On The Brink with Castle Island - Weekly Roundup 09/17/21 (Fidelity's spot ETF plea, Solana goes down, Are Bitcoiners cosplayers?) (EP.242)

Episode Date: September 17, 2021

Matt and Nic return to recap a tumultuous week. In this episode:  Matt's ongoing war against the turkeys Fidelity thinks the SEC should approve a spot ETF The Futures based Bitcoin ETFs are nearing approval The SEC stonewalling an ETF is a political choice The OpenSea insider scandal Elizabeth Warren's critiques of the industry get more and more specific and niche Do we event want to know which tokens are securities according to the SEC? Ripple is asking the SEC to compare them to Ethereum Solana goes down for 17h Our interaction with a blockchain fraudster The NYT doesn't understand cryptography Are Bitcoiners cosplayers? The Epic games v Apple case has implications for the crypto industry Content mentioned:  Fidelity's Wise Origin Bitcoin ETF presentation to the SEC on Sep. 8 Sponsor notes This show supported by Coinbase Prime, an integrated solution that provides advanced multi-venue trading, custody, and prime services for institutions. For more information see coinbase.com/prime

Brought down by bad mortgage investments, Lehman, which has 25,000 employees, will be liquidated. The federal government loans American International Group, AIG, $85 billion. This is a different kind of market, and the Fed is asleep. The federal government is stepping it to stabilize Fannie Mae and Freddie Mac, the two mortgage giants that have been threatened by the housing crisis. The Bank of England has pumped 75 billion pounds more to Britain's ailing economy with a new round of Concentive 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 a Bitcoin. Bitcoin. Welcome to On the Brink. I'm Matt Walsh. And I'm Nick Carter. And this episode is brought to you by Coinbase Prime. More in the middle of this episode. Doing this one in person on Thursday morning, which means something huge is going to happen today.

And it's not going to be in the Friday podcast. 9 a.m. There's 24 hours until this releases. A couple L1s might go down. A couple L. Warren comments about crypto might happen. Liz Warren's going to find new esoteric critiques of the industry. Gensler is going to find a whole new asset class. He just hates.

He's going to take it down. There are some positive developments this week, so I got a fence, and the turkey problem is getting much better. I got a very large fence. See, that wasn't the turkey development that you'd hinted up previously. Suggested you were doing violence to them. There's some other steps that were taken, but the fence is what I want to really highlight. Everything's on the table.

So have you installed the fence, So you just sort of decided to get a fence. No, the fence is fully installed. It's kind of like an iron dome type of situation where these turkeys can fly. There is one patch where they can still come in. They've been reticent to come in because some other measures have also been employed, which again, I'm not going to talk too much about. Iron dome implies that you're shooting them out of the air with missiles.

Well, that could have been unsaid, that part. I just have this image of a turkey, you know, turkeys and fly, right? They do fly. They fly? Yeah. I didn't know that. So I have an image of a turkey entering your airspace and just getting snipped out of the air and disappearing in a puff of feathers. No, no death to any turkey, but there's minimal turkeys in my yard right now.

So it's a good morning. Well, the people have been clamoring for this update. So thank you. And also they've been clamoring for us to get on Colin because you overpromised about our Colin productivity and then we didn't do anything on Colin. I promised an after party last week for Colin and we didn't end up having the party. The party got canceled. We will have an after party.

It may be a bit of a stretch to describe doing a podcasting app as a party. But yes, maybe we'll do it this week. We'll do it this week. I promise you we'll do something this week on Colin. I've been trying to get out of it. Colin's the hot new app. So get Colin, listen to us on Colin. We'll share some more details on the app.

It was a busy week. There was a lot going on this week. There was mostly bad stuff. It seems like every week is like that, actually. I think the price of Bitcoin would be a million dollars right now if the wall of negativity wasn't just falling on us. But bowl markets are made on walls of fud. We're climbing the wall of warriors, they say.

We are climbing. There's a ton to talk about. this week. Let's get into the deals first. So big fundraise. So Jump Capital announced a $350 million fund. They're going to be doubling down on crypto investments. They also established formally what has been going on for a while, which is their big business unit that focuses on crypto assets. So really exciting stuff. Congrats to Peter Johnson and the Jump Capital team. Jump has really been getting much more public about their position in this industry. Well, jump is all over this from a trading perspective, obviously, and just great venture investors as well.

Yeah. They just haven't been that well known historically, and now they certainly will be. Next up, we have X margin, which is a credit risk platform. They raised $8 million from Coinbase Venture, Spartan Group, Hashkey, Coin shares, GSR, and Polychain. Next one is immutable. This is a platform for scaling NFTs on Ethereum. They raised $60 million from Bitcraft, King River, Galaxy, Fabric, Alis. Alameda and a few others. Then we have recur their non-fungible token platform. They raised $50 million in a round led by Stevie Cohen's family office.

Stevie Cohen was also in the news for investing in a company called Radical, R-A-D-K-L. I like what they did there. That's a new quantitative trading firm. They're focused on digital assets. So busy, busy day week, I guess, for Steve Cohen. And then Franklin Templeton has filed for a blockchain-focused venture fund. Yeah, $20 million venture fund for, Franklin Templeton, who's been in this for a while, has been trying to tokenize existing

securities and looks like they're doing more in the blockchain space, which is good to see. Amber Data is also in the news this week. So they are a crypto asset data company. They raised $15 million from Franklin Templeton, City, Galaxy Digital. And then we have ABRA, very well-known, sort of crypto-financial services company. There is $55 million from Kingsway Capital, Tiga investments, stellar, Amex Ventures, in CMT Digital. So a busy week for the deals.

We probably have more deals this week that we'll just put in the newsletter for next week. All right. So let's hop into this. One story that caught my eye this week was Bloomberg broke a story that Fidelity had a meeting with the SEC to discuss their spot-based Bitcoin ETF application.

And so to just orient you around how this came out, so Fidelity has filed for a spot-based Bitcoin ETF, There's a number of filings for spot-based Bitcoin ETFs at this point. There's also a number of filings for futures-based Bitcoin ETFs. And just a procedural point here, so Fidelity has filed what's known as a 19B4 on this product, which means that any conversation they have with the SEC is on the record. So if they bring PowerPoint slides, they need to be published in the public record, and whoever went to the meeting has to have their name disclosed.

prior to filing the 19B4, firms that are trying to introduce ETFs can have off-the-record conversations with the SEC. So you would not know the content of the PowerPoint Act that they presented. You would not necessarily know who went and spoke with the SEC. So with that out of the way, the big argument here, I guess, has been around the manipulation of the spot market for these ETF products. If you look at the denial of the Winklevoss ETF, the denial of the Bitwise spot ETF, it came down to the fact that the spot market, there are venues that are not registered with the SEC, not regulated in the United States, you know, read between the lines, finance, Bitfinex. They perform a big majority of the spot market, well, maybe not a majority, but they perform a plurality of the spot market volume.

The argument that the SEC has is that as long as that's happening, you know, you can't really have this ETF. You have market manipulation concerns. What Fidelity is saying with this report to the SEC is that you actually should look at the CME futures product. And the CME futures market, they say, and the data appears to show this, is what actually drives the spot market. And so if you're concerned about the spot market being manipulated, the point here is that actually it's the CME regulated futures market that drives what happens in the spot market. And so by that logic, the SEC should be on board with approving a spot Bitcoin ETF. So that's a lot. I'll pause there. What was your take on this?

I like that the research was made public through this process. I suggest everyone reads it. I'm going to put it in the show notes. It's interesting to see that Fidelity has not given up on the spot ETF. Obviously, a spot ETF is best because of future. based one has some inefficiencies. The futures ETFs are progressing through their 70-day period to become a 40-act fund. I believe there's five of them. Eric Balkunis, who's one of my favorite, I guess ETF journalists, had a good download of the data. It looks like the pro-shares one is up first. Possible that it could be approved on on October 18th.

So mark your calendars. And then there's a number of others in quick succession in Bensico, Vanek, Valkyrie Galaxy. I think the SEC is, you know, would be remiss to dismiss this analysis out of hand. It's very academic. It's a great analysis. The word Fidelity did.

A lot of coin metrics data in here, I must say. Are you persuaded by the lead lag analysis? I am persuasive. by it. And I think there's a bunch of things going on here. So one is just to your point, the futures-based Bitcoin ETF is not a great product necessarily for the consumer because there's costs associated with rolling those futures contracts. And so it won't necessarily track the price as fluidly as the spot-based product. There will be considerable tracking error. Yeah. And so that's one thing is that I just think this is a much

better product. Now, obviously, that's not enough. And so you need to show that the market actually functions at that spot level. And this data, to me, is really compelling that the futures market actually drives that spot market. So if the futures are getting pushed up, the spot's getting pushed up. And it is persuasive to me. I don't, you know, one question is, has the SEC seen this before. And so it's quite possible to me that other sponsors have had these discussions with the SEC prior to filing 19B4s. And has the SEC opined on this? That will be interesting. But I would think that if you're having an on-the-record meeting with the SEC, you would like to think that the SEC would have to respond to that specific point in the same way that they responded to the

bitwise denial with kind of a detailed summary of why they either agree or disagree with the finer points. So I hope that we'll get a point of view from the SEC on this lead lag issue. Well, I mean, I think that at this point, the barriers to entry that are being inserted are excessively high because the burden of proof is enormously high. I mean, Bitcoin is a large market. It's larger than most commodities. It's global in nature, so it's hard to capture it in any respect. It's produced globally. And there's exchange infrastructure. Some of it highly institutional, have fully regulated, and some of it, like any other commodity, is kind of spot and, you know, OTC based. Like other commodities. You know, you can buy gold at the mall from, you know, the gold, you know,

pop-up shop, or you can buy gold, you know, you can buy a good delivery bar at the LBMA. And, you know, so at this point, at this point, I don't think there's any cause for denying an ETFs. The ATFs work great in Canada. There's ETPs in Europe. They all work great. We actually were seeing, I think ARC actually changed their Bitcoin exposure to move it to Canada. Because, you know, now we're seeing capital flight because of the SEC's reticence here. So, you know, if you look at what exists in ETF format, you've got like 4x levered inverse natural gas ETFs, like things that are enormously volatile, 2x inverse gold, like things that are mathematically guaranteed to go to zero. over time and you know have this decay to them so like investor protection is does not appear to be paramount in terms of what is selected as far as ETF's concerned so I

mean it this continues to look like a political decision to me just in terms of the market size and maturity like it's well well past the point where other other commodities or markets would have been approved this point. I totally agree. I mean, the SEC is in a tough spot here if they really want to continue to hamper this industry because the facts and circumstances are supportive of the ETF. That much is clear. And by the way, just look at the cast of characters that was in that room. I mean, they brought out the heavy hitters at Fidelity. This is a very, you have to applaud Fidelity for this effort here in actually putting it on the record after the 19B4. I think the industry should be

thankful that this dialogue is not happening off the record. Was there ever, I mean, feel free to let me know if I'm wrong, but has there ever been an asset class where this much effort and this broad, a variety of sponsors was assembled to try and create an ETF? Not that I can recall. I mean, there was a lot of hype around the first gold, ETFs. I'm certain that a Bitcoin ETF approval would outstrip the inflows that we saw when,

when GLD was approved? Oh, without a doubt. I mean, this is such a bigger market at scale, potentially, than the gold market. And so I think you're seeing, you know, you're also just seeing a race for customer acquisition here. And so if Fidelity can get out of the gates with this ETF, what would that do to the distribution channels at Fidelity, right? The retail business units, the workplace business units, the institutional business units,

to be able to have access to this product. So there's some strong incentives for why these sponsors are going after this product. So also in ETF news, Bitwise has filed for futures-based ETF. Yeah, so bit-wise, and this is, I would say, you know, this is kind of the most likely product, I would say, still to get approved, at least in my opinion. If you just read the two leaves of Gensler talking about the CME futures market, so maybe we get a futures-based ETF, but I think everyone would like to have a spot product. Yeah. Now, in terms of this is a tricky topic, in terms of market failure or mismanagement, what do you make of the developing OpenC scandal? Yeah, so those who are not familiar, OpenC is, of course, the largest NFT trading platform. They were the subject of controversy this week. Apparently their head of product was buying NFTs, the categories of NFTs.

that were about to be listed on the front page of OpenC. And so basically front-running it. You could think about this as comparable to, you know, some of the things that have happened at Coinbase in the past around employees buying products that were about to be listed. To me, obviously, it's unethical and it's a very bad look. I don't know that this is a securities law violation because I don't know if NFTs are securities or not.

But it strikes me as a pretty bad look. Well, it's the kind of thing. the Gets regulators interested in crafting an insider trading standard for crypto. You know, the crazy thing about this is that it's probably wiping off hundreds of millions of, you know, valuation from the major NFT platforms, certainly open sea. And it will absolutely, I almost guarantee that Elizabeth Warren's going to talk about it. the next time she does one of her campaigns because she has these increasingly specific critiques of the industry.

Elizabeth Warren has someone on her team that must be just really not enjoying gas fees. She was complaining about Eunice. I don't think she mentioned it by your name, but Uniswap gas fees. I think was there, here's how I imagine that going down. So again, for those of you who are not familiar, Gary Gensler testified in front of the panel this week. and Elizabeth Warren had some interesting comments around financial inclusion is not really what's going on here because the gas fees on Ethereum are so high if I had to summarize them. And do you think she just typed in or someone on her staff typed in Ethereum transaction fees and just saw that they were pretty high? I mean, she's not wrong.

They are pretty high, but they're high. I mean, at some points they did hit, you know, $500 plus for a swap on uniswap. so she's not wrong. But it's also like, are regular Americans going to listen to this and be like, yeah, un-swap fees are too high. The fees are too damn high. Nid layer two. Right. Yeah.

Everyone moved to arbitram. Yeah, I don't know. I don't understand the strategy there. It seems like she's getting increasingly niche and esoteric with her critiques. Anyway, she's definitely going to talk about OpenC. Here's the crazy thing. According to the records posted on Twitter and the, you know, rudimentary sort of blockchain analysis detective work the head of product who was doing

this to open C made like 18 eth from it it's quite a bit of ETH I mean I was gonna say it's virtually nothing relative to the amount of reputational damage caused I mean if we were talking thousands of ETH and it's like okay I you know I see why but here it's like a de minimisic amount yeah I mean I don't know fifty thousand dollars to most people that's a lot and Yeah, the reputational damage is hard to convey. Now, I'll say that these things tend to blow over pretty quickly. We've had a number of these scandals with exchanges over the course of the industry.

But yeah, it's a bad look. Yeah. And I mean, the thing is, though, is that because crypto assets are treated as commodities, there isn't really any insider standard. I believe Matt Levine may have written once about insider trading in the context of commodities, but in regular old commodities it doesn't really exist also. I think there's exceptions. I'm going to have to look into that.

But that's the thing. Do the major brokerages have established protocols against trading on insider knowledge about listings? Maybe. Are they particularly robust? I highly doubt it. You're talking about the crypto brokers. Yeah. I mean, there's no distinction really in my mind.

I think the markets are rife with insider trading because there is no standard. And because, you know, it's effectively an implicit part of your compensation package if you're an executive at one of these brokerages, hate to say it. I don't know. I don't think, I don't get the impression that that's going on in a widespread way. I mean, some of this. There's plenty of evidence. Just look at any major listing. The listings always trickle out prior in the form of information being priced in prior to the

listings. Look at the Bitcoin Cash listing on Coinbase. Well, that's what I was about to say is that you do have these clear examples where things happen. But generally speaking, those things come to light. I don't think that this is systemic necessarily. But what I do think is that there's a lack of clarity in terms of which assets are actually securities.

This maybe is a good dovetail into some of Gensler's comments this week. And in particular, I think, you know, whether or not these assets or securities will dictate what type of regime needs to be applied to the trading and lending of them. And so let's just say that per Gensler's comments, a bunch of assets on Coinbase are securities. The implication is that if Coinbase continues to list them, they would need to get an ATS license. They would need to become registered with the SEC in order to be a venue to trade securities. and maybe they'll have another venue to trade Bitcoin and things that are not securities. That venue that has these securities on them would be subject to all the normal insider trading policies and you'd have to have these procedures and compliance regimes.

It's just unclear which one of these things are securities at this point. It's kind of a case where it's sort of like you don't want to find out because if you ask Gensler to go down the coin market cap and point of the securities, he would point at, all but maybe two assets. And maybe he would point at ETH, who knows? So that's an interesting feature of the Ripple case right now, as part of the strategy of the Ripple Council in that case against the SECC is drawing commonalities between Ripple and Eath and saying,

well, if we're a security, what about them? Yeah, that's fascinating. I mean, I think anyone could draw distinctions between Ripple and Eith, But that's actually part of their legal strategy now. Yeah, it seems like that is exactly their legal strategy. So let's play this thought experiment for it. I was talking to a few people in the quote-unquote traditional financial services space earlier this week. And we're talking about sort of a worst-case scenario here where many, if not all of these cryptocurrencies besides Bitcoin and Eath become securities.

They have to be listed on exchanges. Now, what does that actually do? you could argue that that just expands the pie for who can actually transact in these things, where you'd see existing broker dealers having the ability potentially to list these things. So maybe the market size grows here, and maybe that is good for the industry in the sense that more capital can be put to work in these things. Now, the flip side of that is the functionality of these networks would potentially suffer enormously. What if every time you used Filecoin, it was a security transaction?

that starts to get really complicated and probably doesn't work. Yeah, I don't know if regular individuals could even take ownership of these things directly without a ton of paperwork. You wouldn't necessarily be able to transfer them on a peer-to-peer basis. Like, can I transfer Apple stock to you bilaterally? I've never tried, but that's a good. I mean, I'm sure there's a way to do it, but it's probably complicated. It probably involves faxes and, you know, mailing physical envelopes. I believe there is a way to actually get your stock certificates physically, but I think the DTC doesn't support that.

But yeah, I think it vastly complicates it and sort of invalidates a lot of the infrastructure, which is premised on these things being genuinely bearer assets. So securities are not bearer assets anymore, really. and I don't know. I think it would also eliminate competition from the exchange or brokerage market because you'd have to have all this capital raise and you'd have to be at a certain regulatory stature to even begin to engage at that point, which means that all of the startup exchanges are invalidated. Well, they would have a race to raise capital.

You're right. I mean, it would be a tremendous win for incumbents. And there would be a big, you know, the banks and broker dealers would really benefit from that. But I'm not sure it's compatible with the crypto infrastructure that exists, frankly. I don't think it does either. So there's one angle of Gensler's comments just around the brokerages and the lending platforms and maybe they fall under the SEC purview.

My guess is that if and when they do, then, you know, they'll be fine. They'll adapt. What's perhaps more troubling is his comments around stable coins. and, you know, talking about defy. And if there was a push by the SEC or some regulator in the United States to make it much more difficult to get stable coins off of these issuing platforms like Coinbase and Circle, then, you know, my question is kind of what happens to decentralized finance in that world. It seems to me that stable coins are the most, aside from the brokerages and exchanges, stable coins are the most likely vector through which. the SEC would push into defy because stablecoins are the lifeblood of defy you know initially the stable you know defy people try to resist influence the stable coins especially the centralized ones

and then they stopped resisting and then clearly dollar-based collateral was the best and it won out and now you have a handful of issuers that control much of the liquidity on defy and of course a stable coin is not a true bare asset because you're beholden to the issue or to honor your claim. And so that to me seems like a good choke point to actually put pressure on defy. It's why we've seen some of these tweets around if you have the ability to build a decentralized stable coin now would be a good time to try to do that. We haven't really seen a successful one that can actually scale and maintain a peg. Well, dye was a good effort, but then they filled it with USDC.

Right. If you, you know, you cut open to the dye cake inside is just USDC filling. Right. So then, I don't know. It works. It's a tasty cake, but it's not a pure decentralized stable corn. Didn't honor the original vision.

So a lot more there. Along the lines of regulation, so Coinbase has applied to become a member of the National Futures Association. So they would register as an FCM if this goes through, which would brought in their offering, they'd be able to do spot and futures products on the platform. So of course, this comes on the heels of FTX moving into the derivative space as well. It seems like this is a trend that we'll continue to see. I think every major crypto exchange has ambitions to just become a general purpose exchange

in line with IC and NASDAQ and so on. Yeah, they're kind of retail brokers that are moving up the stack towards more of the derivative-based country. This show is brought to you by Coinbase Prime. Coinbase Prime offers trading, custody, and financing tools for institution. Trade financing includes the ability to trade from cold storage instantly, as well as margin lending and shorting. Coinbase custody is battle-tested with dedicated on-chain addresses and industry-leading insurance.

As far as trading is concerned, Coinbase Prime offers sophisticated, integrating trading tools, including real-time market data, smart order, routing, robust analytics, and algorithmic execution strategies. To learn more, visit on the brink.link slash Coinbase. So it was a tough week for the blockchains themselves. ETH continues to be afflicted by high fees, of course. Solana went down for 17 hours. 17 hours.

Apparently. Sometimes it's like you have to just unplug it and put it back on. So that's what they did. basically what happened. There's a proof of discord. The validators got together in a discord and sort of, well, they didn't restart the protocol from scratch, but they did reset it. So that was down for 17 hours. Arbitrum, which is a layer two on Ethereum was down for about an hour. They had a sequencer bug issue. The L2 stuff, you know, that'll happen, I guess. Ethereum itself did not go down. So, you know, effectively transatlantic. transactions that were happening at the L2 level were impacted here, but not just the base money functionality of Ethereum. The Solano one's a little bit more troubling. Yeah, the problem is,

is that there's much less tolerance for mistakes if you are worth a lot, and they are. So there's no equivalent, you know, you couldn't say it's the same thing as Bitcoin having a rollback in 2010, because no one cared about Bitcoin back then. If you're worth $50 to $80 billion, you just have less margin for error. Even though your network may be new and incipient, it's already been financialized as if it's mature. So unfortunately, the stakes are extremely high for a lot of these new L-1s because they appreciate it so quickly. And it's going to be a significant optics blow because this is the trade you're making. The trade you're making is an enormous level of throughput, and hence low fees.

But you're trading that for fragility because you have a smaller number of validators and you might have a liveness failure. And the nodes are harder to run. So, of course, when things go wrong, maybe it's harder to recover from it. And that's the trade. And, you know, people were ignorant about the second half of the trade. And now some more people know. It's interesting to see the framing.

And obviously there's a lot of salonah holders that are listening to this podcast. There's a lot of salana holders in the community. A big chunk of the salina bowls that I saw, they sort of have a web 2.0 maybe model for these things. Like, hey, yeah, Twitter used to go down a lot and the internet itself was really unstable. It's a little bit different, I think, when you take the lens of this is a monetary technology. And so not having access to your wealth for 17 hours is a lot different from not having access to your information feed for 17 hours.

Correct. Yeah, the stakes are vastly different. There are thousands, probably over, well, over 100,000 people's savings at stake, whether or not they should be invested in new L-1s. That's why financial markets are the most heavily regulated markets in the world, whereas information technology is virtually unregulated. It's because it's people's money that is at stake. and so the duty of care is just much, much, much, much higher.

And, you know, that just goes to the territory. What was that one that was down for like a month? Iota was down for six weeks. That's the thing. It always kind of cracks me up when people, you know, notice that a blockchain is down. It's like scandalous. Blockchains go down all the time. They do.

If you're an exchange or crypto broker, this is a huge risk that you're sending out bond transactions onto a fork that is not actually the real network. So it's not, I mean, even Ethereum itself has had some, some forks and, you know, some sort of resets and bugs recently, but, um, especially the newer sort of high performance. It's kind of like a super car, you know, like, okay, this thing can do 300 miles an hour, but it also needs maintenance every, you know, four or five hours of road time kind of thing. So it's just a, there's just more fragility there. And if you have fewer validators and each validator has a higher throughput and, you know, is a high-end piece of equipment, basically, it's easier for it to go down, whether it's deliberate or it's accidental.

And for these high throughput blockchains, there's going to be a ton of fragility and there's going to be a lot of moments where it falls over. Solana isn't the only one. We've seen blockchain outages in Tazos, Cosmos, we already mentioned Iota. Virtually every major sort of web, you know, blockchain 3.0, you'll find these outages. It's just people don't talk about it because it's sort of a black eye, so you have to sweep it under the rug. Yeah, and this will get swept onto the rug for a while, and we'll be on to the next thing. But it's, you know, these things should not be going down. Well, let's talk about micro strategy.

So I'm going to stop calling this a software business because it's just a Bitcoin access vehicle that exists because we don't have an ETF basically. And I love it. They bought another 5,050 Bitcoins. That's a good number. And it is interesting. Microstrategy exists in part and they're influential. And you see now other firms buying them publicly as a way to get Bitcoin exposure.

That exists, that whole business model exists because we don't have an ETF. Did you see Coinbase just announced that they're raising $1.5 billion in a convertible note? It's unclear what they're going to use the proceeds for, but they have been on the record saying they're going to use 10% of their profits to buy crypto assets. So maybe Coinbase starts to make a move here, or maybe they just go on an acquisition spree. But capital markets are wide open for a company like Coinbase right now. This is also part of the reason I think miners are so popular because a minor is just exposure to Bitcoin. And there are so many public miners and so many new listings. People aren't even paying attention to this.

You know he's been good on this? Mike Alfred. I'll give Mike a shout out. He's been covering the miners really aggressively. But for some reason, I just never see any chatter about the publicly traded miners. We will be doing a podcast episode either next week or the week. after we'll release it with a public equities manager who specializes in blockchain focused public equity plays and he's very knowledgeable about the mining space so little tease there all right it'll be on

the podcast not call in not the after party so here's something interesting um stephan uh chin i think that's how you pronounce that um who ran a hedge fund called sigma fund lp also known as virgil capital i think Yeah, a number of names there has been sentenced to seven years in prison for effectively defrauding investors. The fund was apparently fake, and you just sort of siphoned apparently $90 million from it. This is an interesting one. We have a bit of an intersection with this story here. My friend, Stefan, not my real friend, but we do have a little bit of an intersection with this story. You interviewed Stefan on a panel at a Harvard Business School conference here.

This is one of the strangest things that's ever happened to me in the crypto part of my career. So I got asked to do this interview panel thing at Harvard Business School. It was the year that they had all the rock star crypto people coming out. So it was like Brian Foster's year when everyone went into crypto and now is in big jobs. So I got asked to do this panel. I think I was interviewing someone from Falcon X, Joe Lulu's from Bison, Trails and Tim Rice from Coin Metrics. And there's also this guy that runs like this huge crypto hedge fund.

And I was like, oh, I've never heard of that, the Virgil Capital. I've never heard of that fund. And so we go on stage and he wasn't there. So I guess he just didn't show up. It was like a 9 a.m. on a Saturday thing. So it was like maybe he slept in. So we get, you know, 10 or 15 minutes into the panel and there's an empty seat. All of a sudden this guy comes like popping onto the stage and just sits down and

pops himself in and he's like sweaty and he's looking at me to ask him questions. And I just sort of, you know, looped him into the conversation, never introduced him. Could have been anyone. Could have been anyone. I, like, for all I know, this wasn't even Stefan Chin. And, you know, I'm asking questions about crypto infrastructure and he just starts talking about all these like arbitrage strategies that I've never even heard of. And it was just one of the most bizarre things.

And like we wrapped it up pretty quick. But yeah, so I interviewed the guy who's like, going to jail for seven years apparently he raised a bunch of money and just took it all do you think he raised money on the strength of that of the panel i don't know he apparently he'd been on like cnbc so like this guy had somehow like navigated his way into he'd been profiled in wsg even the wsj article talking about the conviction said that they in kind of a they said that the wsj had profiled him so they got taken in too i it's just such a bizarre story here so So I guess this guy raised a bunch of money off of like some of these appearances and,

and just took the money that went into the fund for his own lavish lifestyle, which is just, like, what a psychopath. A New York apartment, apparently. I was there. I was at that conference. I gave a talk. It was a good panel. I thought it was decent.

I didn't understand what he was saying. And I was also pretty confused by it because I'd never heard of the guy or his fund ever. Yeah. So that's that story. That was that story. That was a bizarre one. So the New York Times are at it again. That's been a fun thing that happened this week.

I mean, every time the New York Times has one of these op-eds that just has blatant, just incorrect information on it, I get like 10 emails from people that just read the New York Times and just tell me, hey, sorry, like crypto broke again. I guess this career path you've chosen is just not working because this famous person in the New York Times just said it's all a scam. You know what I like about the corporate press? We don't call them the mainstream press because I don't think they represent the mainstream. I call them the corporate press now.

So new term just dropped. Read the comments on some of these articles. And it's like the most vitriolic bile typically from boomers imaginable. Towards crypto? Yeah, yeah. It's incredible. So read the comments on this article. It's great.

So a certain Mr. Biniamen Applebaum wrote a column called Bitcoin Cosplay is Getting Real. Cosplay, short for costume play, I think. It's like where you dress up as like a Marvel character at a conference or something. I did not know that. Yeah. So Bitcoiners aren't, they don't really overlap with cause. Cosplay people are like, you know, like wee booze and like people that like to,

that are really into comics and like fantasy stuff. Bitcoiners seem to be a little more grounded, I think, in my opinion. Yeah, I wouldn't say we're not showing up wearing Marvel outfits. Yeah, we, I mean, we'll wear, like, Bitcoin gear to conferences. But anyway, I think that's a little unfair right off the bat. But his point is that we're like fake libertarians. I mean, not all Bitcoiners are libertarians for a start, but he's got this kind of like 2015 era view of the industry

where he says Bitcoiners are like fake libertarians. because it's like a fake revolution and they're not doing the hard work of like fixing finance. They're just what's the line that he has here? Let me find it. Bitcoiners are cosplay libertarians participating in a game of make believe on the playgrounds of the nanny state. That's just mean. So there's that. And then he also says the politicians, however, are taking Bitcoin seriously.

So it kind of contradicts himself because if politicians are taking it seriously, then it's not make-believe, then it's real, right? In response to Buckele, embracing it, and he says, you know, it's effectively escapism and that, you know, they should know better. And, quote, it's a pleasant illusion that the problems in the financial system can be solved by replacing it rather than doing the hard work of fixing it. And then he also says a bunch of other wrong stuff. Like he compares Bitcoin to the Enigma Code being cracked in World War II. Yeah. So the government apparently cracked Bitcoin with this case a few months ago, which was reported at the time incorrectly.

So I guess he just Googled that. So I went down a rabbit hole. I'd read the Robert Lustrum book on Enigma. I never saw the imitation game. I think he probably just saw the movie and decided. that it was just like Bitcoin. Yeah, it's encryption. Even though the Enigma was encryption,

it was actually commercially available, encryption that was created in the 20s or 30s in Germany, and then it was used for military purposes and made more complex. Public key cryptography didn't exist until the 70s for military purposes. In late 70s, it was sort of discovered in academia and then consumerized kind of in the, I would see, in the 90s. So it's just not

remotely the same kind of technology. He's talking about 1930s era technology. Bitcoin created in 2008 with you know cryptography

dating back to sort of the 90s. I mean, I guess the colonial pipeline part of this is just complete BS. I mean, the government did not they did not go into Bitcoin and like take those coins back. Well, also he's wrong about the enigma too. So he says the German government relied on a code called enigma that's mathematicians insisted it was

impossible to break. The British famously broke it basically by figuring out the password. That's not what happened. No. At all. No. That's not at all what happened. First of all, the polls give some credit to the polls here. No one gives enough credit to the polls. The polls broke. Well, so the enigma wasn't just one thing. It was continuously iterated on and improved over the course of the 30s and over the course of the war. The Luftwaffe used it differently from the U-boats. The U-boats were the most rigorous with their enigma usage. And then there were just various degrees of sloppiness in terms of operators using the enigma. The Poles were the ones that really broke it and built clones of the Enigma first. And then as Poland was taken over, the polls, the cryptographers kind of escaped to France. They didn't they didn't all come to England right away. They escaped to France and then helped continue to break a lot of the messages or to decipher them. And then then you had, you know, Bletchley Park and Alan Turing. And, you know, there was this operation that really got industrialized, which was just deciphering the messages. But it wasn't, you know,

by figuring out the password. It was more reverse engineering, the Enigma machines, and then doing this kind of analysis on the text where you kind of like solving a crossword puzzle, you would use sloppiness or repetition in terms of the syntax of the text. So a lot of the messages in the Enigma began the same exact way. And so if you could crack those letters, it would often begin to space, as in T.O.

Like, this message is four. And so if you could determine those letters, you could start populating the rest of the message with those letters. Right. And so because the messages were often put together in this sort of stock way, even though the encryption was being rotated on a weekly basis or a daily basis, you didn't actually necessarily need to know what the message was encrypted with to effectively decipher the message, right? So it's like using a one-time pad more than once is sort of how that would be comparable to.

There were a lot of techniques, but one of them was just basically this textual analysis where you'd know the messages take this form and they refer to these standard things. And once you are able to associate unscramble, one or two letters, you can populate the text and kind of figure out lots of it. And so they got really good at that. They'd also do other things like the Navy would place mines, nautical minds, in a specific configuration such that the Germans would discover them and write messages about them. And then the British codebreakers could use the information about the placement of the mines to help, you know, decipher the messages. They also had, they captured code books and material. So it wasn't really

a matter of, you know, just breaking the cryptography. Or just guessing the password. Or guessing the password. And then in terms of, you know, elliptic curve cryptography, the discrete log problem is hard. That's it. Nobody has guessed the password in elliptic curve, you know, or the ECDSA. There's no heuristics for doing that any faster than the naive brute force method. since it's emerged.

So no one, to our knowledge, has ever, quote unquote, guess the password or derived a, you know, private key from a public key. So he's implying that the colonial pipeline hacked dollars were recovered by breaking ECDSA, which is false. That's completely false. And also, if that were possible, then it would undo his whole argument because the government could just confiscate everyone's Bitcoin and make it go away. Yeah. But it's not possible because what actually happened was the government, you know, subpoenaed a server that someone was storing keys on.

They took the keys, the old-fashioned way. So this gets in the New York Times. Yeah. And, you know, to be clear, it's in the opinion section. But this guy, Benjamin is a member of the editorial board. He's apparently their lead writer on economics and business, but he just doesn't remotely understand or he isn't bothered to do the work to understand the way the Bitcoin works.

It's as simple as that. Oh, not much more to add on that. Continue to be shocked at the level of opinion pieces in the mainstream media about the crypto industry. I would say the only publication that's remotely good is WSJ. and they even they are inconsistently good but the rest the FT is just rabidly anti-bicoyne although they're kind of turning a corner a little bit maybe isabella is good but the her colleagues I would say are less good and yeah the WS New York Times is pretty pretty hostile these days um one other thing that I saw this week was did you notice this epic versus Apple

case. So there was a decision. They kind of split the baby. I won't go into the details, but it, you know, Fortnite kind of stays off the Apple store. But a lot of what Apple wanted to do was upheld. But there was a piece of this that effectively looks like it has some big implications on the crypto sector in the sense that, you know, if I read this correctly, and Fred Wilson blogged about this week, apps that use crypto rails for payments cannot be blocked by Apple anymore. said another way, Apple cannot have a monopoly on a payment method for an app. And so you're starting to notice that within the context of Spotify, some of the functionality being opened up there.

But I'm wondering if this will have a broader implication on the ability to launch apps that have crypto payments on the Apple platform. Yeah, this has actually been a pain point for crypto wallet startups, things like that, where they wanted to take fees directly from users for processing certain kinds of transactions. and they couldn't. They wanted to take in-kind fees, isn't in Bitcoin or cryptocurrency terms, but they were forced to go through the app store payment method

where Apple take, I think, a 30% cut. And if I'm reading this correctly, then a lot of those applications will be able to take direct fees, which is a big, big difference for a lot of crypto app. So I agree with Fred. This is potentially quite important. Yeah, I agree.

This will be an interesting one to watch. So I think that's it for the week. I'm sure we'll have more news breaking today and we'll have more news next week. But we'll have a busy week next week. We have a couple interviews lined up and Colin. We'll do Colin at some point. So a paper I've been rumoring, have been going to publish for a long time, just meant to come out today.

It will be out on Monday. So keep your eyes peeled for that. Oh, I can't wait for that. All right, good tease. All right, everyone, have a safe and healthy week. and we will see on Monday.