal industry to make the industry less credible because they can't get audit. Right. Right. I mean, like, who are you protecting by persuading an audit firm to de-risk a client?

You're not protecting anyone. No. So they wanted to strip the industry of the things that made it credible. I mean, it's just terrible. I mean, the playbook was pretty well executed, I would say. So they went after the auditors, tried to get them to back away. Through the SEC, they were able to get the banks to not custody. So there was, you know, they were very covert here.

These were not headline-grabbing events at the time, unless you were really paying. attention. And I think it continues just on this bill. So Elizabeth Warren last night tweeting, as currently drafted, the Clarity Act is a ticket to sanctions evasion. That's crazy. I mean, there's an entire section of this bill talking about compliance and new rules of the road. So you have other senators, luckily, that are jumping in and critiquing her for this take. But talk about bad faith. Yeah, I mean, it's just, and like in hindsight, we know that the proofs of reserve were pretty good and, you know, the Cracken wasn't running some kind of scam or anything like that.

I mean, you know, in hindsight, the concern was ridiculous. And also, even if you don't like an industry, there's no, like, there's no justification for trying to strip them of their audit coverage. No. If the auditor finds something, they can talk about it, you know? There's procedures for auditors to express disagreements with management. completely what possible cause is there for you as a senator to come in and say this

citizen doesn't deserve any audit relationships whatsoever i mean it's just insane so good for crackin yeah good for cracking here's an interesting one so vitalic buterin came out this week and said that ethereum's next major upgrade will take three to four years and that it will rival the merge in terms of significance it will be called lean ethereum there will be a quantum resistance a piece of this. There will also be a privacy component. Three to four years, I hope it doesn't take them that long to get to the quantum piece, but, you know,

glad to hear about the privacy, I suppose. Well, they've said 2029 for quantum. That's the official quantum date for them, which is now in line with what Microsoft and Google and Cloudflare are doing. So I think it's funny that

Vitalik keeps putting together these timelines, because it's just like keeps people looking forward to something. It's actually very clever psychologically, don't you think? I think it is. I mean, it obviously, it needs to happen just because Ethereum's just not fast enough and it's losing out on a bunch of different use cases here that are gaining traction. So it does need to upgrade. And quantum, of course. I mean, this is a hugely important piece of it. I think that we're at a very interesting time where enterprise blockchains are actually striking back here against public blockchains. I mean,

you know, taxonomy might be slightly different, but, you know, you have tempo, canton's doing well, you have Robin Hood chain. Robin Hood chain is the thing now? Yeah. And Swift now? Swift? Yeah, they have a bunch of press releases. Are they actually doing anything?

No, there's an announcement today. I didn't even see that. So maybe it's the case that the enterprise trade actually, is the winner in the end and what everyone thought was true in 2015 ends up being true. I mean, people hate on the enterprise chains. I definitely don't like the private

versions of these, but the ones that are succeeding right now are the ones that are actually solving real problems where some of these public chains just aren't really built for these use cases. You know, it's tough for a big bank to get comfortable with a collateral movement use case where everything is visible publicly on chain.

It's just never going to work. it'd be funny if Vitalik said at any point we're done. Ethereum's complete because at that point, that would be very bearish, right? Yeah. Because then there's nothing left to look forward to. So he has to string Ethereum's along perpetually. What do you think would happen if Vitalik announced that he was retiring? I mean, I think Ethereum could survive it.

It might even actually be good for Ethereum. if it moved to more leaderless governance. Yeah, it doesn't seem like there's a central dependence there, but certainly he's the intellectual fulcrum of that ecosystem. So we mentioned the market structure bill briefly. CFTC chair Michael Seleague came out today, and he said that regulators will be writing all the rules for digital assets if Congress fails to pass the Clarity Act.

That sounds good to me, it's Sealing and Atkins writing them, but I don't want to have, you know, the next Gary Gensler writing them is my take on that. Yeah. No, it's just past clarity. Why don't we just do it that way? We're just past clarity. We're kind of running out of time here, though. I think we need to, like, get on the floor and start debating this within the next two weeks. Yeah, so clarity is still trading at 45 percent, which isn't terrible, but it's very much down from 75 percent in mid-May. I mean, do we think Mitch McConnell's going to be voting for clarity? We got some problems here, just getting to quorum, I think.

Well, we're not entirely sure if Mitch McConnell is currently alive. Correct. Yeah. So I think that would be a problem here. But, yeah, we are kind of getting down to it. But there's a lot more chatter here from the senators over the past week. So people seem to be indicating that it's moving forward. But it's just really hard to get a read on.

Sometimes you get a lot of leaks coming out of processes like this, but I'd say it's been pretty quiet. Yeah, it really has very unclear the way this is going to go. All right. So I think that is it for the week. So I guess are we rooting for England? Is that the plan here? Well, it's your choice, really. France is about to play Morocco.

That's going to be contentious. People say France is going to win the whole thing. Are they the favorite? Yeah, I mean, they look like the favorites. But Argentina has really been getting a lot of favorable refereeing to say. I think I'm allowed to say that. They've been getting a lot of help from the refs. I was very confused.

So, Messi is still really, really good, even though he plays in the MLS, huh? I hate to say it, but he is the greatest player of all time. But don't people usually come to the MLS once they're washed up? Isn't that what Beckham did? Yeah, I mean, you know, stepping foot on U.S. soil doesn't magically make you terrible soccer player. I mean, he's still very good. My impression was that you would only play in the MLS if you'd,

couldn't play in the other league. So I guess maybe we were getting better on that dimension. Or maybe he just got paid. Yeah, I mean, the NLS is getting marginally better. But he, I mean, he is very close to retirement. He's old. Yeah. Well, that was talking soccer. Yeah. All right, everyone, have a safe and healthy weekend. And we'll see you.