The Breakdown - Binance Says Lightning Support is Coming After Halting Withdrawals Around Bitcoin Fees

Episode Date: May 8, 2023

A busy weekend around the crypto space. On today's episode, NLW covers: Tl;DR on BRC-20 Binance halting withdrawals and announcing support for Lightning DOJ targeting Binance around sanctions? NYAG introduces even more sweeping crypto legislation Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribeto the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW “The Breakdown” is written, produced and hosted by Nathaniel Whittemore aka NLW. Research is by Scott Hill. Editing is by Rob Mitchell and Kyle Barbour-Hoffman. Our theme music is “Countdown” by Neon Beach.

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Monday, May 8th, and today we're discussing the latest in chain bloat, Binance halting withdrawals, finance being targeted, and everything else going on in the world of crypto. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link of the show notes or go to bit. ly slash breakdown pod. All right, friends, happy Monday. It was kind of an active weekend in that

there was a fair bit of intrigue at the end of last week, as we'll see, and on top of that, the fee situation on Bitcoin just has absolutely everyone chattering. Now, if you are hearing about this acronym, BRC 20, and you are seeing these debates on Twitter going back and forth around whether it's good or whether it's bad that fees are so high, go check out yesterday's episode of Bitcoin Builders. I did a complete primer on BRC 20 and Ordinals, and I think it'll get you up to speed so you can at least start to form an opinion for yourself about what's going on. However, it is relevant for today's episode as well, so the TLDR is this. Ordinals came out a few months ago, and they were an experiment that assigned each Satoshi

a unique number and used the witness portion of the Bitcoin transaction to quote-unquote inscribe arbitrary data, so that could be text, images, etc. This is why they are called ordinal inscriptions. People started using them to create what is effectively a version of NFTs on Bitcoin, although some think they're even cooler than NFTs because the actual data itself is on the Bitcoin blockchain. Well, a couple months ago, a pseudonymous developer named Domo experimented with the idea of using inscriptions to create a rudimentary form of token issuance. this he called BRC20, probably referencing ERC20, which is Ethereum's token standard. Since then, thousands of these token collections have popped up.

They're basically all meme coins, they're all experiments, but some of them are actually getting valuable, at least in the sense of people being willing to spend real resources for them. Over the last week, the total market cap of BRC20 tokens have gone from the tens of millions, which by the way still would have been a lot just because these things are lines of text, to near on a billion dollars this morning. The biggest collection, the original Ordi, has a market cap approaching 300 million all on its own, and a 24-hour volume over 5 million. Now, there are severe debates going on about this.

On the one hand, some folks think that this is a huge boon for Bitcoin, in that it's driving up fees, which is good for miners in chain security, it's demonstrating what a scarce resource Bitcoin block space is, and it's creating incentives to solve scaling issues with layer two. On the other hand, there are folks who are aghast and see it causing congestion and crowding out other, quote-unquote, more legitimate use cases for Bitcoin. Now, I put more legitimate in air quotes because, of course, legitimacy is in the eye of the beholder and in the will of the free market.

However, I do think it's worth noting that some of the folks sharing this crowding out argument aren't thinking about it from a strictly theoretical perspective. Anita Post writes, can anyone explain how I'm going to onboard people with these fees? Can't use on-chain, can't open channels, makes custodial lightning the only option. And all that because some people think it's fun to quote-unquote break Bitcoin. Why not use liquid or R-SK? Mike in space responds, terrible take. No one is looking to break Bitcoin.

We're just using it and paying for the privilege to do so. This is what adoption will inevitably look like, high fees. This is the system working as designed. I need a response to Mike. I'm mostly onboarding people in Africa. They don't have the privilege like you to pay these high fees. They really need Bitcoin while you're just playing around. Of course, fees will rise, but slowly over the years, just like adoption. Use liquid or RSK. They are designed for tokens. Now separately on the same

thread, Nick Carter also replied to Anita, saying, the answer is subsidies, fee caps are incompatible with a market-based system. Just like all other payment systems, trading off settlement speed for efficiency, L2s, is how you get cheaper payments. Austin Campbell replied to Nick, saying, Anita, if you look at the analogies to traditional systems, over time, it appears the major L1s, Bitcoin, and Eith, are moving towards being vaults. That's not where you onboard low-cost people. You don't open a DTCC account as a retail investor. L2s will specialize for lower costs. Anita responded again to both Nick and Austin saying, thanks, I'm aware of all this. I just wanted to stir the pot and speak about the problems it causes when we mint tokens on the

base chain, although we have side chains for that purpose already. Makes practical self-custody, privacy-first education harder. Anyway, the point here is not that Anita is 100% right necessarily. It's just that I think there's a temptation to think that people who are saying that this isn't what Bitcoin was made for are just doing it from a sort of moralistic standpoint, not a practical standpoint. And for someone like Anita in the communities that she's working with, there is a very practical dimension. Now, all of this is why I said on Twitter this morning that I think that BRC20 is the healthiest debate in Bitcoin I've seen in years. These are real legitimate questions. These are real legitimate excitements. These are real legitimate points being

made on both sides. So obviously I'm going to be covering this more this week, and again, for the full primer, go listen to Bitcoin builders. However, for the time being in the purposes of today's show, the thing that's relevant to understand is that BRC 20 tokens are driving fees up, and it's creating some interesting network issues, which gets us to the weekend. On Sunday, Binance halted Bitcoin withdrawals twice. The exchange claimed that the problems were directly related to high Bitcoin fees and congestion, rather than any solvency concerns. Withdrawals were reopened after less than two hours each time. Now, the number of unconfirmed Bitcoin transactions did pile up to more than 400,000 on Sunday, which is higher than any level seen since the 2018 or

2021 bull runs. Average Bitcoin transaction fees have more than doubled since March, now above $8 representing a two-year high. Now, in their ongoing threat about this on Sunday, Binance writes, we've temporarily closed Bitcoin withdrawals due to the large volume of pending transactions. Our team is currently working on a fix and will reopen Bitcoin withdrawals as soon as possible. Going on later, there is a large volume of withdrawal transactions from Binance still pending as our set fees did not anticipate the recent surge in Bitcoin network gas fees. Our team is working to accelerate the confirmation of all pending transactions will provide updates here. We're replacing the pending Bitcoin withdrawal transactions with a higher fee so that they get picked up by mining pools.

Pending transactions are being processed by replacing them with higher transaction fees. Finally, to prevent a similar occurrence in the future, our fees have been adjusted. We will continue to monitor on-chain activity and adjust accordingly if needed. Our team has also been working on enabling Bitcoin Lightning Network withdrawals, which will help in such situations. Now, not everyone totally bought Binance's explanation. Cryptotrader Hasika noted that other signs of stress had been showing up on Binance U.S. late on Sunday night, where market makers had allowed the spread on Bitcoin and Ethereum to blow out to a 3% premium compared to offshore exchanges. Crypto-Quant data showed that Bitcoin outflows had been extraordinarily strong, with 162,000 Bitcoin, where

around $4.6 billion being withdrawn from Binance over the weekend. That would be the largest withdrawal in the history of the exchange if there's no error in the data analysis. Alex Thorne, the head of firm-wide research at Galaxy Digital, said the Bitcoin network is completely stable. Block space is currently expensive and you apparently haven't spent the time to prepare for a high-fee environment on Bitcoin, with batching, lightning implementations, or just good fee estimation for your users. Time to do some basic engineering. Sim Callahan, the lead analyst that Swan Bitcoin writes, Bitcoin was working just fine. Binance either didn't want to pay up with higher fees or didn't want more Bitcoin leaving the exchange,

so they decided to cut off withdrawals for its users and blame it on Bitcoin. Red flags galore, beware. Now, ultimately, it did get resolved. The fees were changed. Anything Alex's sense that they just weren't prepared for this might be right. Seiz almost said as much when he tweeted, There's some fud about Bitcoin withdrawal issues. Here's why Bitcoin network fees are fluctuating 18x in a month. But there is, of course, another part of Binance's thread, which is even more optimistic.

At one point in the afternoon, Elizabeth Stark, the CEO at Lightning Labs, had responded to their thread and said, What if I told you there was a way to send Bitcoin instantly at high volumes with low fees? The Human Rights Foundation's Alex Gladstein later quote tweeted that and said the world's largest exchange came under heavy pressure to deliver in a high fee environment, and so now we'll integrate Lightning. Bitcoin's beautifully designed incentive system continues to chip away at the world. Now, we haven't got any more information yet about how Finance will integrate Lightning or on what timeline other than that tweet. But if they do, it certainly provides evidence in the favor of the argument that this is a forcing function or a catalyst for improved Bitcoin infrastructure.

However, this wasn't the only instance of Binance as the main character over the last few days. According to Bloomberg, the Justice Department is taking another look at Binance this time for sanctions violations. The publication reported on Friday using multiple anonymous sources that the DOJ is investigating whether Binance was used to allow Russians to evade U.S. sanctions. The inquiry is allegedly being operated by the DOJ's National Security Division and is running in parallel to other previously reported criminal investigations involving money laundering allegations. Now, Binance is already reportedly in talks to resolve issues related to violation

of sanctions against Iran, but this reporting reflects a new set of allegations regarding sanctions against Russia. Binance claims that it tightened its compliance controls following the Iran allegations two years ago, and if these new allegations have validity, it would be an indication that this overhaul of compliance procedures didn't go far enough to snuff out illicit use of the exchange. In a statement, Binance said that the company complies fully with all U.S. and international sanctions, adding, quote, in 2021, Binance launched an initiative to completely overhaul its corporate governance structure, including bringing in a world-class bench of seasoned executives to fundamentally

change how Binance operates globally. Our policy imposes a zero-tolerance approach to double registrations, anonymous identities, and obscure sources of money. Now, this is, of course, the latest in a long line of investigations and lawsuits against Binance. In addition to the ongoing DOJ investigations, the CFTC sued the exchange in March for offering unregistered derivatives products to U.S. nationals. Essentially, the CFTC claimed that Binance deliberately and knowingly circumvented U.S. regulations. In its lawsuit, the CFTC included a litany of allegations around poor compliance with sanctions and money laundering regimes. The CFTC pointed to numerous internal finance communications suggesting that executives were keenly aware of how risky lacks

compliance was when it came to sanctions enforcement. On top of all of this, late last week, Reuters reported that Israeli authorities had seized roughly 190 Binance accounts with alleged ties to terrorist groups, including Hamas and Daesh, since 2021. This was serious enough that it generated a blog post response from Binance that started, once again, the same reporter at Reuters is deliberately leaving out critical facts to fit their narrative. This time, they've raised questions about our compliance policies for preventing and tackling cryptocurrency-based financing of terrorism. This is a topic we take very seriously. Patrick Hillman, the chief strategy officer at Binance writes, this may surprise some, but we are not an intelligence agency. Like every other financial

institution, we rely on law enforcement to investigate and identify illicit actors in their bank accounts. Once they flagged them, we support their investigation by seizing funds. Now, whatever you think of Binance, it is definitely worth noting that there have been an enormous, I would even say, inordinate number of leaks around them. It feels frankly like a fairly concerted effort, from people with knowledge of the investigations. I don't know exactly what that says about the state of the investigations, as in does it suggest that they don't actually have enough evidence to proceed, so they're just trying to try them in the court of public opinion? Or might it be the opposite that they think it's so open and shut that they feel comfortable leaking this information?

Whatever the case, there are even more rumors coming. If he avocas this morning tweeted two sources that made it clear that the SEC is very close to moving on actions against Binance and Binance U.S., as well as CZ personally. Now, for a lot of folks in the crypto industry, they're starting to wonder what I've been asking for a while, which was summed up by Adam Cochran, who wrote, how many days until Binance U.S. announces a U.S. exit? It feels pretty clear like the U.S. government is trying to force that issue, and I can't imagine that Binance is going to want to deal with this for much longer. Now, speaking of U.S. pressure, New York Attorney General Letitia James has proposed a new bill that would beef up the investor protection requirements for crypto firms in the state. The bill, which was published on Friday, would require firms to undertake public audits and

prohibit conflicts of interest between exchanges and token issuers. It would also provide customer protection similar to banks, requiring that crypto firms reimburse customers who are the victims of fraud. On May 5th, James did a long thread, saying, Today my office is introducing nation-leading legislation to tighten regulations on the cryptocurrency industry. We're proposing common-sense measures to protect investors and end the fraud and dysfunction that had become the hallmarks of cryptocurrency. For too long, fraud in the cryptocurrency industry has caused investors to lose hundreds of billions, with low-income investors and people of color suffering the most. Banks and other financial services are regulated. Cryptocurrency

industry must be too. This bill will, require crypto companies to refund customers who are victims of fraud, as banks do now, give my office the power to enforce these laws and shut down companies that violate them, force independent and public auditing of crypto companies, prevent people who create crypto assets from also owning crypto platforms, stop crypto companies from borrowing or lending investors' assets, provide investors with risk and conflict of interest information about crypto companies. My office has taken action to stop cryptocurrency companies from operating illegally. Our bill will continue New York's legacy as a top financial leader to protect investors and our economy. Now, New York is already one of the toughest regulatory frameworks in the world.

In recent months, for example, Attorney General James has brought lawsuits against major crypto firms including Celsius, Nexo, and other firms that are alleged to be skirting New York rules, such as Ku-coin and Coinex. Now, the takes on this show just how weird the discourse around crypto regulation is right now. John Reed Stark, a former chief at the SEC Office of Internet Enforcement, who is absolutely making his public speaking career right now, shitting on crypto as much as he possibly can, writes, wow, bold and powerful crypto regulations proposed in New York. Big Crypto is undoubtedly working feverishly drafting its opposition.

This is clearly not the regulatory clarity Big Crypto wants and could set the standard for all U.S. states going forward. Austin Campbell responded to that, saying, this is an excellent sign of how out of touch this guy is. Most of the crypto folks I have spoken to on this are actually broadly in favor of the bill. It's got some technical problems, but this regulatory clarity is exactly what people want. My personal view? Good starting point, but needs clarity to make sure it works as intended. Now, Drew Hinkies, a partner at law firm K&L Gates, tweeted that the law was, quote, destined to fail because it relies on certain assumptions about crypto that are simply not true.

He pointed out that the bill presumes that centralized companies will continue to be the primary actors in the crypto space, completely failing to account for the growth in defy. He also noted that the accounting and insurance industries surrounding crypto are simply not developed enough to facilitate full public audits or fraud compensation. Hinky said that the bill, quote, would require that companies dramatically restructure their services. Service providers would have to bifurcate their services so that exchanges, for instance, are separate from custody. Again, this is a policy choice, one that will push out most of the industry. Justin Slaughter, the policy director at Paradigm, writes,

overall this bill strikes me as a positive sign for crypto, though the bill clearly needs to be improved on major points. And why AG James and her staff really seem to have put in a decent amount of work on this legislation and research into crypto. For the last six months, at least since FTX collapsed, a lot of progressives have seemed to adopt a posture of strong hostility to even the idea that crypto will or can exist. To quote one notable thinker, why do we need rules for an industry that won't exist in six

months. This position was, to me, incredibly short-sighted. If people have issues with crypto, that's what regulation is for. And progressives especially represent the idea that the government doesn't stand back and let people get hurt, but takes action to make things better. James, a strong progressive, is stepping up and actually coming up with ideas, and some of them are good ones. The idea of requiring listing standards and reasonable disclosures for issuers are worthy ideas. That said, the bill needs some work on technical issues and some philosophical questions. The problem of how to deal with custody and control in crypto is real, and the solution isn't to handwave that independent brokers will solve it. The desire to break up existing entities is understandable, but also problematic.

The thing that gives me the most hope is seeing the most hardcore crypto critics praising this bill as though it's the best possible bill they can request. If you poll most crypto users, I bet a majority would support large chunks of this bill. The insane thing about the last several years, is the industry really has been seeking regulations, and it's the critics refusing to engage in that hard work because of some flights of fancy about how there was no such need. As a progressive, it's been maddening to see. If we're finally getting folks to realize that, one, crypto isn't going away, two, regulations can be designed for it to protect users. Three, this subject is important. That's huge progress and good for everyone. I think this bill is a sign we may finally be on track to that

consensus. Now, I will say on the one hand, I think it shows a lot for how desperate we are as an industry for clarity that we're debating something as heavy-handed as this might actually be a good thing, but I don't think that those who are arguing it is are necessarily wrong. I bristle at the disposition and the aggressive attitude exhibit in that tweet thread that started it, and it's very hard to see how that sort of antagonism by default doesn't find its way into how things are regulated. However, it is worth noting that Democrats in D.C. have basically stopped engaging at this point because they think that regulation legitimizes the industry and so they don't want to do it. To the point of people like Austin and Justin, there is much in here that, especially if designed

correctly, broad chunks of the crypto industry would support. Separation of crypto powers is something that people are keen on, especially after the last six months, just as one, for example. But I think whatever good there is here, it also shows just how often. our regulatory processes in Washington. The fact that we're leaving this up to states, one by one, to come up with confusing and separate regimes, in the absence of any sort of national standards, is just kind of embarrassing at this point. I'm a New York resident, and so I'll take constructive engagement versus attempts to outright ban, and we'll see if we can turn this thing into something workable and good. But at the end of the day, it won't solve the real issues,

which sit firmly in a district to the south. Anyways, guys, that's it for this Monday. Appreciate you listening as always, and until tomorrow, be safe and take care of each other. Peace.