The Breakdown - Crypto and the Fight for Freedom

Episode Date: August 31, 2024

NLW and Scott Melker count down the five most important stories of the week. Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to 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

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 Friday, August 30th, and that means it's time for the Friday 5. 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 in the show notes or go to bit.ly slash breakdown pod. All right, friends, welcome back to another Friday 5. This was a surprisingly consequential week,

with lots of the news being about big epical issues that could have serious implications down the line. In the background, there was a bunch of ongoing institutional adoption, but this is definitely a week to talk about big ideas. And so let's dive in. There's some huge stories this week. It was a bit hard to find five really impactful stories, but they all seem to have sort of the same vibe.

They're really concentrated. I mean, if we were going to have an honorable mention, there are about a million little world just keeps moving on for the crypto industry stories. There's like a Bitcoin hedge fund that launched and a bunch of institutional news, but it's all small stuff. It's all not big stuff.

But for those of you who want to peel back kind of this crazy things, there's definitely a, there's a sort of new normalcy around institutional engagement with crypto that's just sort of quietly going on in the background. I'm sure we'll have context to talk about it future weeks. But obviously that wasn't a big story this time. Yeah, I agree. There's a groundswell and it's become normalized that we just get these huge institutions participating. Even the Morgan Stanley news a few weeks ago kind of came and went. And even a year ago, that would have been the story of the year. I think that BlackRock's involvement and all the other institutions have just made it

sort of assumed that all of these will eventually come online. And they don't impact the market directly, but I have a feeling that when the tipping point sort of comes, if it does in the fall, all those stories, we're going to look back and say, wow, that was absolutely huge, right? Absolutely. Yeah, and speaking of stories that are just absolutely huge. France and Telegram CEO Pavl d'Av, preliminary charges over alleged criminal activity on the app. Of course, he has actually been released since then, although he has to stay in France, I guess,

awaiting charges. I don't really know exactly how the criminal justice system works in France. but for those who don't know, he basically landed on his private plane, a rented private plane we found out, which apparently is relevant. In France was immediately arrested. There was a lot of conjecture as to the reasons because it wasn't originally announced. It took a few days to see the charges. And it, in my opinion, was sort of the worst assumptions came true.

He was largely charged for complicity for things users were doing on the platform, using the technology and for failing to moderate that. So I would love your initial commentary on this as we dig into it. My first reaction with this was very, very standard. Like, let's wait and see what the actual charges are. There's scenarios where it could be, you know, something that we don't think, and then scenarios where it could be really bad. And it ended up being the sort of worst case scenario of, or at least, you know,

it's seeming really worst case scenario of him being targeted for what's going on in this platform. And so the implications of this are much bigger than just this case. It is a, you know, it represents a very different sort of tenor and tone to the relationship between governments and technology companies that has potentially dramatic impacts for what people are and are not willing to build and frankly where CEOs are and aren't willing to go as a sort of a secondary consequence. But we've long had this sort of sense that the people who create and build platforms are not culpable for what their platforms are used for, you know, in general, right? This is sort of embodied in the U.S. in law specifically. But it's coming up now as an even bigger question than it

was before. There was a first round of this question that was answered in the 90s. Because of AI in particular, it's back in a huge way. And this feels like the opening salvo of what is potentially a very different approach by governments when it comes to their approach to, you know, the speech technology and the complicity of teams. And I have to think that the, you know, it's all just prelude for a bigger fight, you know, as new types of technology platforms come online. But, you know, I think for those of us who have enjoyed the fact of creation of these applications, this is a fairly chilling sort of moment. It's also chilling because these CEOs and platforms now have to be concerned with the global nature of what they're doing. It's much like we've seen in crypto where you may be completely compliant in one country and completely breaking the law and risking jail time.

in another. Unpacking this with lawyers this week on spaces like Preston Byrne, he said, listen, everything he's charged with in France would not even be an issue in the United States. So if he was sitting in this country, he would have been completely fine. We wouldn't have that issue. But it's the fact that he landed in France where he has citizenship that they're going after him. So even First World G20 nations that are usually aligned on things now are starting to see cracks in the facade of what they're willing to accept. in terms of obviously free speech and who's culpable. This is just terrifying to me because it's really not, I say it all the time,

but it's not that different than Tim Cook being charged for drug dealers using iPhones on IMessage. If you view this as a technology or a platform, is the mayor of a town going to get arrested for every single crime committed to his town because he failed to moderate his citizens? Are Elon Musk and Jack Dorsey in trouble? We obviously had Zuckerberg this week coming out and apologizing for caving to White House pressure on content. It seems like you play ball and you're fine and you get to be a billionaire and you get to stay home.

You don't play ball. You're going to end up in jail somewhere. There has been a gap between how the U.S. thinks about these issues and how Europe and the U.K. thinks about these issues for a while, right? Free speech in the U.K. looks very different than it does, for example, in America. And, you know, some crypto folks have run into contact with that, you know, around Craig Wright. basically and, you know, and lawsuits they're in. But it's, it's starting, it's clearly calcifying in a harder way, right? Like, Europe is now actively pushing to be sort of the harsher regulator of all

these sort of things. And you, you start to see it playing out in terms of European citizens actually not having access to certain services because American companies are not willing to deal with it. Again, not to keep bringing it back to AI, but this is, I think, where, where, that battleground is shifting in a big way. Meta has chosen not to release certain parts of its multimodal models in Europe because it doesn't think that it can comply with the EUAI Act. Apple has said that it's not putting Apple intelligence out or big parts of Apple intelligence out in Europe. And so Europe has created a situation for itself where, you know, good job, you're the first to regulate things, but you don't have any sort of homegrown industry. You know, companies are going to,

you know, largely have to move out of that, out of the jurisdiction. And, you know, this is just raising that to a whole new level. If platform owners are culpable for what's going on, you know, it's a very nervous thing. And, you know, the likely first losers in this are going to be European citizens who just have access to fewer services. They're going to have access to fewer services. I think it's very interesting, though, that they have more access to crypto services largely than people in the United States do. I mean, this is obviously a crypto-adjacent story because anything that happens for freedom or privacy eventually affects us. But Mika, and of course, Telegram has an adjacent token.

But Mika was applauded by people all over the world for Europeans getting ahead of regulation in crypto and the United States being so far behind. So there's kind of strange bipolarity here. Sort of. It's, you know, the weird wonkiness there is that the freezing effect in the U.S. is not based on how rules have been defined. It's based on a lack of rules being defined and the clear antagonism of a particular administration towards crypto, right? So it's not that the U.S. and Europe sort of sat down and, you know, each went through their own processes to figure out

where it landed. And Europe came out more sort of pro-Crypto than the U.S. It's just that the particular situation has been so frozen and antagonistic in the U.S. that the net impact is even more dramatic. However, it is ironic and I think, you know, is not a particularly nice sign for U.S. regulators that, you know, Europe of all places is ahead of us when it comes to citizen access to services. Absolutely. Crazy town. I mean, and that wasn't the only sort of bad news for Telegram this week. Obviously, Ton. Blockchain went down, I believe twice. This article was for six hours. I think there was another short outage afterwards. And that's largely because of the launch of a meme coin, of course.

which they called here a Memcoin, Coindex doing their best to edit. But meme coin launches, and in the midst of all of this, their chain basically goes down for hours. I mean, rough week for telegram. Yeah, it's brutal. Obviously, this is sort of very secondary

in terms of the pain stories, but what happens next is going to be very weird, and I think we're going to see some strange bedfellows here. You know, the Russia dynamic of this is one that we haven't touched on yet, But that's actually weird too, because Russia's basically going out of its way to sort of point and say, look, you know, this guy was a Russian citizen. He decided to turn his back on Russia and choose sort of, you know, the freedom dynamics of other places and, you know, then got screwed for it.

So it's a weird situation where, you know, Russia's out here, you know, squawking and defending free speech. And I don't know, it's a, it's a strange time. And we'll see what happens. There's also the, the UAE dynamic where basically the, you know, UAE is asking for him back, you know, because he's a citizen of the Emirates as well. So it's a very strange geopolitical moment where a single person in their product represents a lot of fault lines that have a lot more to do with sort of the way that the world is organizing and being reorganized than it does with just him himself. Yeah, I didn't have on my bingo card, Russia defending free speech, right?

Yeah. It definitely makes you wonder how much the United States knew about any of this. Hello friends, before we get back to the rest of the show, I want to implore you to join me at Permissionless. Permissionless is the conference for Cryptonatives by CryptoNatives, and the reason it's so important this year is that despite regulators' best attempts to push industry founders, devs, and executives out of the U.S., the United States remains the beating heart of crypto. Today, the tide is turning. Policymakers have pivoted from fighting crypto to embracing it. Literally now we are in a major political party's platform, which will lead ultimately,

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down 10 to get 10% off. I'll tell you one thing to the United States definitely knows about it sending Wells notices. The SEC has sent a Wells notice to open C warning of enforcement action. Important to note a Wells notice is not the enforcement action itself. And we've actually seen the SEC not take enforcement action against a few companies of late that had been sent Wells notices. But either way, this is a relatively huge development because this is a relatively huge development because this is alleging that NFTs are effectively unregistered securities. To me, this is like going after

eBay for being a marketplace for unregistered securities because people are selling their Jordans and they're used t-shirts for a profit or anything else that they're selling on there. People who believe that NFTs obviously are art do not understand this at all. So this is symbolically, I think very big. And then, of course, there's the political side of it, which is there's rhetoric coming from the Harris campaign that we're going to see changes, that they're going to engage with the industry while Gary Gensler and the SEC clearly have no intention of stopping these sort of abrasive tactics. Yeah, I'm pretty firmly in the camp of this one is a scorched earth sort of thing. No matter where this lands, no matter if on the other side, we have distinct legal

clarity that affirms what everyone believes right now. This is exactly the type of thing that can significantly gum up the works for an industry for years. And I think that this is now a spiteful part of this administration that wants to grind the gears of this industry to a halt even farther than they have. I think that they are perceived that they are losing power, but they still have power right now. No one's going to rate limit them from a power perspective in the middle of this election campaign. It's just not going to happen. You know, I think that, you know, I tend to be a person who looks to Occam's Razor as the simplest explanation for things. And I think that increasingly, Gary Gensler's spite is the simplest explanation for things when it comes to the actions of the SEC.

I think that makes sense, but he's not doing his party any favors here, certainly with the crypto industry. What I find interesting here is that we obviously have a little bit of precedence for this. Obviously, we had stoner cats, right? And impact theory, I think, being the biggest. But if you looked at the impact theory case, Tom, who's a friend of the show, but he did say, listen, you're going to put this much money in, and it's going to turn into a hell of a lot more money, right? And he sort of did the promoter part of the investment contract that they pointed at.

But even in that case, where the CEO of the company outright came out and said, you're going to make a profit. We had two SEC commissioners, Yeda and Perce, of course, come out and say this still doesn't qualify for the Howie test. You might as well be doing this with baseball cards, like I said, and, you know, use tennis shoes. It doesn't make any sense. So going to the marketplace and not even the people launching them now and going after them is a huge, huge escalation. I tend to agree with you that this is scorched earth. I also tend to agree these things take a long time and this will probably be dropped if we see regime change or

even a different chairman at the SEC. I think these are just symbolic gestures. but this is a huge symbolic gesture. Absolutely. No, it is a fireball if it's scorched earth, right? This is not a small thing. I think that we're seeing, if you look at these legal cases, the middle ground kind of space that seems to be getting articulated

is tokens not being securities in and of themselves, which we'll get into in a minute, but there being the potential that an offering of a token, especially an initial offering of a token, or an offering of a token by a centralized, entity can represent an investment contract, which will, unsurprisingly, to anyone listening, make a lot of sense intuitively as where these lines might get drawn, right? That there are, you know, you could sell things in such a way that they sort of start to constitute investment contracts.

This is not what this is accusing. This is actually saying outright that NFTs are securities. It wants that fight, even if, again, it gets smacked down in court, which is the particular reason that I think that this is scorched earth, you know, because I think that the, it's a, it's a, If they couldn't even get the idea that tokens were securities through, I think it's very unlikely that they get the idea that NFTs are securities through. Yeah, it's a lot like Ripple, to your point. When Ripple initially sold them to investors, that was a security offering, but everything that happened after that was not.

This is, again, this is the marketplace that is selling them. It's insane. So maybe Impact Theory could have been a security offering based on the specific things he did to mint and launch those. But once they're being sold on the open market, that open market being liable to me is just absolutely crazy town. There was some conspiracy theory that there is an interesting timing here because Trump obviously launched his fourth NFT collection, I believe the day before the Wells notice. But I spoke to Sheila Warren about this yesterday. And she said these Wells notices take forever.

There's no way that meaningful timing. It's just coincidence. But it is somewhat ironic that within 24 hours of Trump, launching an NFT, the Democratic lead, I guess, of the SEC says NFTs of security operates. The silver lining, by the way, is that if Trump's in office, you know, he's not going to deem NFT's security, since he's launching them. I think it's symbolically notable. I agree with them.

The mechanics of this basically ward out that particular theory for how it came to be. So going back to Gensler not doing his party any favors in that assessment, that's our assessment as we sit here viewing all of these actions as negatively impacting. the Democratic Party. And there's certainly an argument to be had. There are many Democrats who feel that it's negatively impacting the party, including elected officials. However, I think that there is a strong counterargument for many

that especially now with how aggressively Trump and the Trump campaign have moved in on crypto, I think that they will argue that if they don't win, it's a repudiation of crypto, right? That, in fact, everything that Trump stood for will get bundled into we won. And so America validated our opinion, not theirs. It is very rare that a party that loses goes through its platform and kind of, you know, point by point, figures things out. It's even rarer that a party that wins actually understands how they might have lost if they, you know, and which are their positions were a liability. They're just going to say,

look, we won. Scorecard says, you know, us won, them zero. And that means all of the stuff that we stood for, right? Like this, this election does in some ways become, a referendum, or at least you could see how Gensler wants to make it a referendum. People like Elizabeth Warren, Brad Sherman, want to make it a referendum on their view of crypto as just another money thing that's, you know, for bad people and for rich people and for assholes. So I think that the gambit here is that Gensler is part of a wing of the Democratic Party that wants to win with their antagonism of crypto as a plank so that they can be validated in that. So my title is not hyperbolic because it's very real when you describe it that way.

And you sort of alluded to the next story. So we'll go ahead and move there, which is SEC's case against Crack and will proceed to trial. California judge rules. Now, this was largely viewed as a huge negative. When it came out for the industry, you guys might remember Coinbase also most of their case was pushed forward. There shouldn't have been an expectation that this would be thrown out. But it does speak very specifically to the securities offering side that you mentioned before. So go ahead and talk about that.

Yeah. I mean, so basically, so one, to your point, this, it was always going to proceed. It was almost no chance that this wasn't going to proceed to trial. This is, you know, this process is legal derrickering. It's part and parcel of trying to figure out, you try to piece out parts of the argument in advance, right? So to figure out what the, what the SEC can and can argue and what the, basically what the stakes in terms and context of the actual court battle will be. And one of the things that came out in this decision is the judge effectively, you know, kind of once again making this delineation between the tokens themselves and the way that they're

offered and in what circumstances they're offered. In fact, he went out of the way and basically said that he called the SEC on their use of the terminology crypto asset securities, basically saying it's, you know, confusing at best and outright lying at worst. So, you know, This was a, to the extent that you didn't actually think that there was a chance that this was going to get the case dismissed, there's a lot to be pretty positive about in here as well. Yeah. That's how I read it as well. I think that these cases are going to be big trouble for the SEC if they end up going through. I mean, after the Ripple decision, the Coinbase case had already sort of lost all of its teeth as far as them SELION registered to Guarities.

And this is just going to be follow up in that. I wouldn't be surprised if these never get to trial by the time we're done, if these just get thrown out depending on the regime change or not. Our last story, kind of crypto-adjacent, I think. But it's obviously Nvidia. It was the top talk of the town for markets this week. They had earnings. They beat earnings.

But apparently now when you beat earnings, even though your expectations are really high, if you don't beat earnings by quite enough, it can dump your stock. So, Nvidia beat earnings after hours. Invidia stock dumped. Stocks went up. Bitcoin went up.

Then 24 hours later, all those things went down. And, man, I can't figure out what is good news and what is bad news anymore. Let me try to sort of give you my framework for this. There's two things going on. One is sort of AI specific and one is a larger framework. Invidia more than any other company has driven the last two years of stock market performance. It has been the sort of indicator of the generative AI experience. It's been the place that is sort of benefited most, as well as represented most.

Invidia has so aggressively beat analyst expectations every single time that it's no longer a question of whether they beat expectations. It's a question of how much they beat expectations by. So one, there is a little bit of that that just, you know, it was only a couple percent that they beat expectations by. I think expectations were 28.7 billion in revenue and it was like 30.4 billion in revenue or something like that. So that marker negative one against its.

NVIDIA was that they didn't beat expectations by enough. Marker 2 was that their projected quarterly earnings were a little bit lower than analysts had wanted to see. The great looming fear is that at some point this has to stop, right? Question mark, question mark, question mark. And so any indicator of that is going to spook people a little bit. So that was a second negative thing. And then that fact of the second negative thing also triggered a different look at some

trouble that NVIDIA has had in terms of delays with its new blackwall units, right? So, Nvidia does have these tiny little things, by relative to their performance, they wouldn't freak anyone else out in terms of other companies. But again, they're being used as a barometer and a benchmark for the entire sort of AI space. Now, there's another thing going on, though, which is that for the entire period of the rate hiking cycle and then the higher for longer part of the cycle, AI enthusiasm has been the counterbalance that Wall Street has clung to, right? It has been both a legitimate thing that they're excited about, believing that this

technology actually will get, you know, big productivity gains and GDP increases. But it's also been a life raft in an otherwise gloomy period for markets of decreased liquidity and worse performance and all that sort of stuff. Now, I don't think it's surprising that we're starting to see, you know, bigger questions around AI hype and AI pricing and all these sort of things right as we're heading up into the beginning of the rate cutting cycle. It's just the narrative need for AI has decreased a little bit. Now, I don't think that we're going to see some massive flood to the exit because it wasn't that AI wasn't real for people. It's just that maybe it was 20% higher priced or 30% more excited that people should have been. And I think we'll see some amount of sort

repricing on the basis of that. So that's what I see going on. But I do think that weirdly, NVIDIA is telling as part of that process. Totally agree. I don't think there's much more to say there. That was our five stories. I just want to take a look very quickly as we end at coin market cap here and remind people that Bitcoin is still $59,500. And as boring as the summer is and as bad, quote unquote, as price action is, I would guarantee that if you zoomed back six months, certainly a year, and I told you that at the end of the dull summer that comes after every halving cycle or coming into the end, we'd be sitting around $60,000 Bitcoin. You guys would be celebrating your asses off. I pretty much only look at the price of Bitcoin right before we jump on,

because I want to make sure that I know. And if I'd close my eyes the entire summer, it would have been roughly what I thought it was going into the summer, around 60K. That's just been the, that's the, when we look back at 2024, it'll be the year of 60,000. Like that's just, you know, that's what we'll mentally associate it with, you know,

maybe, maybe 59,000 for the glass half empty people. Yeah, well, it's been 10 above or 10 below for, and hovering around it basically since February, right? Yeah, on the way up to 74K in March. So I just tell you guys, listen, it's fun to come here and talk about these things. Don't worry about the price. Chill. It'll change eventually.

And for now, you could be touching grass, at least after watching this show for 27 minutes of your life on Friday. So that's all we got for you guys today. Follow NLW, of course, on X and his YouTube and podcast channels The Breakdown. It is the single best show for that quick 10 to 15 minute update on everything that's happening. That's why he's so good at this by Friday. Because it's already done it all week. Thank you so much. Really appreciate it.

We will see you guys next week. Bye, everyone.