On The Brink with Castle Island - Weekly Roundup 08/11/23 (PayPal's stablecoin, the Fed's oversight program, Ryan Salame emerges) (EP.443)

Episode Date: August 11, 2023

Matt and Nic are back with more news and deals. In this episode:  Matt's op-ed in Coindesk SAB121 is still bad SEC scope creep We investigate PayPal's stablecoin  Why would PayPal want to issue a stablecoin?  What does PYUSD mean for Operation Choke Point for 2.0?  Why PYUSD is being launched on Ethereum Crypto as a flashpoint for state versus federal banking oversight The Fed's new crypto oversight program Banks still can't issue stablecoins in the US Ryan Salame reemerges What will become of Ryan Salame's restaurant empire?  SBF will indeed be prosecuted on campaign finance violations SBF's trial will not be televised LK-99 did NOT replicate   Content mentioned in this episode:  Matt in Coindesk, Congress, Not the SEC, Should Set U.S. Digital Asset Policy Zach Wong, A comprehensive explanation of SAB 121 and how it prevents safe crypto custody Sponsor notes: Coin Metrics STATE OF THE NETWORK: DeFi's Double Edged Sword - Unpacking the Features & Risks of DeFi Lending  In our new special insights report, we utilize a balance sheet like methodology to contextualize the health of DeFi lending protocols through the lens of two recent exploits on Aave and Curve Finance

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 Concentute Easy. You print a couple trillion dollars, and all of a sudden, people start to worry. So out of this worry, we have something called the Bitcoin. Welcome to On the Brink. I'm Matt Walsh.

And I'm Nick Carter. And this episode is brought to you by Coin Metrics. And here is the Metrics Minute. Today's Metrics Minute is brought to you by Coin Metrics. Today we're looking at Curve Data. Based on Coin Metrics balance sheet data, curve pool utilization surged 30% in November 22 due to increase borrowing fell by 20% in March 23. emit a rapid increase in deposits. These utilization shifts were linked to recent exploits. In November, AVE faced a 1.6 million asset liability mismatch as a result of a highly leveraged curve loan, which affected liquidations. The recent curve hack also had implications across DFI, the founder

of curve, a 20% of curve free float supply as collateral on AVE. That's your metrics minute. All right, so Matt, you're reporting in from vacation. Look at that level of hustle. That's a lot of commitment. From vacation. Yeah, you like this? I just came off the beach to record this, actually. A lot of commitment. You look like you're still on the beach.

We're not doing these video podcasts yet because it turns out that the guy that we hired just is completely incompetent. So more to come on that. You can't blow up the guy's spot on our show, Matt. Well, you know, I don't think he listens to our podcast. I don't think he has ever listened to a podcast to turns out or done one or seen an audio version of one. So we're having huge challenges,

huge colossal challenges with this and signed a consulting agreement that I very much regret. Did you encounter any piping plovers on the beach? Did not encounter any piping plovers, but there are, so I'm down in North Carolina. We're recording this on a Wednesday. So if you have that on the jenga, what is it, the Ouija board or whatever the bingo? The bingo card. So something big will inevitably happen on Thursday. But recording this on a Wednesday. No, they don't have piping plovers in North Carolina, as far as I can tell.

There are some turtles that are in the dunes, but you can still go on the beaches. Did I tell you that I went to Long Island to visit a friend, and they had piping plovers. I think I sent you a picture on that beach, but they still allowed people on the beach, which makes all the sense in the world. Massachusetts just shut it down. So they figured out how to coexist with the piping plovers. Yeah, they're like, all right, don't walk over there. But if you want to go in the water, it's not like they're hatching in the water.

So you can still go in the water. Just mess choices just can't get that right. We coexist with the turtles. They just put little, they rope off the turtle nest areas. Yeah, it's easy. It's easy. Just put up a fence. Just stamp on the turtles.

Don't go stomp on the turtles or the birds. Yeah. So you have. your first op-ed in Coin Desk? Is that right? Very first. That was my first op-ed. Yeah. I just got fired up. So I wrote this op-ed for Coin-desk. The title is Congress, not the SEC, should set U.S. digital asset policy, and just kind of sounded off a little bit on what I'm seeing in the market. Honestly, I thought it's pretty good. Let's walk through it. What's going on?

Basically, this comes back to whose job is it to set the course, basically. for the U.S. as it relates to crypto policy. And I think it's important to remember that these are very big issues. You know, you're talking about stable coins in particular are really a tool to instill the dollar as the supreme fiat currency for the world. And so I think if my view is that if you lose this, if you lose this crypto market and you allow it to happen elsewhere and the U.S. does not participate, then you really risk losing the dollar as the apex fiat currency. of the world. And you allow all this innovation and all these jobs to be created elsewhere is kind of the secondary byproduct. So it's really Congress's job to establish laws in this country. It's not

the SEC's job to just come up with a bunch of rules that are proxies for laws and to enforce them. And that's what's happening. So the SEC's three-part mandate here is protect investors, number one. Number two is to maintain fair, orderly, and efficient markets. And number three, is to promote capital formation. And they're supposed to do this as a disclosure-based regulator that is technology neutral. So that means that they're not supposed to have a stance on, okay, we don't like AI, we don't like crypto, you can't do that here. Or, you know, we don't like telephones, would be an example from back in the day.

And you're supposed to just have an issuer that comes out and makes disclosures and represents what they're actually building to prospective investors. The opposite of that is a merit regulator, which is an arbiter of basically which technologies should exist in the U.S. And it's pretty clear that the SEC under Gary Gensler is a merit regulator. They're just taking a view on which technologies ought to exist and they're shutting down others. And what this really amounts to in the crypto space is there's a bunch of rules that they've come out with that are just preventing well-established companies from entering the space.

So number one we've talked about is staff accounting bulletin 121. And this is all about holding back the banks from participating in crypto. This is a bespoke rule that the SEC came out with and says that if you are a publicly traded company or a bank in the United States, then you need to treat customer assets as if they were the assets of the bank for accounting purposes. And why this matters is that if you're a bank, if you're a federal bank, a big custody bank, you need to hold capital reserves. And so imagine having held $100 worth of Bitcoin, but having to hold $500 in U.S. dollars as a buffer against that. It just precludes you from being able to participate

in this market. And so Bank of New York Mellon has been on record with this. They wrote a comment letter to the SEC that said banks cannot practically serve as qualified custodians for digital assets in any sufficient scale if they're still subject to the threshold limitations of Sab 121. So, that was the first thing that I really took issue with. And just on Sab 121, which is maybe even supplanting SEC rule 15C3-3-3 as our most referred to obscure policy, there is a great piece by Zach Wong entitled a comprehensive explanation of Sab 121 and how it prevents safe custody, which we are directing your attention to, which we'll put that in the show notes too. I would definitely recommend reading that, and we'll put that in our newsletter as well. I thought

Zach did a great job breaking down Sab 121. And he really took the view that there's a couple of ways that you can get rid of Sab 121. The first would be for the SEC to just roll that back and repeal it. Now, they won't do that because it's a pride issue. So the second way would be to pass one of these market structure bills, either the Lummis Gillibrand bill or the McKenry-Thompson bill, which is now called the Fit Act. But anyways, back to my second issue here.

So they've targeted the banks and they've effectively said the bank. banks cannot enter the crypto space, which again, makes no sense. You want more Bank of New York Mellons to enter the space. You want more trusted qualified custodians to enter as opposed to forcing it offshore and you'll end up with another FTX situation where people are finding ways to just park money on these offshore venues. So you don't want that. So they're going after the banks. The second thing they're clearly doing here is taking aim at the state trust path to be a qualified custodian. And so what happens here is that you have a lot of companies that have gone the state path under New York primarily, where they have gotten licenses under the New York Department of Financial

Services. This is, by the way, one of the largest regulators in the world, New York Department of Financial Services, very reputable. You have a lot of non-crypto businesses that are established there. It's a world-class regulator as much as we don't like some of the things they do with crypto. So Fidelity has gone that path. Coinbase has gone that path. And under the definition of a qualified custodian under the Advisors Act of 1940, the state path is a perfectly viable option. So in the first quarter of 2023, the SEC proposed changes to this custody rule under

the Advisors Act of 1940. And if you read this closely, they have a set of questions here that asks for feedback on whether or not they should narrow the definition of qualified custodian. to only include banks or savings associations that are subject to federal regulation. So if this is ultimately the path they decide to go down, which seems like they want to, then you just wouldn't have fidelity in Coinbase or BitGo or any of these crypto custodians as qualified options. So that would mean that registered investment advisors, big funds, would not be able to hold

their assets with those type of institutions. Talk about choking off the industry. I mean, this is a targeted, precise way. to really choke off capital formation. And, you know, this is effectively writing a law. And the SEC just doesn't have the ability to. So I'll pause there, but that's my second huge issue with the SEC. Yeah, that would be catastrophic.

My third one was D5. And so I think the SEC here has gone through and been very systematic in how can we prevent the crypto slash digital asset economy from thriving in the United States. and it's clear that they didn't really have a way to go after defy. Well, I think they found one. So in the second quarter of this year, the SEC reopened the comment period for a pretty controversial update around the definition of an exchange under the Exchange Act of 1934. And they reopened the comment period explicitly to say that Defy protocols should be regulated

as exchanges. And so keep in mind, this is open source software. So what they're basically saying is that uniswap, and all of these Ethereum-based dexes are just exchanges, and they will be subject to the Exchange Act. So if this is ultimately what goes through from a rule perspective, the SEC is just going to start going after the individuals behind these defyb protocols, and they're going to start charging them with crimes for running unlicensed exchanges in the United States.

And so what they're basically saying here, and there's been dissents on this, there's been a lot of people that are commenting to the SEC. I hope it doesn't go through. But basically what you're saying is that open source software that is financial in nature is not allowed to exist in the United States. That's the posture. That's the law that the SEC is writing in a way that really they should not be writing because they're not supposed to be writing the laws. Congress is supposed to be writing the laws. Yeah.

So we're moving from a kind of a harassment regime to just outright ban decapitation of the industry if the SEC gets their way here. Yeah, and look, I'm not the only one that's recognizing this. You have congressmen from both sides of the aisle here that are taking issue with it. Richie Torres is a Democrat in New York who's been very vocal on the number of these issues. And it's, look, the industry will exist. Whether or not exist strongly in the United States or it flourishes elsewhere, that's really on this administration to decide at this point. But places like the EU, the UK, Singapore, Australia, Hong Kong, they've already passed

these regulatory frameworks that the U.S. is beginning to discuss with the market structure bill and the stable coin bill. And so, you know, it's really that's the solution, is for Congress to start acting and just pass these laws. And then you just put the SEC back into its box of doing what it's supposed to be doing, which is the three things I mentioned at the outside. So go enforce, go promote capital formation, make sure the disclosures are there. We don't need Gary Gensler deciding how blockchain is out of work in the United States. That's not his role. Yeah, the scope creep is really remarkable. I mean, the SEC lists among their top priorities now, climate. I mean, what ability they have to address climate change is unclear.

And AI now they seem to care about. And the thing that gets me is just they describe all of these ancillary topics as potentially financial risks. And it's just so bizarre. I mean, have you ever heard them say about any phenomenon? hey, we think this is actually accretive to financial stability. No, they've never said that. They describe everything as a risk. And if they can characterize it as a risk, then they think it's within their scope. And that's how they grow their scope indefinitely. That's just not what the SEC is fundamentally meant to do.

It's not what its contemplated role is in society. So I agree with that. And look, I think this is heading down a pretty bad path with the SEC and it has been for some time. But there is light at the end of the tunnel. whether or not it's through these market structure bills or through the courts. And so the courts have been very active here in pushing back against this administrative state, the idea that you should have the executive branch playing roles that the legislative branch should be playing. So a lot of these things will get overturned, but it will take years to get them up to the Supreme Court, unfortunately.

Yeah, and it's not all doom and gloom. You know, good things sometimes happen. So we had a huge development this week with the PayPal, stable coin announcement, which will cover shortly. Yeah. Let's do the deals first. All right. First one up is L1D.

This is a crypto-focused investment firm. They're based in Switzerland. They raised $152 million for their second fund. So huge congrats to Jake and Ray and the whole L1D team over there. We've had a great partnership with these guys over time. So it's great to see a successful raise in this bear market. Yeah, awesome to see venture firms. continue to raise here. Next up, we have D8X, decentralized exchange. They raise 1.5 million from

Polygon Ventures and others. Then we have Puffer Finance. This is a defy infrastructure company. They raised 5.5 million from Lemnis Cap and Brevin Howard. Then you've got Cube 3 AI, crypto security company. They raised 8.2 million from blockchain, dispersion, hypersphere, and others. then you have spherex which is also a crypto security company that it looks like also raised a 0.2 million and that was from a left pillar and others so those are the deals of the week a lot of geometric shapes yeah so that's it on deals all right let's talk about p y usd i don't know what i'm calling it piang y i gather that the p y stands for PayPal anyway this is this is PayPal stable so we actually talked about it last week and uh that uh that

then it happened. So there we go. I'm psyched about this. Yeah, the PYUSD, I guess why couldn't they just go six letters and just have it be pay USD? Or USD pay, I think would have been interesting. Either way, PYUSD. PYUSD. All right. So PayPal has announced that they are launching this PayPal stable coin and it will be on the public Ethereum network. They're doing it with Paxos. It's a huge development. We'll talk about the regulatory stuff. But I guess I've had a bunch of people. ask me, why would PayPal do a stable coin? And obviously, they're not coming out and explicitly saying anything, but I'll take a, I'll take a couple of guesses. Would be curious to get your thoughts on this. But if you look at this from a PayPal perspective, they spend a lot of money on these fees to Visa and MasterCard. These card networks are obviously cash flow businesses here. They're doing great. And PayPal, I would think here gets in a pretty interesting situation where they could maybe circumvent some of these card payments. So if people start using PayPal stablecoin on Ethereum

Rails, then they're not paying that fee to Visa and MasterCard. Furthermore, they're getting a bunch of this net interest income, since they're not paying interest on the stable coin. So it looks like it's a really nice revenue stream on the float. And then, of course, you're just paying less cost because you're basically settling some of these transactions on a public utility as opposed to settling it on a utility that's owned by Visa or MasterCard. So in my mind, that's sort of the obvious benefit. Yeah, I mean, frankly, PayPal is already in the stablecoin business. It's just that PayPal balances, those liabilities are tracked on their own internal database. I say the only difference, really, is that the liabilities circulate on a public blockchain. But if you think about their

core business, you know, they accrue users and they make transactions and they monetize that the interest on the reserves. And a stable coin is the exact same thing. And the stable coin market is huge. It's about 130 billion in outstanding stables. I don't know what stable, what PayPal's current sort of depository basis, maybe 30, 40 billion range. So I think just financially, if they can, you know, win some market share in the stable coin market, that's highly accretive to their core business. And it's kind of what they already do with the difference is that it's settling. on an open global network as opposed to kind of a proprietary network, which is geographically limited. So I think it makes tons of economic sense for them. And the real story here other than just,

hey, this is one of the largest companies in the United States getting into the public blockchain space, which is big in and of itself, is that the regulatory front here. So the word was that PayPal was going to launch this months ago and halted it because the SEC came in at the 11th hour and put the kibosh on it. And part of that was SEC was going after Paxos for its affiliation with finance on that stable coin. But PayPal has launched this with Paxos as the back end custodian. So it looks like that issue has been addressed whether or not the SEC even had a say on

that, whether or not they could have technically halted them. I think is a big question. So PayPal went through the proper channels. They went through the New York Department of Financial Services, and this is operating within the laws of the United States. Now, that's not preventing folks like Maxine Waters from coming out and saying that she is deeply, quote, deeply concerned that PayPal chose to launch this under the state framework

and didn't go federal. Meanwhile, if you go federal, there is no way to launch. So I guess it's just we're deeply concerned that you, started a profit-seeking enterprise. I'm not exactly sure what the rationale is there. Yeah, and I was actually shocked to see this because Paxos had been kind of the victim of a lot of regulatory harassment around the broader sort of choke point initiative from virtually every agency. And the fact that they're able to get this out is remarkable in New York as well. I think it's super encouraging that they were able to push it through.

And I think the stable coin is pretty well designed. I mean, frankly, Paxos has always been at the forefront of sound stablecoin design from a legal perspective, in my opinion. I think the Paxos stable coins were always built well from a bankruptcy remoteness perspective. and indeed this is bankruptcy remote, so nothing to worry about there. They have done a good job with the attestations historically in terms of transparency. So even though the finance engagement might have hurt them a little bit, I think they've always done a good job in terms of actually structuring the thing. And this one is no exception.

Some people were asking, I thought Austin Campbell had a good kind of FAQ. on PYUSD. People asking, okay, well, why is it on Ethereum? Why isn't it on other blockchains? That's because the New York DFS does it on a case-by-case basis in terms of which blockchains you can issue the stable coin on. Ethereum is one of the ones that they're comfortable with. You have to go to them and get approval as far as I understand

to launch on some other blockchain. So Ethereum being the one that they're comfortable with and obviously having a ton of liquidity, it makes sense to launch there as opposed to somewhere else. Did not know that? People are also, yeah, people are also wondering, well, why are they using older solidity code, like I think from 2018?

I think the curve hack is actually a good example of why you would want to use more battle tested kind of legacy code that is, perceived to be more secure as opposed to newer smart contracts. So I think there's actually a good reason for them to go back and use kind of older code for this, even if it's not necessarily the most efficient design from an on-chain perspective. That makes sense too. Well, huge news.

I mean, this is a very big development, I would say, in terms of just broader institutional usage of blockchain. So I'm really excited to see what the uptake is here on PayPal. Maybe I'll have to get the PayPal app again. Do you have PayPal? I don't. I think I was kicked off PayPal. Really? For what, buying Bitcoin or something? Yeah, that's kind of the irony is that they have been very aggressive and, you know, kicking people off the violate of the terms of service. So this PayPal, this stable coin does come with the kind of standard freeze functions that, you know, major Fiat back stable coins come with.

Austin also makes this point a lot, which is you can't just not include that because if the regulator feels or court feels that the stable coin is in the wrong hands, if you lack the freezing function, the court will just immobilize the reserves. So the blockchain is just the ledger that tracks the movement of the liabilities, but the actual funds, you know, the dollars are clearly they're in a custodian somewhere in the U.S., right? So the fact that, let's say you're a stablecoin issuer and you don't build in a freezing function into your smart contract, that doesn't mean that you're immune from actually having your reserves be immobilized. You're not immune from regulatory harassment. You're still beholden to it because the physical dollars are somewhere. If you don't like that status quo, this sort of inherent feature of stablecoins, then don't use stable coins. But yeah, you're still on the hook ultimately. and so at this point it's kind of the cost of doing business is having the freezing function built in. So the last thing I'll say about this PayPal thing is I think this is a master stroke from a management perspective on when to launch a product. Because you have this stable coin bill going on right now. And the key fight is you have this faction of the Democratic party that does not want stable coins to be able to be issued under the state trust charters. and they want the federal oversight,

and they want the Federal Reserve to oversee it, which I guess we'll get to that next. But right now, if that bill were to pass, then you'd have to shut down PayPal, and you'd have to shut down this business. So PayPal, I think, is being very smart to just get out in front of this and really put the pressure on the,

really the Democratic side, or at least a small fraction of it, the Democratic side, and just say, look, hey, we should just observe, like, laws as they're written, today and let's just pass the stable coin bill. Let's codify that you can do it under a state trust charter and just move on. Yeah, and this is a microcosm of the kind of big debate that crypto is catalyzing in this country, which is state versus federal oversight of banking.

And it's happening all over the places. Should the states have the right to charter their own banks and, you know, if necessary, incorporate new innovative industries into the models of those charters, or should the federal government have oversight over everything? And you see the debate with custodia. You see it with the trusts that we've been talking about. You see it with the stable coins. Crypto is catalyzing this debate. And ultimately, if you look at the history of this country and the constitution, the way it's laid out, the states do have that power. In the last year or so, I would argue it's been kind of stripped from them. If you look at choke point, that's what it is. It's federal regulators asserting themselves over the states and saying, hey, you know, these state

chartered, you know, newer crypto-focused banking institutions, they're not allowed to do business. And the states are not happy about this. If you talk to them, I think you'll see reactions there. You'll see more lawsuits like that of custodia. And so this is another front in that war. And of course, I'm on the side of the states because I believe there should be a plurality of approaches here. I think the states can meaningfully oversee these things. So that's basically the big battle that I kind of perceive is going on here. Well, maybe building on that a little bit, the Fed came out yesterday. They announced a new program to oversee crypto activity at federal banks. And it was basically just an announcement. I didn't see any new rules. It did give

clarification that banks need to seek approval from the Fed in order to engage in stable coin activities. But what did you make of this Fed program that they're putting in place here? Yeah, I tweeted that it was kind of neutral to negative in terms of its effect on crypto. So there were two pieces to it. There's the creation of this novel activity supervision program. And that's broader than just crypto. That's banks doing anything pertaining to DLT. that's banks engaging in banking as a service with fintechs, right? So it's not just crypto. It's kind of any technologically enhanced banking activity. And the Fed is saying they're going to explicitly supervise this and very closely monitor banks that are doing this, which we kind of already knew

was the case. Like with Chokepoint, we knew the banks that were servicing crypto clients, for instance, they were being asked by their regulators to, you know, very specifically, they're facing more burdensome compliance and disclosure requirements. And in some cases, the regulators were asking them to get permission before onboarding crypto clients. They're expanding this to banking as a service, which I think is actually the next front in this war. I think we're going to see a lot of these fintechs, not even crypto-related necessarily pressured through programs like this. So I would look out for that. So this seems to be basically formalizing a kind of a stepped-up campaign of oversight over banks that are doing creative stuff, whether it's fintech or

crypto. The second part is this supervisory non-objection process for banks that are doing stable coin stuff. That's not the exact language. And this one I found a little bit strange. So basically the Fed is saying, if you as a bank want to issue a stable coin, you need to get a non-objection letter from us. You need to get a permission slip to do that. And you need to prove that you can cover all these risks, operational, cybersecurity, et cetera. The one that really stood out to me was the illicit finance risks clause where the Fed is saying, you need to understand the nature and the purpose of the customer relationship and perform ongoing monitoring to identify and report suspicious activity. My read, and this is pretty vague, right,

we don't have actual concrete details. My read is this continues to de facto make it impossible for a bank to issue a stable coin on a public blockchain because the way that that works in the orthodox model is you don't know for sure who is you is. holding your stable coin on chain. You know who is creating and redeeming the stable coin, because there's sort of authorized participants to do that. But once the stable coin is out in the wild, transacting on the blockchain, the bank or the issuer of the stable coin doesn't know for sure who those people are and what they're doing. That's kind of like with cash, where if I withdraw cash from an ATM or from a bank teller, of course I knew who I am at that point. But then

I tip the valet, they don't know about that transaction. They don't know about the peer-to-peer transactions that happen subsequently. And that's considered fine with cash. With stable coins, the Fed is saying that's not fine. We actually want to know who is ultimately holding that thing. What's the nature of all the subsequent secondary transactions? And so I feel that this, my read is that this makes it, it continues to make it impossible. for a bank to actually issue the stable coin, which this just echoes the Fed's policy that they issued in January. So I see no change there. And I think we're still kind of in that paradoxical catch-22 state where banks ultimately under this model, the Fed oversight cannot issue stable

coins. Well, I hope that that's not the case. But again, back to the court's issue, I think this is potentially something that would just be winnable in the court. I hope it doesn't take two years to get to that conclusion though. Yeah. And the core question is can we as a society accept a world where we have cash like products that are digitized that have the same qualities as physical analog cash? Is that permitted? Is that the social contract that we as a society opt into? or as these things get digitized, are we opting into this perpetual surveillance world? And I'm hoping it's not the latter. More to come on that one, I'm sure.

So there are some FTX news this week. Ryan Salem, who's the former co-CEO of FTX Digital Markets, that's the Bermuda sub over there. He is reportedly in talks for a plea deal on a number of FTCS-related charges. and a lot of these look like they're related to campaign finance. So he took a bunch of money from FTX and made political contributions primarily to Republicans. It looks like this guy's got a private jet and six restaurants in Lennox.

So maybe those are coming back to the customers here. Yeah, I got some complaints last week that we did not play the FTX crime family music when we introduced this. So we're going to actually roll it belatedly. You want to roll it? Yeah. All right, roll it.

Well, first I want to talk about these restaurants. Have you ever been to Lennox? No. Beautiful. Beautiful part of the world. I don't think I've ever been to any of his restaurants, but I mean, six restaurants in Lennox. That beautiful part of the world. So you could have been unintentionally funding Ryan Salem without even knowing it.

I was thinking about this. I haven't been out there since like, I don't know, I lived in New York. So it was probably like 2010. It was well before crypto. So these restaurants are going to come under Mr. John Ray's administration, is what you're saying. I mean, I think John Ray is going to be looking to hire some, like, busboys at these restaurants. That's what I think. They'd probably do a better job of running them than Salam.

You think so? So that's all coming back. The Jets coming back. But so what here's, I mean, there's a lot that we don't understand here. obviously they would want him to flip and testify against SBF. But I mean, how much leverage does Salem actually have here, I guess, is the question. There's only one person that he can kind of point to. It's only SBF that's really above him.

So, yeah, he gives them SBF, but does that mean that the feds don't think that they have a rock solid case with Caroline and Gary Wang and Ashad? I don't know. Yeah, that's what I don't get is what's the marginal contribution. of Ryan's testimony here. I mean, don't they already have their case? Don't they have them dead to rights already? Do they need to give sweetheart deals to these other executives? Yeah, you would think you'd want to flip early, right?

So Caroline Ellison made the right move. She was immediately in New York City, immediately cutting a deal. Same thing with Gary Wang. So where's Trubico? Where is the last man standing? Where is he? And then this guy ran one of the, great cons of all time. A farce of an organization, Alamedo, just never actually made money.

It was just complete clown show amateur hour, money-losing expedition. I can't accept a state of affairs where he gets off scot-free. It seems inconceivable to me. Abide that. I keep waiting for the headline to drop about Jericho. Is he still on the boat? Right around in a boat. Didn't someone have a picture on Twitter a few weeks ago? can we not identify the boat can the internet not crowdsource this knowledge i mean we've got that for private jets do we not have that for boats i don't know that's a good question was it that hard to find

a boat i mean come on it they found the uh the wolf of wall street he was on the yacht right when oh is that how they found him well that's what the movie claimed i don't know if that's what actually happened let's find troubugo's boat the um the other story so it looks like the there's a preceding indictment that is rumored to be coming as early as next week for Sam Bankman-Fried. And it looks like some of these campaign finance charges that were dropped a couple weeks ago. The rumor is they're coming back into play here. So I guess we'll see. Yeah, a lot of the more conspiracy-minded folks thought that this was evidence that there was some kind

of dark conspiracy because it was going to show once and for all how SBF was in cahoots with all these representatives and senators in Washington. Yeah, turns out those charges are still being brought. I think you were in that conspiracy camp there. I was maybe a little conspiracy minded on that. Well, I think some of this was that the way that they extradited him from the Bahamas said that they couldn't charge him with more than what they said they were going to charge him with when they extradited him.

So I think there was a little back and forth there with the Bahamas. That's fine. but I mean, ultimately the U.S. government, I think, can push the Bahamas around a little. Yeah, I would think so. Do you think there's going to be cameras in the courtroom here? Yeah, I think it depends on the state, right? Because sometimes we just have these weird courtroom illustrations, like the Tom Brady one. And then sometimes you have...

When was Tom Brady on for him? Well, remember he was in court for something or other, and there was an illustration of him that didn't look anything like him. You remember that? no episode no i don't i don't remember that i think they need better illustrators because they never look like the person so you're you're too young to remember this but when oj was on trial also in california that basically like no work was happening people were just watching court tv the entire day so i think it's totally dependent on the state yeah so he's being tried in new york i think right

but that's one of the ones where they don't have the cameras, right? Probably. I think that's right. Let me look it up. I mean, if they had cameras, do you think that this industry would just grind to a halt for a month? Yeah, so I just looked it up and it looks like, yeah, in New York courts, by law, there is no televising of that. So, unfortunately, it's not going to be like OJ, maybe for better for worse. It will just be these weird scribblings of the court artist. The court artist is that, what are they called?

The portrait, official portrait artist of the court. That person is going to be. I don't know. That's a very desirable job, though, for this trial. That person is going to be. No pressure. No pressure. Yeah, because this was a thing in the Trump trial, apparently.

People wanted one of the Trump trials. There's many. People wanted footage. But there is no footage. We will be robbed of that opportunity with Sam. I can't wait for this trial. I'm excited to put it to bed. I'm sick of speaking about the FtX crime family, and I'm ready for it to be over. I am too. I am too.

There's a few other people that it would be nice if they could come to some resolution. Do you remember when three hours capital, raise capital from U.S. investors? Do you remember that? I do, I recall. Yeah. I do recall. Do you remember when they defrauded U.S.-based lenders? Yeah, that seems like U.S.-based prosecutors.

would consider that in scope. Yeah, I don't know. Just defrauding U.S.-based companies and raising capital from U.S.-based investors when you're not allowed to. I don't know. Just food for fun. That's in scope.

So I had a look at our reviews on our podcast recently. Okay. And I'm happy to share that our rating is 4.8 out of five. Pretty good. So feel free to give us some five-star ratings. Tyler says This is his favorite pickleball podcast Wow

Thanks Tyler Thank you Tyler I mean I haven't actually been playing pickleball Because I ripped my shoulder out of its socket Are you recovering well? Yeah I mean Maybe someone can tell me

Does that just recover on its own Or do you have to do something to fix it With a shoulder injury like that I don't know First step would probably be good to like a doctor Yeah I'm kind of at the school of thought thought of just hoping and we'll see what happens well i don't know i had this last summer when i was on vacation you'll remember that i had a very bloody injury on an umbrella so i've been staying away

from these umbrellas the whole time but i caught my finger on an umbrella last year and it punctured it it basically just made a hole in my finger you almost lost the tip of your finger right yeah i had to go to the i had to immediately go to the emergency room i was just gushing blood all over the beach. So I'm staying away from those umbrellas. But the lesson learned there is you got to go get treatment. Well, we'll see. We'll see if I can get back on the court. Yeah, I hope you, they have pickleball down here. I haven't been able to make it out and play yet, but. Paddle is also a very rapidly growing sport around here. I saw in the Bloomberg piece. Do you see the Bloomberg piece, which was like the lost photos of SBF's final days or something? Oh, yeah, I did see that. Why did they blur out all those

co-conspirators? Yeah, they, yeah, they shouldn't done that. So, They said in that piece that for his birthday party, they played chess and then paddle. But the idea of Sam playing paddle was baffling to me. One of those pictures, man, he looked like the hunchback of Notre Dame. He was hunched. I mean, he did become goblin-like, which I think should have been a big red flag. Is that, can you tell, is there like some medicine that turns you into a goblin or something? I think it's like if you have all this internal torment,

your exterior starts to reflect that. If you're running like a huge Ponzi scheme. Yeah, the weight of that is so crushing that you become hunched and kind of disfigured in a way. Yeah. And then when the weight was lifted, you kind of looked like a new man.

Yeah, stood up tall. Yeah, I don't know. He looked better. He got a shave. He lost some weight. I really believe that. Your internal state. that I listened to a podcast with Teddy Scheifler, I guess is Sheffler from Puck News.

And he said he's been talking to Sam. So I think Sam just sits at home and just talks on the phone to these reporters. I mean, if you think about it, so he lost all his friends because he kind of dragged them into his sort of catastrophe with him. But then reporters, they still want a story. So they're going to keep hitting him up. So all his friends now are journalists. And he just sits at home on his Motorola razor all day and talks to journalists. And his parents must be very troubled.

But they should be, honestly, you see the father was in one of those pictures, standing behind the laptop. He was probably standing behind the laptop and saying, okay, you send the wiring instructions to light speed and soft bank, and they send in the money. He's pretty involved that father. Yeah, Mr. Bankman is, he was, he worked for FTX. Oh, yeah, he was out there hunting, hunting VCs.

He was, yeah, you wouldn't want to be like a growth fund. around Sam Bankman Fried's father. He would have gotten you to write the check. He's implicated. And he's totally avoided scrutiny for the most part. We talked about this a couple weeks ago, but the defense is being funded by Sam's father. Sam's father got a $10 million gift from FTX,

about six months before the whole thing blew up, a gift from a startup for $10 million. What world is this right now? Yeah. So we have to close a little. loop on one ancillary topic. So LK99, the room temperature ambient pressure superconductor, as it turns out, it is not real. It can't be replicated. That's the current consensus. So you just cut out there for a second because I have bad Wi-Fi, but I think what you just

said is the thing is not real. The room temperature MRI thing, not real? Not real. That's too bad. world has not changed. The world as we know it is still the same world. I started to get really excited about it. Me too. I was thinking maglev trains, quantum computers, electricity grid saved, not going to happen back to normal. That's too bad. I mean, I listened to the all-end podcast and they kind of talked about the replication and how it's hard to replicate. That's too bad. I'm surprised that these guys actually put out the paper in the first place. Yeah, so we don't really know what happened there yet. But the prediction markets were interesting to follow. I think

this was the first time those prediction markets really got a ton of traction, which was the original use case of blockchain, see if you recall. Yeah, Auger. Auger. That was the first touted smart contract on ETH. Oh, man, Auger. Simpler times back then. So Auger, I tweeted this the other day, but they raised over a million eath. They raised 1.2 million eath, I believe, and sold it the bulk of it for less than a dollar per eath. Really? So if they had just not sold it,

they would have, I think, several billion dollars, or one to two billion dollars of eath in their endowment, which is like the Golem. Yeah, I was just going to say, Golem. Oh, man, Golem, what was that? It was like a, what were they trying to build? Decentralized rendering, which is maybe relevant today.

But there's so much path dependency because Auger, I think made the frankly sensible decision just to move to Fiat. Yeah. Because they weren't trying to speculate on the price of ETH. Turns out in hindsight, that was the wrong call. Golem just hung on to the Eith. And now they have a massive endowment to do whatever they want with, even though they never actually shipped their,

their first envisioned product man I remember when multi-coin put out the auger paper and I reached out to Kyle that's when I met Kyle for the first time because he had done some like

cash flow analysis on how that would work I remember the Auger DCF yeah I remember that very well it was it was very thought-provoking it was like one of these how to value crypto networks things papers at a time not a lot of people were doing it was like Berniski

and Kyle were kind of the first to try it, I think. That paper provoked some thoughts in me, that's for sure. Yeah, I thought it was a good attempt, actually. We talked about it at the time. I mean, it's funny to go back and read it now. Turns out the DCF model for valuing crypto assets. Well, I mean, maybe there is something to it. Like, of course, today you have cash flowing.

Yeah, with like Maker, I think it's like not dissimilar to how I think you'd try to value Maker, actually. Yeah, but just no one ever used So I remember trying to use it back in the day. It's impossible. It's one of these really interesting use cases, but not a lot of people have tried prediction markets because they are in a regulatory, like difficult situation, right? You're opening yourself up to a lot of liability as a founder if you launch one of these things. Yeah. Turns out people just wanted to gamble on Uniswap and use staple coins. Did you see the, speaking of gambling, did you see this pen bar

stool deal. Yeah, so I was actually going to ask you about this because I feel like you follow it more closely. What on earth happened there? Can you explain it? So as far as I can tell, so Portnoy sold barstool to Penn, it was something like, 500 million. Yeah, it was something like 500 million in Penn stock and cash. And then Penn ran into all sorts of issues with Barstool where the barstool content was apparently provoking the ire of a lot of state regulators. so they were saying things that you're not supposed to say if you're a gambling company. And they're also kind of having a lot of, I don't know, PC type of issues, I guess, from people complaining about some of the content in some of the states.

Anyways, Penn had an opportunity to do a deal with ESPN. ESPN obviously has a lot more reach than Barstool. And so they're going to do it. And as part of the deal with ESPN, it looks like ESPN made it such that Penn had to stop working with Barstool. So Penn ended up selling Barstool back to Dave Portnoy. It looks like for $0.00. It looks like it was in exchange for 50% of the proceeds if he sells the business again, which I guess is an if, and to non-compete.

So he can't go out and do a deal with like Draft Kings, similar to what he just did with Penn. I wonder if he can get Draft Kings as an advertiser. But it looks like a great deal for Portnoy. He kind of round-trip the whole thing. He sold it at the peak, put 500. or he didn't own all of it, I guess, but he sold it for 500. He had a good size chunk of that. He holds a bunch of Penn stock.

Penn's doing this deal with ESPN that seems like the stock market liked it. It was up like 12% on the ESPN announcement. So he holds that and then he gets his company back for no money. That's remarkable. And so I guess from Penn's perspective, even though they are taking a right off of a half a billion dollar asset, they're not too troubled by it because they're losing the baggage from barstool and the market liked the deal with ESPN.

Yeah, I mean, I guess the market didn't like some of this barstool baggage. Certainly the state regulators didn't. They're getting crushed in some of these states by by Fanduel and from draft Kings. And now that they have this ESPN thing, that's the prime content, right? ESPN's reach is number one in terms of sports content. So it looks like a win for all sides, honestly. Does this mean that Portnoy is not going to be liberated to gamble on some long-tail tokens once again.

You remember the Marty Bent connection there, that Marty Bent was over there working in Barstow. Trying to get them to, it was Bitcoin Marty. He was trying to get them to stop speculating on the shit coins and just buy Bitcoin. He was hooking them up on hardware wallets. Yeah, they should have a crypto podcast over there. And then Portnau endorsed Safe Moon infamously. Yeah, that was probably not the best.

It wasn't safe and it did not go to the moon. No, it probably resulted in some lawsuits too. It did, yeah. Unsafe Earth is what they should call that. That was a bad one. You got to listen to Marty on that one. All right, so I think that's it for the week. We'll be back next week.

Everyone have a safe and healthy weekend. We will see you on Monday.