The Breakdown - Interpol, Elon-DOGE and the Latest Crypto Controversy

Episode Date: April 5, 2023

Ah, just a casual Monday in crypto land, where an encrypted tweet from an influencer leads to billions of dollars of value wiped off the market cap. On today’s episode, NLW looks at the CZ Interpol Red Notice rumors, explanations for Elon Musk changing Twitter’s blue bird icon to a Shiba Inu dog, and more substantive news about the latest hearings around Binance.US’ intended acquisition of bankrupt Voyager Digital’s assets.  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.  

In the wake of one of the most tumultuous years in crypto history, the conversations happening at Consensus 2020 has never been more timely and important. This April, CoinDess is bringing together all sides of the crypto, blockchain, and Web3 community to find solutions to crypto's thornyest challenges and finally deliver on the technology's transformative potential. Join developers, investors, founders, brands, policymakers, and more in Austin, Texas, April 26 to 28th for Consensus 2020. Listeners of the breakdown can take 15% off registration with Code Breakdown. Register now at Consensus.coindex.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 CoinDess. What's going on, guys? It is Tuesday, April 4th, and today we are talking about why crypto is a weird world full of weird people. Before we get into that, 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. Well, friends, yesterday was the first Monday we've had in a while where we didn't get actual regulatory action. So, what did we do? Well, of course, we had to invent some drama

of our own. Okay, so on Monday afternoon, a rumor ripped through crypto Twitter. The rumor was that Interpol had issued a red notice for Binance CEO, CZ. From the Interpol website, quote, A red notice is a request to law enforcement worldwide to locate and provisionally arrest a person pending extradition, surrender, or similar legal action. Where did this rumor start from? Well, for most people, it was an encrypted post from Up Only Host Kobe, which, when decoded red, Interpol red notice for CZ. So let's take a step back here. Last Monday, several Binan entities were sued by the CFTC over allegations that the firm had knowingly offered crypto derivatives products in the U.S. between 2018 and 2020. CZ, as well as another executive, were named

personally as defendants in the lawsuit. At the time, it was notable that no criminal charges accompanied the lawsuit, as the allegations featured overtones of willful money laundering at finance. Still, for many people, it didn't feel like a one-off. There was a lot of speculation that we'd see something from the SEC or even the DOJ to follow. Back a few months ago, Reuters had reported that the Department of Justice was split in whether to charge Binance with any sort of criminal action, with some prosecutors thinking that they had enough evidence to make the case around anti-money laundering rules, and others thinking that it just wasn't enough.

Now, of course, on everyone's mind yesterday were recent examples of similar actions. In particular, we saw a similar situation play out two weeks ago during the arrest of Luna founder Doe-Quant. Interpol was also rumored then to have issued a red notice for Kwan's capture. After Kwan was arrested in Montenegro, the DOJ unsealed charges of fraud and requested Kwan's extradition. Now, it's important to remember that that means that the Justice Department had these criminal charges under seal until they had the defendant in custody, meaning that there's

no guarantee that similar charges haven't already been filed and just not revealed. Since the rumors of Kwan's red notice first emerged in September, no formal acknowledgement had been made, and the red notice was not published on Interpol's public database. Kwan had repeatedly denied that he was the subject of a red notice, despite the rumors, noting the lack of publicly available information. Kwan was initially detained for traveling using falsified documents, but reporting later confirmed that he was arrested to satisfy an outstanding Interpol notice which had not been publicly disclosed. In fact, according to the Interpol website, quote, the majority of red notices are restricted to law enforcement use only. Extracts of red notices

are published at the request of the member country concerned, and where the public's help may be needed to locate an individual, or if the individual may pose a threat to public safety. Binance, of course, denied this. CZ retweeted an image of the Interpol website, which was Photoshopped to show a red notice outstanding for his capture, saying, this is a photoshopped image, four. The four, of course, is CZ's way of telling people that something is just fud. A spokesperson for Binance said in a statement to the block, this rumor is not true. Binance Chief Strategy Officer Patrick Hillman tweeted,

things is true. One, it's bullshit. Two, a law enforcement agent is illegally leaking documents of a case file through encrypted message a la Q&N on GitHub, which is a felony and arguably a much bigger news story. My bet is number one. Now, part of the intrigue with all of this had to do with how the information got out there. Encrypted posts are frequently used in the crypto community to make predictions that can later be revealed, with the favored method using the same encryption scheme that underlies Bitcoin, SHA 256. After Kobe's encrypted message was revealed, there was some hysterical discussion about the encryption being broken, but later in the evening, Kobe himself gave his best guess of what happened. He wrote, have posted SHA 256 hash of rumors more than 20

times in the last year without the secret being revealed. Point of a hash commitment scheme is nobody is supposed to be able to read them until after the secret is revealed. Looks like someone I discussed the rumor with, a handful of possible people, leaked the seed to cause a stir at my expense. removing the context of rumor, etc. Highly doubt any theories about brute forcing, salt, etc., since no others have been broken, including the one I posted after. It was not supposed to be readable ever unless I revealed it, so sorry about that. Well, once again, narrow down the list of people I can trust.

Since tweeting only leads to bad things instead of good things, I will probably do it, much less in the future. Now, part of the discussion here is a meta-discussion on the nature of what is news. Eric Wall wrote, 1. I see Kobe Hash. Two, I see Kobe hash says Interpol red notice for CZ. Three, I see CoinDisc article. OMG, Kobe was right.

Four, CoinDesk source. Kobe tweeted a hash. On the other hand, I understand it. Kobe always knows things. It's weird, probably a Fed. Kobe himself was surprised that this was treated as news. He said, I still don't really understand why every crypto news outlet treating a sealed prediction tweet based on rumors that they already knew were circulating

as news that needs responding to by Binance. I mean, my account mostly shit posts. I'm hardly a reliable journalist source. Frank Chaparro from the news. the block responded, we reached out to Binance before your tweet. The rumor was circulating before your tweet among very serious market participants. It was just your tweet that had market impact. Kobe responded to that. I think there's a pretty big leap from jolly crypto guy posting a sealed prediction to, Kobe has insider info about Interpol. This must be news. Frank then responded again.

No one reported what you said as news. They reported on the market reaction of what you said as news. If what you tweeted didn't move the market, no one would have penned an article. Now, I understand where Kobe is coming from in the sense that his message wasn't supposed to be revealed, and he's just a guy, so even if it was revealed, it shouldn't have caused such a reaction. However, two things. One, it was revealed and it did cause a reaction. And two, I believe pretty firmly that in the world we live in, a world where consensus reality is pretty much gone forever. The way that people react to and discuss the news is a part of the news. If you'll allow me an aside, one of the things that I think makes the breakdown different is the fact that from the very beginning I've treated the discussion

around the news as part of the news. It's why you hear so much about what people are saying on crypto-twinter Twitter, fin Twitter, and other forums. The process of truth-making in our world involves not only the news as it is reported, but the interpretation of that news. I'll give another example. Do the specific words that Jay Powell says at any given press conference matter in the abstract? Or do they matter in the context of how people are discussing them, how people are interpreting them, and how people are reacting on the basis of them? Of course it's the second. So I'm with Frank here too. The story may have been overblown,

and maybe we shouldn't have reacted as much as we did, but it was a story. Now, speaking of market reaction, CZ tweeted, If you panic sell on fud or photoshopped images, well, you aren't likely to become rich. Block the fud sources. What he was referring to is the fact

that Bitcoin and BNB token prices both plummeted in the hour following the rumor, with B&B falling by more than 3% before recovering into the evening. Cold-blooded Schiller tweeted, Elon changing Twitter icon, doge pumping 30%. Alt season.

CZ Unprompted 4 tweet. Kobe tweets hash. Converted his red notice from Interpol for CZ. It's all over. Welcome to a four-hour candle in crypto, greatest markets in the world. Now wait a second, you might be saying. What was that about Elon? Yes, the clown show was in full effect yesterday,

and Elon was up to his old tricks. On Monday morning, Twitter changed its blue bird icon to the Dogecoin Shiba Inu logo. Dogecoin soared because, of course, it did, gaining more than 35% over the following hour, and getting above 10 cents for the first time since. December. Elon was very limited on details around the change, posting a meme and referring to a Twitter discussion with Wall Street Betts chairman from last March, where they suggested that Elon

should, quote, just buy Twitter and change the bird logo to a Doge. Of course, part of the narrative around Elon's purchase of Twitter was that he wanted to change the social media app into an everything app with integrated payment rails. To that end, Elon has in the past suggested that Doge might offer better payments infrastructure than Bitcoin. In January, the Financial Times reported that Twitter had begun applying for the required licenses to operate a payments platform and informed a small team within the company to build out the infrastructure required. Then again, the head of that team was subsequently fired by Elon in February, so who knows? The question then is, is this logo change a sign that Elon could be bringing Dogecoin payments to Twitter

soon, or is there another explanation? A fair number of people on Twitter suggested that the logo change was designed to overshadow other recent news relating to Elon and Doge, pushing it off the front page of search results. Comedian Jesse McLaren tweeted, Why do I get the feeling the Doge icon was added so that when you search Elon and Doge, the story of his racketeering lawsuit will be buried. What's McLaren referring to? Back in June, a racketeering lawsuit was filed by a Dogecoin investor against Musk, SpaceX, and Tesla, claiming that the plaintiff, quote, was defrauded out of money by defendant's Dogecoin crypto pyramid scheme. The lawsuit made a range of claims about Musk's promotion of Dogecoin,

claiming a total of $258 billion in damages on behalf of all Dogecoin investors. The figure is triple, the total decline of Dogecoin's market cap representing punitive damages. On Friday night, Musk's legal team lodged a filing asking the court to dismiss the lawsuit, stating that the plaintiff's claims were, quote, a fanciful work of fiction, over Musk's, quote, innocuous and often silly tweets about Dogecoin. Lawyers for the investor who is bringing the case said on Friday, we are more confident than ever that our case will be successful. So people actually in the crypto industry are not convinced of this.

Niaraj from Coin Center writes, Anyone can sue anyone for anything. Treating this lawsuit as anything real is embarrassing. It is not, of course, the first time that Elon has been sued over tweets in relation to market manipulation. In February, he won a lawsuit pertaining to a tweet in August 2018, where he said that he was going to take Tesla Private at a price of 420. To the extent this reverse stric-sand effect strategy was a strategy, it appears to have been at least partially effective. Gizmodo is one of the few major publications that mentions racketeering in their headline, and, as another example, the Washington Post reporting on the topic, has buried

commentary on the lawsuit in the closing paragraphs. Now, of course, there is a third possible explanation for why the Twitter icon is now a doge. And that explanation is that a lot of the things that Elon does, he does not for some big strategic reason, but because they amuse him. And he looks for ways to amuse himself. And whether or not they get a reaction is, in his mind sort of someone else's problem. To use a famous phrase that my mom loved, them if they can't take a joke. I'll be honest if I had a gun to my head right now and was asked which of these three possible explanations, Doge payments, lawsuit obfuscation, or just effing around for fun, is the reason the Twitter icon has now changed? I'm not betting on Doge payments or lawsuit obfuscation.

Now, returning to Binance for just a moment, there were two actual stories that I thought were a bit more interesting. One has to do with their ongoing attempt to acquire Voyager's assets in that company's bankruptcy. A quick TLDR on the background, after Voyager, went bankrupt, FDXUS had been approved to acquire their assets. But then, Binance US came in with a winning bid, but the SEC filed an objection. That objection went to court, and basically the SEC wanted the judge to block the acquisition because the SEC argued some assets might be unregistered securities, although they would neither claim a specific asset to be a security, nor explain what qualified it as such. That judge got extremely flustered with the SEC and

basically said, no, you can't block this because of might-bees. The creditors deserve some recourse, and so come to me with a real complaint or GTFO. Now, of course, that's my paraphrasing. The judge didn't quite say that. I've widely cited that recently as a positive example of how courts can be a counterbalance to an overreaching SEC, but obviously that wasn't going to be the last we heard about this. The government filed an appeal with the key dispute surrounding a clause in the orders which

the government viewed as restraining them from bringing additional legal action against Binance U.S. at a later date. Now, with a month passed and substantial additional scandals piling up on Binance, the appellate judge appears more open to the government's arguments. In a hearing on Monday, the appellate judge said the government's arguments have, quote, gone entirely unrebuted by Voyager and its creditors, and, quote, neither of which have provided any authority for the proposition that a bankruptcy court can release criminal liability. In examining the orders, the judge agreed with the government that, quote, the exculpation cause appears to go further than the quasi-judicial immunity

doctrine allows. The judge, however, was sympathetic to the need to wrap this up quickly, noting that delays could cost as much as $10 million per month to the Voyager estate. A swift timeline has been set with briefs to be lodged by April 18th. Now, the other Binance story I thought was worth noting has to do with their conversion of a billion-dollar industry backstop fund from BUSD to Bitcoin and other native crypto. On-chain analysts have noted that Binance appears to be almost finished with this conversion. In November, CZ announced that Binance would be forming an industry recovery fund to help stabilize the industry, and that fund held $1 billion in BUSD at one point, although it's unclear how much of that money was spent to keep crypto firms and projects afloat.

In March, after the New York Department of Financial Services shut down the BUSD stablecoin, CZ tweeted that the remaining funds would be converted into Bitcoin, Ethan BNB. The wallet that had been performing transactions since then now appears to be almost depleted of its BUSD holdings with only $96 million left. Why is this relevant? Well, many analysts think that it was this conversion and the announcement of it that actually got this latest rally started, as opposed to people rushing into Bitcoin as a salve for banks failing.

This was especially assumed because CZ telegraphed the move. so loudly, giving traders the chance to front-run it and pile in. So if that buying pressure is exhausted, well, it just means that that buying pressure is exhausted. It certainly doesn't mean that we'll go in the other direction, just that we've depleted one source pushing the price of Bitcoin up. Still, even if it was Binance that got the rally started, it doesn't mean that a narrative slingshot effect hasn't taken hold that can give Bitcoin further momentum. For example, a new research report from Coinbase has pointed to the surprising resilience of crypto markets in the face of dysfunction and collapse in the traditional banking sector.

Among crypto tokens, Bitcoin has been a notable outperformer, increasing its market cap dominance from 43.9% percent, 47.7% in March. The report explained that part of the reason is that the stress in the banking system reinforced Bitcoin's store of value properties. It offers a hedge against current conditions. The report also noted that with regulatory actions swirling throughout the industry, Bitcoin benefited from being the sole cryptocurrency that has a fairly cleared and agreed upon regulatory status. What's more, the correlation of Bitcoin to stocks has also significantly reduced. Bitcoin recorded a correlation of 70% to the S&P 500 last May, but is now sitting around 25%. So what comes next? Well, first of all, I will say once again that I do

not care about prices in the short term, but for the sake of rounding out this show, April is a seasonally strong period for Bitcoin throughout the history of the asset. According to data provided by Matrixport, Bitcoin has recorded gains across April in six of the past 10 years, with an average return of more than 17%. Over the past 10 years, April has been the best month in the first half of the year, and the third best month over the entire year. What's more, it's not just Bitcoin. The S&P 500 is also cyclically strong in April, with an average return of 2.6% over the last 10 years, with 8 out of 10 April's returning a positive result from U.S. stocks. Now, there have been a lot of explanations given for this, with one of the most popular being that is just about tax season. In other words,

April 15th rolls around, and people are four sellers of both stocks and crypto because they have to pay their tax bill, but then once that's taken care of, that cell pressure is also gone. However, another explanation might have to do with liquidity cycles. Part of the reason it seems that Bitcoin has been strong in April could be the historically weak results put up in March. Six of the last 10 years have seen a drawdown in Bitcoin across March, which is typically seen as a low point for liquidity across asset classes at the close of the first quarter. Recent analysis of Bitcoin has honed in on its sensitivity to liquidity conditions as being a defining feature of the asset as it trades currently. On that basis, one of the big questions hanging over Bitcoin and indeed

broader markets right now is whether liquidity will remain tight or if recent troubles in the banking sector are enough to convince central banks that they have hit the liquidity floor and will need to loosen conditions. That, my friends, is one of the big questions going into this month, and you know we will be tracking it here. For now, I appreciate you listening, hanging out, and shaking your head with a sly granite the anything can happen rumors in crypto. Till tomorrow, be safe and take care of each other. Peace.