On The Brink with Castle Island - Weekly Roundup 10/02/20 feat. Michael Moro (BitMEX goes down, Genesis launches custody, the SEC scores wins) (EP.133)

Episode Date: October 2, 2020

Nic and Matt cover a tumultuous week in the crypto markets. In this episode:  We investigate the Dollar Milkshake Theory BitPanda raises $52m Genesis announces the official launch of their custody product Our breakdown of the BitMEX situation Where the BitMEX situation leaves the remaining offshore crypto exchanges The prospects for users who currently have funds on BitMEX How the BitMEX lawsuit potentially improves the prospects for a Bitcoin ETF Whether BitMEX was a source of sell pressure for Bitcoin Where BitMEX leaves decentralized exchanges The SEC obtains a summary judgment over Kik Why the SALT lending settlement with the SEC signals a shift in the SEC's attitude with regards to tokens CommerceBlock converts their token into equity into a UK company Talos Trading comes out of stealth mode The biggest remaining systemic risk that the crypto industry faces

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 Concentutee easing. You print a couple trillion dollars, and all of a sudden, people start to worry.

So out of this worry, we have something called a Bitcoin. Bitcoin. Welcome to On the Brink. I'm Matt Walsh. And I'm Nick Carter. And what a week. This was the end of the fiscal year for CFTC and for SEC. And boy, oh boy, did they deliver.

Jake Trevinsky mentioned this. I think we talked about it last year too and we were kind of disappointed. Nothing big came down the pipe. What happened last year? Well, I think that was the Block 1 settlement, right? right? Oh, yeah. Yeah.

So that was like fairly big, but this year was monstrous. I mean, we had the kick summary judgment. I don't know if that was actually related to it. And then obviously Bitmex is now in the crosshairs. I was on the, I think it was the 16th hole. I was playing in a charity golf tournament this morning. And I got that text from you that Bitmex is kaput. Crazy.

And by the way, I was playing with a very, very, prominent Bitcoin financial markets guy and he hit a hole in one. Whole in one today. It is an otherwise inauspicious day for Bitcoin, but that probably means something. I don't know what the significance of that is. Just as he was hitting that hole in one, there's like people being arrested, just a broad crackdown. What a freaking week. I mean, we had Bitmex, we had kick, we had the salt ICO.

So we had all sorts of enforcement actions. And then we had two really profound big announcements in terms of new businesses being launched on the institutional side with Genesis Capital and Talos trading coming out of that. Not to mention KuKoin got hacked. What a week. Yeah, I'd honestly forgotten about the freaking Ku Koon hack. That was like the fifth biggest hack of all time, wasn't it? Yeah, it was huge. I mean, because Ku KooKoin made a name for themselves listing all of these like early stage tokens.

so dozens and dozens of tokens were hacked. And then the teams behind them started freezing tranches of supply. But that had completely faded into irrelevance relative to this Bitmex news, which is, I mean, I guess it's something like we all sort of maybe expected in the, you know, in the back of our minds, but it's still no less shocking when it actually happens. It's so crazy. So let's set this up. let's actually run through sort of what we're going to talk about today. We have a lot to discuss.

You know, we're going to run through some of the deals, some of the things that happened this week. First, let's talk about some of the pods we had this week. So we had Chase Lockmiller, the co-founder and CEO of Crusoe Energy Systems. That was one of the coolest podcasts we've ever done. Crusoe is a company that's capturing stranded energy, converting that energy into Bitcoin, among other use cases. So just one of the coolest ideas I've ever seen. Who knew? Could Satoshi have expected that his invention would end up being pretty useful for reducing the energy intensity of the oil extraction industry? I mean, how crazy is that? Just so crazy. And what a just a really impressive team. Chase actually climbed Mount Everest. That's the first Mount Everest guy we've had on the podcast. That we know of. That we know of, yeah.

That we know of. We might have had some secret Everest. climbers among them. We could have. And then later in the week, we had Brock and Trent Elmore, that was the first brother duo that we've had on the podcast at the same time. The brothers Elmore, they are two of the five founders of Yam Finance, which is a defy protocol. So that was a fun one as well. I mean, that's probably the first defy token that we've interviewed the team of. So we're really branching out here. We're branching out. We, you know, we're trying to expand the horizons into all sorts of different places. So listen to those. And then you did a bunch of content this week. You were on Real Vision. Yeah. So it was my second time on Real Vision first dedicated interview. That's behind

a paywall, unfortunately. So subscribe to Real Vision, I guess. If you want to hear my dulcet tones through that medium. But yeah, that was actually a really, really fun interview. And the Real Vision subscribers gave you a bunch of upvotes. And so they seem to like it, too. That's great. Yeah, enjoyed it. The thing I like about Real Vision is that you can put the video on 1.25 or 1.5x speed, kind of like a podcast app. So I did that last night when I was listening. Yeah, the production quality of Real Vision is amazing. They have transcripts. They tell you when you said stuff in the interview. After that, I went on a bench of watching Real Vision. I found out about the Dollar milkshake theory. Have you heard about this? I have. I do know about the Dollar milkshake theory.

So I finally, I'd seen it on Twitter, I'd know what it was, and then I watched like five interviews back to back about it. And now, you know, consider me converted. I'm an adherent of the dollar milkshake theory. The basic gist there is that the dollar is slurping up all of the other crappier currencies, right? Yeah, that contrary to what a lot of people think about the dollar softening, this kind of global deleveraging event has yet to occur. and there's kind of unsustainable amount of debt, especially in emerging markets. And at a certain point, it's all dollar denominator, it has to come due. And the proponents of this theory think that emerging currencies are going to get absolutely crushed,

and the dollar is going to appreciate sharply, which would be devastating for the world. When the dollar goes up, risk assets go down. Probably not even good for Bitcoin. So that's their view. and I guess we'll see if it happens or not. We'll see. All right, so let's do some deals and then we'll get into the news. Big deal of the week was BitPanda,

which is a Vienna-based neobank in crypto brokerage. They raised a $52 million Series A led by Valar Ventures. So congrats to BitPanda. Yeah, I actually rolled through the Vienna airport not too long ago and I saw their ads. And I was super pumped because I was like, wow, they like, They like Bitcoin here in Central Europe too. I mean, and who doesn't like pandas?

Yeah, I don't know where they got Panda from, but apparently Central Europeans are buying a lot of Bitcoin. Who knew? The next one is Flurry, which is a data management company. They raised $6.5 million in a seed round with 449 ventures, rise of the rest, good growth capital, and engage ventures. Next up we have Dodo, which is a decentralized exchange. They raise $5 million through a token sale. fact about dodo the newest set of emojis that's being released contains a dodo in case you've ever felt the need to express that in text format so a dodo bird in terms of and so like why would

you use that is it just like I'm about to go extinct or something yeah I guess to conode extension or to now the dodo exchange they can use it too well the dodo exchange is bitmax oh that's uh it's too soon. I mean, Bitmax isn't dead yet for the record. I mean, I did see they're doing withdrawals. All right, we'll get to that. We'll get to that. Yeah, they could power through. Who knows? All right, a couple fun news type of things here. So Parify, which is a crypto fund started by Ben Foreman, formerly of KKR. They're focused on defy. They received an investment from Galaxy Digital into their management company. Also, Robert Leshner of robot ventures, also of compound, raised a $4 million fund and brought on Tarun Chitra as a partner.

Tarun is also the founder of Gauntlet. And if you followed private investments in the defy space, you know the Robert is prolific when it comes to making angel bets and defy. And so now he's formalized it with Robot. And I got to say, Tarun is just one of the most impressive people I know in the industry. I mean, his papers regarding proof of stake yields and lending, yields on chain were kind of revelatory, honestly. So super impressive guy. All right. So let's get into the news. What a week it's been. And I actually thought that the biggest news of the week was going to be

Genesis announcing their new custody platform, which I think is a huge deal in the context of institutional adoption of crypto assets. And it's really an impressive feat that that whole team is pulled off here. So we wanted to bring on Michael Morrow, the CEO of Genesis Capital, to talk about what that is. So we're going to cut to that right now and then we're going to come back and we're going to get into the BitMack story. So here's Mike Morrow. Michael, well, thanks so much for coming back on the podcast. You are now a returning guest. So thank you very much for making your second appearance on the brink. I guess I did well enough to merit a second appearance. So thank you very much, Matt, for having me again. Of course. Well, I feel like we could have someone

from the DCG family on like every week at this point because you guys just keep on coming out with new business lines, new exciting things. investing in new companies, and we're going to talk about one of those today. So what are you guys unveiling or what did you unveil this week? So back in May, we had announced our acquisition of Volt, which was a UK-based digital asset, digital currency custodian. And it took us some time to kind of integrate their custody processes, their technologies, both on the front and the back end side. And this week, we were able to announce the official's formal launch of the Genesis

custody product, meaning now the vault's infrastructure technology, vault, all of that has been integrated with the existing Genesis infrastructure, which was something that, you know, that we've been working on over the course of the summer. And in addition, and I think this is a bit more notable, we've sort of married the custody interface with our trading and lending business lines. We had announced our prime brokerage intentions and initiatives back in May. And we kind of taken our first step to having a one-stop shop, a single platform for our institutional counterparties to be able to buy and sell and borrow and

as well as now hold the digital currency. So we're really excited about the next generation of our platform. I think it makes all the sense in the world. And I'm kind of a nerd for business model innovation. And I look in the traditional markets. I think if you look at what Fidelity is done with having the asset management franchise and then the various distribution channels to kind of push that product is probably one of the most beautiful business models of all time.

But I look at what you guys are doing at DCG and at Genesis being actually pretty similar. You know, you have the asset management component, you have the trading and the lending component, and now you have the custody component. I guess not to mention the fact that you have several other things that didn't mention. Retail brokerage is now part of the equation. But maybe let's dig into kind of how the custody piece really powers some of the trading and lending. So you talk a little bit about how you imagine customers interacting with those various platforms and how custody fits into it. Sure. Happy to do it.

So, you know, for years, many of you know that. we have been non-custodial. We were pure sort of OTC market makers on the trading side of the business as well as, you know, having started our lending business in early 2018. But when we decided in earlier kind of 2019 to explore the possibilities of becoming sort of the crypto prime broker, we obviously realized that we couldn't really call ourselves as offering prime services without the custody product. you know, for a long time, I don't think we were interested in custody as a standalone business from kind of the economics and the skill set and kind of know-how.

But I think, one, I think the growth of our lending business really sort of opened our eyes to the possibility of being able to custody assets for our third-party clients who have, frankly, asked us the custody assets for years, and we've always had to turn them down. and also enable them to kind of seamlessly lend it out when they wanted to. And I think so there's kind of immediate synergies around the custody business and our lending business in the ability to locate borrow really, really quickly and easily and kind of make it really easy for institutions of investors to be able to lend out assets that are already custody at Genesis. Certainly, there's lots between the trading and the custody business and that we have lots

to guys that say, hey, I just want to buy, I just want the exposure. Can you hold it for me? And so there's kind of natural kind of synergies around that. And so as we thought about the next generation, the future for the firm, we realized how central and core the basic functionalities of the crypto custody business was to kind of help drive the other business lines. And so it was a natural extension of the business. And, you know, we're really proud of. of what we were able to introduce this week with lots to come on the road now. It's interesting.

If you think about the risk inherent to a custody business, people will think about that as, you know, risky business, kind of a cybersecurity business. But if you think about it in the context of what you guys are doing on the lending side, I'm wondering if it actually makes that business less risky in the sense that you're not dealing with custody away on some of these transactions

and you actually have visibility into kind of the whole life cycle of the trade. Am I thinking about that? Yeah, I think that's right. I mean, look, I think we're always more comfortable sort of borrowing, lending, buying and selling with assets that were already sort of sitting on the Genesis platform. And I think there's a lot of kind of seamless back-end settlements, operations that kind of make it easier to sort of deal with one kind of entity with, you know, that is Genesis. And also, like I said, operationally, I think it's a ton of easier for us as well as from a compliance perspective to kind of be able to do that.

And, you know, we're just really kind of like scratching the surface as to what this capability offers. And the various, you know, combinations and the benefits that ultimately come from being of the kind of custody third party assets. Now, you know, we describe it as, you know, a high risk business than it is. And historically, it also hasn't been a high margin business either. And I think, you know, part of what certainly is interesting about what we're thinking about is, is we don't really need the custody business to be the standalone, you know, P&L driver for the business. We have the other businesses do that. And we're kind of able to kind of offer our custody product as an additional sort of added service,

value added service to our clients rather than a major P&L driver for us. Yeah, it's interesting because you have a lot of custodians in this market that are sort of moving up the margin stack into trading and trying to get into lending. And you guys have kind of moved down into custody. I'm curious how you're seeing that competitive landscape evolving, you know, with some of the new entrance. And I guess from both the startup as well as the traditional, you know, financial services firms taking a look at custody. What are you seeing out there for custody? I really believe that, you know, this isn't a secret. And custody as a standalone business just purely becomes an AUM game.

And it's how much assets can you, you know, kind of gather under your roof and how much ultimately can you charge and knowing that you can't charge a heck of a lot on a dollar-held basis. So you better have a lot of it to kind of make up for ultimately kind of volume. And you're right. I think there are certainly businesses that started out as custodians that are adding other value-added services kind of on the trading and lending

and kind of building out their prime services kind of that way. And to your point, we've kind of gone the other way. I think standalone startup custodians I don't think is a thing anymore. You saw it certainly on the VC side a number of years ago of standalone custodians and kind of that's being the only thing that they offer.

I think they realize that they can't make it as a standalone business, and it has to make sense in the context of other businesses. And I think economically, it kind of plays itself out that way. From a landscape perspective, like, we don't tend to compare ourselves against other custodians, frankly. You know, we tend to, we much prefer to look at Genesis as a package, as a platform business and a suite of services that Genesis offers as opposed to any kind of standalone. product that might compete with somebody here and there. That makes sense. And how about on the

regulatory front? You guys have always been really buttoned up with the regulatory approach at Genesis. How does the custody piece fit into that? And what framework do you envision operating? Sure. So it's funny. Lots of regulatory regime seem to be kind of coming to, you know, into legislation stage all around the world. And as we have clients all over the world, we're finding that, oh, this country is coming out with this new regulation. That country is coming out with new regulation. We're having to kind of react to it. As mentioned, you know, the UK entity in Volt, you know, was an existing business in the UK. We registered recently our business with the, with the FCA over in London. As it relates to the United States, we are working to become a qualified custodian here in the U.S.

So as of today, we're unable to serve, sort of, say, customers in the state of New York. But we are kind of working to run through the regulatory hurdles to be able to service all of our existing customers, much in the same way that we're doing for other businesses. And when you think about qualified custodian, are there a bunch of options out there? I mean, you see certain companies are going the New York route. There are certain companies that are going the Wyoming route. how do you think about just the range of options? It's hard, right?

I mean, one, you know, the headquarters obviously of Genesis is located in New York. So that tends to kind of lean us towards kind of the New York regulatory path. And two, our trading entity already has the bit license. And so we certainly have a great relationship with our regulators at the New York BFS to be able to kind of work expeditiously with them on any kind of New York. qualified custodian status path that we might be taking. Ultimately, you know, you know, given our old friend David Kinnitsky and the Cracken Financial team kind of working on in Wyoming, I think what there, it's kind of remains to be seen how a state of New York might view Wyoming regulation. I think there's a question mark genuinely around what their

reaction might ultimately be. And to my knowledge, it's unclear, right, how the state of New York might ultimately react to the Wyoming licensing, whether it's passportable and reciprocated elsewhere. So being that we're in New York, we'll start going down kind of the New York path and, you know, and as opposed to the, you know, to the Wyoming route. Yeah, I think that reciprocity question looms large and certainly I'm going to be excited to see. I guess there are going to be a lot of lawyers that are employed for a long period of time dealing with some of the...

That's right. state to state. So I guess one thing that a lot of people will be wondering, you know, those who are trading actively in this ecosystem, those who are using other custodians is, you know, what's this offering going to cost? So what can you tell us about the fees and how you guys are thinking about bringing this to market? Yeah, I think I alluded to it earlier in this conversation about kind of the custody business,

not needing to be a sort of a primary revenue driver for us. you know, I reiterate that we're doing this as a service to our existing kind of trading and our lending and borrowing clients. And so we don't intend to sort of charge what I think are ultimately are quite high fees. And the way we're thinking about it, given kind of the Genesis platform and the prime offering that we're offering to the marketplaces, depending upon, you know, the levels of transactions that you do with us, either on spot or on derivatives or in the borrowing and lending side, there are sort of rebates that we will offer to our custody clients. And if you are actively doing other transactions and other business lines with us, you can get to a point where you're paying nothing or next to nothing on the custody fee side over the course of the year, given volumes that you do. And so I think that it's a win-win sort of situation for both Genesis, who we really do think that we'll see increased activity in our other business lines as a result of being able to offer this, as well as having an insured custody platform for our clients and having to pay basically nothing for the service while still getting to access Genesis liquidity, both in the trading and the lending markets.

And so I think that that is a differentiator in the marketplace for sure. That definitely sounds like a differentiator. I haven't heard any other firm with that type of an offering. You mentioned the insurance. What was that process like? And what can you tell us about the insurance? Sure. So we are insured.

Our lead underwriter is Lloyds of London. And we have coverage for up to, I believe, $600 million worth of assets. and we can certainly seek more as our assets under custody hopefully grows from where we are today. The process itself was fairly straightforward, but the overall size of the market still isn't anywhere near where I think the ecosystem needs it to be. And if you took the market cap of crypto, you can only get, if you added up all of the insurance, contracts that have ever been written in crypto, it's a fraction of the market that you can get insured. And so ultimately, you know, there is still quite a bit of education and maturing that has to do from the kind of the insurance industry as it relates to to crypto asset class and make it less certainly scary for insurers to willing to kind of underwrite in bigger chunks. and I do think that it's certainly an area for growth for insurance businesses.

But having said that, it seems have gotten a lot better over the last few years. So we're definitely kind of headed in the right direction. Yeah, it's getting better, but I agree with you. Even just getting basic D&O insurance for portfolio companies, just a huge, huge headache. And I think the range of folks in the insurance industry that understand this industry at a detailed level is pretty small. So any progress there to push that forward,

which sounds like you guys have is appreciated from the ecosystem. Yeah, I think it is an education process, that's for sure. And frankly, you have to have insurers wanting to learn, right? There is a learning curve here to this asset class that is probably unique than any other asset class that these guys might insure in other markets. And so you have to have a group of underwriters and an insurance brokers that are willing to kind of learn how this industry works and care enough about it to learn. And once that happens, you kind of get over the hump.

And, you know, we're all doing our part, I think, within the industry to kind of push the ball down the field, you know, one yard at a time. So a lot's happened since the last time you're on this podcast, specifically around some of the market participants that have publicly come into the market. So, you know, we had a pandemic. And Paul Tudor Jones got involved, started buying Bitcoin futures. A lot of a lot of larger macro hedge funds have started to get involved. Just what have you noticed in the past? few months since COVID and curious just your views on the overall market at this point. You know, I have, you know, I seem to say this all the time, but I've never been more bullish

on kind of the asset class and directionally where we're going. And, you know, the recent kind of happenings in Defi, I feel like I'm getting more and more questions from folks kind of in that realm as to what's happening. Now, there's not really a good, you know, 15 second way to convey sort of uniswap and sushi swap and all of that. But at the very least, it's on the consciousness of the investors. And frankly, a couple of years ago, Bitcoin wasn't on the consciousness of these very same investors. And so I feel like we're definitely headed in the right direction. I do think the viewpoint that the Paul Tudor Jones investment kind of removing career risk from some money managers of having an invested in Bitcoin, I do think it's sort of true to some extent.

And, you know, it's all of what's happening domestically, politically, politically, from an economics perspective as well, or I'm like, you know, the old ad is the old mean, Bitcoin solves this, you know, you find yourself sort of finding that, hey, you know, you can see why we're doing what we're doing and why we in the industry kind of believe so strongly in the asset class. And I think over time you find that even subconsciously your belief in the asset class and what we're ultimately trying to accomplish getting even stronger on a daily basis. Yeah, I couldn't agree more. It makes what you're doing so much more exciting. Wish I was an equity holder and what you're building over there.

Mike, that's a great place to leave it. it. Thanks so much for making your return appearance on the brink. We will have you next time on when you're undoubtedly going to announce some other new business line that we're struggling to keep up with here. So congratulations on the launch. We're excited to see how it goes. Matt, I appreciate it. Thanks so much. All right. So it's always great to have more on the podcast. I think those guys are just knocking it out of the park over there. And he's a repeat guest now. That's right. Repeat guests. That's the new model. We're running out of guests.

We're going to have to start recycling them. We're not running out of them, but it's just, you know, if you keep on announcing new business units, we're going to keep on having you on, you know? That's right. Well, so you thought that was going to be the big news. Turns out it wasn't the biggest news of the week. There were a number of regulatory actions. So should we, which one should we cover first?

I mean, let's do Bitmex. Bitmex is like the biggest one of the year. So for those of you who have been. living under a rock, Bitmex is one of the largest exchanges in the world as it relates to crypto assets. They're based in the Seychelles. They're not regulated. They're an unregulated venue. They're operating a derivatives exchange. And they're really, you know, they're really a gargantuan force in terms of liquidity in this market right now. Although they don't have a spot market, that perpetual swap really acts like a spot vehicle. So it is one of the largest venues.

in the world. It was the largest for a very long time. It's probably been surpassed by finance at this point, maybe a couple of others. But, you know, so it's been known that this was a unregistered offshore exchange, right? So that has been known. Now, there are quite a few of these unregistered offshore exchanges. So it's been going on for a while. And I think, you know, some folks have thought that there might be a reckoning coming. And I guess we got our answer today. So the big news was that the CFTC has charged BitMex with operating an illegal derivatives trading platform. So, okay, that's number one. Additionally, the Southern District in Manhattan, the U.S. Attorney's Office, has charged and

indicted Arthur Hayes, Sam Reed, and several other members of the original BitMex founding team on criminal charges for Bank Secrecy Act violations, having to do with anti-money laundering. and not having a compliance program. So these charges, as far as I can tell here, carry up to five years in prison per count. And so Sam Reed was arrested, actually, in Massachusetts. Arthur Hayes, you know, who knows where he is. You know, he doesn't live in the United States.

Not sure what's going to happen there. But, I mean, a lot to digest here. What, you know, what are your initial thoughts here? It's a little bit strange because even though BitMik's, was completely unregulated and operating out of the Seychelles, clearly using them as a friendly jurisdiction that wouldn't provide any oversight. And that was a running joke, you know, Arthur liked to say, you know, you're welcome to sue me in the Seychelles.

Despite that, they were fairly responsible when it comes to custody user funds. They'd never lost any funds. They hadn't been hacked. They were careful. They had that once daily withdrawal, where all the executives would use the multi-sig to withdraw coins. So they were very security-focused. Sam Reed lives in the Boston area.

I've met him a number of times. So they were in a tight ship over there as far as technically running an exchange is concerned. It's just that they never really, as I can, as far as I can tell, they never had an intention of becoming regulated in the U.S. I think it's worth noting that they had booted U.S. users off the platform. But if you read the complaint, basically the allegation is that they still knowingly had U.S. users on the platform, and in some cases encourage them to use VPNs. So their commitment to excluding U.S. users was not ironclad, and now they're paying an extremely high price for it.

I mean, the SDNY element here in particular, you know, we're not just talking about a settlement with the CFTC. We're talking about federal prison potentially. Yeah, I mean, this is no joke. These Bank Secrecy Act charges are completely no joke. There have been other platforms, other exchanges that have settled with the CFTC over the years. I can't recall any federal charges on BSA. So this is... I mean, this reminds me of Liberty Reserve.

Yeah. You know, this doesn't remind me of any other crypto exchanges that have been taken down by the regulators. This reminds me of instances where the, effectively, U.S. government made a very strong political statement. You know, if you are going to interact with U.S. users and you're going to reach a certain size and you're going to intermediate a large volume of payments in an unaccountable way, we're going to take you out and throw the book at you, basically. I didn't see anything in the published documents around what specific transactions are triggered here with the BSA. It will be interesting to see if and when details start to come out in terms of who the participants on this platform were, what that money laundering situation was looking like. But this doesn't look good for these guys.

Yeah. And yeah, the STNY complaint, I'm not even sure that's actually public yet. What is public is the CFTC complaint, which, which is more about, hey, these are clearly regulated products, at least in the U.S., and they, for a long time, knowingly, interface with U.S. users. So it's not exactly clear what the substance of the SD&Y complaint is. So a bunch of kind of second order things to dig into here. The first one I want to get your opinion on is just what happens to the rest of the

unlicensed offshore exchanges. I mean, this is a massive, massive category. You know, you have Derribut. finance, you know, BitFanax. What do you think happens here? So it's interesting because Bitmax was very careful to sever any links to the U.S. financial system, which is why, and I'd actually interrogated them about this in the past, this is why they didn't have stable coins on the platform because they didn't want to have those banks be pressured, you know, that were maybe custodying funds behind stable coins.

They wanted to remove that vector of control over themselves, which is why they only only had Bitcoin deposits and withdrawals on the platform to fund your account. So they were very fastidious in maintaining that separation, at least from a settlement perspective, in terms of the financial infrastructure perspective. Now, a lot of other offshore exchanges or unregulated derivatives exchanges are not that fastidious. And many of them are listing a number of assets, which arguably are unregistered security. So I would be very concerned, quite frankly, if I was running one of those BitMex competitors

or offshore exchanges. I think what this demonstrates is that the U.S. believes that its jurisdiction is global. And if you have ever had U.S. users on your platform, or if you've even booted them from the platform but it been insufficiently diligent in restricting their access, and if you knowingly had them on the platform through VPNs, the U.S. authorities are going to assume complicity and knowledge. And finance for a long time was completely available to American users. But virtually all of these offshore Bitcoin exchanges, U.S.-based individuals can get access to through one way or another.

So I would be very concerned about the whole industry of these exchanges. just the target U.S. retail investors, quite frankly. So the other thing that's interesting here is what happens to BitMex is Bitcoin. They have a massive insurance fund. You might be able to pull up how much Bitcoin is in that. You also have, you know, a lot of Bitcoin in customer accounts tied up on the platform. So I've noticed that withdrawals are actually happening in real time, you know, for the past hour.

I've actually seen some going out. So that's, it looks like they're trying to take care of their customers and allow people to pull off outside of their usual withdrawal windows. I wonder what's going to happen to the insurance fund and are we going to have a Silk Road style seizure here and a resale of these coins? I mean, what do you think? Yeah, so Bitmex has about 193,000 bitcoins in their vaults. And this is knowable because they have an interesting scheme for their public keys. they hold all of their coins in vanity addresses that start with three BMX. So that's how you can very easily determine which coins are held in Bitcoin's vaults.

Now, of that 193,000 Bitcoin, there's about $2 billion worth. About 36.5,000 of them are in the insurance fund. So you've got some coins that are held on deposit by users and then some coins in the insurance fund. Now, let's say the withdrawal cease and Bitmex, as a going concern, gets taken down. Just looking historically at past precedent, there would be some sort of claims process where you would be able to demonstrate that you would funds on the platform, you can get them off. And there's no insolvency here, as far as I can tell. So you would be able to get 100% of your funds off, presumably.

But those claims processes always take a long time. But what would happen in the insurance fund is completely unknown. I mean, I presume that some fraction of that would be used to finance a settlement with the CFDC at a minimum. Yeah, the customer deposits is interesting because, you know, almost every market maker in the industry has an offshore legal entity that allows them to trade on BitMex. And so you can bet that a lot of capital was flowing through that venue. And so I'm sure as soon as this came out, there was a mad scramble to just get withdrawal is queued up. So it'll be interesting to see the second order effects on the market makers. The other thing I'm really interested in is, I guess, two things. One is the impact on the U.S. regulated derivatives exchanges.

Now, these exchanges don't offer margin in the same attractive way that some of these offshore unregulated venues do. They offer huge margin, you know, leverage on the offshore exchanges. So it'll be interesting to see if the U.S. regulated exchanges actually start to grab market share here. I mean, I guess assuming that the market. participants stay in the market that, you know, people don't get washed out here, have capital impaired on the exchange. So keep an eye on the U.S. regulated exchanges like CME and AirSX. I guess the other interesting thing is just think about the Bitcoin ETF and think about the reasons why the past bitwise denial was actually denied. So it was really around price discovery happening

on some of these offshore venues. And so will that continue to be the case now? And is there a world where more of that volume starts to move on to U.S. regulated exchanges? And if so, what will happen to the next application? I think those will be interesting byproducts here. Yeah, I think that's a very astute point. So there are some silver linings, one of which is that most likely larger share of the both spot and synthetic Bitcoin market volume will be under the aegis of U.S. regulators Some people might think that's good, others might think that's bad, but that probably makes it more likely than an ETF goes through.

If you remember our interview with Tom Lee, about a year ago, actually, he talked about BitMax being a constant source of sell pressure for Bitcoin because the exchange itself was taking fees in Bitcoin and selling it off for Fiat. So that's another potential silver lining, if you believe that story, that that was suppressing the Bitcoin price. He claimed at the time that it was more than what minor sales accounted for, that the outflows from Bitcoin to fiat due to selling off fees at Bitmax was greater than sales by miners. Now, I don't know if I 100% buy that story, though, because Bitmax was this liquidity sink that was sucking up a bunch of Bitmonds. historically, although the number of Bitcoins on Bitmex dropped sharply in March and never recovered. So it was giving back that sync effect. But yeah, so that's another potential silver lining, if you believe that story. The last one thing to talk about is decentralized exchanges, the Dex environment.

So I saw a lot of triumphalism, you could say, from the Dex crowd. and I mean, I'd like to get your view on this, but I think that might be a little premature because any, like this signals a vastly stepped up level of attention from the CFTC on the industry, which historically the CFTC had been pretty hands off, honestly. And if they are directly, you know, scrutinizing the markets, at a certain point, their scrutiny is going to fall on the dexes and they'll identify the critical points of centralization that they can put pressure on. And undoubtedly, those exist. You don't really have to think too hard to identify them. So I wouldn't be too encouraged if I was running a Dex or running

software for Dex. I think what they should prefer would be just a laissez-faire attitude from the regulators, which is manifestly not what we have right now. Yeah, I think, so look, it took years to build this case, I'm sure. So they've been going after Bitmex, for a while. Decentralized exchanges are a lot more nascent. This whole defy thing is really just popped onto the scene. But I completely agree with you. I think that if you just look at what are some points of centralization here, if you have a CEO, that's a pretty good point of centralization. If you've raised venture capital money, presumably that money has gone into a bank account. That's a pretty good point of centralization. So, you know, they can shut down some of these corporate wrappers.

and sure the software is out there running in the wild and it could be forked and maybe they can just take down the interface. But yeah, I'd be pretty careful if I was running at decks right now. Yeah, I mean, people don't remember this, but regarding prediction markets, I believe there was the CFTC several years ago

said there is such thing as liability for writing autonomous smart contracts. I'll surface the passage or the speech or that was set and I'll put in the show notes. But yeah, I think generally speaking, some people were kind of cheering this announcement and implying that it was good for the decentralized exchange industry. If the decentralized exchange industry was more decentralized,

I'd be inclined to agree. But fundamentally, it's just not. And the moment you sell a token and you have a corporate entity that's receiving the proceeds from that, you're exposed. And if it was an anonymous team and you weren't monetizing

your creation of those smart contracts, maybe it would be a little bit different. But these are not. These are U.S. domiciled, venture-backed teams that are doing this. So let's move on. Not to be outdone, the SEC did a bunch of stuff this week.

So kick and kin, I think this is pretty much over. So this wasn't even the SEC, but a federal judge in New York Southern District ruled that the company violated securities law with their $100 million token sale in 2017. It was a summary judgment. And so essentially this looks, I mean, I guess they could appeal, but this looks like a death blow here. It looks like kick and can, which we were pointing to as really being a bellwether for what was going to happen with some of these other tokens. They're done, as far as I can tell. Yeah, I remember.

remember, we identified Kinn and Telegram as the two Bellwether cases, and then the SEC basically won total victory over both of them in different ways. This was actually summary judgment, so the judge basically said the facts of the case are decided, they're entirely in the SEC's favor, the case is done, we're not going to have a trial, which is, you know, the most like aggressive and definitive outcome. So basically their interpretation is that it wasn't just the pre-sale contract that was a security. The whole thing was a security. Every transaction of kin on chain was a securities transaction. So it's the most expansive vision of securities as it relates to tokens possible, which, you know, people keep telling me these aren't precedents,

but the direction is not good for the more minimalist theory of tokens of securities. So let's keep up with the SEC path here. So salt lending, which is a crypto asset lending platform. So a really interesting business in and of itself, but they decided to issue a token, and they did a $47 million ICO. And it turns out that's an illegal securities offering too. So they have settled charges with the SEC. they must begin the process to redeem.

So they need to pay a $250,000 fine and start to pay back a $47 million to the people that bought into the token, which who knows how that will go. But no surprise, I guess. Not surprising at all. It's again interesting that the SEC has started to take on these cases

where there was no apparent fraud. So as we noted recently, these cases don't involve direct misappropriation. of the funds from the crowd sale. There wasn't, you know, clear fraud, but they just didn't register the offering. And that, this newer conception that the SEC has taken on captures a much broader, you know, set of token issuances. And it's addressable to most of them. So, you know, initially they went for the low-hanging fruit. This is the medium-hanging fruit. We're not at the low-hanging fruit anymore. And I think this is incredibly indicative. This is just a classic token story.

The lending business is not when you need a token for. You do not need a spurious utility token for. The utility theory of tokens is pretty much defunct at this point. And moreover, the lending business is a fantastic business to be in. There's some enormous companies, including BlockFi, that did this without a token. So this is more evidence for our theory that tokens actually in many cases are a liability. They're not an asset. For all of that non-dilutive capital that you're raising with that token sale,

you're going to have to pay the pipe or five or ten times more at some point in the indeterminate future. And maybe it'll come through a class action, maybe it'll be the SEC, but that token is going to cost you something. There's nothing in life that's free and you have to balance that balance sheet.

There's got to be a liability to balance the asset. Did you see commerce, block, so it's a company that did a utility token, an ERC20 token on Ethereum, they are voluntarily, it looks like, processing that token into equity, trying to basically get out of that infinite liability of having issued a utility token. Yeah, I know the team very well. I'm impressed of what they did. I think it's forward thinking. It's not the first time this has happened. I economy did something similar, but Commerce Block was very astute. They realized there's no need for the utility token here. They rolled it up and they gave token holders prorata share of a UK entity.

And so they converted that token into explicit equity, which makes a huge amount of sense. I think it's a great move. Now, I don't know how you convert a global token holder base into shareholders of a British company. So it's probably some complications there. But I would love to see more of this, honestly. So one other SEC thing here really quickly in it, regards some guidance they put out regarding digital asset securities, so actual securities this week. So they proposed a new process for ATS venues. So these are trading venues, you know, exchanges. So they propose that it become a three-step process to register as opposed to a four-step process that FINRA and SEC had previously instructed. So, you know, we won't go into details about that, but they're cutting some red tape, it looks like.

But, you know, there's still a lot of open questions here as it relates to security token. And I think a lot of the entrepreneurs and a lot of actually the broker dealers that want to do business and hold security tokens and trade them are still seeking clarity here around custody and specifically possession and control of a digital asset rule 15 C3-3.3. So that guidance didn't put out anything on that. So hopefully we start to see some more movement from the SEC on just making it clear how you can do business with digital asset securities. But this, you know, this wasn't it. All right, so a couple other odds and ends this week. So Talos Trading, which is an institutional trade execution and settlement platform that we are investors in, they came out of stealth. So this is really exciting. I think this is a critical piece of infrastructure as it relates to some of the regulated venues and how they trade and settle securities. So really exciting news that I guess was a little bit overshadowed by some of the regulatory actions this week. But I think ultimately the story is just one of the maturation of the market.

And it's startups like Talos that are probably going to take us there. And the other side of that is these unregulated exchanges and products getting washed out. And so that's kind of directionally, I think, indicative in terms of where we're going. So congratulations to the Talos team. So what a week. I mean, this was definitely one of the busiest news weeks in the past couple years. I don't know if I can handle another one like this, but I do get the distinct feeling

that there is more bad news coming down the pipe as far as some of these regulatory actions are concerned. I mean, the biggest specter hanging over this industry is obviously Tether. There is still an outstanding case. The SD&Y, same folks that went after Bitmax, they're still going after Tether and Bipfinex. and if tether folds up, that would be incredibly disruptive to the industry.

And that's honestly something I'm expecting to happen at some point. Yeah. It's hard to see a path where that doesn't start to get serious pretty quickly. But what people don't understand is that the crypto industry, the exchange industry, in particular derivatives exchanges, became tetherized in the last year. So the pair that assets were traded against historically was Bitcoin. Today, increasingly it's tether. So if tether kind of blows up, that also eliminates a critical piece of market infrastructure that powers most of these exchanges, in particular the offshore ones.

And the effects of that would be hard to predict. but Tether is a systemic asset in the crypto industry right now. So we'll be keeping an eye on it. We have a bunch of podcasts coming next week. It's going to be a busy week next week too. We have our first ever central banker on the show. And we also have an episode on security tokens. So it should be a really good week.

All right. So we're going to try to keep up with it. Everyone have a great weekend.