The Breakdown - Hasta La Vista, USA! Crypto Companies Look Abroad

Episode Date: April 22, 2023

This week Coinbase was on tour in the U.K. and also announced a new Bermuda license, through which it will supposedly soon announce a new derivatives offering. NLW recaps the contrast between the increasingly open arms from the rest of the world and the cold aggressive stance of U.S. regulators.    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=   Join the discussion: https://discord.gg/VrKRrfKCz8   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW   “The Breakdown” is written, produced and narrated by Nathaniel Whittemore aka NLW, with editing by Michele Musso and research by Scott Hill. Jared Schwartz is our executive producer and our theme music is “Countdown” by Neon Beach. Music behind our sponsor today is “Foothill Blvd” by Sam Barsh.  Join the discussion at discord.gg/VrKRrfKCz8.  

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Register now at ConsenSys.com and join CoinDesk at Consensus 2023. 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 produced and distributed by CoinDesk. What's going on, guys? It is Saturday, April 22nd, and that means it's time for the weekly recap. A quick note before we dive in, we are coming to the end of our partnership with CoinDesk. A few weeks ago, I announced the Breakdown Network. It's a network of shows all about big picture power shifts that includes not only the breakdown, but a new Bitcoin Builders show,

as well as an AI breakdown. As part of that change, the breakdown will no longer be a part of the CoinDesk Podcast Network. So after tomorrow, April 23rd, Sunday, you will not be able to get this show, on the CoinDesk Podcast Network anymore. Go search the Breakdown or the Breakdown NLW wherever you listen to podcasts and switch over to the Breakdown-only feed. Again, tomorrow Sunday the 23rd is the last day for the breakdown on the Coin Desk Podcast Network. All right. Well, friends, it is Saturday, and as you know, that means the weekly recap.

Now, the weekly recap is an interesting content slot for me. Sometimes it's a chance for sort of just another show about a topic that I thought was important, but perhaps not as urgent as something else we needed to cover. Other times, it's really sort of a grab bag of smaller stories that we're still worth knowing about, even if they weren't quite as prominent as some of the other things we covered in the week. And then sometimes, there is some big, blaring theme to a week that is so clear that it really becomes a true weekly recap of understanding that theme.

And boy, howdy, did this week have a theme. Asta-Luista U.S. love crypto. That quote, by the way, comes from a tweet from lawyer Jeremy Hogan. All right, so we kicked off the week covering CoinDesk's tour of the UK. Brian Armstrong keynoted London FinTech Week and had a number of conversations that were at once provocative, and at the same time, kind of completely obvious. In one interview, he said that if the U.S. wasn't able to give regulatory clarity, Coinbase would be forced to consider relocating.

Armstrong also specifically called out the turf war between the CFTC and the SEC. as part of the problem. Later in the week, we of course got the hearings, which I've now covered ad nauseum, but which basically showed just how partisan crypto regulation is getting, and how the U.S. sphere in this domain is to quote congressional witness Austin Campbell, collapsing into chaos. Now, this stood in stark contrast to the European Union, where on Thursday, the European Parliament voted by a huge majority to pass the markets in crypto asset or meika legislation, which is a landmark first comprehensive crypto legislation from a major global power. Austin Campbell again articulated the significance in stark terms.

He writes, I told my class yesterday that Mika might be the most significant development in crypto for the next two years. If the details work out, always TBD as they implement, the EU has created a framework to formalize how crypto works in the largest economic block to affect such rules. In the past, when Europe has taken these steps, normally they have been surpassed as a place for innovation by the United States.

However, in this case, the hysterical response towards a new technology by U.S. regulators and some politicians means the EU has a massive advantage, unless Mika is truly broken in ways I am not aware of yet, in the short to medium term. The longer that advantage persists, the longer it will take to overcome if the United States ever manages to act, which I don't think is a foregone conclusion. Excellent bit of playing offense by the EU to get this done, and puts the UK in a position where they need to act fast or get left in the dust by the continent. It seems the future of crypto is no longer in North America, and I haven't even mentioned Asia yet. Now, on yesterday's show, we also discussed that basically the UK seems to have gotten this memo. Earlier in the week, they trotted out secretary to the UK Treasury, Andrew Griffith, who talked about the potential for there to be the UK's own comprehensive crypto regulation within 12 months.

On April 17th, Coinbase's Brian Armstrong tweeted after a meeting with Griffith as well, saying, great meeting today with the UK Economic Secretary and city minister Andrew Griffith. The UK is moving fast on sensible crypto regulation to both drive economic growth and consumer protection. Excited to keep investing in the UK. The UK trade body, CryptoUK, also tweeted about the new urgency. With the adoption of Mika, they wrote, the EU has solidified its position as a regulatory leader for years to come. While not flawless, Mika is an extremely relevant regulatory stack that puts significant pressure on the UK and US in terms of delivering operational clarity for crypto.

Now, in terms of how a UK framework might differ, or be similar, here's how CoinDesk put it. The UK's constitution said policymakers were considering an authorization regime similar to that of Mika. While the EU also made significant room for rulemaking around asset-backed stable coins, the UK is attempting to regulate them as payments. Diverging from Mika, the UK's crypto proposals leave out areas such as settlement and financial advice. End quote. Indeed, the UK right now has a financial services and markets bill that's working its way through parliament that integrates stablecoins into the broader system. Now, although Coinbase was physically in the UK this week, the UK wasn't the source of their biggest news. On Wednesday, the exchange

announced in a blog post that it had obtained a license to operate in Bermuda. The tiny Caribbean nation is a global hub for international finance with extremely permissive regulatory regimes for a range of financial businesses, including one of the first crypto licensing schemes in the world. In its announcement, Coinbase called the Bermuda Monetary Authority, quote, a highly respected and experienced financial regulator. This followed last month's reporting that Coinbase had been discussing plans to establish a trading platform offshore with key market makers in the industry. A Coinbase spokesperson said they have, quote, nothing to announce today regarding our future plans to offer services through this license. However, according to anonymous sources speaking

with Fortune, Coinbase plans to launch an offshore derivatives exchange based in Bermuda as soon as next week. The block added that perpetual swaps are expected to be part of the offering. The move comes as part of Coinbase's eight-week international expansion drive, which included that whistle-stop tour of the UK, as well as the exchange doubling down on efforts to be registered in Canada. T.D. Cowan analysts said in a note on Wednesday that the move by Coinbase was, quote, more akin to jurisdiction shopping amid SEC and U.S. regulatory risk than anything else. Quote, we think it will be difficult for Coinbase to replicate its U.S. dominance overseas. These moves could adversely impact the company's brand and or reputation post-FTX.

Anita Analyst was skeptical that the new platform could successfully cut into the market share of other offshore derivatives exchanges. They write, while international derivatives exchanges in crypto have been real revenue generators, as Binance. It is still early to determine how material this offering would be for coin. Now, reaction on crypto Twitter was predictably vehement. Bankless host Ryan Sean Adams writes Coinbase getting Bermuda license. Cool, Gary, you're driving all the exchanges offshore. Go America. Farcaster founder Dan Romero writes, this is an utter failure of the U.S. Coinbase and several other regulation-first companies have been trying for nearly a decade to

offer licensed derivatives in the U.S. But leveraged VIX ETFs are legal for retail investors. Delphi Digital co-founder Tom Shanasi writes, Coinbase starting to move offshore is extremely disappointing for the U.S. The most legitimate player, who has been aggressively asking for clarity and working within the frictions of uncertainty for 11 years, has had enough. Can it get more obvious the U.S. is messing up? Now, the alternative take was basically that Coinbase was stepping into an institutional void that FTX's collapse had left.

Luma Welts-WALAWALIA writes, "'Coin-Base securing an exchange license in Bermuda "'looks more like market expansion than, quote, running offshore.'" This is about taking share from finance in the perps market. If you are centralized, trust matters, and Coinbase seeks to build a global trusted brand. Others pointed out that this could cause some challenges, practically speaking. Investor Adam Cochran writes, will be interesting to see how the market responds to the Coinbase news about offshore perps exchange.

Perpetuals exchange are crazy lucrative, but with none having ever been tied to a public company before, it might get underpriced on a lack of data. Then, of course, there were the crypto critics who more or less scoffed. Dirty Bubble Media writes, 84% of Coinbase's revenue in 2022 was attributed to the United States. Good luck. This tweet was kind of like a cell phone, though, right? I mean, wouldn't Coinbase's concentration in the U.S., which is now a high-risk jurisdiction,

mean that it would be smart for them to diversify geographically? Anyways, one interesting wrinkle is that after FTX and after the CFTC lawsuit against finance, as well as the SEC's recent suit against BitTREX, Coinbase has a lot more info on how not to do this. In the CFTC versus Binance, the regulator is alleging that Binance was allowing U.S.-based firms to trade using offshore entities and claiming that they were aware of this and or encouraged the activity. The Bitrek suit is an even bigger reach, suggested that by having a combined order book,

they are functionally servicing the U.S. That means that when Coinbase does this, they now have things that they can be really careful about avoiding. And frankly, Coinbase is hyper-focused on the legal compliance side. If they figure out a protocol that they're comfortable with to ensure that market makers are not legally in the U.S. and then requires all participants to follow that process, they're essentially giving U.S. participants a guidebook to leave the U.S. Now, Coinbase is not the only firm who's looking abroad.

Gemini also announced plans on Thursday to open its first office in India as part of quote-unquote big plans for the Asia-Pacific region. The CTO of Gemini, Pravjit Duana, will lead that regional team and said in a blog post announcing the move that, quote, The products and features built in our India location will be used by our retail and institutional customers in 70-plus countries. The Winklevoss twins said Gemini has big plans for international growth this year in APAC. This initially involves building out products and engineering teams in India.

We will also be expanding our business teams in both India and Singapore to execute go-to-market strategies focused on growing our individual and institutional customer base in this region. Gemini had also reportedly had their eyes on launching perpetual futures products last month. Now, the India office will primarily serve as an engineering hub for the exchange, which expects to hire, quote, hundreds of full-time employees to build products for the region. The Winklevosses went on. We believe that crypto and Web3 products will continue to have a strong growth trajectory in APAC. Crypto knows no boundaries, and it is important for Gemini to be present and active globally. So to sum things up a little bit, after this week, the chips are just

pretty clear. Partner at Brown Rudnick Stephen Paley writes, If it wasn't clear before, it should be now. The SEC, under Gensler, intends to completely shut down any crypto-related businesses in the United States, including exchanges and any other on or off-ramps to fiat. It's also maddening to see one person wielding so much power in a supposed democracy, whatever you think of magical internet money. I start to see how maybe, just maybe, this Supreme Court could be persuaded by this kind of horseshury to clip the wings of our octopocean administrative state.

End quote. Now, to make matters worse, Elizabeth Warren also seems poised to lob more grenades our way. Rumors are swirling that she's lining up to reintroduce the Digital Asset Anti-Money Laundering Act next week. Now, this bill was originally introduced in December during the lame duck session of the previous Congress, but obviously failed to gain any traction. The seven-page bill would have prohibited financial institutions from using digital asset mixers, such as Tornado Cash, and would have required self-hosted wallets, miners, and validators to write and implement AML policies. Bill Hughes, a lawyer at consensus, threw up the warning sign,

tweeting, reports from Capitol Hill are that Senator Warren is pushing her crypto-a-m-m-L bill before its introduction next week. It's time to rally in opposition to this remarkably bad legislation that purports to serve national interests, but is really about killing crypto in the U.S. The reasons to oppose it are many. One, it is flagrantly unconstitutional. Two, it drastically over-regulates software development and use. Three, it will give regulators a job they can't do. Four, it will come nowhere close to solving any problem. And on top of all this, it requires a monumental increase in spending in Fed headcount, which is being ignored.

Elicit finance policymakers and law enforcement are not asking for this, in large part, because they know it's folly. This is about killing crypto, not making things better. I simply cannot fathom why limited government, personal freedom, pro-market senators would utterly abandon those principles and swallow a crisis-quick-fix story. This bill makes the Infrastructure Act's reporting requirements look completely immaterial, and everybody got spun up for that. This is unquestionably more important, and it shouldn't get farther than it has. Now, Austin Campbell captured the irony about this Warren bill.

He writes, Ironically, there would be nothing offshore illicit markets would like more than this bill passing. It will cause crypto to exclude the U.S. not adopt these policies, and we will lose our reach to influence or regulate those markets. This bill is majorly pro-criminal. Now, I think as we close out here, there is one thing worth holding on to, especially if you're an American or just care about the U.S.'s role in crypto. The reality is not that most American politicians hate crypto. The reality is that a handful of U.S. politicians in positions to make our lives

really, really miserable, hate crypto. And our industry, especially one person sitting at their parents' house wondering what the world outside is saying about him, but certainly not exclusively him, gave those opponents an immense amount of cloud cover to push their agenda this year. If you're a politician who is neutral on crypto or just had more pressing priorities elsewhere, are you really going to take on this caustic battle when you know these antagonists are going to throw consumer protection and rampant fraud and all this sort of stuff back in your face? Of course not. It's just not worth it. Now, there are still lots of opportunities to push a pro crypto agenda. We're just going to have to be a lot smarter than unfortunately a lot more patient

about it. Anyways, guys, that is it for the weekly recap this week. I hope you are having a wonderful weekend. As always, I appreciate you listening, and until tomorrow, be safe and take care of each other. Peace.