The Breakdown - Crypto Daily 3@3 - 8.7 | Katherine Wu on KIK vs. SEC / Binance KYC Hack / Year of the DAO?

Episode Date: August 7, 2019

Katherine Wu joins us as a guest to discuss her full annotation of the 117 page clap back from KIK against the SEC. What's bluster? What's business as usual for lawsuits like this? What are the actual implications for the rest of the industry? We also discuss the Binance KYC hack - what's real, what's FUD, and what we still don't know. Finally, we look at Ryan Zurrer (ex-Polychain, Web3) and his new DAO. Combined with Moloch, Metacartel and Aragon, is 2019 the year of the DAO?  Watch: https://www.youtube.com/nathanielwhittemorecrypto

All right, everyone. Welcome back to another Crypto Daily 3 at 3. So let's dive right in. Our first topic is this Binance KYC hack or leak. And so obviously anytime there's an accusation of a leak or a hack like this, it's super important to really kind of dig in rather than just spread fud. So I wanted to share what seems clear what we know so far, but not try to kind of kind of overstate things. So basically over the course of the last few hours earlier today, a hacker started popping up saying that they were, effectively, they had Binance K-Y-C information. They were trying to get people to confirm it via a telegram group asking them for additional information. And so Binance, basically, their first statement was CZ tweeting out, hey, hold on, let us look into it. We've heard similar things.

Their next statement was this blog post statement on false. quote KYC leak. So a few different things they say here. First, first and foremost, there are inconsistencies when comparing this data to the data in our system. At present time, no evidence has been supplied that indicates any KYC images have been obtained from Binance. Second, they say that this was the, they think that it's the same data set from the Binance hack from earlier this year where someone got away with 7,000, 7,000 Bitcoins, right? So we'd already heard about that. So this is really important that even if this hack is legitimate, it's not new. It's just they got more in that hack than we had thought about. So it's not a second unique compromising of the Binance system. Third, they say that this person had previously threatened them demanding 300 BTC in exchange for withholding 10,000 photos that bear similarity to Binance KYC data. Again, this is their official statement. This is just me reading it. Four, they basically said that they were kind of doing this beneficently and asking people to confirm things.

So there's a lot going on here. So a few people made the point that Binance KYC hack is old news. This is from box mining. Be careful of any telegram groups that help you check if you've been hacked. Someone is up to no good. I think regardless of the legitimacy of the hack or this data, that's definitely true, right? going into a telegram group and giving your phone number or personal information to try to find things not really best practice. However, CoinDesk has been doing some digging and it looks like the

picture is a little bit murkier actually than it seems. So basically they said on Wednesday a telegram group created by an admin under the pseudonym Guardian and distributed hundreds of images of individuals holding their IDs and pieces of paper written with Binance 22419. And the CoinDesk was actually able to get in touch with this supposed hacker. So the hacker told CoinDesk that he or she has at least 60,000 more. We have access to nearly 1,000 in response. Obviously, they cover Binance's response. And then the important thing is since Monday this week,

CoinDesk has reached out to three people whose ID images among hundreds of others were first uploaded to a publicly available cloud drive, and we're later circulating the telegram group today. Two individuals confirmed to CoinDex the authenticity of the images and that they submitted such images to Binance.com on February 24th, 2018. So there's clearly a little bit more legitimacy, it seems like. So what's the point of all this? One, you know, anytime there's a hack, especially of an exchange as important as Binance, it's important that we know what's going on. We understand what the real risks, what the real vulnerabilities are in this space.

Second, I think for those who argue that KYC is a security hole, this is exactly why, right? This is the thing that can happen if you go through a KYC exchange. This is part of why Dexes are on the rise and why non-custodial exchanges are appealing to kind of the set of users who value privacy and kind of that personal sovereignty and shield and cloak of information over just straight convenience. So anyways, highly developing story, you know, important to note again, even if this is real that it's still part of kind of the same big singular hack from Binance, but important to cover nonetheless. With that, let's move on to number two. So number two, kick claps back at the SEC. So for those of you who don't remember, a few months ago, the SEC hit kick with a big lawsuit.

just days after KIC had started something they called defend crypto, which was theoretically a legal defense fund to effectively try to force the SEC's hand at providing some amount of guidance on token definitions, right? So all of this comes back to, you know, the unsolved or unresolved issues of to what extent crypto asset tokens are securities or are they something else? Do they start as securities and become something else? And so KIC has throughout this taken a pretty aggressive stance, and the SEC's lawsuit against them took a similarly aggressive stance. We covered that pretty extensively back a couple months ago. And so just yesterday, KIC responded, and they responded with a 117-page document.

So just to get a sense of what this looks like. So Stephen Paley, who is obviously one of the crypto-twitur legal corps and who writes with the block, wrote Breaking Kickfiles' aggressive answer to SEC complaint, accuses commission of twisting facts and misstating evidence. So basically, a lot of KIC's argument has to do with what the SEC said in its complaint and effectively trying to kind of lawyer them in. Paley says, a wise friend who has to be anonymous tells me he thinks that they think that kick fell into a trap by being quite this aggressive. The SEC will death by a thousand cuts them and this just makes it all the more difficult to get anything settled because they made it personal.

It's hard to say who's right here. The kick people no doubt felt backed into a corner with no choice. Those first three pages of the answer look bad for the SEC. But at the end of the day, it's a legal question. And who said what, when may be less important than what they think. So again, a lot going on here, always with the block. And so, you know, I am not a legal expert, but luckily we have a lot of amazing legal experts on the case. So Catherine Wu, who formerly had Misari, has, when the first kick complaint came out,

when the SEC complaint against kick came out, she did a full annotation of the entire complaint. She's back. She's done that again. It's a full 117 page annotation. For those of you who are watching rather than listening, you can see I'm scrolling through it and just how much is here. But because I can't possibly do this justice, I actually asked Catherine to join us and share basically a couple minutes of takeaways. So I'm going to flip over to her right now. Thanks for having me on, Nathaniel. So here's the thing. The complaint didn't really need to be over 130 pages long. An answer doesn't usually go line by line and do it so aggressively unless it was partly for publicity as well, which, you know, to be fair, I think KICC has played pretty aggressively on the publicity front

from the get-go, right, from the statements that were released before the complaint about how they won't settle, releasing their wealth report, which is also something that's pretty uncommon, and also the whole, you know, defend crypto campaign. Now, onto the actual answer, which Kik pretty much denied all allegations and also, raise some affirmative defenses, which is what you're supposed to do in an answer to a complaint. And so in their defenses, KIC challenged U.S. security laws as being unconstitutionally broad, and then got into a whole history of, you know, what the SEC has said and done around crypto since 2017. And I think this would be a pretty interesting argument, actually,

and I think that's probably where a lot of the court action is going to be around, because this is pretty much as saying while you guys have put out either contradictory or vague statements. And I think that I think the crypto industry in general would have an interest in seeing how this plays out kick in their affirmative defenses also hammered home that they raised 50% of the 100 mil in SAFs and the other 50% in a public ICO. And they were saying how the SEC shouldn't have lumped those two sales together. And the last defense was almost like a throwaway like you guys don't have jurisdiction, which I think, you know, was good to bring up, but probably doesn't hold that much water. Look, a lot of the complaint was about how the SEC twisted their statements or

omitted parts of statements, which, to be honest, is sort of what lawyers do, right? You take the same set of facts, but somehow you make it, you know, one versus the other. So a lot of this answer was sort of like, you know, the SEC said ABC, but actually we met XYZ. And so it was sort of turning it more into a he said, she said, situation, which again is a totally uncommon for trial. So look, ultimately, it's going to be a great litigation showdown as we enter into the discovery process and potentially uncover more materials and, you know, what was actually said versus what was actually meant. So yeah, this is going to be one to tune in and follow. So basically what Catherine is saying is that there's a lot of substance here, but also a lot of

back and forth and just kind of standard lawyering. I guess I just want to end the note on, like, with the why this matters, right? And the reality is that you know, outside of just the entertainment value of these two companies, or rather of KIC and the SEC, kind of

slamming into one another, there's going to be a lot of precedent, there's going to be a lot that gets revealed in terms of you know, what sort of action the SEC can take here. William Mogar wrote a piece pretty pro-ke kick piece. But basically his point when he comes to why does this matter for the industry is that

there's a real cost for the lack of regulatory clarity right now. This is something we've talked about before where you have, when you have companies like Circle who are leaving U.S. jurisdictions for places like Bermuda where they actually know how the government is going to treat crypto assets from kind of a compliance standpoint, there's something really important there. So again, this is just the beginning or maybe phase two of the kick versus SEC story. And we will keep watching. But with that, let's go to our last topic for the day, DOWs. So a couple days ago, I guess on Monday, Ryan Zer, who was previously a polychain capital

and has been working with the Web3 Foundation for the last year or so, announced that he was leaving and he was leaving to start a Dow. And that's super interesting. So basically he says in his tweet storm about it, the 2016 Dow is still one of the coolest projects I have seen. If it hadn't been, if it hadn't imploded today, it would be the largest capital deployer in the space. And the quality of due diligence that we saw from the community on those early days would

have tempered the ICO craze of 2017. However, we lacked certain tools, regulatory clarity in many jurisdictions, and a deeper understanding of smart contracts, crypto economics, and decentralized coordination. All of these tools exist now. It is the right time to explore this venture. The dream of a sustainable, decentralized organization that attracts and filters for great talent, supports genuine innovation and meaningful experimentation, and delivers outlier value to its members, is really the most compelling project in my humble opinion.

So this is super interesting, right? So the Dow was obviously kind of one of the first big hacks. It led to the split between Ethereum and Ethereum Classic, for example, over a difference of opinion about whether the money lost in that hack should be, basically written over or just lost forever. And so because of that, you know, people kind of soured on the idea of Daos for a while. During the ICO boom, there wasn't a huge emphasis there. Now, there were some projects like Aragon, like Colony, that were kind of slowly and more quietly behind the scenes starting to build infrastructure. But this idea of a Dow, of a decentralized organization that could

create resources, in some ways, I think actually benefited from having less focus on it while the ICO boom was happening. Now, fast forward to this year, and you've seen a few different kind of high-profile Dow projects. First, you saw Malik, which was basically a community funding Dow for Ethereum-related infrastructure. That emerged this year, led by folks like Amin Soleimani from Spank Chain and a number of others, and has gotten lots of attention. Meta-Cartel forked off of Malik and kind of had a different approach. They just this week announced their first wave of funding. And so, you know, the interesting thing here is why do DAOs matter? Why are DAO's interesting? Well, for some of the folks in this space, the idea of coordination of resources in the absence of

traditional organizational structures is one of the biggest and most exciting opportunities to solve. So this post from earlier this year from Stefano Bernardi over at, who's both of token economy, he's an investor, and now he's been with Aragon for about the last six or seven months. He wrote a piece called Why 2019 Will Be the Year of the Dow. He wrote a lot about what DAWS are good for. So he wrote, decentralized organizations are good at coordinating resources when not all parties are known to one another, aligning large number of stakeholder contributions towards shared goals, running organizations in a way that is resistant to censorship, accommodating a variety

of levels of contribution, allowing people and entities to contribute work in a jurisdiction agnostic fashion, nimble setup, especially relative to traditional organization structures. So a lot of this is that there's this big space between, you know, informal groups who just chat together and formalized companies. But right now there's no actual kind of organizational structure for those in-between-type organizations. And Stefano goes on further to kind of point out which trends are incentivizing DAO's. So he points out the globalization of talent, the transformation of work, more people contributing more different types of work at different levels from all over the world, well-resourced stakeholder networks needing coordination. So this is kind of like the

the Malik Dow use case of coordinating Ethereum Dow, Ethereum infrastructure, emergence of decentralized finance. This is a huge regulatory gray area. So people are using DAWs as a sandbox to experiment, normalization of participation in governance. Again, a lot of what DAWs are are experimenting with is how people contribute to decision making when they're part of an organization where not everyone knows each other. There's potential issues around deplatforming, upswing in political and social organizing, and so on.

And so, you know, his argument is that 2019 is the year of the Dow and that you're going to see more and more experiments. And so far, frankly, we're seeing some interesting things. So, you know, when someone like Ryan goes into a new project, it's worth at least keeping an eye on. And I think it's in a space that is pretty fascinating. So with that, I will wrap this Crypto Daily 3 at 3. Thanks so much to Catherine Wu for hanging out and sharing a couple minutes on

on recapping what's going on with Kick and the SEC. And I will see you tomorrow, guys. Peace.