The Breakdown - BlockFi’s Lead Investor Bows Out Amid Regulatory Uncertainty

Episode Date: July 31, 2021

Today on the Brief: Robinhood's underperforming IPO and settlement battles  MicroStrategy’s continued faith in bitcoin  Proposed sweeping crypto legislation  Robinhood’s underperforming initial public offering came amid settlement after settlement, with the latest coming with the Financial Industry Regulatory Authority (FINRA). Next on the Brief, MicroStrategy’s second-quarter earnings report lays out the company’s intention to buy more bitcoin. Alongside these crypto ups and downs, the regulatory narrative continues: proposed legislation on digital assets covers everything from the Securities and Exchange Commission’s authority over digital securities to U.S. Treasury authority over stablecoins. In the main discussion, NLW covers BlockFi’s tumultuous run-ins with regulatory bodies in New Jersey, Alabama and Texas, and most recently, Vermont. BlockFi has been making simultaneous appeals to regulators to address their concerns and to their existing customer base to affirm their accounts will not be affected.  An unconfirmed report last night, first shared by Eric Newcomer and not able to be confirmed by CoinDesk, claims that a major Wall Street investor has pulled their funding in the midst of the regulatory onslaught. Will BlockFi be the first victim of shifting regulatory winds? Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW The Breakdown is written, produced by and features NLW, with editing by Rob Mitchell and additional production support by Eleanor Pahl. Adam B. Levine is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsor is “Razor Red” by Sam Barsh. Image credit: screenshot of BlockFi website.

I've tended to see a fair bit of dismissiveness around some of these things on Twitter based on the fact that previous regulatory challenges have been sort of nothing burgers, and I just don't want to see us blindsided. It's a tightrope for sure, how to be vigilant without being paranoid, how to take seriously the challenge that new regulations could pose without collapsing into hysterical hyperbole, how to rip apart headlines for the sake of nuance. 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. The breakdown is sponsored by Nidig and produced and distributed by CoinDesk. What's going on, guys? It is Friday, July 30th, and today we are talking about a report that Block Fai's lead investor is bowing out amidst regulatory uncertainty. First up, however, let's do the brief. First on the brief today, a quick check-in on the Robin Hood IPO. At this point, it's a tale as old as time. Hot tech company goes public, excitement peaks, before the listing, stock goes live, and instantly drops. This is the story with Coinbase and it's

the story with Robin Hood. The difference being that Robin Hood didn't trade up in a big way first like Coinbase did, but it also didn't fall as far on the other side. Still, however, ultimately Robin Hood closed 8.4% off its initial price, which was technically the worst first session after an IPO of its size ever. Remember, Coinbase was a direct listing. Now, Robin Hood could have a bit of a tough time ahead of it. Settlement after settlement, it can't seem to shake legal questions. The latest is Vlad Tenaf's failure to register with FINRA, the financial industry regulatory authority. The company argues that Vlad doesn't have to because he's the CEO of the holding company, not the trading subsidiary, but Finra does not seem to agree on this. However, if you're a Robin Hood

investor and looking for some solace. Here's a hot take from three arrows suzoo. Quote, edgy take of the week, but it's a good thing if IPOs nuke on listing versus if they pop up on listing. Means no value was leaked to middlemen and bankers, and investors also need to do more research instead of aping into every new thing. And quote, perhaps cold comfort, but comfort nonetheless. And of course, Robin Hood investors always have Kathy Wood to backstop them. Ark bought 1.3 million shares of hood yesterday. Next up on the brief today, this one is going to really shock you, and I mean really, truly blow your mind.

Micro Strategy made their Q2 earnings announcement, and TLDR, they intend to buy more Bitcoin. Micro Strategy announced that their most recent funding had allowed them to increase their holdings to over 105,000 BTC. The calculation of its holdings at the end of the quarter were $3.653 billion worth of BTC with a cost basis of $2.741 billion. And for all the haters out there who say that Microstrategy is nothing more than a Bitcoin ETF, well, the company also reported over $125 million in revenue for the quarter, which is a 13.4 increase year over year.

Finally, on the brief, as if there wasn't enough going on right now in the regulatory sphere, Representative Don Byer of Virginia has introduced new legislation to regulate digital assets. Byer is the chairman of the U.S. Congress Joint Economic Committee and argues that the existing framework is too, quote, ambiguous and dangerous for investors and consumers. His new bill would give the SEC authority over digital securities and CFTC authority over digital assets. Add digital assets to the definition of monetary instruments under the Bank Secrecy Act, formalizing the requirement for them to comply with AML recordkeeping and reporting. Give the Fed authority to issue a digital dollar and simultaneously clarify that state's and other digital assets aren't legal tender, and give the U.S. Treasury Secretary authority

to permit or prohibit stable coins. There's a lot in here not to love, but frankly, after what we're dealing with right now with the last-minute insertion of this crypto tax language into the infrastructure bill, I'll take any open discussion and dialogue almost no matter what the starting point. One of the most important developments in this space is that community banks, regional banks and credit unions can now start offering Bitcoin to their customers. That's right, checking, saving, and now Bitcoin. It's all happening seamlessly thanks to a platform by NIDIG that offers institutional-grade custody and compliance. They're also the sponsor of The Breakdown. And if you want to find out more, go to nidig.com slash NLW. That's nydig.com forward slash NLW.

Which brings us to our main topic and it's another one that relates to regulation. If you've been listening to the show, you know that BlockFi has had a rough go of it. They were recently dinged by securities legislators in New Jersey, Alabama, and Texas, around whether their main interest account product, their flagship offering, violate securities laws. On Saturday, Vermont became the fourth to the party, giving BlockFi 30 days to convince its commissioner not to impose a cease and desist. One piece of good news on Wednesday, BlockFi tweeted that they had gotten more time

specifically with regard to New Jersey. The company's official Twitter account tweeted an update on regulatory conversations with a statement that read, We were in active dialogue with multiple regulators regarding the BlockFi interest account, BIA. We firmly believe that the BIA is lawful and appropriate for crypto market participants, and we remain steadfast in our commitment to fight for consumers' rights to earn interest on their crypto assets. Following ongoing discussions with the New Jersey Bureau of Securities to provide more details

about the BIA, they have further postponed the effective date of its previous order to Thursday, September 2nd, 2021. The order, which calls for preventing the creation of all new BIAs, does not affect our current BIA clients or any of our other products, and all existing clients in New Jersey and worldwide continue to have access to all products, services, and assets on the Block 5 platform. We welcome discussions with regulators and believe that appropriate regulation of this industry is key to its future success. While it's tempting to be skeptical of corporate communications that say everything is going okay, even though it seems like this scary thing is happening, the proof is in the pudding and the fact that the timeline is being delayed is, I think, a positive

thing from both sides' perspectives. However, a report that came out last night painted the whole situation in a slightly different light. Now, at this point, I need to make a quick caveat. I'm an opinion podcaster, not a journalist. I have complete editorial control over this coin desk doesn't shape what I say. Now, I'm going to relay a report of someone that I find credible, but who could, of course, be misinformed. To date, this story has not been confirmed by CoinDesk or the Block, so take it with a grain of salt. The report comes from Eric Newcomer, a tech journalist who covered venture capital, but who recently went independent. He formally wrote for the information and Bloomberg where he was for the previous six years, and generally speaking has a lot of respect among the Silicon Valley Venture

capital set, which is why I find this report credible. Initialized capitals Gary Tan described his newsletters as, if cap tables could talk, this is what they'd say. Anyway, newcomer is now on substack, and he's reporting that a major Wall Street investor has pulled its funding offer in the midst of BlockFi's regulatory troubles. On June 8th, the information reported that BlockFi was raising roughly a half billion dollars at a $4.25 billion pre-money valuation. This money was meant to help Block Figo public. Additionally, the round was intended to include a $200 million secondary transaction, aka early investors selling stock. The two firms that were supposed to co-lead the round were Head of Sophia, which enormously confusingly is a London-based venture firm,

not Chimoth SPAT companies, which are all called social capital head of Sophia something. And the other firm that was supposed to lead the round was Dan Loeb's third point. Third Point is not a traditional venture firm, but is a hedge fund with around $15 billion in assets. under management. Recently, Third Point founder Dan Loeb has been all over the cryptosphere, tweeting about it, adding the lasers, investing in companies, you name it. Of course, intense regulatory scrutiny from multiple states can give investors the jitters, perhaps especially for firms that aren't used to the long-duration bets that something like an early-stage crypto tech company represents. Apparently, according to newcomer's source, earlier this week,

BlockFi told investors in a call that Third Point would no longer be participating in the round. Additionally, apparently a number of other investors wouldn't either. There remains a big question mark, according to this source around Hedda Sophia. Expectedly, then, many of the remaining investors are anxious to see if the one current lead of the round remains committed. Despite this, apparently BlockFi still asked the remaining investors to wire money this week with the same pre-money valuation of $4.25 billion. Says newcomer, quote, on one reading of the events,

it demonstrates the risks for startups when raising money from Wall Street investors who perhaps feel less bound by their investment agreements than Silicon Valley investors. On the other hand, the situation with BlockFi also reflects the vast regulatory uncertainty in the crypto space, even as companies seek stratospheric valuations. Now, I think there are two potential ways to read this story. The first is that these regulatory issues are even worse than they seem, and these investors are fleeing with good reason. The second is a little different.

It's that third point and these other investors who have left the round are ultimately focused primarily and fiduciarily on their own returns. They're not interested in seeing capital get tied up for a long period of time on a company that is already so in the regulatory eye. Now, I obviously have no insight into which of those it is or whether it's some combination. I will say that while the narrative of it actually being much worse is appealing when we're speculating on Twitter, it feels to me more likely that a hedge fund, which already isn't used to acting on the time horizon of a venture firm, was just like, you know what? No, let's not fight that today. As Newcomber points out, I'm not sure what that will do for their reputation among entrepreneurs,

but it's also not an unreasonable take from their vantage point. This could get messy with BlockFi, and it's not like hedge funds are ever truly out of legislative scrutiny either. Even right now, legislation is being advanced around getting better transparency into the dealings of family offices, who, some accuse of being able to act like hedge funds but with even like. less oversight, position that was pretty well reinforced by the implosion of Bill Huang's archa-go's capital earlier this year, which was technically a family office. I found out about this last night when Frank Chaparro from the block tweeted newcomer's piece. He said, quote, likely means BlockFi is going to have some trouble closing this round, and it is in deeper

regulatory trouble than we might have thought. Not great. When Brent KT replied and asked BlockFi, Zach, you good? Zach Prince, the CEO of BlockFi, tweeted back simply, yes. Just to be super clear, I'm not presenting this story to make villains out of anyone or add to FUD to the fire when it comes to BlockFi's regulatory troubles. Like I said, I think it's encouraging that New Jersey has extended their time again. It suggests to me that they believe that BlockFi are engaging in good faith, and it suggests to me that they're also engaging in good faith.

I think, however, that this is a meaningful story and one that's worth covering, because it shows that there are big money implications of all of these shows. shifting regulatory wins. I've tended to see a fair bit of dismissiveness around some of these things on Twitter based on the fact that previous regulatory challenges have been sort of nothing burgers, and I just don't want to see us blindsided. It's a tightrope for sure, how to be vigilant without being paranoid, how to take seriously the challenge that new regulations could pose without collapsing into hysterical hyperbole. How to rip apart headlines for the sake of nuance. So hopefully this helps a little bit on this front. I'm officially leaving this spot as a place where my

editors can insert a new statement if we learn anything more in the next little bit while we're editing. But assuming that doesn't happen, guys, I appreciate you listening. And until tomorrow, be safe and take care of each other. Peace.