The Breakdown - Jerome Powell Confusingly Calls Out DeFi for Lack of Transparency

Episode Date: October 1, 2022

This episode is sponsored by Nexo.io, Chainalysis and FTX US.   On today’s episode, NLW catches up on recent crypto news including: Jerome Powell’s recent comments on DeFi California enforcement actions An update on Do Kwon  TBD teams up with Circle - Nexo is a security-first platform where you can buy, exchange and borrow against your crypto. The company ensures the safety of your funds by employing five key fundamentals including real-time auditing and recently increased $775 million insurance on custodial assets. Learn more at nexo.io. - Chainalysis is the blockchain data platform. We provide data, software, services and research to government agencies, exchanges, financial institutions and insurance and cybersecurity companies. Our data powers investigation, compliance and market intelligence software that has been used to solve some of the world’s most high-profile criminal cases. For more information, visit www.chainalysis.com. - FTX US is the safe, regulated way to buy Bitcoin, ETH, SOL and other digital assets. Trade crypto with up to 85% lower fees than top competitors and trade ETH and SOL NFTs with no gas fees and subsidized gas on withdrawals. Sign up at FTX.US today. - I.D.E.A.S. 2022 by CoinDesk facilitates capital flow and market growth by connecting the digital economy with traditional finance through the presenter’s mainstage, capital allocation meeting rooms and sponsor expo floor. Use code BREAKDOWN20 for 20% off the General Pass. Learn more and register at coindesk.com/ideas. - “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with today’s editing by Eleanor Pahl and research by Scott Hill. Jared Schwartz is our executive producer and our theme music is “Countdown” by Neon Beach. Music behind our sponsors today is “Razor Red” by Sam Barsh and “The Life We Had” by Moments. Image credit: Drew Angerer/Getty Images, modified by CoinDesk. Join the discussion at discord.gg/VrKRrfKCz8.

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 FTCTX, and produced and distributed by CoinDES. What's going on, guys? It is Friday, September 30th, and today we're discussing Fed Chair Jerome Powell's comments on DFI. 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 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, we have been deep in the macro weeds, so I wanted to use today as a chance to catch up on some of the crypto stories that have been happening in and around market madness this week. And we start with J. Pow himself. Earlier this week, Fed Chair Jerome Powell spoke at an event hosted by the French central bank. He was on a panel discussion focused on defy, digital assets, and systemic risk. A couple of key points from Powell's comments. First, he argued that there is now a new context for defy, based on a global rise in interest rates. This, Powell suggested, has exposed, quote, significant structural issues in the defy ecosystem.

Expanding that out, he said, the monetary policy normalization that we're seeing all over the world, all it did was reveal significant structural issues in the defy systems and conflicts of interest. All of those things have been revealed now that the tide has gone out. As a quick aside, let's not let go by the monetary policy normalization, as opposed to monetary tightening. This man is never not political. Anyways, he also said that defy has big issues around transparency, which was a real head scratcher for the Twitterati, who pointed out that the entire hallmark of defy is that everything happens on chain. In fact, many pointed out that it seemed like Powell was confused between centralized finance

crypto apps and decentralized finance crypto apps. In any case, his tone was definitely more skeptical than we'd seen in the past. To the extent there was an upside of recent defy turmoil, he said, it was that there simply isn't much interaction yet between defy and the traditional system. Quote, the good news, I suppose, is that the interaction from a financial stability standpoint, the interaction between the defy ecosystem and the traditional banking system and traditional financial system is not that large at this point. The Defi Winter didn't have significant effects on the banking system and broader financial stability due to the lack of links between them. However, he said,

quote, that situation will not persist indefinitely. There's a real need for more appropriate regulation, so that as Defy expands and starts to touch more retail customers and that sort of thing, appropriate regulation is in place, end quote. Powell also said that rather than create a whole new set of rules he favored using the conventional rules of finance for Defi as well. He cited the mantra same risks, same regulation. Now, in his comments, he also discussed stable coins. He said again that here we needed regulation to help ensure that they have sufficient reserves to meet their typical one-to-one redemptions. Powell also spoke about the potential of a U.S. Central Bank digital currency. As he always does, he hedged pretty aggressively, saying that they're still deliberating and that

he doesn't expect them to make a call soon. Quote, at the end of the day, we will need approval from both the executive branch in Congress to move ahead with a central bank digital currency. So we see this as a process of at least a couple years where we're doing work in building public confidence in our analysis and in our ultimate conclusions, which, as I say, we certainly haven't reached yet. Now, earlier this month, in a different set of comments, Powell said that the Fed's thinking around a CBDC has been driven by four specific ideas. One, a digital dollar would have to protect privacy. Two, it would have to work through intermediaries that exist in the financial system such as banks. Three, it would have to be widely transferable. And four, it would have to use identity verification to combat money laundering.

Now, if Powell's comments were a little more bearish than we'd seen before, other central bankers were even more harsh. You can tell that there is definitely a current emboldening of skepticism right now and a lot of residual anger coming off of the terror situation. Singapore Monetary authorities Ravi Manon said, I don't see any redeeming value in cryptocurrencies. Their time for reckoning has come. ECB president, Christine Lagarde, said that the collapse of TerraUSD was Exhibit A in why there needed to be new rules for the sector. Ligard said that from its origins of Bitcoin, crypto has been, quote, abused. Still, when all was said and done, most people on Twitter were

really focused on the transparency comments. Tier 10k wrote, Powell, very significant structural issues in defy around transparency, to which Anthony Sasano replied literally everything that happens in defy is on-chain and transparent. Another commenter responded to Sasano, saying, to be fair, the likes of Celsius, Terra, and co, were shilled profusely as DeFi Revolution, by pretty much all prominent crypto influencers, educators, and personalities alike. And those who didn't conform were bullied into silence. For better regulations, we need better education. Tasana responded in there and lies the problem, really. Powell thinks these things are defy when they are anything but that. I also really liked Andrew Lloyd.Eath's summary of Powell's comments. He writes, TLDR,

defy is real and a threat. Smart contracts are real and a threat, and we admit they're good. We think the Fed should be in control of creating money. Stable coins are risky, but f*** do we want one. we're drafting policy to control stuff if we can. I guess if you take anything from this, it's the fact that Defi is clearly on the agenda for folks like Powell and Lagarde, and I think that that focus is going to do nothing but increase. Staying on the theme of regulations and government engagement with crypto, the California Department of Financial Protection and Innovation, DFP, filed cease and assist orders against 11 little-known crypto firms on Tuesday, alleging they were misappropriating customer funds or violating state securities laws.

The regulator set in a press release, each of the 11th, entities allegedly offered and sold on qualified securities, and ten of them also made material misrepresentations and omissions to investors. The entities are all alleged to have used investor funds to pay purported profits to other investors in the manner of a Ponzi scheme. I mentioned this only as another example of the enforcement side of the growing regulatory discourse. And frankly, this part, actually prosecuting scams and schemes, doesn't bother me a bit. It's more that this gets conflated with everything else. Nexo is a security-first platform built for the long run with everything you need for your crypto.

Five key fundamentals, including real-time auditing and insurance on custodial assets, safeguard your funds, making Nexo the right place for you to buy, exchange, and borrow against your assets safely. Learn more about Nexo's reliable business model and start your crypto journey at nexo.io. That's nexo.io. Eager to make more informed decisions around crypto, Chainalysis is here to help. Chainalysis demystifies cryptocurrency by providing industry-leading compliance, market intelligence,

and investigations support for all crypto assets. For organizations like Gemini, Crypto.com, and BlockFi. Gain unparalleled visibility and maximize your potential with the leading blockchain data platform by visiting us now at Chainalysis.com slash coin desk. The breakdown is sponsored by FTX, U.S. FDX U.S. is the safe, regulated way to buy and sell Bitcoin and other digital assets with up to 85% lower fees than competitors. There are no fixed minimum fees, no ACH transaction fees, and no withdrawal fees. One of the largest exchanges in the U.S. FDXUS is also the only leading

exchange that supports both Ethereum and Solana NFTs. When you trade NFTs on FTCS, you pay no gas fees. Download the FTCX app today and use referral code breakdown to support the show. In the Terra case, some new updates. Terraform Labs has finally started to make statements. Founder Doe Kwan has spoken out against his persecution following the collapse of the lunar ecosystem in May. He called the entire process, quote, highly politicized. A spokesperson for Terraform Labs said that South Korean prosecutors had demonstrated, quote, unfairness and a failure to uphold basic rights guaranteed under Korean law,

and added that there is no reasonable basis for accusations of breaches of capital markets law. Last Sunday, Interpol issued a red notice, asking global law enforcement to assist with Kwan's arrest after he was unable to be located in Singapore. South Korean prosecutors claim that Kwan is evading their investigation, saying that he is obviously on the run. Those are their words. Kwan, on the other hand, maintains that he is, quote, in contact with all government agencies that have asked to communicate with him. In this recent statement, the spokesperson said Kwan is, quote, not on the run and remains actively involved in the management and oversight of Terraform Labs. The statement comes following controversies surrounding the Luna Foundation Guard, a Bitcoin reserve established to defend the Luna Stable Coin peg. The fund held more than 80,000 Bitcoin in early May, worth more than $1.5 billion at the time. On Tuesday, prosecutors sent requests to exchanges

Ku-coin and OkX to freeze 3,313 Bitcoin worth around $76 million. The Bitcoin had been transferred shortly after an arrest warrant was issued for Kwan on September 14th. Kukoin has frozen 1,354 Bitcoin, while Okx was allegedly ignoring the request according to early reporting from CoinDest Korea. Later, they issued a statement, quote, OKX can confirm that it is received a request from the Korean authorities and that it is cooperating with their investigation. Doe Kwan denied the accusations that he had tried to cash out the Bitcoin on Twitter, saying, what has probably been the most surprising in all of this is the amount of misinformation that gets spread. There is no cash out as alleged. I haven't used Ku-coin or OkX in at least the last

year and no funds of TFL, LFG, or any other entities have been frozen. In fact, Doe has been super active on Twitter. In a thread he wrote, yeah, as I said, I'm making zero effort to hide. I go on walks and malls. No way none of CT hasn't run into me the past couple of weeks. He also commented on the red notice and discussed making plans with another crypto investor. It was so noticeable that he even got a Bloomberg article. Crypto CEOs are quitting, but Doquan can't quit Twitter. Anyway, moving on through the list of some interesting news. TBD, the Jack Dorsey-founded crypto infrastructure project that has been largely focused on Bitcoin, and which spun off from Payment Company Block, has partnered with StableC Circle. They'll be working to integrate USDC into TBD's TBDeX decentralized exchange and their

decentralized identity platform affectionately or panderingly known as Web5. The collaboration will create, quote, a set of open standards and open source technologies aimed at enabling global-scale mainstream adoption of digital currency and payments and financial applications. The first step is a product to enable cross-border remittances and a self-custody wallet. The test market will be the cross-border remittance corridor between the U.S. and Mexico, with TBD seeking to build, quote, ubiquitous global on-and-off ramps that connect traditional payments rails to digital assets. Data from the World Bank has Mexico as the second largest recipient of remittances in the world

with $51.6 billion annually, 95% of which is originated from the United States. Since TBD announced their Web5 project in June, the goal has been to create the infrastructure to allow crypto rails to comply with regulations around identity and KYC requirements, while maintaining privacy by using decentralized identity proofs. This partnership should assist TBD with its goal of advancing the mainstream use of crypto. TBD chief operating officer Emily Chu said, quote, the US dollar is the reserve currency today, and we think Bitcoin might be the reserve currency of tomorrow.

Stable coins are the bridge in between. She also elaborated on the need for better on and off-ramps. This is Crypto's last mile problem, how you get people in and out of crypto. Today, it's too hard for someone who isn't a crypto-native to access crypto in a decentralized way, and for crypto-natives to off-ramp into Fiat money depending on their jurisdictions. The official TBD account tweeted, We're partnering with Circle to solve some of our biggest money challenges, including decentralized global on-and-off ramps between fiat and crypto worlds that can power global use cases from cross-border remittances to self-custody of stable coins. Together, we can fuel the potential of crypto as a mainstream

payment system using open standards and open source technologies around stablecoin, crypto payments, and decentralized identity. An open approach is key to enabling global scale mainstream adoption of digital currency and payments and financial applications. The first step of which will support cross-border remittances and self-custody wallets that can hold stable coins. Now, the big question for many out there is what this has to do with Bitcoin, if anything. TBD has been very clear about how important Bitcoin is to their vision for a digital currency world, and so this will be a test case in seeing how they connect the dots between other parts of the crypto ecosystem and the reserve currency they prefer. Speaking of Bitcoin, Jack Mahler's

Lightning Network Payments firm Strike has raised $80 million in a Series B funding round. It was led by 1031, which is a Bitcoin-focused VC firm that includes great folks like Marty Bent and Matt O'Dellis Partners. One of the things, if you guys listen regular to me that I always look for in these rounds, is to see who's actually participating. Does the type of investor actually tell us anything interesting. In this case, the answer is absolutely. The round included participation from Washington University in St. Louis and the University of Wyoming, which to me is yet another example of post-narrative institutionalization. It may not be getting headlines like it used to, but endowments are still getting in the space. In any case, the additional capital will be used

to enhance Strikes' payment network for merchants and consumers. Strike has been working on integrations with existing payments infrastructure, including Blackhawk, NCR, and Shopify. strike also plans to release integration APIs for existing financial institutions and businesses. Said founder Jack Mahlers, quote, businesses and institutions want a groundbreaking experience sending payments as well. We can empower businesses to move money in ways networks such as card networks and Swift can't, and we pay these partners in the form of commissions to do so, which makes it an exciting innovation for everyone.

We've seen a lot of demand here. Retweeting the official announcement, Matt O'Dell wrote, No K-C Bitcoin off-ramps in every store in America. the team at strike are going to make this a reality. Now finally, and perhaps most surprisingly, this week we saw some signs of life in the NFT space. There was an announcement out of meta that all Facebook and Instagram users in the U.S. can now share NFTs and cross-posts between both apps, which, as easy as it is to be cynical about, still represents significant mainstreaming. There was also a project from Fidenza creator Tyler Hobbs that raised almost $17 million in its initial mint.

many pointed out the irony of that happening the same day that Bloomberg posted a story about how NFT volumes were 97% off. And just really for the final rubbins that night, a Cryptopunk sold for something like 3,300 Eth, around $4.5 million at the time. Whether you think that's a deal or insane and justifying Fed Chair Powell's view that they need to keep tightening until excesses are flushed out, it's for you to decide. But you can't deny that it's interesting. Anyways, guys, for now, I want to say thanks again to my sponsors, nexus.i.o, 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 sort of a digital economy. invest and secure the next big deal in digital assets. Use code Breakdown 20 for 20% off a general pass. You can register today at coin desk.com slash ideas.