The Breakdown - D.C. vs. Saylor

Starting point is 00:00:00 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 nexus.com, and FtX, and produced and distributed by CoinDes. What's going on, guys? It is Thursday, September 1st, and today we are talking about Washington, D.C. versus Michael Saylor. 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

Starting point is 00:00:43 bit.ly slash breakdown pod. Also, a disclosure as always. In addition to them being a sponsor of the show, I also work with FTX. All right, folks, well, the best time of the year has begun. That's right, it's September. That means it's autumn. Don't care what's official. It is official in my heart, and according to TikTok, I am certainly not alone. Now, when it comes to markets, I am expecting an autumn of action. On the macro front, we have a rate meeting coming up in September that is going to be seen as a real bellwether of where the Fed is, how they're thinking about the future. Will we get another 75 basis point hike? Will we see the return of forward guidance? Will we instead still be in wait and C mode, basing decisions on new data as it becomes available? In either case,

Starting point is 00:01:30 also has meetings in November and December, so you can expect a lot of market discussion to come. Now, on the crypto front, there are reasons to think that there is likely to be a slew of action as well. One, many of the deadlines for the reports that President Biden called for in his executive order are going to start coming due. Second, there are a significant number of outstanding legislative efforts that are likely to be pursued when Congress and the Senate are back in session. Third, the midterms could shape the discourse in one way or another, either with Republicans reclaiming control of the House, and setting a new agenda, or Democrats feeling emboldened with what would at this point be a surprise victory to hang on to control of the House. There is also a budget dimension, as Jake Chavinsky points out. He recently tweeted, September and October may be busy for crypto in D.C.

Starting point is 00:02:16 Congress comes back to town for a final push to make headlines before the November election. Agencies approach fiscal year end on 930, with the goal of bolstering their budget requests with big enforcement actions. Plus, on top of this, there's just the fact that it seems as though action is And that's where we'll start today, with news yesterday that Washington, D.C. is suing Michael Saylor, former CEO of Micro Strategy, who is obviously best known for his big Bitcoin play for tax fraud. Attorney General Carl Racine tweeted yesterday, today we're suing Michael Saylor, a billionaire tech executive who has lived in the district for more than a decade, but has never paid any DC income taxes for tax fraud. We're also suing his company, Micro Strategy,

Starting point is 00:02:57 for conspiring to help him evade taxes he legally owes on hundreds of millions of dollars he's earned while living in D.C. It's the first lawsuit brought under D.C.'s recently amended False Claims Act, encouraging whistleblowers to report residents who evade our tax laws by misrepresenting their residents. Led by Chairman Mendelsohn the Council of D.C. unanimously updated the law and gave us enforcement authority. With this lawsuit, we're putting residents and employers on notice that if you enjoy all the benefits of living in our great city while refusing to pay your fair share of taxes, we will hold you accountable. So that threat obviously pretty well sets things up. But the real meat is in the complaint itself.

Starting point is 00:03:33 D.C. is alleging that Sailor lived in a penthouse in Washington while masquerading, their word, as a resident of Florida or Virginia, by purchasing property and registering to vote in those states. Their claim is that Sailor lived in Washington, D.C. for a minimum of 183 days per year, which is what's required to be considered a, quote, statutory resident. Micro-stratage's involvement in the lawsuit as a second defendant stems from the claims that the company was aware that Saylor lived in Washington for more than half the year, but still listed him as a Florida resident in form submitted to the IRS.

Starting point is 00:04:04 Sailor responded in a statement, stating that a decade ago he purchased a property on Miami Beach and relocated there from Virginia, despite MicroStrategy being headquartered in Virginia. Florida is where I live, vote, and have reported for jury duty, and it is at the center of my personal and family life. I respectfully disagree with the position of the District of Columbia and look forward to a fair resolution in the courts. strategy also denied the claims against them in a statement. The District of Columbia's claims against the company are false, and we will defend aggressively against this overreach. Micro Strategy claims that this is a, quote, personal tax matter involving Mr. Saylor, and that, quote, the company was not responsible for his day-to-day affairs and did not oversee his individual

Starting point is 00:04:42 tax responsibilities, nor did the company conspire with Mr. Saylor in the discharge of his personal tax responsibilities. The District of Columbia's claims against the company are false. Now, the allegations against Microstrategy are based on the accusation that the company investigated Sailor's residence in 2014. From the complaint, quote, concerned about Micro Strategies' involvement in defendant Sailor's fraudulent scheme to avoid district taxes, in or about 2014, Micro Strategies' then-Chief Financial Officer undertook account of the number of days that defendant Sailor spent in Florida as compared to the

Starting point is 00:05:14 district and found that because Sailor spent the majority of each year in the district, Micro Strategy could not justify misreporting Sailor's residency to federal tax officials. As well as having detailed information about his personal location through travel and expense accounting, the lawsuit alleges that soon after this internal investigation, Micro Strategy reduced Sailor's salary to a nominal $1, to reduce the company's exposure if Sailor were to be sued for tax evasion. Sailor's compensation instead was paid in fringe benefits and stock options. The lawsuit originated from a whistleblower report made in April 2021,

Starting point is 00:05:46 which said, demonstrating his disdain for the rules that everyone else has to live by, Saylor publicly flaunted his billionaire lifestyle while bragging to his friends and associates about how he was evading district taxes. So a few things here to break down. First, we have a whistleblower, which has kicked up some speculation that there might be ulterior motives. Second, many have pointed out that while the complaint is thick on allegations, it's fairly brief on evidence that he resided in D.C. for more than the 183 days required. Third, it's clear from the suit that they have been watching Sailor's content, and that brings up a discussion about his role in the role of any self-appointed

Starting point is 00:06:19 spokesperson when it comes to Bitcoin. And fourth, just to clear things up, this is a civil suit, not a sailor going to jail thing, and its accusations are that he owes something along the lines of $25 million, not a sailor has to sell all his Bitcoin to survive sort of thing. As soon as the news broke, the internet was split effectively into two groups. There were those who basically said, yeah, this seems like normal rich person tax stuff, effectively arguing that whether Sailor was guilty or not, this was just the normal sort of toying the residency line that many people do, and that it wasn't some anti-Bitcoin thing. On the other hand, were those who immediately felt this was suspicious, particularly because it was a whistleblower-driven complaint.

Starting point is 00:06:57 Neil Jacobs summed up this view when he said, I'm pretty confident Michael Saylor meticulously keeps a day count of when he is in Florida. This isn't about taxes. They're coming for Bitcoiners. Nico, the host at Simply Bitcoin TV, writes, U.S. government sanctioning open source software, U.S. government suing Michael Saylor, all in the last month. This is the separation of money and state anon, wake up. Nexto is a security-first platform built for the long run with everything you need for your crypto.

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Starting point is 00:08:53 When you trade NFTs on FTX, you pay no gas fees. Download the FTX app today and use referral code breakdown to support the show. Now, I was interested in who thought what, whether this was more run-of-the-mill tax issues, exactly as they said, or whether it was a surreptitious attack on Bitcoiners. I ran a highly scientific Twitter poll, and actually more than half of the people who responded said that it was an attack on Bitcoiners at 53.6%, whereas 46. 46.4% thought it was just tax fraud the way that they said. it is. Now, obviously, I have a very specific audience, so I don't think that you should take this as the general view, but it's notable that it's not necessarily just a random few who saw this as potentially Bitcoin motivated. Still, that wasn't the only opinion even among Bitcoiners. Nicole Dobrow wrote, I don't know. Miami is fashioning itself as a Bitcoin and Crypto Hub.

Starting point is 00:09:47 Sailor has been in regulators crosshairs years prior to becoming a Bitcoiner. Not good for public perception of Bitcoin either way. Just not sure if it's part of a larger strategic anti-Bitcoin play yet, though. Indeed, this idea that it might not be a Bitcoin thing, but that Bitcoin was going to get wrapped into it was a pretty common sentiment. Zero X Sisyphus wrote, seems unrelated to Bitcoin, but will get headlines nevertheless. There was also a lot of discussion about the sort of cavalier way Saler had sometimes talked about tax evasion and Bitcoin. Luke Martin tweets, why would they go after Saler for tax evasion? Quote from Saler, if you push me too far, I lost it. It's gone. Sorry, tax that. Attorney General says, say no more, fam. It is notable that

Starting point is 00:10:25 that interview came up explicitly in the complaint. Quote, Saylor bragged in a January 24th, 2021 interview that Bitcoin is an ideal tool for evading taxes, suggesting that owners of Bitcoin could tell the government to go f*** yourself and claim to have lost their Bitcoin access key daring the government to tax that. Now, when it comes to tax professionals takes, it's sort of mixed. James Yocum writes, the legal complaint filed by Washington, D.C., against Michael Saylor includes numerous social media posts. He's going to have an uphill battle when they've outlined in the legal complaint dated social media posts of him commenting on his Washington, D.C. condo as home. You'd have to be a fool to brag to others about evading taxes, let alone avoiding

Starting point is 00:11:02 taxes in our nation's capital, while having a multi-million dollar residence there, and being the CEO of a business that is 30 minutes away from D.C. However, Nathan Peary, tax attorney said, I will say I doubt D.C. cares about the fact he's a Bitcoin or except maybe for the publicity factor. It's worth noting how odd this would be when he has a huge place in McLean, Virginia, just outside of D.C. My point is that they are saying for 183 days he couldn't be bothered to go 20 to 40 minutes home to his giant McLean mansion to sleep.

Starting point is 00:11:29 It's insane. Another dimension of this was the sort of brazenness of the way the AG put Sailor publicly on blast. Anna Atlas BTC responded saying, I'm disappointed that you're bragging about this to your social media audience. Every citizen is innocent until proven guilty and Sailor deserves the same treatment.

Starting point is 00:11:45 Shame on you. Brian 21896 says, I don't want to live in a country where a government bureaucrat uses Twitter to both about suing private U.S. citizens. Now, as for me, I have no idea. Obviously, I don't have the facts of the case. However, I resonate with, one, the position that would be very shocked if Michael Saylor hadn't completely covered his ass on this stuff. Two, the position that whatever you might think about social media posts bragging about residences, they aren't really evidence

Starting point is 00:12:10 that the specific number of days was spent in them. I also resonate with Zero Hedges' joking take where they said, Michael Saylor must be the only exec ever to live in D.C. while pretending to live in Florida. But also, while I don't think this is probably quote-unquote about Bitcoin, I do believe that because Saylor has made his whole thing Bitcoin in the court of public opinion, it is going to be about Bitcoin and the type of company Bitcoin keeps. I wish, in fact, that we would have more of a debate about Bitcoin spokespeople. Nicole Dobrow again says this is why having Bitcoin figureheads is risky. Now, I guess for completeness and as a reflection on the state of the discussion, there are far

Starting point is 00:12:46 more Bitcoiners on Twitter basically saying, this is base, taxes or theft, than those who are really engaging with that type of issue, but whatever. So the way that I set this all up, though, is that it's an example of government increasing crypto engagement heading into the fall. So let's talk about a couple more things coming out of D.C. as of late. The Financial Accounting Standards Board FASB laid out its criteria for assets it will include in its cryptocurrency accounting project. The criteria will rule out providing guidance for NFTs and some stablecoins, but will include most other cryptocurrencies. Now for background, FASB provides the accounting guidelines for businesses, corporations, and investors. For years, they'd been asked to provide solid guidance on how

Starting point is 00:13:24 crypto should be accounted for. However, for a long time, they declined to provide that advice, claiming that investment in crypto wasn't widespread among companies. Obviously, that has now changed. And in fact, micro-strategy is part of that. Companies are currently using the non-binding guidelines of the Association of International Certified Professional Accountants, relating to other intangible assets like website domains and trademarks to value their crypto holdings. Under these guidelines, businesses must review the value of assets at least once a year. They're also required to mark down their value as an impairment if it drops below the purchase price. If the value rises, companies can only record a gain when they sell the asset.

Starting point is 00:13:58 These guidelines were designed to attribute value to intangible assets without liquid markets, often referencing subjective valuation metrics. This standard has been a point of contention within corporates that handle cryptocurrencies for some time. due to how badly it fits the nature of liquid crypto tokens with constant market pricing. Microstrategy notably released a set of alternate accounts that stripped away impairment losses of their crypto holdings with their financials. In recent months, investors and analyst groups, including the Alliance of Concerned Investors and the CFA Institute, have pushed the FASB to set rules on crypto investments to allow

Starting point is 00:14:28 equity investors to get a more transparent picture of companies' financials through SEC filings. The FASB is hoping to conclude initial discussions of the crypto project by the end of the year and bring a vote before the board on whether or not to issue a proposal. Over on the law enforcement side, the FBI has issued new recommendations for defy investors following a year of brutal smart contract exploits and hacks. In a public service announcement published on Monday, the FBI said, quote, cybercriminals are increasingly exploiting vulnerabilities in the smart contracts governing defy platforms to steal cryptocurrency, causing investors to lose money.

Starting point is 00:15:00 They highlight the main exploits that have been performed, including flash loan-based exploits, signature verification, fishing, and spoofing, and manipulation of price order. The announcement lists recommendations for investors, including researching defy platforms and protocols, ensuring that the defy platform that you use has undergone a code audit, being alert that liquidity pools with very limited time to join and rapid redeployment of smart contracts could indicate fraudulent behavior, and so on and so forth. It also makes a set of recommendations for defy platforms. Now, I think what's notable about this is that this is ultimately a pretty practical,

Starting point is 00:15:32 well-considered set of guidance. It is very light on the sort of histrionics, and crypto is for criminal sort of language that we've seen in the past, and is basically just common sense guidance. Speaking of which, earlier this week, we saw a letter from the chairman of the House Oversight Committee to the Treasury, the SEC, the CFTC, as well as five digital asset exchanges, asking for relevant information about the steps they're taking to combat crypto-related fraud and scams, as well as asking about what additional actions are needed to protect Americans. This letter sort of got lumped into the anti-crypto letter thing that has been happening a lot with people like Elizabeth Warren, but it doesn't really read like that to me.

Starting point is 00:16:07 It reads much more like it's legitimately asking to help this person and their committee understand crypto and reinforces for me the idea that conversations taken in good faith are almost always going to lead to better outcomes than the sort of supposition-based debate we've had before. Finally, we learned this week that Gary Gensler and the head of the CFTC Chairman Benham will both be testifying before the Senate this month, which is likely to have lots and lots of questioning around crypto. So there you have it. Like I said, I expect an autumn of action.

Starting point is 00:16:37 And so far, just based on the last couple days, that position has only been reinforced. For now, I want to say thanks again to my sponsors, nexus.com. I know, chain aliasis and FTX. And thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace. I want to tell you about CoinDesk's new event, the investing in digital enterprises and asset summit or ideas. The event facilitates capital flow and market growth by connecting the digital economy with traditional finance. Join CoinDesk October 18th and 19th in New York City for a 360-degree investment experience, where you can source, invest, and secure the next big deal in digital assets. Use code Breakdown 20 for 20% off a general pass.

Starting point is 00:17:22 You can register today at coindesk.com slash ideas.

The Breakdown - D.C. vs. Saylor

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