The Breakdown - Is Crypto at a Socio-Regulatory Inflection Point?

Episode Date: September 26, 2021

This week’s “Long Reads Sunday” returns to the format’s roots with four threads from Twitter: Chris Dixon on tokens as a new web primitive https://twitter.com/cdixon/status/1440026947036356619 Raoul Pal on the coming change to securities laws https://twitter.com/RaoulGMI/status/1440361603459735556 Cozomo (aka Snoop) on getting into Punks https://twitter.com/CozomoMedici/status/1433587285035913217 Kris Sidial on why millennial investing is not the same  https://twitter.com/Ksidiii/status/1434299567974100996 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 by and features NLW, with editing by Rob Mitchell and additional production support by Eleanor Pahl. Adam B. Levine is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsor is “Only in Time” by Abloom. Image credit: gremlin/E+/Getty Images, modified by CoinDesk.

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 Nidig and produced and distributed by CoinDesk. What's going on, guys? It is Sunday, September 26th, and that means it's time for Long Reads Sunday. And today, I wanted to do something a little bit different. I've been enjoying interspersing the traditional. Essays with threads from Twitter, getting back to Long Read Sunday's roots when it was a thread of Twitter threads. And today I've picked out four threads very different, but all have a similar theme to me of it's the dawn of something. It's the dawn of something new, something interesting,

something different, a different phenomenon that good or bad, right or wrong, we have to deal with on its own terms. That is the meta-theme, and to start, I'm going to grab a thread from Chris Sidial from a couple weeks ago that's all about the shift in millennial mindset. He writes, About a year ago, I went on Corey Hofstein's Flirting with Models podcast. Outside of my thesis, one important change in the microstructure that I listed was the shift in speculative sentiment due to a change in the demographics of the buying power. Simply put, this means that millennials and under are more inclined to make speculative investment decisions. This is aided by the confirmation that they were correct because asset prices continue to rise. Like a gambler on a roulette

table, more winnings means more gambling. The important thing to note is how this translates over to asset prices. This means we should expect asset price changes to demonstrate wider variance. This means price changes can move more rapidly and more obscure than we are used to seeing. We are seeing this thesis confirmed in the NFT space, crypto, and single stock. There are tons of examples of craziness during the last year. But I hope folks understand this, adapt to it, and change their mentality. We are in a market that keeps grinding higher and is giving a false sense of security. As fast as they rise, these asset prices will fluctuate the same way on the way down.

Hence why I get so frustrated when people show me backtest results from the 1980s and 1990s. This market in 2021 is nothing like those markets. Running regression samples and trying to make direct sense of it is a little. literally comparing apples to oranges. In a way, I'm actually shocked that people are surprised when assets like Solana or GME go up 500%. If you actively trade and observe what is transpiring in the market, then this should just be another confirmation of what we already know, not new information. Asset prices change off of one thing, literally one thing. Investor sentiment. Investor sentiment is a nonlinear system if you want to qualify it. Aggressive winners keep adding more and more to their

holdings due to a false sense of confidence that occurs while winning. So some millennial who is leveraged on asset XYZ makes money on it, then takes his winnings and leverages even more on asset ABC. This is a continuous whirlpool as asset prices continue to rise with it. The market follows, while some 50-year-old fund manager is sitting there and trying to short the asset because, quote, it can't keep going up or, quote, this doesn't make sense. Complete perfect example of a trader who is not adapted with the times, the market will eventually engulf him. So when you list out what the main things are in this market that are causing it to react this way. Understand it is largely due to a shift in the way how people think about investing. Cautious investing is out the door with

the young generation. It's get rich or go broke trying. One of the things that I like about this thread is that he's not presenting this with an error of judgment like so many threads that have identified this phenomenon. He's simply saying this is the new reality and you have to understand it. We can and we have given numerous shows to what might be going into that, the nihilistic side, the degenerate gambler side, the rationalist take on a world that seems less full of opportunity side, and so on. But I think it's a great thread that simply states the obvious to many of us, which is that the people who are investing these days are not playing by the same rules as the people who came before them. Which brings us, I think, to Raoul Paul's threat. This came after Gensler's

Washington Post webinar earlier this week. He writes, listening to Gensler, and it's clear he is laying down the hardest case he can for regulation of digital assets. But my view is that he will likely get his way that most are going to be classified as securities, but with a wholesale change to what that means. It's like when the internet started to gain real traction. The authorities tried to impose harsh rules, but in the end, there had to be a grand compromise to not stifle something very important indeed. That decision led to trillions of dollars of new capital creation in the largest investment inflows into the U.S. in history. The innovation that was seeded from light-touch regulation on the internet changed the world with the U.S. as leader. Digital assets are as big a deal. This technology

has created an entirely new financial system, more robust than the last, and created entirely new business models on a scale we are all trying to get our heads around as it's developing so damned fast. Digital assets might well be securities, but the regulation around that will end up being much lighter touch than today. If they try the heavy hand, capital leaves, and also the lobbying power of the crypto community is growing every day. Money talks. The reason no one wants to call something a security is that it comes with a huge burden in cost, time, and access to regular investors. But pair that all back to create innovators' regulation and layer in KYC, tax compliance, and some investor protections, and it's a good thing.

And that also means the frankly ridiculous rules around accredited investors or selling securities has to change to meet the modern world, not the 1930s world. It is simply inexcusable to allow rich people to get richer and penalize the poor people who aren't accredited. In a world of decades of stagnant real wages and rising asset prices, that is morally wrong. That very dynamic has pushed U.S. households to rack up more debts than in all history. What is more risky? The debt or the digital assets?

We know the debt is what makes the bank's rich. The political push from stopping ordinary people access to investments just won't work in the current political climate, and nor should it. Newer crowdfunding rules have shown the way, and the legal challenges around some of that has helped, but the current system still generally forces individuals to use large financial institutions to get access to investments, keeping the power in these institutions' hands. This is unlikely to survive as a structure as it's inherently unfair, and trust in institutions is entirely eroded. The madness of all of this is that people are free to bet on sports or throw all their money away in Vegas but can't buy securities. They can lose

money in any number of unregulated private transactions. My view is that in the end, we will get new securities laws for digital assets and that they will be cheaper, faster, fairer, and much less onerous on issuers. Consumer protection will have to come via warnings or some sort of risk metrics. But this will take years. The next three to five years in crypto will be about setting the battle lines and then using the courts and lobbyists to reach a grand settlement of what it means to classify something as a security. In the end, that will help the space and as with all regulations, there will be regulation arbitrage in different jurisdictions, if required. But regulation is coming globally, and countries that actively encourage these entrepreneurs

with lighter regulation will take the lion's share of the benefits. I don't see the U.S. making the same mistakes the EU did with internet companies that essentially forced all innovators abroad. It is not in the U.S. DNA. Genzer's hard line is the start of a long negotiation. Classic negotiating tactics. Start ultra-tuff, then compromise. The digital asset industry needs to formally come together and do the same, just as the internet companies did. It's going to cost a lot of money, but in the end, where the compromise is made is the difference between a $10 trillion industry or a $200 trillion industry. That is a hell of a prize. What I like about this thread is that it's taking this whole conversation about regulation and where we land in a totally different direction. Basically,

arguing that crypto will in fact drag all of securities, rules, and regulations with it to something that is leaner, lighter, and more open. If Raoul has called himself irresponsibly long Bitcoin before, that is almost irresponsibly optimistic, but I like the sentiment. This podcast is sponsored by Nidig, the institutional grade platform dedicated to building a more inclusive financial system through Bitcoin. To find out more about Nidig and their mission to bring Bitcoin to all, go to nidig.com slash nLW. That's nydig forward slash nLW. If you're going to do a big think something is changed type of thread,

you kind of got to look to Chris Dixon. His thoughts on crypto haven't always been right. At least they haven't always been validated in the short term in terms of how the market has moved. However, the man thinks big and is always worth having a look at. He wrote earlier this week, tokens are a new digital primitive, analogous to the website. Major computing waves generally have two eras, the skeuomorphic era and the native era.

In the skeuomorphic era, the design thinking is largely adapted from older domains. For example, the early web was mostly digital adaptations of pre-internet activities like letter writing and mail order shopping. Websites back then were mostly read-only. It took about a decade for technologists to start seriously exploring the idea that websites could be read-write, where users generate the content. This led to the growth of web-native categories like social networking, crowdfunding, and social productivity apps. This pattern is repeating itself with crypto and Web3. There are some great native Web3 products, but overall, we are still in the

skeu-morphic era. Many Web3 products are adaptations from older domains. Popular skeuomorphic Web3 ideas include offline ticketing, supply chain management, and record-keeping for offline assets. These may be good ideas, just as read-only websites were a good idea, but they only scratched the surface of what Web3 can be. A lot of today's NFTs are adaptations from the offline world of art and collectibles. This leads people to think that NFTs are limited to those domains, in the same way people once thought the web was limited to brochures and magazines. Tokens, fungibles, and NFTs, are better thought of as new digital primitives, similar in

flexibility and generality to pass digital primitives like the website. Tokens give users property rights, the ability to own a piece of the internet. Web2 left out digital property rights. When you use a site or app, it would only let you borrow or rent things. Imagine if in the real world you had to buy everything from scratch every time you went to a new place. That's Web 2.0. Like websites, tokens are digital primitives that can be generalized to represent almost anything. Money, art, photo, music, text, code, game items, control, access, and whatever you

people dream up in the future. Users can now have a persistent inventory of objects in their wallet that they take from one app to another. If their objects increase in value, the user gets the upside. This is a big change from Web 2, where the upside was mostly captured by tech companies. We're still very much in the skeuomorphic era of Web 3, but are starting to see a new wave of native applications that have no prior analog and simply couldn't have existed before. For example, building on mechanism designs pioneered by defy entrepreneurs, a new wave of Dow's are exploring ways for groups to come together, pool resources, build things, and self-govern. Composable NFT games like Lute incentivize the community to build an entire world around a single

set of NFTs, an activity that would be impossible without the ownership and portability that Web3 enables. There is nothing intrinsic about fungible tokens that needs to be related to money and finance, and nothing intrinsic about NFTs that needs to be related to R3. and collectibles. Those are great initial applications and will likely remain very important, but tokens are better thought of as a new digital primitive, analogous to the website, the atomic unit around which a new era of the internet is organized. And as if to give Chris's take just a little bit more credence, let's end this week with Cosimo de Medici, now revealed to be Calvin Bradus, aka Snoop Dog, writing about their very first purchase of a useless JPEG.

Did I imagine my very first purchase of an air quotes useless JPEG would cost $2 million? Absolutely not. It should have been $4 million. Friends, today I share the uncensored tale of how I entered the wild world of NFTs, from zero to eight figures in 30 days. Grab a glass, take a seat, and hold on tight. Disclaimer, the story you are about to hear is unique. It is not to be taken as investment advice.

On the contrary, it is a tale of ego, envy, recklessness, and sleepless nights. It may one day end in a $100 million plus fortune. It could also end in me being broke, angry, and humiliated. But such is the life we all signed up for. My name is Cosimo de Medici, and I collect JPEGs. While I am new to the NFT space, my family have been patrons of the arts for many years, are collecting philosophy simple, the best painters, and their best paintings. This is what led me to the punks.

My friend Metahans, who introduced me, gave me one warning. You were about to discover digital crack. The day was in February. I remember it well. Flamingo Dow had recently purchased an alien punk for a record-breaking $670,000. It gave me great envy that I did not possess one of these alien punks myself. Ah, the prestige we silly humans are programmed to seek. I decided to go shopping. A source mentioned an alien could be had. In fact, it was simple.

I would need to open with a price of 4.5 million USD. My jaw hit the floor. Why would I spend 3.5 million or 2,300 of my precious eth? When days before, just one went for 25% of that. I passed and proceeded to place 400-Eth bids on every crypto-punk ape. After four or five unaccepted bids, I moved on with my crypto life, not thinking of the punks again until June and July. And that was when I noticed something peculiar.

When all of crypto was crashing down, punk prices were holding steady, even climbing. I began reading the words of the great Perugia V and realized how wrong I had been to look away from the number one asset in cryptocurrency. With the help of my old friend Farouk, I began ape shopping again. Repeatedly, we are told to buy the floor ape for 1600 Eth, which again seems astronomically priced. Then one day, my DMs explode. Congrats on your buy, the floor ape has sold. OMG, you did it.

I rushed to my computer. What had I done? Had a bid been accepted? I couldn't remember if I had even bid up. If I even had a bid up. The floor ape had sold, but not to me, to Gary Vaynerchuk. All negotiations I had with ape owners end instantly. We would likely never again see an ape for less than 1,600 eath,

for there is a strange cultural pondonomics to NFTs, much like contemporary art. No one wants to sell for less than the previous high price. Two hours later, Pete D grabs the ape listed for 2,200 Eath, and we will likely never again see an ape below 2,200 Eth. And then, as I am drowning in sorrows for not buying the floor ape, Total pandemonium takes over the punk's discord. A floor sweep is happening, then another. The funds are coming, the funds are coming.

My budget too slim, my ape dreams now shattered, my dear friend Justin Versano, who had been graciously helping me in pursuit of an ape, makes a crazy suggestion. I should buy the floor zombie, both floor zombies. As I'm pondering this crazy idea, the pandemonium continues, and another problem starts to arise. The great repricing. Every punk owner not asleep is pulling their punks and dung.

doubling their prices. The floor is lava. People who bought punks that morning are selling for double just hours later. I look at the wallet that holds the treasured Cosm zombie, unquestionably, a top three zombie, and unquestionably priced at what was hours earlier, a very expensive 850 Eth, and it now looks like a damn good deal. Earlier, the site said the wallet hadn't been active in weeks, but now it says active one minute ago. Cosm is about to be repriced. I loaded up my Eath and click the trigger. First on Cosm, then on Punk 8472, Rhinozambi. And that is how Cosimo de Medici was born. This tale is getting a tad long. I will write chapter two if there's enough interest. For now, I will simply say that this NFT ride is just beginning. If you are

reading this, you are early, and it is a pleasure to be on this journey with you. I raise my glass to you all. Epilogue. I couldn't just let this end without sharing a little of my philosophy for this wild world we are all in. Last night, I connected with AC Collect. We had a delightful conversation in the DMs, and I began to browse his remarkable gallery. As I'm browsing through his Metaverse, I realized that we are on the dawn of an entirely new world of socializing meets entertainment, meets the arts, meets investing. It felt not unlike an exotic car meet-up, an outing on the golf course, or sitting around a poker table. The conversation evolved around his collection and mine. We shared our interest,

our excitement over rare works, our philosophy. And it was then when I realized we are all part of a new paradigm. Never before have the worlds of social, art, and investment collided in this way virtually. It is not an activity requiring much money to start, nor a particular skill. It can be done by anyone with a simple web connection. Kids will compare video game wares, us adults are art blocks. But this isn't going anywhere. It's only going to continue to explode. With nearly everyone I know who owns a little crypto now asking me about the JPEGs, I can see and feel it. Let us enjoy these early days of building collections, connections, and experience. in the Metaverse. We are at the dawn of something special, and I know you feel it too.

I'll end there, and I think the fun thing about this one is that even if some of these dawn of new somethings aren't the something that you care about, even if you don't care about the dawn of a new cultural moment where art meets collecting meets investment, even if you don't care about the dawn of a new era of tokens as a web primitive, even if you don't care about the dawn of a new security's infrastructure or paradigm in the United States and the rest of the world. You are almost for sure a part of some new dawn, the dawn of whatever new something that matters to you. And that very fact of this Cambrian explosion moment, the fact of shared participation in it, makes you connected to everyone else out there, even if they have completely different

values and interest than you. I'm glad you're here. I'm glad you're rocking and rolling with the breakdown. Until tomorrow, guys, be safe and take care of each other. Peace.