On The Brink with Castle Island - Weekly Roundup 10/08/21 (How to offset emissions, SocGen's Maker play, Tether revelations) (EP.248)

Episode Date: October 8, 2021

Nic and Matt are back for more deals and news. In this episode: Our podcast SNAFU Can you wear a suit with sneakers How to offset your Bitcoin emissions (without buying offsets) Soc Gen asks Maker for a loan Bloomberg's Tether bombshell Are stablecoins like money market funds? 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 This show also supported by OurCrowd. Join the fastest growing venture capital investment community at OurCrowd.com/OTB

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 Conjecturee 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 and Our Crowd. More on them later in the episode. And guess what? We just recorded 20 minutes of lost content because you don't have your podcast equipment. And we just spent 20 minutes telling everyone which tokens we thought were securities, talking about the untold banks that are building custody

and people will just never hear about it now. The Dead Sea Scrolls of On the Brink, part two. Talking about what NFT collections are going to fly off the shelf. So we really are having a complete debacle this week trying to record. We're suffering for our listeners here. Yeah, so your podcast equipment did not make the journey with you to this conference and the audio quality shows. So we're in the midst of a crisis.

So I'm in Austin. I was late for the plane. I forgot my loafers and I forgot my recording equipment for on the brink. So I'm just speaking into my microphone, into my MacBook. And hopefully the audio works. I don't know. I don't know if it will. We'll see.

If this doesn't work, then I think I'm going to have to do the rundown with Ria and Sean. just two professionals who know how to record. But the good news is that I did get a new pair of loafers. So, because I can't just show up to, you know, you can't wear a suit with sneakers. I mean, some people do it. It's just, it's not for me. I think the suit with sneakers look is very acceptable.

Only if you're an NBA player, I think. I don't know. I mean, they'd have to be some really premium sneakers. Yeah, if you have like, you know, you can't do it with. like A6 that you just ran in this morning. I mean, you have to do it with like nice sneakers. Yeah, remember when A6 used to mean running shoes as opposed to the machines that you mine Bitcoin with? Yeah. Do you know that A6 were how Phil Knight got started? He started Nike. He was distributing A6 and then he got cut off from the A6 brand and they had to start Nike. He was kind of

forced into starting his own brand and that's how Nike started. So that A6 could have been Nike. Yeah, it's unbelievable. Shoe Dog, one of the best entrepreneurial books out there. So we recorded half an episode. There was some good stuff in there, honestly. There's some really good stuff. I guess we can try to run it back a little bit, maybe not verbatim. But one thing that we started with, and we might as well start again, is you wrote a

coin desk article, want clean Bitcoin mining, subsidize it. Talking a little bit about this philosophy paper from Andrew. Drew Bailey and Tony Cross. Yeah, and I'm feeling very defeated right now because I just said all this stuff and now I have to say it again. So, I mean, and you're hearing it for the second time. I'm just going to zone out right now and make sure that my fantasy football team is set up for the weekend.

But what's here about it? My fantasy team is having a shocker this year. I've written it off already. I've accepted that I'm not going to win the championship of the summer. sat bowl per a second year. Anyway, I wrote an article in Coin Desk this week. Another article on the topic of Bitcoin energy consumption. I just, you know, I didn't know I had another one in me, but it turns out I did. And there's an interesting paper from Andrew Bailey and Troy Cross. And it's called greeting Bitcoin with incentive offsets. And now don't be confused by

the name. They're not talking about carbon offsets or anything like that, which I consider to be kind of borderline, possibly scammy. Incentive offsets is their word for, basically, if you buy Bitcoin, you're concerned about the emissions, you pair it with a investment into sustainable or green mining. And you can do this by mining sustainably yourself if you happen to have clean energy, Andy, and an ASIC, not the shoe of the machine. or you can just invest in a sustainable miner. And actually there are some publicly traded names.

I'm not shilling any of them. But actually we have a disclaimer for this show, right? We do have a disclaimer. So it's about time we had a disclaimer. But yeah, you should have already heard a disclaimer. So you can, you know, I don't think that means if you have a disclaimer, you can just say go buy stuff though. So I'd be careful.

That's the point of the disclaimer. You can just say anything you want as long as you have a disclaimer, right? Yeah, if you just say this is not investment advice, then you just get to say whatever you want. Yeah, exactly. So now that actually a lot of people are kind of shocked by the disclaimer. I guess I never expected on the brink to, you know, grow up and become a proper show. I mean, there's conflicts abound in the crypto industry. I felt like we needed a disclaimer.

I'll take, I'll put a hand up for that. But, you know, no conflict, no interest. That's true. That's what Michael Lovitz always used to say. So look, I'm not going to shill any sustainable miners. They exist. Okay. That's all I'm going to say.

You can find them. There's a whole bunch of publicly traded miners, in fact. And they have varying levels of renewable, non-renewable energy. Okay. So you can buy them. You can buy an investment in a miner that's renewable alongside your investment in Bitcoin. If you feel bad about the emissions from the Bitcoin, how does that make sense? Well, mining is a single market.

They all compete for the same 900 new bitcoins a day. And if you are lowering the cost of capital for a sustainable miner, you are giving them an advantage relative to the non-sustainable miners. And actually, the miners use capital markets in this really direct way. Unlike a lot of publicly traded firms, miners will continuously issue new stock, I mean, be aware of this if you own any public miners because it's very dilutive often. They want to hold on to the bitcoins. They want to become like a Bitcoin acquisition vehicle.

And oftentimes they'll just issue stock to cover their expenses. So they really take advantage of public markets access. And this is also why mining is getting so big in this country because we have the deepest and most liquid public markets by far. the U.S. has something like 20 to 25% of global GDP, but something like 40% of global public equity capitalization. So way disproportionate. And so anyway, everyone lists here and then as a consequence, Bitcoin mining is massively growing its footprint in the U.S. Actually, according to Cambridge, I'm getting off topic now. Cambridge just told me that the U.S.

30% of Bitcoin mining globally. That data will be out next week. So anyway, you can invest in a sustainable miner alongside your Bitcoin allocation, which in theory offsets the emissions associated with it because sustainable miners that you invest in will ultimately prevail in the market if they have this, you know, exogenous influence relative to non-sustainable miners. And so investing in sustainable miner is actually an effective tax on non-sustainable miners. That's the point of the paper. Interesting. All right.

Well, maybe we'll start to see more of that. I like it. I like it. So you're not for the subsidies directly. That's clear. Yeah. And the point I make in the article is that El Salvador mining with geothermal energy, is a state level subsidy for green mining,

and it's a state level force to make Bitcoin more renewable at the expense of non-renewable mining. So maybe Buckele is aware of this concept, or he just likes the idea of mining with volcanoes. I mean, the idea of mining with volcanoes, that's way better than my mining with waterfall's idea, way better. Oh, yeah, you know, I actually got some feedback on that from brinkers.

What'd they say? You know a lot about mining. It doesn't make any sense, Matt. I had a lot of people in my DMs, actually, that were brinkers that said, hey, this put a Bitcoin miner at the bottom of a waterfall. This is the best idea you've ever had. It's a shockingly bad idea.

However, I did find out recently that from a mining pool, I'll be sharing the data on Friday. This will be never before seen data. I found out the New York State is the number one state for Bitcoin mining in the U.S. According to at least Foundry's data. And that's because the St. Lawrence River, which I think Niagara Falls is on, if I'm not mistaken. But and there's a ton of hydrant power up there. So in kind of like a more oblique sense, Bitcoin mining with waterfalls is real.

I mean, like a dam is like a kind of a waterfall in this. It's good for New York to get a win with that. You know, their state legislature has been trying to shut down Bitcoin mining in the state and the Red Sox just absolutely smoke the Yankees this week in the wildcard game. New York can't catch a break. So that's the thing is that if New York band mining, it would actually be a subsidy to less renewable miners. So this idea goes both ways, right? because Bitcoin mining in New York is generally pretty clean, them banning it would actually

increase the carbon intensity of the Bitcoin network. So someone needs to inform them of that. Yeah, that doesn't really boil down to a soundbite. So I don't know if they're going to get that. Yeah, it's about second order thinking. And I'm thinking that maybe New York State representatives are more like a first order kind of thinking type of people. First order thinkers. First order So you also sat down with Esteban Castanio from TRM Labs this week. This is a fun episode. So Esteban is the co-founder and CEO of TRM Labs, which is a big blockchain forensics company.

We talked about the evolution of that business. They actually started as a Pokemon NFT company back in the day. So at some point when they're a big publicly traded company, they're going to be telling the story about how they started off with Pokemon's and transitioned into particular. some of the biggest governments and financial firms against cybercrime. It's just fascinating story. So I had a lot of fun with that one. All right.

Let's hop into some deals of the week. The first one up is Coin Switch, Cooper. This is the Indian cryptocurrency exchange. They raised $260 million in a Series C round of funding. It was led by Andreessen Horwitz and Coinbase Ventures. So the market in India, we've had a lot of regulatory ambiguity there, but this is a huge financing. And obviously, just a market that is yearning for,

cryptocurrency, so it's great to see. Yeah, if you look at the chain analysis data for crypto adoption, India is easily in the top 10, despite, I think, the fact that the regulators have been really trying to disempower crypto entrepreneurs there. Next up, we have Dapper Labs. They acquired B-R-U-D, a startup focused on social influencers. Next one is another M&A event. So chanalysis, which is the largest blockchain forensics company out there, they acquired Exigent, which is a cybercrimes investigations company. It's interesting to see chanalysis start to go into M&A mode here.

They're cranking. They've raised a lot of capital. And so I wonder if this is the first of many. Then we have Strip's finance a fixed income platform. There is $8.5 million via token sale from multi-coin, Sequoia, India, Fabric Ventures and Morningstar. Next is Tiny Man. This is an automated market maker.

It's built on Algarand. They raised $2.5 million from borderless capital, Arrington, the LOW, and Block Tower. Wonder how they came up with that name, Tiny Man. And the LOW is the, it's a legal Dow that also is an LLC, if I'm not misremembering. Yeah, the LOW is in some hot deals. So then we have Bit Oasis. which is probably the largest Middle Eastern crypto exchange. They're based in Dubai.

There is $30 million from Jump Capital, Wamba, Alameda, DCG, Pantera, and others. Next is a venture fund. A new venture fund on the block ARCA has raised a $30 million blockchain-oriented venture fund. Congrats to the ARCA team. And then we have Thor swap. They're a decentralized exchange built on Thor chain. There is 3.75 from Ideal CoLab, ventures, nine realms, and some others.

And the last is Sienna Network. This is a decentralized finance company. They raised $11.2 million from Arrington Capital and Block Tower. So those are the deals of the week. This show is brought to you by Coinbase Prime. Coinbase Prime offers trading, custody, and financing tools for institutions. With trade financing, you can trade from cold storage instantly and acquire margin for lending and shorting.

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While we hop into some news, I saw some news here that the FDIC is reportedly studying whether or not stable coins might be eligible for coverage under the FDIC insurance program, which would be kind of shocking to me if that happens, but would obviously be a great thing for the industry. Well, I am against FDIC protection for stable coins. Hot take. To be clear. So the FDIC is, you know, depository insurance is the problem with banking, right? Because it allows losses to be socialized.

So if you have insurance, then, you know, you're not bearing, you know, the, significant costs if something goes wrong. So the presence of insurance socialize a level like that is what gives the state control. And during Operation choke point infamously, the FTIC was the means of exerting that control. So, you know, I don't necessarily think insurance at the state level is necessary. I mean, all it does is effectively bring stable coins under the watchful. of the state, which isn't strictly necessary. And you've had, you know, historical epics of banking without depository insurance that were just fine. So. Yeah, we'll see if that happens. I think it would

probably bring a lot more capital into the industry if there's FDIC insurance here. So we'll see. This is sort of at the same time that the Wall Street Journal is reporting that the Biden administration will officially seek to regulate stable coin issuers as banks. So we talked about this a little bit last week, but it seems like that's the direction things are headed. Yeah, I mean, it's a little puzzling because stable coins mostly don't act like banks. They don't pay interest on deposits. And for the most part, it depends on the issuer. They generally act a bit more like money market mutual funds, albeit without any, you know,

attempt to provide a return, just holding liquid assets and backing the notes. So, I mean, if you're going to regulate stable coins like banks, then do you demand the PayPal be regulated like a bank or, you know, other non-block chain stable coins effectively? Well, this brings up something I want to talk about. So Forbes had an interview with former SEC Chairman Jay Clayton, who is now an advisor to fireblocks and likes to talk about crypto industry, but when he was in the seat, didn't really do anything about crypto. He made some statements that suggested that he believes stable coins resemble securities and talks about, you know, pooled investment vehicles with commercial paper, which, you know,

some stable coins were like that. Many have left that model. But the logic around why these are securities does seem really strange to me, since stable coins don't have the expectation of profit. And they, as you point out, they closely resemble the way that PayPal and Venmo hold dollars on behalf of users. So Jerry Brito pointed out that it's actually squarely written into PayPal's user agreement that the business operates understate MTRs. And effectively, to me it looks like just how stablecoins work. So I don't know why they would be regulated differently. Yeah, I mean, there is a bite the bullet approach that I've seen from the let's regulate everything like banks crowd. which is, oh, we should also regulate PayPal and everyone else that has this dollar

denominated liability to their clients. We should regulate them like a bank too. So there's a bite the bullet approach, which just, you know, would cast everything under the government's sphere of influence. And in fact, you could argue even that the stable coin, you know, trying to apply this logic to stable coins is an attempt to deliberately capture PayPal and also. other fintechs and force them to, you know, become, you know, banks and effectively become extensions of the state. So I've seen that. But I think, you know, there's scope for,

for, you know, private sector here. And not everything ought to be regulated by the state. How the progressive side of the political aisle hasn't caught on to public blockchains being such a great force for their movement is beyond me. So if you think about the categories of innovation here that are giving power to the people, it's giving power to the people over monetary networks, self-sovereign monetary systems. It's giving power to the people over internet architecture, giving people the ability to hold their own data, not participate in these data monopolies, not propagate the strength of Facebook. and some of the largest tech companies out there. And then, of course, giving power to the people over financial products and giving people the ability if they choose to opt directly into things in the defy space, which would be peer-to-peer transactions without banks, without these big dreaded banks.

And so it's odd to me that we're going to, you know, some factions of this regulatory apparatus, the Liz Warren crew, wants to push this more into government oversight on all of these things, which would just make the big banks even more powerful. and probably make the big tech companies even more powerful with some government oversight. It's puzzling. Well, let's move on to another country that is talking about cryptocurrency regulation. This is the country of Brazil.

They are set to vote on a cryptocurrency bill that would make Bitcoin legal tender in that country. So following El Salvador. So the federal deputy in Brazil said with this asset, you'll be able to buy a house, a car, go to McDonald's, buy a hamburger. It will be a currency in the country as it happened in other countries, presumably referring to El Salvador. It's not clear to me looking at the coverage how likely this is to pass, whether it's just a proposal or if it's actually got support. But certainly Brazilians are pretty keen on cryptocurrency. So I mean, it would be incredible if there were a number of states that started passing legal tender laws for Bitcoin.

Ukraine has also been mentioned as one. Another story this week is MoneyGram is apparently partnering with Stellar and USDA for blockchain-based payments. It seems like just yesterday they were partnering with Ripple to do proof of concepts and XRP-based payments. I seem to remember MoneyGram being a very distrust company and kind of relying on those stipends to ripple to stay alive. Maybe they, maybe they have a future. Who knows? Wow. So there was, there was a really interesting narrative story from Bloomberg this week,

which was kind of a long form article on Tether, our favorite topic. And it was kind of framed as a investigation. And the way it was sort of promoted by Bloomberg suggested that they uncovered some interesting secrets. But oddly enough, having read the article, there didn't seem to be a lot of new information in there. I think the only thing that was novel to me was that Tether did not deny that some of their short-term commercial debt was being consisted of exposure to Chinese.

companies, which I think they had previously denied. Evergrandfod. Yeah. So besides that, there didn't seem much novel in the article. Well, there was a couple nice reminders. So there's a nice reminder that Brock Pierce is the founder of Tether and that he was in the Mighty Ducks, which was just a terrific Disney movie back in the day. It was financed by the fact that Michael Eisner's kids played hockey.

And so he green with that, little known fact. but it's always good to have that reminder. But these investigative stories pop up like two or three times a year. And they generally, they don't have like new information. There's nothing really new in this one. Yeah. So this article is titled, Anyone Seen Tethers Billions. And it's characterized as this sort of deep investigative report.

But they don't have any conclusions. whatsoever about where they are, aside from saying some of them are at DELTEC. I guess this Celsius relationship maybe is there's not as much known about that. So maybe that was a little bit new info. My favorite piece of information in here was the revolution that the, I think CEO or possibly chairman of Deltic was the guy who invented the inspector gadget IP, the comment comic book series, animated series, and was later made into a movie. Yeah, it's a terrific show.

The movie was probably not as good, but terrific show back in the day. I liked the movie. And they put Inspector Gadget on the cover, because it's the cover story for Bloomberg Business Week on the physical magazine. So, you know, I don't know what the objective was there. But yeah, Mighty Docs and Inspector Gadgett intimately tied to the fate of crypto here. I'm sure that guy likes the free publicity. Did you see Andreessen Horowitz, they put out some proposals to the Senate Banking Committee this week?

It's kind of four big prongs here. One is consumer protection and inclusion. The second is clarity and the ability for decentralized autonomous organizations to evolve. So really seeing Dow's as a cornerstone as a new way to manage and coordinate human activity. They talked a little bit about comparing jurisdictions and harmonizing across various jurisdictions, having SROs, having nonprofit corporations. And then lastly, they talked about some of the tax reporting issues. So all sensible stuff.

It's nice to see Andresen, obviously, they've made some just huge bets in the space and beefing up the regulation and the kind of just the leadership around proposing frameworks here that could benefit the industry. So another piece of news this week, U.S. Bank announced that its subcustody services for crypto are live via their Niding partnership. Yeah, I mean, this is going to be huge, I think, right? U.S. Bank is one of the largest banks in the entire country. And so it looks like their subcustody relationship is now live. And U.S. bank customers presumably pretty soon here will be able to buy crypto assets and have them custody at NIDIG. So elsewhere in traditional finance news, Sussgen, Sussuil, they applied for a 20 million maker Dow loan using on-chain bond tokens issued by the bank as collateral.

pretty interesting. I actually saw a lot of pushback in the MakerDAO community against the SOSGen proposal. No idea if it's going to pass. I have no idea if this will pass, but the reason why society general is known to me is Jerome Curveille, the rogue trader. Didn't he lose like $7 billion or something like that?

Why didn't they collateralize it with the IOUs from all the money he owes them? Yeah, so maybe if they had been active on DFI back then, their losses would have been curtailed. Could have made it up. Elsewhere in the intersection of traditional finance and crypto seems to happen a lot lately. KKKR invested in Parify the crypto fund. So congrats to Ben Foreman and the team. Two great financial firms collaborating there. And then AngelList.

So AngelList has enabled USDC on the platform. This will allow investors to invest in syndicates and funds using stablecoin rails. I'd expect to see a lot more of this, actually. So the WSJ had an interesting story about separately managed accounts today. Did you, or this week, do you see it? I did see it. Yeah. So it talks a lot about just how separately managed accounts are very appealing in the context of crypto.

obviously for a bunch of reasons, but one of the main reasons that they highlighted was that there's no wash sale rule yet in crypto. I'd actually expect this will be fixed. I think there's various legislative proposals right now to change that rule, but SMAs have some tax benefits. Those will just have greater kind of flexibility to allow financial advisors to fine-tune allocations for their customers. But this is the bigger story for me is just if you look at the RIA landscape and the independent broker-dealer landscape, financial advisors in general. Crypto assets are like, you know, zero percent penetrated or still. It's crazy that you call up a financial advisor and you say, what do you advise your

clients to do when they ask you to buy Bitcoin or Ethereum? And it's like, well, I tell them that we can't do that. And I say, go open a Coinbase or BlockFi or River account. Well, I mean, regarding the wash sale rule, saying that it ought to be fixed implies that something's wrong, but it's just a function of its regulatory classification. And Bitcoin is considered, I suppose, property by the IRS. And that's just a consequence of what they decided to do. So the way it works is if Bitcoin goes down dramatically, you can sell it and buy it again.

And with no regulatory penalty in any sort and lock in taxable loss, which you can use to offset your taxable gains elsewhere. So it's a pretty handy feature. Maybe it'll be closed. Maybe a loophole won't be closed. Yeah, my guess is that that gets closed, but it's definitely a handy feature out there. Business Insider had a nice profile of Alex Thorne,

head of research at Galaxy Digital, talked about his origin story in the crypto space, which is, of course, just an awesome story of how he came up at Fidelity and was the Bitcoin Viking, so to speak. So definitely check that article. out? Yeah, Alex does have a great story. Linchman of the Fidelity Mafia, which is going from strength to strength. Speaking of Fidelity, there's a great research piece published this week by Jack Neruder over there. I think that's how you say his name. It's called Getting Off Zero,

Bitcoin's role in modern investment portfolios. So really well done and well-researched piece that I'd recommend everyone check out. We have that in our newsletter this week. And I'll point out that while stocks have been flat to down over the last week, Bitcoin has been rallying strongly. So I know a lot of people like to point out that Bitcoin looks like a risk on asset. And they point to those periods of high correlation during distress in financial markets. But, you know, if you're going to point that out, you also have to give credit when Bitcoin actually looks inversely correlated or uncorrelated, which was definitely the case this week. So I'm going to chalk that up to a dumb for Bitcoin. Might be going up on news of your speech tomorrow.

Yes. So I've put about a month's work into this talk. Actually, it's probably some of the most effort I've ever put into a conference talk. I think I interviewed 20 miners and energy experts and energy traders and things like that. And the whole talk is about how Bitcoin is accretive to grid stability, in particular in the context. of Texas because that's where I'm giving the talk. But how Bitcoin actually is synergistic with increasingly renewable grids and a lot of new info in there. Well, I'm looking forward to it. I think that's all we have for the week. There's, you know, like we said at the outset,

25 minutes of just alpha generating content that unfortunately we could not include. Lost in time, like tears and rain. But, you know, unfortunately, it's never going to be revealed. This has been difficult. It's been a slog today. I guess I should remember I'm going to bring my recording equipment with me next time. We'll be showing a better face next week for sure. And we'll be back on Monday with an exciting interview.

Everyone have a great and healthy weekend.