The Breakdown - Crypto Daily 3@3 - 7.19 | BitMEX vs. CFTC / Bitcoin legal in China? / Ycash and Friendly Forks

Episode Date: July 19, 2019

The CFTC's investigation of BitMEX is the latest in string of screws tightening on global exchanges touching US customers. In an interesting twist, a lawsuit leads to a Chinese court determining that Bitcoin is a protected legal property. Ycash has friendly forked from Zcash, but is a friendly fork even possible?  Watch the video version: https://www.youtube.com/nathanielwhittemorecrypto

All right, all right. Welcome back to another Crypto Daily, three at three. Hoof, coming down, coming down the pipe with a very long week. For those of you who have been on vacation, you picked a crazy one to miss. We've had a total narrative shift in terms of how regulators feel about Bitcoin. We've had more enlightenment around what they think about leadership. Libra. It's been a hell of a week. And so just to close it out quickly, I had three, three things that are finally not just about Libra. So let's kick it off with Bitmex and de-Americanization. So I think a lot of us woke up to the story this morning that the CFTC was going after Bitmex, who was probing Bitmax

in terms of whether American users were using the platform. And obviously, Americans are technically banned by Bitmex. Many Americans obviously still use it. You know, they use VPNs or whatever to access it. It's one of the most popular exchanges in the world. And the CFTC is the regulator in the U.S. that's charged with, or that's most charged with things like swaps and derivatives, right? So it makes sense that they're interested in this. But I think that it's interesting less in the context just of Bitmex and whatever may or may not happen in this particular probe or this inquiry. But more in kind of a clear shift in the regulatory regime in the regulatory era, right? So over the last few months, we've had a pattern of shifts, right? And so I saw Larry from the block kind of mentioned this.

This is getting quite serious. He said, let's summarize. Both Bitmex and BitFenex are now investigated for servicing U.S. customers. Bitrex and Polonex started to geo-block tokens from the U.S. finance pulled crypto-to-crito trading out of the U.S. completely. We've clearly you get turned a corner at some point where the regulatory arbitrage kind of play fast and loose game for these exchanges in the U.S. is not working and they're feeling increased pressure and increased regulatory heat. And what's shifting then is that, you know, America is going to be an increasingly crypto regulated environment, even more so than now. And I think that it's important to note that it's not necessarily that this is a bad thing, right? So we saw last week that

Blockstack and you now had both been approved for effectively SEC sanctioned token sales. That's going to be really good information. It's going to give us really good information about to what extent people find value in the actual underlying crypto assets and the tokens that kind of make these networks function versus they just want to play kind of the online casino game. Neither of which I'm drawing moral judgments on. But that's really what's happening now in America is we're going to see that question answered, you know, what, what is this really about for folks? So it's interesting times, I think Bitmex is, you know, the latest in, in a kind of a set of actions that suggest this shift in where the state of regulations is in the U.S. And, you know, as Libra continues to dominate

the conversation in this country, you've got to think that that's only going to continue. With that, let's move on to number two. So speaking of regulation, so, a lot of the meta conversation around things like Libra is what are governments going to do as these cryptocurrencies start to threaten sovereign currencies in some way. And so it's interesting to keep tabs on kind of what the big powers, how the big powers are treating these crypto assets in their different jurisdictions. So China has obviously had a number of different restrictions on Bitcoin for some time. it's been illegal to trade in certain ways.

You've seen a lot of the stories, you know, a lot of the action in Chinese markets has to do with, you know, how easy it is to get involved in ICOs, which are technically banned and so on and so forth, right? And so super interesting thread from Dovi, just, I think this morning, maybe or last night, basically she was looking through different kind of social media sentiment in China. to see how people were explaining recent price action. And what she came across was a court decision, a recent court decision where effectively someone had bought Bitcoin in 2013. It was in the custody of a seller. The seller closed out the business without any notice. The buyer sued it.

And so what this court decision effectively said is, I'll read her translation. Bitcoin holds the attributes as property, valuable, scarce, and disposable. We should recognize it as a virtual property. according to the general civil law, virtual property, this is her interpretation, is legally protected by the laws of the People's Republic of China. And she says, and I think this is really, this is really important for understanding like kind of the emotional state of this. This is like unreal to me actually, has been under years of holding Bitcoin as a legal you criminal cloud in mainland China, and now it's clear. Now other folks have pointed out,

and even Dovey pointed out, that trading Bitcoin isn't necessarily legal. Some have tried to say that, have pointed out that perhaps, you know, this doesn't apply everywhere because it's just a local court. But still, I think it's notable because especially it's notable in the context of, you know, there's really two interesting and very divergent paths for crypto markets to go as it relates to governments. One is outright bans. The other is kind of a slow infiltration where governments feel like the government's.

these crypto assets and Bitcoin in particular can sit alongside sovereign, you know, fiat currencies. And it's really just about preventing criminal activity on them. Obviously, there's a lot to be said for that, for hoping for that second approach. But, you know, other people have thought that we might be within, you know, a year of some major government just outright banning Bitcoin. I don't think it's, I think it's still too early to tell exactly how this all shakes out. but it's super interesting from the ground case study thanks as always to dovi for translating really cool stuff so with that we're on to number three this is zuko wilcox of zcash fame saying welcome to the

world y-cash you may be asking yourself what in the world is y-cash well y-cash is what has been called a friendly fork of zcash so let's talk about this idea of friendly forks first so friendly fork is actually a concept and a name that I think Zucco himself may have written about first. And it's effectively the idea that a fork doesn't have to be contentious, that it can just be kind of a normal part of the crypto ecosystem in a way that people kind of express disagreement. You know, we've talked in the crypto community for for a long time about how forks represent governance by exit. But obviously, as we've seen with, you know, Bitcoin Cash, with BSV, with Ethereum Classic, forks tend to be highly contentious.

Forks tend to be value destructive, ultimately, even if they kind of represent an initial pop as people speculate on the new chain. I think what Zucco is interested in with this kind of idea of a friendly fork is something where, you know, one community recognizes that there's a relatively fundamental disagreement with another and kind of with their blessing, you know, enables a clean, break. And so in this case, the particular issues at hand have to do with the Zcash Founders Reward. So the Founders' Reward is effectively a tax on mining that goes back to the developers of Zcash. And in particular, they've kind of been very public and open about what the distribution

is. And you can go look that up in terms of what Zucco gets versus what other people get. But the point is that it's used to fund operations. Now, the founder's reward was intended to be four years. It was tended to never be more than 10% of the total 21 million hard cap of Zcash. And there are a lot of folks in the community who worry that when that runs dry in a little over a year in October of 2020, there will be too much pressure on the whole community and they will kind of accede to a shift in that principle of only 10% being ever, ever made available for this founder's reward. The idea of Y-Cash, as opposed to Z-Cash, is to kind of get out ahead of this and actually

try to shift the way that the incentive structure is run from a 20% for four years to, basically they want to shift it to a 5% perpetual inflation from here on out. and effectively the math works out such that that would that would effectively be the same it would never kind of transcend that 10% total of the 21 million hard cap that would go to developers now that 5% would go to the Y-cash foundation you know to be distributed in a way that I haven't really seen any articulation of but that could just be because I'm not totally clued in and so anyways what this comes down to for me is there's almost two different two different things one is is the idea of of a friendly fork just kind of a, you know, a contradiction in terms. And so, Mateo from the block shared a piece from

Arjun, Balaji, who's now at Paradigm Capital, who was working with the block earlier this year, where effectively he argues that even if a fork tries to be and intends to be a friendly fork, ultimately, it's value-destructed, its value-competitive. It competes for resources, for community feelings. It's very hard for it to not be competitive. I think that that's an interesting point of view and one that I, you know, I think at base, or at least my starting point tends to agree with. I think I admire the intention of trying to make it easier to try to reduce the value destructiveness by not making it contentious. I think there is some amount of kind of a priority value destruction initially. But then again, I'm way open to being

proven wrong and hope that I am. So that's that's one that's that's one interesting piece of this discussion. I guess the last piece that I'll mention quickly before we wrap for the weekend is, is this question of incentives, developer incentives and how these protocols are funded. This has been a long ongoing conversation that extends back into, you know, forms of open source software development that goes, you know, much before just, you know, crypto assets. But there's a real question still that I think is unanswered about, what is an appropriate way to get these protocols off the ground. How much should developers expect? How regular should it be? You know, earlier this year, Grin kind of made a splash by having a quote

unquote, a fair mine where they didn't do any pre-mines. They didn't have any dev taxes or founder rewards or whatever you want to call them. And, and, you know, within weeks, they were basically, some of the core developers were kind of like hat and hand asking the community, begging the community for resources. So I don't think this is a resolved question. I think it's a really interesting, tricky issue where there's not necessarily a norm yet. And, you know, I'm going to be interested to see what happens with C-Cash, not just in terms of Y-Cash, but over the next year as that Founders' reward comes up. So anyways, guys, that is the Crypto3 at 3 for today. Let me know if you think any of this stuff is interesting, if you think there's more that we should explore in the coming

weeks. And until then, I will see you soon. Thanks for hanging out.