On The Brink with Castle Island - Weekly Roundup 07/22/22 (More insider trading, SEC regulates via enforcement, more 3AC shenanigans) (EP. 335)

Episode Date: July 22, 2022

(Reuploaded, fixed audio) Matt and Nic return for news and deals of the week. In this episode: Inert ETH from the crowdsale? Why the credit crunch is like the European panic of 1772 Should we bring back full-liability banks? Are Bitcoiners wrong to reject fractional reserve banking? 1000 pages of 3AC intrigue  Genesis had 2.6b gross exposure to 3ac The 3AC blockchain .com transcripts More 3AC shenanigans are revealed Secret exchange insolvencies Coinbase insider trading scandal The SEC regulates by enforcement Gensler is getting a lot of heat Is the bottom in? What is MVRV telling us right now? What is the issue with ETH yield being related to MEV? Can MEV be addressed? Paul Krugman admits he was wrong about inflation Christie's launches a venture arm Content mentioned: Nic in Coindesk, The Credit Crunch is not the End of Crypto Lending SEC insider trading complaint Coinbase blog post on the SEC Paul Krugman, I was wrong about inflation Sponsor notes: Subscribe to the Coin Metrics State of the Network newsletter

Brought down by bad mortgage investments, Lehman, which has 25,000 employees, will be liquidated. The federal government loans American International Group, AIG, $85 billion. This is a different kind of market, and the Fed is asleep. The federal government is stepping it to stabilize Fannie Mae and Freddie Mac, the two mortgage giants that have been threatened by the housing crisis. The Bank of England has pumped 75 billion pounds more into Britain's ailing economy with a new round of Concentive easing. You print a couple trillion dollars, and all of a sudden, people start to worry. So out of this worry, we have something called a Bitcoin.

Welcome to On the Brink. I'm Matt Walsh. And I'm Nick Carter. And this episode is brought to you by Coin Metrics. And here is the Metrics Minute. Today in the Metrics Minute, we're talking about the Ethereum crowd sale. That took place eight years ago. Can you believe that? Eight years ago.

In that crowd sale, it was actually, it was permissionless. There weren't any white-lil. or I don't believe you actually had to KYC to do the crowd sale, if I recall correctly. So it was actually pretty open as far as crowd sales are concerned. All the data is visible on chain. So you bought it with Bitcoin and then you basically got ETH. So Coinometrics took a look at it. There are 8,000 purchases made, raising over 31,000 Bitcoin worth $18 million at the time

for a total of 60 million ETH sold. The total supply at launch was split across. about 9,000 addresses. Here's an interesting thing. 8% of the accounts from the sale have not touched their eith this entire time. Can you imagine just diamond handsing your Eth from 30 cents to today?

It's not diamond hands. I know a few of these people, they lost the keys. Yeah. What do you call that? What's the hands version of lost your keys? Anyway, not diamond hands. No hands. No hands.

So of those, so that those no hands accounts that haven't touched their ETH, they control 2.6 million Eth, 2% of total ETH supply. Hate to see it. That's the coin metrics metrics minute. It's, it's tough. Yeah, it's tough. As I said, I know a few of these guys. And it's, uh, you really have to like go through a mental journey to get comfortable

with that. One thing I remember was the Tazos ICO, which I, it's not a secret. I participated in the Tazos ICO. Hey, I'm a big, I was a big Tazos guy as well. There was a password that you needed to remember to claim your TES. And a lot of people forgot the passwords. Yeah. I remember I was, I worked from home on the day of what was the one that was the browser, the brave one?

Brave, yeah. Yeah. And so I wanted to participate in that one. And it was over in like four seconds. There was zero ability to participate in that one. Yeah, there were a couple where there were gas wars basically, right? Like early gas wars for these ICOs, and they were like one or two accounts bought up most of the tokens.

Bat was one. I feel like maybe Gnosis was one. Gnosis was over quick. Yeah, there were a few. There was kind of an early mid-2017, and that's when things started to really get crazy. Simpler times. Back when unregistered securities weren't being cracked. down on by the SEC. Oh yeah. So we got we got news on that front today. It's going to be a it's going to be a

jam-packed news week here. And we also had this drop which is we'll talk more about the three arrows liquidator put out just this thousand page PDF that has so many nuggets. We could do three podcasts on it. Maybe we will at some point. But I guess before we do, you went back to coin desk. So you're you're back in the writing game. So you wrote a piece called the credit crunch is not the end of crypto lending comparing the 2022 crypto credit event to the 1772 Scottish credit crisis, which everyone knows about that. That was just a classic, classic credit crisis. It was actually Scottish, London, and European.

So it was a widespread credit crisis. So, yeah, I realized that the credit crisis in crypto was very similar to this other credit crisis. So here's what happened then. This new investment like territory opened up, which was after the resolution of the French and Indian War in the U.S., well, it wasn't called the U.S., I guess, North America. England got a stable claim on the territories in North America. There was a ton of investment. There was an investment boom. So you could say this was like a new, like all this new kind of like metaverse opened up, right, except it was in the

real world. And a ton of credit was also created to finance colonial planters. And new equity instruments became popular. Basically new financial instruments. So East India company stock became very popular to trade with. So it kind of sounds a little familiar to crypto, right? And then firms started trading the stock on leverage. So they gained a lot of them, they were trading it on margin. And so one of these firms, which is a bank in London called one of the parties we called Fordyce, they blew up. They were actually shorting East India company stock. So it was the other direction. They were shorting it.

They blew up. Their creditors immediately started to fail. One of the creditors was this bank in Scotland called the Air Bank, AYR. And this kicked off bank runs all across England, Scotland, Europe. and something like 20 banks failed as a consequence of the contagion caused, partly by this one investment firm blowing up. Did they think it was a super cycle? Was that what it was?

They were just like, this is the end time super cycle? Well, so the Fortis guys, they thought they had a bearish view on the East India Company stock. So what's the opposite of a down super cycle? I don't know. And then Fortis fled the country also, the partner. at this bank to escape his debtors. So, you know, it tells his oldest time. He probably had a nice yacht or whatever they had back in those days,

Caravell or Galleon. Did he try to put his wife on the list of creditors? That may have been part of the story. I know that the Air Bank, AYR, interestingly, they were known for lending to their own affiliates at very favorable terms. So, you know, what is what we're seeing right now, we have seen this, you know, throughout history. There's many other similar credit crises. I'm sure you could find.

This one just tickled me in terms of how similar it was to the one we're dealing with now. I guess humans just don't, you know, every generation you have to learn these lessons, I think. Yeah. And the moral of this story for me was, you know, the credit situation in Scotland, specifically, the Air Bank was one of the largest banks in Scotland. It was a full liability institution. So, you know, maybe we should bring this back because all the deposits were guaranteed by the lands

of the shareholders, of the bank. So imagine that. Talk about a limiting move for capital formation. You're part of a bank, and then you can actually get your farm seized on a bad loan. So they sold off, like a material. fraction of all the land in Scotland because there was all these rich landowning, uh,

Dukes Lairds, you know, that were the shareholders in the bank, like major noble families in Scotland, they were ruined. They had to sell their lands. It took like 50 years to do it. Um, talk about a, you know, drawn out liquidation process. And then all the credit, all the credit depositors were made whole. So it was turned into a bad bank in the parlance. And, uh, eventually everybody got their money back. It's just that a bunch of Scottish royal or noble families were ruined in the process. What a crazy system, huh? It sounds like a pretty good system to me.

It's symmetrical. You know, maybe we should bring it back, bring it back for financial institutions, full liability, fully guaranteed. Unbelievable. Well, I think it's, you had some great points in the article. It's kind of crazy that there's folks in this crypto community that are completely against, you know, banks, essentially. don't think that there's a role for credit creation. It's like you and I could do a deal right now on this podcast. That's credit. We have created credit. It's really hard to prevent that. It's a weird

thing to be against. Yeah, I mean, you're against markets, right? If you think credit is fraud, then you think markets are fraudulent, right? And so actually that was the moral of the story was, yes, there was a crisis. Yes, it brought down, you know, one of Scotland's biggest banks, a lot of banks in London, Amsterdam. Then things just resumed. And actually, the Scottish banking system in particular, which we talk about, I think, on this podcast a few times, was one of the most robust and stable and deregulated banking systems. And it was completely laissez-faire, unregulated until 1844. So many decades later.

And so, you know, the lesson isn't necessarily that you need strong regulation. When there's a failure, it's actually markets can just learn from failures. And then I, you know, made some suggestions. as to how things could be improved and how we could learn from these failures. That was a good article. So why don't we hop into some news of the week? Let's start with the deals. Two in the Castle Island portfolio.

So the first one's a new company in our portfolio, Halborn. This is a cybersecurity company. They're focused on the blockchain space. They do smart contract audits. They do pen testing, a whole range of products and services. They've raised $90 million in a round that was led by summit partners, included us at Castle Island, Brevin Howard, and DCG. So really excited about the Halborn team.

Next up, we have another Castle Island portfolio company, Meow, founded by Brandon Arvinagi and Bryce Crawford. They're focused on treasury management. They raised $22 million from Tiger Global QED, us, and archetype. So congrats to the fellows over at Meow. Congrats, guys. Next one up is Empiric Network. This is a decentralized Oracle.

They have raised $7 million in a round led by variant. Then we've got Hologram, which is a virtual avatar company. They raised $6.5 million from Pollychain and others. Next is Sire, a layer one blockchain. They've raised $100 million from SRAM and Miram. Is that the intern trying to test us again? That can't be a thing. This has got to be an intern troll.

I mean, first of all, it's called sire, but instead of an S, it's a five. So it's like... It's like three... They've raised from... From Marshalland Capital, launch pool labs, moonrock. It looks like this is real.

I have never heard of it. But Saram and Moram, is that a real investment firm? Yeah. It's a UK-based conglomerate called Saram and Maram. Love it. Okay.

It's... It's on the internet. it must be true. So that sounds like one of those like three arrows shelf corporations that we're going to be talking about in a second. Next up we have Valkyrie. They're a crypto investment asset manager. They announced a 30 million fund focusing on early stage Israeli blockchain startups.

Congrats the team over there. Next one up is tribe capital. They've raised $25 million for a crypto incubator called Tribe Crypto Labs. have hired Boris from Republic, Boris Revson, a Boston guy to go run it. So congrats to Tribe and to Boris. Then we've got archive. They're a Dow focused on building a decentralized museum, of all things. They raise $9.7 million from offline, TCG, crypto, Coinbase Ventures, and others. Next, we have an acquisition. So Block Damon has acquired Sepior. This is a company that was focused on MPC custody for digital assets.

This has been going on for a while where every MPC custody company is just getting taken off the board. If you recall, you know, you had Curve, unbound got sold to Coinbase. There's been a number of smaller transactions in the space. And it looks like Block Damon is pushing into custody here, if I had to guess. I don't know why else you'd buy a crypto custody player. Next up we have XLD finance, their defy infrastructure startup. They raise 13 million from Dragonfly, Infinity Ventures, and others.

Next is Optic. This is an AI-enabled NFT authentication startup, and they have raised $11 million from Kleiner and Pantera. And lastly, we have never mind a provider of software tooling for DAP builders. They raised $3 million from signature ventures, polymorphic capital, and others. Next one up is Hashflow. This is a decentralized exchange. They've raised $25 million from Jump, Wintermute, and others.

And the last one is Ku-coin, which is, of course, the centralized exchange. They've raised $10 million from Susquehanna. A lot of deals this week. The deals keep on coming in. Yeah, things are picking up a little bit. Got to say, subjectively, it's not over. All right, so we're rolling out a new segment on the show. We're calling it three-ero shenanigans.

So here we go. What you're going to do? What you're going to do when they come for you? Bad boys, bad boys. What you're going to do? What's you going to do when they come for you? I like that. One of my all-time favorite theme songs right there.

So I think we could probably do a half an hour on three arrows every single week if we wanted to. And I think maybe people want us to, to be honest with you, because these guys are the biggest clown show this industry has ever seen. So let's run through some of the things that happened this week. So it was a pretty busy week in terms of the liquidation process. So there's this website called 3AC liquidation.com run by Taneo. They've been putting out court dockets, essentially, with some of these creditors that are coming forward. And I believe the deadline to come forward is early next week.

So by no means is this over. But they dropped a 1,000 page plus filing that was temporarily made public. And it was subsequently pulled off, which was kind of interesting. I think there was a lot of juicy things in there that maybe some of the creditors didn't want to be revealed. primarily I would expect because it showed where they're going to be pressing from a legal perspective. And it's certainly exposed allegations of extreme fraud against the three arrows. So why don't we just run through some of the things that we learned in this thousand page

court document first? The first one is Genesis Capital. It looks like the exposure here was $2.36 billion in loans. It's unclear what the net exposure is. I've seen some numbers floated. That wasn't clear from the court filing. There have been some reports that it was in the 600 million loss range. There have been other reports.

It was in the 1.2 range. So who really knows? But I guess that was the first kind of big reveal in this document is that the total loan size was $2.36 billion. Let's see. What next? Also, did you read this whole thing? I'd be nice. I read some of it.

But 1,000 pages. My God. Well, there was 1,000. pages, but there was a lot of just like copying pasting of tweets and copying pasting of coin desk articles and things like that. So the real juicy stuff was in the instant messages that were going back and forth between blockchain.com and three. So I guess let's talk about that one next. So this is kind of, this is kind of a crazy sinister situation. So I'm going to read some of this verbatim and it's from blockchain.com.

So on June 13, 2022, I spoke to Mr. Davies over Zoom and informed me that 3AC was trying to borrow 5,000 Bitcoin from Genesis Global Trading, another digital currency lending firm to pay a margin call to another lender. At that time, this amount of Bitcoin had a rough value of $125 million. Mr. Davies also offered to sell us some of their illiquid assets, including their shares in Derbit and Starkware and represented during this conversation that if the crypto market continued to decline, 3AC would not be okay. That's probably the first true thing he ever said.

And it was clear to me that 3AC was having severe liquidity problems. So there's a few more references to this, but essentially it looks like they're scrambling to try to get a Hail Mary, you know, extra loan from Genesis to payback blockchain.com here in the waning days. Not a good look, for sure. There's another section of that blockchain.com, essentially testimony, I guess, or court filing, where they say that they believe that, there had been misrepresentation in terms of the net asset value and some of the stuff they had

gotten from 3AC, which is no surprise that's coming out everywhere that these guys falsified documents. Yeah, I think one of my favorite parts was Kyle Davies just signing a very short letter attesting to the nav of the fund. And it was just like, yeah, we have X amount of assets signed Kyle Davies. Please trust me. And there's, I mean, there's things that he was telling people at different firms, which are totally the opposite in terms of their exposure and representing that they're market neutral. There's another thing in here around TPS capital. So this is the OTC trading desk.

They had previously denied that they were closely linked to three arrows other than having a three arrows investment. They represented that they were totally separate in arm's length. That was actually revealed not to be the case in this documentation that actually three arrows filed. And so recall that three arrows filed in the BVI for liquidation, Kyle Davies actually filed it. There's an org chart in there that shows all different types of entities. So you have TPS on there. You have defiance. You have Starry Knight.

You have this warbler capital thing that I haven't seen a lot of reporting on, which is another fund that was under their umbrella, another share class. So there's a lot coming out here. And, yeah, I think we're going to find out more. But this TPS capital thing is like these guys lied. like 24 hours before about this. And then it was just revealed that they were, you know, they were actually like closely aligned and part of that org structure, which is pretty crazy.

And then the last thing, I guess, from my side is this will be really heavily scrutinized. So Su-Zoo's on there for $5 million claim. And the wife of Kyle Davies had submitted a claim for $65.7 million. So let me pull up the exact date here. So on the 26th of June, there's a document. from three arrows confirming a quote unquote loan balance. So obviously this isn't the date that like the loan was taken out. But this is so far along in the process to produce documentation.

It just shows that this is Fugazi. I mean, if you gave someone a $65.7 million loan, don't you think you would have had some level of documentation that you could produce in a report that you're filing on your own to liquidator? Instead, you have this like three sentence. confirmation that you're putting out on the 26th. This is the most brazen thing I've ever seen that these guys actually think they can get away with this. It defies logic. You really can't make it up how unethical these people are. Yeah, you know, it's funny that episode we did

where you had a, what is it, how do you say, tirade, tirade, a tirade, a tirade. A tirade. How have I forgotten how to pronounce words? A tirade, effectively. saying this wasn't just bad bets this was fraud and a lot of people were actually still pushing back at that time I think this filing makes it completely incontrovertible there's it there's just rampant fraud throughout throughout all situation absolutely I mean you have to believe a few things are happening one is that you know it's interesting these guys no one knows where these guys are still and these guys must be on the run. You know, there's just no way that they're going to be free citizens

after some of these things get prosecuted. And I guess the question is like, who, which prosecutor is going to take this on? Historically, prosecutors only take cases where they think that they have a clear path to victory because, of course, you know, you win and you set yourself up politically and you keep on getting good cases. You know, so you would look at this and just say, like, all right, well, where's the smoking gun? I think we have it now, right? Like there's all of these affidavits that are going to come out from these lending firms.

Some of the lending firms are in New York. And so the Southern District of New York is going to be positioned here if they want to look at this thing. And I would have to imagine this is just going to be a slam dunk. I mean, there's just so much bad stuff in these things. So we will see, but it's not going to happen overnight. I mean, it takes a while to build a case. And I'd imagine they'll go out and interview some folks. all will be revealed at some point.

But what a mess. So that's our section. That's our three-hour section, I guess. What is it? Three-Herrish shenanigans? Maybe we can solicit some suggestions for what to rename that because it's going to be a running segment for the next year of the show, probably. Well, maybe we can do like a where in the world is Kyle Davies and where in the world is Suzoo section. We just guess like exotic places that they might be.

All right. I'm going to take a wild guess. here and say it's the city with the tallest building in the world in it. Dubai. A completely wild, non-informed guess. Yeah. Trading on Dexas and posting under pseudonyms on Twitter. Yeah, I bet they're trying to, what if they make it all back?

They could make it all back in one trade. There's more kind of ancillary three-era stuff also, so Vald, which was a Singapore-based crypto lender that had exposure to them. They've now filed for creditor protection. So the fallout continues. More shoes to drop there. Another one is ZipMex. This is a Singapore-based exchange. They've halted customer with Charles looks like they're insolvent. This also daisy chains back to three arrows because this company appeared to have a significant exposure to Babel, which is a Hong Kong-based lender that ceased operations a couple weeks ago because of a three-ir-os issue. And so the daisy chain continues with these companies.

This is an interesting one, though, because in theory they were in exchange. So they should have held all customer deposits. And it looks like they're lending them out for a little bit of extra yield. So, you know, this is kind of what it seems like Sam, our friend Sam Bankman-Fried was referring to when he said there was sort of third-tier exchanges that were secretly insolvent. Yeah. So surprise, surprise, Zip-Mex, you're a third-tier exchange, I guess. Second tier at best.

That's who he was talking about. Yeah. Well, someone who's opinion I respect had a good analogy this week and who's saying, look, all of these lenders, you know, they're in row houses. And they all sort of looked similar. You know, you knew that some houses were crap, but they're all kind of row houses all together. It turns out a few of these guys were just making dynamite in the base. and when it went off, it took out the whole crop of them.

So that's, we're seeing more of that. So elsewhere in kind of regulatory law enforcement developments, there's been, remember Terra? I mean, it's like, it's like we've forgotten about Tara. There's Terra is still around. That was still in Q2. It was Q2 is the most eventful quarter in the history of the crypto industry. Yeah.

So Tara stuff is still going. South Korean authorities did I think it was a dawn raid or a midnight raid either way it was a raid at a time at which you'd probably rather be sleeping of a number of crypto exchanges and sort of crypto offices and various affiliates in connection with their investigation into terraform labs and doquan so they are still trying to get information I think and apparently terraform had secret offices anyway so there's some sort of entry going on in South Korea as well, Tara, not to be forgotten in this whole thing. I mean, all of this stuff is just on chain, right, at the end of the day. So you're going to, people already know the three arrows accounts. They certainly already know Doe Kwan's on-shan

addresses. And so you just need to follow them. And so my suspicion is that, you know, you follow these things to some exchanges. You're going to see some bad things in this terror case. The MPC custody set up for Three Arrow's Capital is what people need to really be digging into. So they were known fireblocks users. And so Suzu had done a podcast with Haseau years ago said that they run their whole stack on fireblocks. There's no indication that the liquidator has access to those keys. But you really wouldn't even need access to the keys.

You just need to have some of the addresses and some of these OTC deals. You start to trace it back and forth. And you start to see where the money for the yacht and the money that's going to Kyle Davy's wife goes. So I think that's really the third. thread that, you know, Chinalysis and TRM are probably going to get hired by some of these investigatory agencies. And, you know, we're going to find out. Yeah, bull market for lawyers and for forensics on-chain forensics accountants. So here's an interesting one. The Monetary

Authority of Singapore, their top financial regulator, said that Terraform Labs and Three arrows were not regulated in that country. So even though they may have represented that they were it looks like they were operating illegally dare I say so kind of explains I think a bit of the MAS is relatively hostile stance on crypto these days a lot of these firms that imply that we've seen it before with certain crypto exchanges to imply they're regulated summer just aren't yeah I guess add this to the list of potential issues here but yeah MAS doesn't want this in their backyard. That's for sure. So two of the biggest black eyes in the history of the industry just happened this quarter in Singapore. It's kind of a mess. So moving over to the SEC,

beloved SEC, here is an interesting one today. They have charged a former coin-based product manager. What is it with these these crypto PMs and his brother and their friend for insider trading listings and announcements of listings on the Coinbase platform. I think basically anyone with the brain knows that this occurs, whether it's, you know, insiders at Coinbase or anyone else that happens to know about the timing, doing it because it's very easy. You just look at the price and you see that oftentimes there are pre-listings pumps. It's very, very obvious. Certainly not a surprise. Maybe the surprising thing is they had access to this bounty of information only made $1.1 million in total across a bunch of different trades that they'd made in connection with various

listings. So that is sort of, that's one thing. The other kind of, you know, interesting feature of the case here is that the SEC. has gone the route of determining that the assets in question, which are almost all of them, like super kind of low-cap, almost irrelevant assets for the most part, you know, for the most most almost all them below a billion in market cap, I think, some of them, you know, very small. The SEC has also gone through in their filing and determined that these actually constitute securities. So they've used this insider trading case as a platform against which to apparently determine that a lot of these assets are securities, and they named, I think, you know, eight or ten of these.

And then this actually triggered a response from Coinbase right away saying, hey, the SEC is, they're regulating by enforcement in a kind of arbitrary way, in a closed door way. and I'm kind of a little sympathetic to Coinbase because it's like very arbitrary that the assets that they're weighing in on happen to be ones that were sort of insider traded by these by this random employee. That's sort of like a really weird way to select the assets in question as the ones that happened to be traded by this guy. Yeah, there's a lot here. So the part you didn't say was that this is also a DOJ Southern District of New York case. And so these three from Coinbase have been formerly charged with insider trading. SEC is also going after them civilly. And as you said, use this as an opportunity to try to say that a certain amount of these tokens or securities.

But yeah, these guys are also getting criminally prosecuted. And it looks like one of them tried to flee the United States to India on the back of a Kobe tweet, actually. So Kobe is for those who may not know. Crypto Cobain, one of the largest Twitter. I don't know, influencers, people out there. I don't know what you'd call him, but the guy who's like, iconic in the industry. Talismanic. Talismanic. Calismanic. Yeah. So he's, you know, he's like one of, he has a podcast, probably has more downloads than us on his podcast. Buy a lot. Up only. It's a very good one. In any event, he found the wallet that had hundreds of thousands of dollars worth of tokens

moving like the day before some of these asset listings. And it turns out that that's what got one of these guys on the run and he was arrested. And it actually references the tweet, the Twitter account without saying Kobe in this DOJ filing. So, you know, that's one thing. It's pretty serious. This SEC thing, you know, there's one school of thought that says, hey, they have to come out and say that these things are securities to actually have any skin in the game because they regulate securities. And so if these things are commodities, it's probably not at SECK. So maybe that's part of it.

But I'm very, very sympathetic to Coinbase's pushback here that you don't have a framework here. I mean, some of these assets look identical to other things that are much larger in the market that are on Coinbase and that are apparently not securities. So there's just no top-down framework for how to think about these things. And this is blatantly regulating through enforcement. So quite sympathetic to that blog post that Coinbase put. out. Yeah, so many interesting things here. So first of all, it's kind of obvious that there's rampant insider trading at these exchanges. I doubt that their controls are particularly strong. Also, if you're a PM at Coinbase, why would you bother insider trading for a measly like

million of a million dollars split three ways? What's up with that? Second of all, through the open sea kind of wire fraud case, we know that you can, you know, plays criminal charges for front running kind of similar thing, insider trading listings and elements, very similar with the OpenC case, without the assets themselves explicitly being considered securities. But as you say, it then would probably fall outside of the SEC ambit. So it's interesting that they decided to use this as a kind of sounding board to determine that these eight assets or so were securities. And if you read through the case, there is, uh, There's a Howie analysis for each one of them.

So it's kind of, I'd love to know where the SEC is with some of these other cases. I mean, there's been long rumor that they've been going after some blue chip D5 projects. And I think a lot of that was public. And that's been going on for over a year. Obviously, this ripple thing has been lasting forever.

It looks like Garlinghouse has spent like $100 million on this case. I don't know if there's ever an end in sight there. But it's starting to kind of percolate up to elected officials. So Tom Emmer, Minnesota's Tom Emmer, who's been on this podcast before, had a really, I'd say, impassioned exchange with the SEC Director of Enforcement, who's Gubir Grwal, this week in a hearing. And basically, it sounded like got him to say that they were pursuing digital asset companies that were outside of their jurisdiction. And that's not really what you're supposed to be doing. So this was, the SEC is coming under a lot of heat. Gensler was the subject of a Wall Street Journal op-ed this week as well that just hammered them on all sorts of stuff, not just crypto, but really just failing to meet the objectives of the SEC on capital formation and on a number of investor protection issues and bumpy, bumpy times over there, I guess.

Yeah, so here's my question. What happens if you're one of the developers of these protocols? And through a unrelated insider trading case, the SEC has, has now determined that you are a security, then what? Do you get the chance to sort of challenge that? I mean, it doesn't seem like you're even a party to the case, really. So where's your opportunity to, let's say you wanted to push back? How do you actually voice your objections to the SEC? Yeah, I wonder if the SEC actually went to these teams, went to these projects or not, or if they just did this analysis and it was kind of a book report.

I'd be really curious. how that worked. Yeah, so maybe there's going to be eight or ten settlements that occur in the coming weeks. I don't know. It just seems like a really odd procedure to get at them, you know, obliquely through the insider trading case. Price of cryptocurrencies went up a lot this week. We never talk about the price on this podcast, but market was shrugging off all this bad news in a pretty meaningful way. Yeah. So I was feeling good about it. I actually wrote a blog post saying why I thought the bottom was in and I didn't publish it. So shout out to all the people that tried to cancel me on Bitcoin Twitter. You were deprived of that and that's what you get. You should have timestamped it.

I know. I really should have. The things I was pointing to there was we kind of knew the extent of the contagion a couple weeks ago. A lot of macroeconomic signs are pointing towards the necessary pivot by the Fed, in my opinion, especially if you look at what's happening in Europe and Japan. MvRV, the market value to realized value for Bitcoin printed a generational buy signal. And it only does that once every couple of years. I think it fell below the free float MVRV, not to get too jargony on here, fell below 0.8, which is just epical generational buy zone. MVRV.

I haven't heard that in a while. Yeah, no. I mean, it's still, it's like the best bottom picker that exists, basically. The Ethereum MVRV was also looking good. And then, you know, other events happened, like the merge announcement was made. And then Ethereum had a rally that was more deosyncratic, I guess. But anyway, I have to say, I'm feeling pretty good. I know we're not meant to talk about the prices.

I'm feeling pretty good about the market positioning here, despite the, you know, actual the macro data deteriorating. Yeah, I guess subject to the macro, right? I mean, bad things continue to happen in macro land. So, you know, the Fed will really have to change course here for this to change in a meaningful way. But I think the Ethereum merged narrative is going to be a powerful one. People out there talking about risk-free rates, talking about institutions, getting more comfortable with a type of asset that you can model on a cash flow basis.

So who knows? Maybe that catches a narrative towards the end of the summer. here. Yeah, and there's been some interesting developments there because the yield from your staked ETH post merge is going to be one issuance, two fees that your validator is processing, and three, M.A.V. Right. And so, you know, actually I'm seeing more chatter. Oh, the MAV portion of the yield could be really material. And so the, because nobody knows exactly what the yield's going to be. But so isn't it like a little bit perverse as well? which is like, all right, if you think of eth as a treasury or whatever, you're earning a return.

And part of your return, if you decompose it, comes from like systematic front running strategies against people that are actually using Ethereum. You know what I mean? So, you know, there's a slight perversity there, I would say, even if the, you know, the revenues are really real and material and so on. It's like partly it comes from basically rent extraction against people using the protocol. But it's kind of, there's no way to address that, right? You're going to have that on Bitcoin to the extent that there are smart contract platforms that take off.

MBV is just a feature of public blockchains. Yeah, I, I, I, maybe. There's actually some debate about this. Is it something that is sort of always going to be with us or are there ways to, you know, firstly, obfuscate your transactions as they go through the mempool and obviously, you know, maybe deliver them directly to miners, but maybe even arrange the protocol such that you can't, as the validator, reorder transactions, you know, at your discretion. So I would actually be optimistic that if it became a really big problem and I do see it as potentially being a problem,

I know a lot of people don't think it's a problem. I think it could be because validators have no allegiance to end users. And so there's sort of no limit to the amount that a validator would be willing to rip off an end user, if that makes sense. So it could just get worse and worse, I think. So I think it could be a problem that people do try to address in terms of new protocol designs. But I haven't seen anything yet that actually addresses it. Well, I don't think you'll see a new protocol design on Bitcoin.

And to the extent that we have... Certainly not Bitcoin. Smart contract platform stuff being built on Bitcoin. That's not changing. It's hard to... Maybe Ethereum, I mean, different development culture. you could see that. A good episode on MEV was the Matt Cutler episode that I did with him about a year ago,

Matt Cutler from Black Native. They do a lot of Mempool analysis. So if you're interested in going deeper on that topic, go back and listen to that one. So here's an interesting development. Paul Gergeman, possibly the most despised man in the crypto industry, has written an op-ed for the New York Times saying, I was wrong about inflation. He's also wrong about the internet.

He's also wrong about the internet and blockchains. Is he ever going to admit that he was wrong about Bitcoin? Probably not. But was he wrong about inflation? Yes. So we're going to take our W there. Take that, Paul. You were wrong.

We were right. It's incredible how many people just listen to what he has to say still. They gave him a Nobel Prize. I mean, technically that's a fake. Nobel Prize. It's the Swedish Central Bank Nobel Prize. I don't think it's actually in the original cohort of the Nobel Prizes, to be clear. But he also, you know, the textbook I used to learn economics in high school, he wrote that textbook. Did you have to unlearn a lot? Yeah, I mean, he tried to indoctrinate me from an early age. I really to work hard to free myself from his

ideological grip. That's tough. They get you early. All right, just a couple of, A couple nuggets to round out the news here. So BNP Powerbos, big French bank, they're developing a custody offering with Mataco and Fireblocks. So that seems like a pretty big deal. So they'll be joining the ranks of Bank of New York Mellon and State Street as banks to offer custody. Pretty exciting. Here's an interesting one. Christie's, the art auction giant, is launching a venture arm focused on.

art tech, art tech. Naturally, crypto approaches are a big focus area for them. Never thought I would be reading about art venture. That seems like a pretty good idea for them. Christie's has been prominent in some of these NFT auctions, so probably a smart thing to do. So I think that's it for the week. It's hot.

It is hot. It's hot everywhere. I was just in Europe. It was hot there, and they don't have AC. Terrible. I don't know what they're. Europe just, I don't know, when I went to France the last time, I stayed in a bunch of hotel rooms that didn't have air conditioning. It was just peculiar. Like, why wouldn't you have that? So we'll be back next week. We were a little delayed on the edit for the podcast this week. So we're going to run that one on Monday, it seems. We will see you on Monday.