On The Brink with Castle Island - Weekly Roundup 12/03/21 (Square is now Block, Crypto Basel, Cowen's Regulatory Projections) (EP.265)

Episode Date: December 3, 2021

Matt and Nic return for deals and news. In this episode:  Art Basel is now a crypto event Is the crypto industry culturally relevant? Jack Dorsey leaves Twitter Will Twitter become more censored Square renames itself Block Celcius CFO is arrested Fidelity launches a Bitcoin ETF in Canada David Marcus is leaving Facebook Regulatory projections from Cowen BadgerDAO hacked Content mentioned:  Cowen's analysis of the regulatory headwinds in crypto 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 Corporations and institutions can allocate cash into Circle Yield to gain crypto lending exposure and earn superior returns compared to traditional markets. It's secured, overcollateralized and built on the leading dollar digital currency. Visit circle.com/yield to book a meeting

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 Conjecturee 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 the...

Bitcoin. Bitcoin. Welcome to On the Brink. I'm Matt Walsh. And I'm Nick Carter. This episode is brought to you by Coinbase Prime and it's also brought to you by Circle. More on those companies later in the episode. And are you going to have like an upbeat thing on this ad read? I've been hearing some chatter that you're a little bit like monotone on these ad reads. We've received some feedback that I'm not sufficiently enthusiastic when I read the ads, both from the sponsors and then just from the regular listeners, which is like if you're a listener, you don't actually have to listen to the ads. I mean, you got to liven it up a little bit,

like have another cup of coffee when you're doing the ad rates. I think it costs extra for me to be excited. I just tell people that's your like natural thing. It's just kind of like monotone. That's what I sound like. That's my natural state of being. Just like get more excited. I'm like, he is excited.

That's how he operates. That's true. That's true. It feels like everyone is in Miami this week in the crypto industry. Yeah, so like crypto just decided that art Basel is now like a crypto event. That's kind of what happened. Crypto Basel, yeah. So the crypto industry has decided that it's culturally relevant, which is frankly dubious, in my opinion.

And they've co-opted all of our Basel. And it's basically NFT Basel now. It's like some people, yeah, some people just wanted to go to Miami. Yeah. I mean, Miami's great. But so if you go to any of the art exhibitions, it's just NFTs. all over the place. That's cool.

I don't know how I feel about it. So everything's crowded. Traffic is really bad. And as a bona fide Miami resident, you know, I'm a local now. So I resent all these out of towners, these tourists and carpet baggers,

you know, coming in. Yeah, because you were like two months ahead of the Miami trade. Yeah. So, you know, I'm a local now.

I have deep roots here. And so have fun down there. Yeah, it's a little bit of a boondoggle for all these out of towners. You know, I think something people don't realize about Miami's, you know, it's not trivial to get from Miami to Miami Beach on a Friday night. You know, that's not going to be an easy trade. So you can't just hop between parties on different.

Yeah. First world problem. You had a good podcast this week with the Galaxy guys, more in the mining series. Yeah, the mining minors series has received positive reviews so far. So we shall continue it indefinitely. This was a very specific episode on how miners should account for their cost of production, which is not of general interest, but if you are an analyst and you cover miners, you probably should be listening to the episode and reading the note that Galaxy wrote about it.

Yeah, with so many more public companies in that category, I think having the standard approach is very necessary. It's honestly very sloppy the way I see it reported. the cost of production, you have to include, in my opinion, the ASIC depreciation in your cost of production. Yeah, if you don't, then it's kind of like the we work style of EBITDA recognition. It's like EBITDA, but community adjusted, it's just like, we're going to take stuff out. That doesn't, you know, we're just going to make this number be whatever we want it to be. If you report your marginal cost of production just based on the electricity inputs, it's like

your A6 just appeared out of thin air. It's like, well, how did you get the A6? They weren't handed you by a genie. You bought the ASIC. So build that in. That's like half of the cost right there. I mean, that's the whole complexity of the model too, right? It's like, can you get access to these asics? Can you buy them in an efficient manner? So that's one of the most important parts of being a minor. Yeah. And how long do they last? Are you depreciating them over 18 months or five years? Like is hash rate making them obsolete? You know, so that's just the key sort of decision point you make as a minor. You have to incorporate that into the model.

So anyway, very good episode from Cream and Brandon. So let's get into some deals. There's a busy week. Why don't we kick it off with a Castle Island deal? So Mint Songs, a music NFT marketplace, raised a $3 million seed round. We led it. So it was led by Castle Island, had participation from the other island, North Island. Great to do another deal with the North Island.

gang, Coinbase Ventures, Freestyle VC, Goodwater Capital, iOSG, and Grammatic. So really excited about Mint Songs and check out the platform. They're giving away an NFT, actually. So it's a very popular time to be hopping onto Mintzongs. That's right. So check it out. I think digital merchandise is a pretty natural compliment to physical merchandise. I mean, artists already sell collectibles and merch and things like that. So it just makes sense. to do it in a digitally native way. And keep an eye on the platform. Who knows?

Maybe some Castle Island partners will be releasing music on there at some point. So minthongs.com to get your NFT. Next time we have hive mine capital. This is a monster fund. This is a $1.5 billion fund raised by former city executive, Matt Zang. That one took me by surprise.

I'll admit it. Yeah, that is a huge raise. So congrats to Matt and the team over at Hivemind. Next one up is a convertible note deal. So we do all sorts of capital raising announcements here. So Galaxy Digital has announced that it's raised $500 million via convertible note. You know, you'd have to think that this will spur them to be a little bit more aggressive on the M&A front if I had to guess. So exciting to see this type of an announcement.

Then we have Coinbase is acquiring unbound security. they specialize in crypto custody infrastructure using MPC. So congrats to the unbound team. So I think I want to talk about this one for a second here. I think this is a really interesting move. So MPC custody is becoming much more pervasive in the industry. So the growth of fireblocks really shows how big of a market this can be. And at least my perception of what's driving this is just that MPC allows you to get on to more assets,

you know, quicker, basically, versus doing a conventional kind of, of HSM custody set up. And so I wonder if we'll start to see more MPC custody platforms acquired. Obviously, Curve was acquired by PayPal. This, to me, signals that Coinbase wants some of this infrastructure to be able to spin up new chains quicker. And Unbound was a really, really compelling company. I mean, this is a super talented team. So interesting trend here, potentially. So next up, we have Iron Fish, which is a new block. network focus on privacy. They probably get the best name of the week award.

Iron fish. Yeah, that's a good one. I like that. They raised 27.7 million from A16C, electric capital, metastable, Sequoia, Erickton, XRP and others. Next is 2TM.

This is the holding company of Mercado Bitcoin, the Brazilian cryptocurrency exchange. They raised 50.3 million from 10T in tribe capital. Next up, we have HexRow. I believe it's actually pronounced hero, but it's spelled X-Roe. Their derivatives platform building on Solana. There is $34 million from Susquehanna, Jump Capital, Coinbase, Alameda, blockchain capital, and others.

Next one up is Grid, is GRIID. So Grid, this is a infrastructure company in the Bitcoin mining space. They have announced that they're going public via a SPAC merger with Adet, EdTech acquisition, Corp. So congrats to the grid team. This is Harry Suttac and Trey Kelly over there at grid. So congrats. Yeah, and grid, I'm hereby inviting them to appear on the mining miniseries. They specialize in exploiting stranded or underutilized energy assets, especially renewable ones for Bitcoin mining. So really interesting company. Congrats the team there. Then we have one inch, which is a decentralized exchange aggregation platform.

There is $175 million from Amber Group, Jane Street, Fennek, Fennak, Fembusci, Alameda, Celsius, Nexo, Tribe Capital, Monster Race. Next is Sertic. This is a blockchain smart contract auditing firm. They raised $80 million from Sequoia, Tiger Global, Koto, and Hillhouse Capital. Then, crypto.com, they've been in the newsleting. lately. They have agreed to acquire North American derivatives exchange, Nadex, and small exchange for a combined fee of $216 million. Next up, we have a fund announcement, so Maven 11 Capital has closed a crypto fund at $120 million, so $120 million raise from Maven 11 Capital. And also in fund announcements hashed, well-known South Korean crypto fund, they raised $200 million.

And congrats to bake, Kim, and the team over there at Hosh. Next one is AAG Ventures. This is a play-to-earn blockchain gaming company. They raised $12.5 million from Shima Capital, Tribe Capital, and Tess Ventures. And lastly, Bitcoin Miner Lancium, who we did an episode with recently, they announced $150 million equity raise led by Hanwa Solutions, which is the owner of of Q-cells, a large solar company manufacturer with participation from SBI. And their ambition is to build, you know, several gigawatts with the power out in West Texas

with renewable energy. And the last one is structure. This is a trading platform. They raised $20 million from polychain capital. Busy deal week. Yeah, lots of, lots of chunky deals here. Lighter on the news front. Well, the big news is Jack Dorsey, no longer in charge of Twitter.

What does this mean for the crypto industry? Yeah, I think Jack is probably focusing on, you know, people have suspected he's sort of more partial to Square these days than Twitter. And, you know, the day after he announced his departure from Twitter, Square rebranded itself. So you have to imagine that those things are correlated. Yeah, so Square is renaming themselves block. make of that? I think that's an indication of where they're going with the business. I mean, to me, that's a pretty overt signal that they are going to be focusing on public blockchain. So I think that's the obvious solution. I mean, the obvious interpretation. They also tweeted

block references, the neighborhood blocks where we find our sellers, a blockchain, block parties full of music, obstacles to overcome, a section of code, building blocks, and of course, Tunks and Cubes. Good to see them on the cube train. Very good to see that. You know, so they, the second thing they reference after their core square, you know, payments processing business is a blockchain. So we know, what did Jack Dorsey say at Bitcoin 2020.

He said if he wasn't running Twitter or Square, he'd be working on Bitcoin full time. So it'll be interesting to see what the decentralized exchange play ends up looking like over its square. That's right. They have TBD and then some number of digits. They release their white paper for their decks. What do you think this entails for Twitter? Do you think the features will continue to evolve, the tipping features? Well, I thought Mike Solana had a good take on it, which is that you know, he felt that Jack was kind of fundamentally committed to you know, free and open platform. Jack Dorsey at times seemed distraught about some of Twitter's own decisions in terms of

being aggressive on censorship. And his interpretation was that now that he's gone, Twitter will become more kind of censored and restrictive. And I kind of align with that interpretation. As far as the blockchain elements go, I mean, The new CEO, former CTO, was, I think, in charge of the Twitter crypto initiatives. So I think they'll probably continue on that trend. All right.

Well, let's get in some other news. The CFO of Celsius, the crypto lending company, was apparently arrested last week on charges stemming from his affiliation with Mosh Hoguegg's firm. So this is a company that's been embroiled in a money laundering operation. So kind of a crypto-specific investment. here going on around some ICOs that happened back in 2017 it looks like yeah Moshe Haagg infamously was behind a number of ICOs back in 2017 many of which sort of didn't really go anywhere I think he was behind stocks which was the oh man that was Floyd Mayweather right Floyd

Mayweather promoted it and eventually to settle with the SEC or find. He was behind Siren Labs, if you remember that. I do. Which was the blockchain phone, which I don't think went anywhere. The Finney smartphone. He was behind orbs. So really chronic ICO sort of promoter and issuer. some of these websites are still up by the way if you go to iCO bench and iCO drops you can actually

see some of the people that were advisors to some of these projects and that's those are not websites you want to be on yeah it appears that now uh the c flesi cFO is is somehow embroiled in this kind of hard to figure out what's going on but it doesn't seem particularly good what was that project that when you first started at fidelity you were pounding the table that this was one of the biggest frauds in the ecosystem. It wasn't BitConnect. It was, um, is it eternity? Could have been Veritasium. Veritasium. That's what it was. Yeah. I mean, I was right. That was a big one. I was right about that. SEC got them, I think, at the end. 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. Coinbase custody is battle tested with dedicated on-chain addresses and industry-leading insurance. Coinbase Prime offers integrated trading tools, including real-time market data, smart order routing, robust analytics, and algorithmic execution strategies. To learn more, visit on the brink.link.combeast. If you manage corporate or institutional funds, you're probably looking for ways to access opportunities in crypto. You see the growth in momentum and want exposure, but a lot of institutions don't know how or aren't comfortable with the risks of Bitcoin or Defi. Now there's a new investment that's built

specifically to help institutions get into digital assets. Meet Circle Yield. It's a blockchain-based investment built with USDC, the leading dollar digital currency. Circle Yield is fully secured and over-collateralized with Bitcoin to protect your funds. This also makes it a great fit for crypto institutions who want to diversify their treasuries and reduce risks while staying on chain. You get your choice of terms from one to 12 months and a fixed rate that's higher than what you'll get at a bank or in many fixed income markets. Visit circle.com slash yield to book a meeting with one of their experts. That's circle.com slash yield. All right, well, speaking about the SEC, let's talk about a couple of things that are going on this week. So it appears here that there has been some developments

with the grayscale Bitcoin spot ETF. So their attorneys at Davis-Polk have sent a letter to the SEC basically arguing that the fact that they've approved the Bitcoin futures-based ETF but not the Bitcoin Spot ETF is arbitrary and capricious and therefore in violation of the Administrator of Procedure Act, the APA. So this is an interesting argument. Apparently the APA requires that the SEC treat like situations. quote, alike, an absent orismo basis for different treatment.

And so they're arguing that this means the SEC needs to look at that spot product differently. Not sure if this has any legs, but certainly good for them for making the case. I think that this is a product that should be approved. The fact that Fidelity is launching a spot ETF in Canada right now is also a little bit embarrassing to the SEC. As Eric Balcunis points out, he's the Bloomberg ETF analyst. It's like pretty embarrassing when the leading asset management firm in the world basically has to go up to Canada in order to launch this product. They can't launch it in the U.S.

So, grayscale and to some extent fidelity here, continuing to make news in the Bitcoin ETF space. Yeah, I think the argument is pretty reasonable, honestly. I mean, the lawyers like to say, you know, arbitrary and capricious. And I think the question is, is the SEC's decision to continue to start. Stonewall spot ETF when there are many, many other spot commodity-based ETFs out there? Is it arbitrary and is it capricious? Are they, you know, imposing a consistent rule here? Or are they being inconsistent?

And are they singling Bitcoin out for special treatment? It's obvious that it's the latter. And it's obvious that there's a political dictate here at play. You know, if this was any other commodity not named Bitcoin, it would have a spot ETF many times over, and it would have had one probably five years ago. And, you know, I think, you know, when you have, you know, the number one ETF analyst

at Bloomberg saying this loudly, I think, you know, it's pretty clear that the SEC is kind of misbehaving here. The existence of micro strategy in this market, in a market that doesn't have a spot ETF, is pretty fascinating. So they went out and they bought 414 more dollars worth of Bitcoin. this week. So they continue to just $414 million worth of Bitcoin, which is crazy, right? They continue to just turn this into a Bitcoin access vehicle. And in the absence of a Bitcoin ETF, I mean, there's clearly an appetite for this.

What I don't understand is where they got $414 million. I don't know where it came from. Well, they've been raising capital left and right. So my guess is that they had some cash on the balance sheet from some of these notes that they've been issuing. Yeah, it's astonishing And they do have that legacy software business, right? So, you know, there'll be some cash spitting off of that occasionally and they'll buy more Bitcoin with it. Yeah, I don't know if it's that profitable, but yeah, it's astonishing.

I think the ambition here is to get 1% of all the Bitcoins. And maybe just stop there at 1%. That would be good. So David Marcus, is leaving Facebook slash Libra slash DM slash Novi. A lot of titles there. Yeah, I wonder what he's up to next. So he's probably had a frustrating job.

I think the original vision of Libra in creating this alternative currency was a huge, big swing that obviously they couldn't get through the regulatory apparatus. And then now even some of their initiatives around just launching US dollar-backed stable coins have been hamstrung. So it's a tough place to obviously. And certainly Facebook has, you know, a lot of political pressures on them to say the least. So probably not the easiest job he's had over the past few years. Yeah, they've had a tough run of it.

Certainly not a good development for the DM project, although they are live, right? I mean, they're using Paxos stable coin, right? Yeah, I don't know how broadly that's been released, but that's the product right now. It's basically a US dollar stable coin with Paxos as the underlying infrastructure. So there was an interesting piece on the regulatory research arm of Cowan today, looking at kind of the state of affairs of crypto policy. And we're going to put this in our show notes. Certainly worth reading.

Neither, you know, certainly not starry-eyed. optimistic, not overly cynical either. I thought their analysis was pretty compelling. So what they said, you know, to summarize the state of affairs in terms of crypto regulation, they think it's inevitable. They think crypto products will be regulated similarly to non-cryptial alternatives. Quote, we see no way to avoid this outcome. You know, until the federal government accepts crypto for taxes, crypto must be converted to dollars. This gives the government power. They think crypto firms should embrace oversight now, instead of trying to stymie regulators until there's a crisis, which would cause Congress a step in

more onerously. They think that DC is concerned about the collapse of a stable coin to trigger some sort of crisis. Some of the statements were a little tough. I mean, they say, quote, the government's likely to regulate the ability to lend out crypto and pay interest on crypto deposits. We don't see crypto industry pushback succeeding. Banks are regulated. Money market mutual funds are regulated. The crypto alternatives will be regulated. And at one point, they also say, quote, give the government its money. Tax enforcement is going to skyrocket. So pretty sober analysis from Cowen. Yeah, I guess that's not a lot to disagree with there, right? I mean, tax enforcement is definitely

going to increase. If you just look at the request for proposal that the IRS is putting out and look at the crypto forensics companies that are getting in the fray over there, they're certainly going to ramp up their enforcement. So hard to imagine a world where all of this doesn't come true. It's just a matter of time I'd have to think. Two of their interesting predictions are crypto platforms, you know, effectively the brokerages and exchanges will have to register with the SEC. and they feel that the SEC has a strong case in terms of deeming token securities. They even say even if the SEC loses in court,

they don't mention it, but I guess they're implying the Ripple case. They expect Congress would deem certain tokens to be securities. They additionally say they think the Fed will issue a digital dollar within five years and that would bring more oversight of crypto as a consequence. This whole like digital dollar thing,

It's hard to imagine that this would actually happen at a retail level. Like, why would the Fed introduce a digital dollar that completely obviates the need to deal with a retail bank? The bank lobby would just have too much to say about that. Now, if they want to do a digital dollar in the context of institutional payments, like a, you know, overnight repo dollar or something like that that allows banks to move assets and collateral potentially more efficiently, like that makes a lot of sense. But could you ever imagine a world where the bank lobby, goes along with a, you know, like direct Fedwire account for individuals. That just seems crazy to me.

What they should obviously do is just allow stable coins to be backed by federal, by reserves of the Fed, instead of commercial bank reserve. So eliminate that residual source of risk. And then you get a hybrid stablecoin CBDC that's administered by private entities. So it's not like the Fed has to become a retail-facing institution. Yeah. I mean, your earlier comment around the SEC having enforcement over the spot market, I don't know. Not if these things aren't securities. I don't see the SEC having any direct oversight around crypto assets that are commodities. Like, that's not what the SEC is really put in place to do. And so, yeah, if some of these venues are doing certain activities other than spot trading that qualify as securities transactions, maybe they'll get some oversight there.

but I don't think it's oversight of everything they're doing at those businesses. I don't think that a central limit order book that is just doing non-security assets, like why would we want a world where the SEC has oversight over that? One thing to discuss this week, just breaking as we record, is Madridow is one of the bigger tools to get yield on Bitcoin in the theorem context to use Bitcoin, wrapped Bitcoin and DFI. suffered a significant exploit, I believe over $100 million were lost. And the interesting thing is it suspected this was a front-end attack, as opposed to the smart contracts themselves being exploited, which means that Nexus Mutual claims that any losses

would not be covered by insurance that people had bought pertaining to Badger. That's interesting. It's kind of like some of the same insurance problems that you get in the real world where you suffer a loss, but it's not covered by the policy. So here, because apparently was a front end as opposed to a more fundamental attack, it wouldn't be covered. So suffice to say people are upset about that right now. So Nexus Mutual had coverage over the smart contract? Is that what is that where you're suggesting? Yeah.

And their coverage only pertains to the smart. our contract and not sort of just the interface, which was what was apparently exploited maliciously. I mean, I guess that makes sense, right? If the front end was fished or something like that and people were engaging through a different front end, there's nothing that Nexus Mutual could have done. Well, I think there's a bit of blowback developing over them sort of nickel and diming on the payouts here. I don't think if you'd bought Nexus mutual insurance, you know,

it doesn't matter to you whether you lost money through the front end or the back end. You still lost money. So have you been following the Constitution Dow, you know, people token here? So Ken Griffin may have gotten the Dow, but it looks like if you participated in the process, you're up like 10x on people token.

So crypto people, as always, getting the last laugh. but what's the purpose of the token now that they have not secured the Constitution? I thought they were doing a refund process. I think they are doing a refund process, but now there's this token out there that is like 10xed over the past couple weeks. And so what is the purpose of the token? That's the wrong question, man. Yeah. I mean, if you're asking that question, you're NGMI.

Yeah, NGMI, big time. So, you know, I guess it wasn't really a play for the constitutional. institution. I thought the core team there had sort of resigned their influence over the Dow and wanted to give back the money. They're giving back the money. Yeah, I think the money is like in the process of giving, been giving back. That's the thing about crypto. You know, these movements become self-sustaining after a certain point. All right. So I think that's it for the week. We'll be back next week. We have a Monday episode that goes into a bunch of detail around mempools and MEV and just generally on-chain forensics. So people will like that one,

I think. Yeah, light week this week, but it is also our Basel. All right, everyone, have a safe and healthy weekend, and we will see you on Monday.