On The Brink with Castle Island - Weekly Roundup 10/25/24 (Stripe acquires Bridge, Polymarket whale, Stables as Fintech 3.0) (EP.569)

Episode Date: October 25, 2024

Matt and Nic are back for more news and deals. In this episode: The Polymarket whale is identified BTCUSD predictions for the election Election models versus prediction markets Stripe acquires Bridge for $1.1b Did the Bridge deal make sense for Stripe? Stablecoins as Fintech 3.0 Nigeria frees Tigran Gambaryan Kraken is launching the Ink blockchain Buenos Aires is launching a blockchain-based identity solution Opera launches the minipay wallet A new paper from the Fed gives us new insight into the 2023 bank run Coinbase FOIAs the regulators behind OCP 2.0 Content mentioned in this episode: NY Fed, Tracing Bank Runs in Real Time Sponsor notes: Introducing Exchange Flow Metrics: In Coin Metrics' State of the Network issue 282, we introduce Coin Metrics' new exchange flow metrics for BTC & ETH Withum's Digital Currency and Blockchain Technology Team specializes in crypto-assets, offering accounting, tax and advisory solutions to fortify trust in a dynamic industry. Contact them today to get started. - withum.com/crypto

Matt Walsh and Nick Carter are partners at Castle Island Ventures. All Vies expressed by them or the guests on this podcast are solely their opinions and do not reflect the opinions of Castle Island Ventures. Guest and hosts may maintain positions in the assets discussed in this podcast. You should not treat any opinion expressed by anyone on this podcast as a specific inducement to make a particular investment or follow a particular strategy, but only is an expression of their personal opinion. This podcast is for informational purposes only. Brought down by bad mortgage investments, Lehman, which has 25,000 employees, will be liquidated.

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slash crypto to learn more. Busy week. Yeah. And you know what? We are in the last stretch here before the election. Two weeks to go. Thank gosh, man.

Yeah. What a nightmare. It's been a slog of an election season. It doesn't really matter up in Massachusetts, although John Deaton, Let's go. Two good debates against Elizabeth Warren, I thought. Although they weren't even really on TV yet to be on some, like, random website to watch them.

So I guess everybody's voting early. Like, what's up with that? I thought the old-fashioned thing to do was just go to the polls and cast your vote. But everybody I know is like has voted already? Yeah, I've already voted. I've already voted. Just got a milling ballot. What happened to physically showing up in voting?

Do we not do that anymore? I did like doing that. You know, back in the day. Do you remember being at school and they were just voting day? It's like you couldn't have gym class because the gym was just all voting machines. I think it's better to do that. I don't know. I don't trust the mail.

Like, what if it gets lost? Yeah, I always kind of, I wonder if there's a way to check if your vote got counted. That's the thing I always worry about. I shall be voting physically in person, hopefully a paper ballot too. none of this like machine nonsense. Yeah. Has Florida figured out how to do that? I know it's been historically a tough.

I don't know. Tough to handle the paper down there. We're going to find out. Well, it's coming up. I mean, it's all anyone has talked about in the crypto space for the better part of a year. So on the prediction market front, we've identified this mystery trader on polymarket that went insanely long Trump. French guy. It's just a rich French guy.

He bet $45 million on Trump. It seems like he's just a guy that wanted to be long Trump. It doesn't seem like anything more sinister than that. What type of capital do you have to have that it makes sense to put $45 million under Trump? Is that 1% of your portfolio? Is that 0.01% of your portfolio? Or is that 25% of your portfolio? I think it's the whole bankroll.

And I want to know what he saw. Like what did he see in the data that made him willing to. Also, he was really trusting polymarket, you know. Oh, yeah, big time. But what did this guy see? Does he have access to some proprietary French, you know, electoral odds database where he thought Trump was actually that underpriced? And it's kind of crazy that everyone's calling it market manipulation.

It's like that is not market manipulation. that's one guy putting a huge bet on. It's not manipulating the market. Yeah, like either he's sophisticated and he's actually pricing in alpha into the market or he's unsophisticated and just gone like ridiculously long Trump. But it's still not manipulation in that case.

It's still just uninformed flow. Exactly, exactly. But yeah, I wonder what he's seeing because if you were really getting scientific with this, you'd be just looking at, you know, on the ground in Pennsylvania. and how things are trending. But this was before early voting started that he put that trade on.

Yeah, that's right. Yeah, and also, like, all of the smartest people in the world right now are focus on positioning themselves. Like, the bond markets, bond trade, there's, you know, the bond markets are positioning themselves. Equity markets are positioning themselves. You can see, like, I think J.P. Morgan had a note where they said the Trump index in equity markets is rallying.

So everyone on the planet is doing. this and you know does this guy have some information that no one else has what do you think the price of bitcoin will fluctuate to kind of plus or minus based on the election outcome here and i'm talking about that night so i'm not apparently it could take a week i don't know i guess maricopa county in arizona like can't count ballots for some reason but let's say it's resolved on the night I think I might get in trouble for saying this. I think the skews between 100K and 50K depending on the outcome.

Okay. I think it's basically get ready for the highest one-day volatility in Bitcoin's history. I think it's going to be super volatile. And it could be one of those things where it's whipsawing that night based on the various TV channels that make calls or not, you know. Right. And it's so close. And people like, okay, well, Nick, because I tweeted,

this so people are saying well if it's if try if it trades at a hundred k if Trump wins like why isn't it there now and it's because of course Trump is only a moderate favorite so it hasn't been priced in yet yeah I was listening to a podcast Joe McCann has a podcast um on one of these channels I get I'd listen to so many of these podcasts but there's a really good podcast that's James Safer and Joe McCann do and they were talking about it they had Jeff Park on, he thought lower band of like 30K Bitcoin. If Harris wins.

Yeah. That seems pretty stark. I'd be shocked if that happened. So as of right now, there is an interesting divergence between basically the market-driven probabilities and the models. And I aggregate a lot of the stuff and then Alex Thorne did an update. And so as of yesterday, the bookies, and the prediction markets are all trading between 59 and 62% in favor of Trump.

And then the proprietary models like 538, the economist model of the Hill, are all between like 51 and 55%. I mean, even if it's 6040, that's, I mean, it's close to a coin flip. Yeah. But I think it would be a really interesting test because this is the first time we've had these very liquid prediction markets. will finally be able to determine were the prediction market's more accurate than the models. At what time election night do you turn on the TV? Because it's just going to be nonsense from 7 p.m. to 10 p.m. right?

Like there's nothing's going to actually happen when the ballot boxes are still open. We could know just based on early voting the way this is going to go. I guess that's possible, but I don't know, Pennsylvania and Georgia, You've got to close down and count the votes, right? Yeah, and all the battleground states have already said it's going to take them days, apparently. I don't get that. Can you hire some like temp workers to come in there and count? Is it really that hard?

Yeah, like, why are third world nations able to do this and give us the result in hours? And we can't figure it out. That is maddening. Now, do they count the right-ins? Do they actually like tally that up? Because I'm pretty sure Tom Brady would have won if the counted right. in some of these previous elections in Massachusetts. Well, two weeks to go and we can put it behind us.

All right. Why don't we hop in some deals of the week? Yeah, first up, this is from the Castle Island portfolio. We co-led a round into Hata. They are a crypto exchange for Southeast Asia, starting in Malaysia. Co-led that round with Kedenza. There is $2.5 million from us, Kadenza, and Alliance Dow. So congrats to the Hata team.

Really excited about Hata. Next one up, biggest deal in the history of the industry, Bridge, which is a stablecoin infrastructure company. They were acquired by Stripe. This was rumored for a few weeks. They were required for $1.1 billion. So you want to talk about the impact of the Stripe deal now or in the news? Yeah, let's cover that after the deals. But I think there's a ton to say about Bridge and we'll be talking about them for a really long time.

Next up, we have Carpot Key, a Dow Treasury Management platform. They raise $7 million from AppWorks, Ventures, and Wintermute. Then we have borderless.xyZ, a stablecoin liquidity network that raised $3 million from Amity Ventures. Next up is Moonwalk Fitness. They've raised $3.4 million in Iran led by HackVC with participation from reciprocal, finance, and CMS. Then it's variational, a crypto derivatives trading product. that raised 10 million from Bain Capital Crypto, Peak 15 Partners, and Dragonfly.

Then you've got Party Icons, a crypto-mobile gaming platform. There is 9 million from BitCraft and IDG. Azura is a defy trading platform that raised 6.9 million from initialized Volt and Winklevas capital. Then you have fluid protocol. They're a decentralized stablecoin protocol. There is 3.9 million from Blackcelerate, Anamoka, and CMS. Then it's high of a data availability protocol. They raised $1.8 million from Lemniscap and Paper Ventures.

Then you've Kraft that's with two T's, a decentralized platform for employee benefits. There is $2 million from SuperScript and DCG. Skyfire is a payments network for AI agents. They raised a million dollars from Coinbase and A16Z CSX. Then Propine, their digital asset custodian, they were acquired by Coin Manu. another digital asset custodian backed by Numira. And then we have NOSISDAO. They have announced that they're going to do a $40 million venture fund

focused on RWA's payments and crypto infrastructure. All right. Ecosystem funds. I love it. We're back. So before we hop in the news, tons to discuss. Let's do the metrics minute. Today for the coin metrics,

Metrics Minute, we're talking about Bitcoin Exchange flows. currently 2.6 million Bitcoin or $173 billion worth are held across 20 centralized exchanges. Their percentage of Bitcoin on exchanges jumped up 4%. By the end of September now, it's 13.4% of Bitcoin's supply. In comparison, 13 million ether, 10% of Ethereum supply is held on exchanges, while most of it remains in smart contracts. Bitcoin's one-hop supply, this is Bitcoin's typically held by miners, has dropped from 3 million at the last, having to 2.5 million today due to reduce block rewards and minor distribution. Bitcoin minor outflows have risen this year, peaking at 59,000 Bitcoin

in January, as I suppose miners suffer some deteriorating economics. That is your metrics minute. All right. Good metrics minute. All right. So let's talk about this bridge deal with Stripe. obviously just a great, great outcome for Bridge and their investors. What do you make of this in terms of the strategic rationale for Stripe? Yeah, so Stripe had a stablecoin product before. It wasn't necessarily that useful, I think, in my opinion. They had looked at crypto back in the day, deprecated that, came back, started building in for stable coins, bought Bridge. Bridge described themselves as the stripe

for stable coins. Bridge does orchestration, so basically an API to easily send stable coin payments, and they do issuance. So, uh, issuance, stable coin issuance is a service. The API product was basically similar to the product that Circle had before they deprecated it. And that was actually product that was making Circle a ton of money, I think, $50 million run rate. So Bridge kind of picked up the slack there. A lot of people thought it was richly priced. I mean, it looked like a, you know, 70x multiple. But I think Stripe saw that Bridge was basically the,

I would say probably by far the most successful firm in stable coin orchestration and wanted to move aggressively and faced a kind of build versus buy decision and saw the ability to acquire a very talented team. So, yeah, I guess the verdict, we won't know yet how smart of an acquisition it is. You know, kind of, I think the potential spoiler here is if they lean heavily into stable coin payments, they could face even more banking issues than they currently do. I think Stripe was de-rested from Wells Fargo recently. So that could be the spoiler.

They may not be able to operate as freely as Bridged did. when Bridge was independent? Yeah, there's a lot of things to say about this. I mean, if the regulatory swing happens and the banks become more freely able to service some of these crypto companies, this could end up looking like one of the best acquisitions of all time, I think.

Because now you're basically building a network on top of stable coins. If you can expand the bank access to actually get money into these stable coin networks, then this ends up looking like a home run. Obviously, Stripe has way more resources than any startup would have in terms of getting bank accounts up and running. So really, I think, validating for the category. And Colson Brothers are usually a couple of years ahead of their competitors in terms of seeing things.

So I'd be shocked if you don't see more M&A from Stripe's competitors in the coming years. Yeah, I think this will be remembered as the moment that kind of stablecoin-based fintech became a thing. Obviously, it's been a thing. but more awareness of that has been confined to our niche. And I see this is the Catholic moment that A induces other fintechs into getting more heavily involved in stables. I mean, you know, PayPal has already been active there and, you know, V's and MasterCard are active. But I think you'll see an acceleration there.

And my view is that this is a new era of fintech where the old era, fintech is we're building on top of really shoddy rails ultimately in sort of the, you know, correspondent banking system, FedWire, Swift, and they were ultimately really constrained by the underlying infrastructure. Now you have this new wave of end user applications, both consumer and B2B, that are building on top of stable coins instead of banking rails and just a fundamentally better infrastructure. So I don't know what we're going to call it.

thinking of calling it fintech 3.0 as a non-to-web 3.0. Okay. So just ripping out, hot swapping out the infrastructure and creating experiences that are far, far better because we're using stables instead of the banks. Yeah, although you do need those banks. You got to have. You still need them. You still do need them. And there's like three banks that do business in this category and we're very reliant on them. Yeah. It's, yeah, it's really, I think we'll look back. on this is, as you say, kind of a seminal moment for the industry. And if you just judge this based on the number of generalist venture funds that I've talked to over the past few days around, okay, what are we doing in stables? And like, is there anything we should be looking at?

There's going to be a lot of capital flowing into this category. Yeah, I'm already nostalgic for the days when just a handful of crypto vCs cared about stable coins because now the secret's out and everyone is looking to do stablecoin deals. Yeah. All right. So transitioning a little bit, news that happened this week. So the FBI made an arrest this week. It was a man in Alabama who actually was the person that compromised the SEC's X account by posting the fake Bitcoin ETF approval. So probably shouldn't have done that. Do we know if he actually traded successfully on the news because Bitcoin did whipsaw around a lot at the time? Very unclear, but his Google search history was kind of like, how do you know,

if the FBI is hunting for you or something like that. It was not good. In very good news, Nigeria has dropped the money laundering charges against Tigran Gambarian, the finance executive who'd been detained for eight months. And reportedly, he is on a plane home. So a great outcome, really glad that I guess the pressure worked or they came to their senses, and they've now released Tigran. Yeah, you have to give a lot of credit to the folks that really stayed on this. French Hill comes to mind. Also just a lot of other, you know, people in the crypto space, entrepreneurs who were keeping politicians feet to the fire in terms of pushing for this.

No explanation, as far as I can tell from the Nigerian government, other than say, hey, he was just an employee. But I mean, the guy was in jail for what was it? You said nine months? Yeah. And I mean, he was having seriously deteriorating health. He had a litany of health problems. I don't think they have the best medical care, maybe in Nigerian prisons. Malaria, double pneumonia. Unclear if he was going to make it, honestly. And like this guy, as we said, this guy was a decorated agent of the U.S. government. He led investigations into all sorts of crypto-related crimes.

And I felt that he'd been totally abandoned. But something worked, and now he's free, thankfully. So really glad to see that happen. here's some news that was pretty big today. So Cracken, one of the largest crypto exchanges in the world, they announced that they're launching their own Ethereum Layer 2 network called Inc, built on the OP stack. This, of course, comes after Coinbase launching their own Layer 2 network base.

It looks like there's some interesting products out of the gate being listed on this. So kind of a wrapped Bitcoin product will be one of the first things on this. Very, very smart move, I think, especially if you have the view that Cracken will end up becoming a public. who traded company, which I tend to think it will. This is just another line item on the revenue, you know, on the income statement. Yeah, congrats to Cracken. And I think we'll see basically all of these major centralized exchanges launch their

own L2s. Many of them have already. It's the market structure for exchanges, stable coin issuers, and layer one and layer two protocols is kind of converging, I think. I think you'll see more stable coin issuers trying to control the plastic. that they're on doing their own L2s and in some cases L1s, I think you'll see these exchanges try to do their own L2s, kind of control the trading landscape and participate in some of the economic upside of some of the applications built on their platform, kind of turn into like app stores at the exchange level. And then the protocols themselves, I think it's kind of moving towards more of an app chain model in some cases, I guess. You know, Uniswap being the example there where you're kind of, you're kind of, you're kind of. moving to a situation where you want to control the execution environment more than you previously had.

So we'll be tracking Inc. that's slated to launch in 2025. Interesting news as well this week. The city of Buenos Aires has announced a blockchain-based digital identity protocol called Quark ID. Apparently, citizens will be able to access public services and claim personal documents such as birth certificates. That's cool idea. And they're, yeah, they're building this with Matter Labs, the developers of the ZKSync L2.

I mean, I guess ultimately a birth certificate is just a notorization of something, right? So why wouldn't you be able to do that on a blockchain? It seems like a perfect use case for a blockchain. Yeah, I feel like blockchain-based identity never really took off despite dozens of pilots. Well, it's like the monetization is kind of a question, right? Like how do you make money building a blockchain ID system? And do will ordinary users have to, you know, hold these keys in a non-custodial wallet? Probably not, right?

I mean, I should hope not. Wallet technology has just accelerated so much. We were getting a demo this week of a stable coin wallet that had no seed phrase, no, no anything, right? Just log in with Google and all of a sudden you have a crypto wallet. Oh, yeah, we should, we should mention that. So many pay, that's the wallet you alluded to. They were, this is very interesting. So they were, this many pay wallet was built by Opera, which is a publicly traded company,

and they obviously have the Opera browser. Then they built a non-custodial stablecoin wallet, which is just for stable coins. And they spun it out into a standalone app, as lightweight as possible from a data perspective, just focusing on emerging markets because I think Opera has a lot of users there. And it's pretty cool. You know, there's no gas. You don't need to pay gas and ether or anything like that. It's actually all in the CLO blockchain.

It's all stablecoins and they're integrated with a lot of local on and off ramps. It's kind of, to me, this is the future of stablecoin wall. It's just not a lot of obvious crypto stuff in there. Use your phone number to connect with people. You don't really have to manage the keys. This to me is an example of really, really good crypto-UX. It's going to be a bad decade to be a dictator, I think. How are you going to prevent your local population?

is from accessing dollars when you have technology like this. Yeah, exactly. I mean, you know, some of these nations have tried. You know, Nigeria tried. And Nigeria is one of the most crypto-dollarized nations in the world. So. I mean, so what do you do? You just kind of lean into it and you go like Panama and you just create a dollarized economy?

This is my theory is that because it's so frictionless to do currency substitution with stable coins, you'll see crypto dollarization. That was what my talk was about in Singapore, and I listed, I think, 10 nations where I think it's likely to happen. I sincerely believe this will happen in the coming decade. But then you can't print money. How is that going to work?

You don't control the central bank. I mean, that might just be the reality that we come to live in. It enforces more monetary discipline. Except for at the United States level, where the U.S. will get to print the money and basically at the detriment of the folks that are not in the U.S. Yeah.

And remind me why U.S. politicians don't like this? I think they just haven't figured it out yet, but I think they will. Speaking of which, Chris Waller, who's, in my opinion, one of the smarter Federal Reserve governors, he gave a speech centralized and decentralized finance substitutes or compliments, speaking pretty positively of Defi, actually. Yeah, I thought that was quite good. There are some other kind of regulatory things that happened this week. So Coinbase filed a series of FOIA requests to U.S. regulators,

a bunch of different agencies around their handling of digital assets. They're trying to get to the 15% deposit cap on crypto company guidance. I'd be shocked if that's in writing. That feels to me like something that was communicated via phone calls. Yeah, so I'm obviously really happy to see them take up the thread from folks that have been pounding the table about chokepoint 2.0. So really, you know, big credit to Coinbase for doing that. As you say, the problem is, is that the regulators learned from choke point 1.0. What happened with choke point 1.0 was there were two memos written by, I think, the Obama DOJ

that were outlining the strategy, like official memos. and these memos were leaked and then there was a ton of pressure on chokepoint 1.0. Next time around, they, as far as I understand, the entities that were communicating this guidance, this informal guidance to the banks, namely the Fed and the FDIC being the most important ones

and the regional feds, they were unwilling to put a lot of this in writing for this exact reason to make it FOIA resistant, which is very simple. if you ask me. It's not how things should be done. Like if important guidance is being passed down by regulators, the public deserves to know about it at a minimum. And probably they should have, they should have the chance to weigh in on it too. Do you, have you ever seen the wire? No, I haven't actually. One of the best shows of all time. And these bank regulators kind of remind

me the criminals in the wire in some cases because they, in the first couple seasons of the wire, there was a lot of drug dealing communication over phones. And eventually there was a phone tap that was put in place and a bunch of the criminals went to jail. But the criminals evolved. They started to move towards beepers and kind of codes, just numeric codes on beepers. And so there was no ability to wiretap someone. Eventually you can crack the code. But that's kind of what happened here.

And people think that we're a conspiracy theorist, but we know this to be true. It was all verbally communicated. We don't want to see that deposit cap above 15% on crypto-related companies or else you're going to have a really hard time. Yeah, I mean, shouldn't there be meeting notes or something? I don't know. I mean, the other problem is that this is considered confidential supervisory information, which if you're the bank, you're not allowed to leak that. So it's very black boxy. I'm really hoping we had some hard evidence of this. We know what happened and actually have an interesting paper for.

from the Fed that gave us a little bit some more breadcrumbs. The paper is called tracing bank runs in real time. And it just came out and it covers the bank runs in March 23. They found two really interesting things. One feeds my conspiracy part of my brain, which is, so they found more banks where bank runs occurred. They found 22 banks where significant runs occurred. even though there are only four actual failures,

because they had access to, of course, the proprietary Fed data set. So the sinister thing or suspicious thing is, for me, that three of the banks that failed were crypto banks, Silvergate signature and to a lesser extent, SVB. And then First Republic was the fourth. But there are actually 22 banks where runs happened. Is it a coincidence that, you know,

at least two of the banks that actually went down were crypto-focused banks. I don't know. I don't think so. No, it doesn't seem like a coincidence to me at all. The other thing that I expect Matt Levine will write about at some point is they found that there were lots, there was similar impairment between publicly traded and private banks, but the ones that suffered the runs disproportionately were the publicly traded ones because they have much more legibility about their...

position. And I thought that was interesting because basically it means that being a publicly traded bank is you're actually more vulnerable because you're sharing more information with the public. That's tough, right? So, you know, that makes intuitive sense, but these banks want to be public so that they can access capital markets. Yeah. And I kind of makes me think that there's a self-fulfilling prophecy where short sellers sold short, the stock of these banks that were sort of known to be impaired and then that helped intensify the run because people looked at the stock price like oh there must be a run happening let's withdraw so kind of a tough situation be in his bank yeah that is a tough situation well we'll put that paper on our newsletter that's worth a worth a read all right so

we're up against the clock here stable coin VC we just never sleep over here yeah or we got a lot busier since the bridge acquisition, which I guess is a good thing. That's a good thing. All right, everybody, have a safe and healthy weekend and we will see you on Monday.