The Breakdown - Meet the Bitcoin Legal Defense Fund

Starting point is 00:00:00 it's hard for me to imagine any scenario in which having a hearing, especially a hearing that allows Congresspeople to hear directly from the industry itself, doesn't do more to dispel notions around energy that are largely thrown around in the media and in the popular consciousness, then make them worse. Knowledge, education, information, the chance to discuss, even if it comes with the side of demagoguery is better than the alternative. Welcome back to The Breakdown with me, and I'll double. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexo.io, Abra, and FTX, and produced and distributed by CoinDesk.

Starting point is 00:00:44 What's going on, guys? It is Thursday, January 13th, and today we are talking about the new Bitcoin Defense Fund, along with a number of other topics. First, however, if you are enjoying this show, please go subscribe to it. give it five stars, or leave a review. And if you want to get deeper into the conversation, we have a popping Discord now. It's bit.ly slash breakdown pod, or that link is in the show notes as well. I would love to see you guys there. Please come join. Also, standard disclosure, in addition to them being a sponsor, I also work with FTX. Now, there are a bunch of interesting topics today, so let's dive right in and let's start with the Bik. Bitcoin Legal Defense Fund.

Starting point is 00:01:32 This news was not announced in any formal way. It wasn't a press release. It wasn't a tweet. It was just an email from Jack Dorsey to the Bitcoin Dev mailing list. I'm going to read it in its completion. Two Bitcoin developers. The Bitcoin community is currently the subject of multi-front litigation. Litigation and continued threats are having their intended effect.

Starting point is 00:01:52 Individual defendants have chosen to capitulate in the absence of legal support. Open source developers who are often independent are especially susceptible to legal pressure. In response, we propose a coordinated and formalized response to help defend developers. The Bitcoin Legal Defense Fund is a non-profit entity that aims to minimize legal headaches that discourage software developers from actively developing Bitcoin-related projects, such as the Lightning Network, Bitcoin Privacy Protocols, and the like. The main purpose of this fund is to defend developers from lawsuits regarding their activities in the Bitcoin ecosystem. including finding and retaining defense counsel, developing litigation strategy, and paying legal bills.

Starting point is 00:02:33 This is a free and voluntary option for developers to take advantage of, if they so wish. The fund will start with a core of volunteer and part-time lawyers. The board of the fund will be responsible for determining which lawsuits and defendants it will help defend. The fund's first activities will be to take over coordination of the existing defense of the Tulip Trading lawsuit against certain developers alleging breach of fiduciary duty and provide the source of funding for outside counsel. At this time, the fund is not seeking to raise additional money for its operations, but will do so at the direction of the board if needed for further legal action or to pay for staff. If you have questions or concerns, you can email info at bitcoindefense fund.org. We'll share

Starting point is 00:03:12 more information in the near future. Sincerely, Jack Dorsey, Alex Morcos, and Martin White. So if you're not familiar with those names, that's obviously Jack Dorsey, the former CEO of Twitter, the CEO of Square, now Block, the co-founder of Chain Code Lab. Alex Morcos, and the academic Martin White. As you'll probably well know, one of Craig Wright's current line of attacks these days on Bitcoin is suing Bitcoin developers, which is all sorts of gross. And when it comes to how I feel about the Bitcoin Legal Defense Fund, I will say not a lot other than it fucking rocks. Contributing to the Bitcoin network shouldn't be some penitential act of self-sacrifice, and it certainly shouldn't involve opening oneself up to lawsuits.

Starting point is 00:03:50 The community is rightly stoked. Adam Back says good, patent-trolling legal filibuster have no part in Bitcoin or free and open source software. Marty Bent says shout out to Jack, Alex Morcos, and Martin White for stepping up to protect Bitcoin developers from getting bogged down by lawsuits so they can focus on what they do best. Preston Pish, I always suspected Jack would bring a gun to a samurai sword fight. And Kailen Long brings up another interesting point. Excitedly sharing the news of the Bitcoin Legal Defense Fund, she writes,

Starting point is 00:04:17 Wyoming has a code-is speech law to protect open-source software developers from criminal liability. It's just one of many things Wyoming is doing to support devs who are the most important people in crypto. Now, of course, this gets at one of the key underlying issues here. These types of lawsuits are at core an issue of the liability that developers have for the operation of their software. This is particularly tricky in the context of open source software and unlikely to go away as an issue anytime soon.

Starting point is 00:04:44 I think that overall, while there is obviously a specific court case that this is relevant for right now, the more important thing is just cutting off this particular attack vector. Now, to the extent that anyone had any pause about this, it's about the way that decisions will be made by the centralized committee of directors. I think two things about this. In the long term, it is meaningful and reasonable to ask about any centralized points of failure, even when they're people by really trusted leaders. However, this is an independent outside organization. It's not a canonical or exclusive thing. There could be other Bitcoin legal defense funds with other priorities. And what's more, in the short term, it's basically just unmitigated one of the same. 100% awesome that they're doing it. So while it's always reasonable to ask about power in the Bitcoin ecosystem, this I think is just a double-blazing thumbs up plus. Nexo is a trusted

Starting point is 00:05:36 and easy-to-use crypto platform where you can buy cryptocurrencies at the touch of a button and start earning up to 17% annual interest that is paid out daily. They support all of the major assets on the market and even allow you to swap one asset for another or borrow cash against your crypto without selling it. Nearly three million people in over 200 countries trust Nexo with their digital assets. So whether you're just getting started or you're a season pro, get the most of your crypto today with Nexo at nexo.io. Today's episode is sponsored by Abra.

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Starting point is 00:06:40 The breakdown is sponsored by FTX. FTX is the safe, regulated way to buy and sell Bitcoin and other digital assets. Trade crypto with up to 85% lower fees than top competitors. FTX US is also the only leading exchange that supports both Ethereum and Solana NFT. You can trade NFTs with no gas on FTX US, and gas is subsidized when you withdraw off the platform. Help support the breakdown and visit FTX.us today. That's FtX.us. All right, next up, let's talk about the Manuchin files. TLDR, CoinDesk used the Freedom of Information Act to get a dump of about 250 pages of former Treasury Secretary Stephen Mnuchin's email correspondence, specifically relating to crypto.

Starting point is 00:07:32 There are a few interesting nuggets. First, as Jared Kushner, the president's son-in-law, who is more involved in foreign policy, was quietly a booster for digital currencies. On May 29, 2019, he suggested that a group come together to have a brainstorm about a U.S. digital dollar. He linked in that email to a post from former white combinator head, an open AI CEO, and World Coin Guys, Sam Altman, where Altman argued that the U.S. government couldn't stop crypto but could, quote, create the winner. Kushner seemed disposed to the idea of a business.

Starting point is 00:08:02 central bank digital currency, saying, quote, my sense is it could make sense and also be something that could ultimately change the way we pay out entitlements, as well as saving us a ton in waste fraud and also in transaction costs. Kushner obviously was ahead of his time on this one, given how big a deal CBDCs would become the following year, especially in the wake of COVID-19. In October of 2020, the Ukraine government asked the Treasury for help when U.S. exchanges stopped servicing Ukrainians.

Starting point is 00:08:29 They got no response, but Bill Hughes, a lawyer at consensus in former deputies, Department of Justice lawyer tweeted, I suspect one of the most interesting parts of the story will be the most overlooked, and that's Ukraine complaining about U.S. exchanges bailing on it because concerns they would violate sanctions imposed on Crimea. This dynamic persists. The other interesting moment was in the last months of Mnuchin's role when he was trying to put strict new rules around crypto wallets. Now, the timing of this was rushed. The rules would have required exchanges to collect a ton of info, and it would have undermined people's privacy around their own wallets. In these documents we get a view of the arguments from legal counsel that fled it into Mnuchin.

Starting point is 00:09:06 The Blockchain Association retained outside counsel, and Kirkland and Ellis lawyer Paul Clement, wrote a letter to Mnuchin saying, quote, the notion that stakeholders could meaningfully engage with a rule that touches on more than 24 separate subjects in such a highly truncated period would be doubtful even in the ordinary course. Thus, what purports to be a reporting requirement may well operate as a de facto ban. What makes this interesting to me is that it was an early inflection point for the blockchain lobby. That lobby has grown stronger as the need has grown stronger over the course of the last year. Certainly it was strengthened, for example, by the fight around the infrastructure bill.

Starting point is 00:09:41 But this was a real warning shot when this happened. We've had many more since and we'll have many more in the months and years to come. Speaking of the regulatory world, the U.S. House and Senate Agriculture Committee has sent a letter to the chair of the CFTC requesting more info on digital asset marketplaces. The letter gets into the CFTC's history with crypto, including its thinking around Ether and BTC as commodities. It reiterates the CFTC's power to bring enforcement actions against digital asset marketplaces through the Commodity Exchange Act. It details specific risks, such as arguing that there has been an uptick in losses from scams and also highlighting defy as a risk. The letter says, there are still questions around who is responsible for monitoring

Starting point is 00:10:21 DFI markets for fraud and manipulation, safeguarding customer funds, and ensuring parties meet their obligation to one another. We're also concerned about any DFI protocols offering derivatives contracts on unregistered exchanges, the subject of a recent CFTC enforcement action. From there, the letter lays out eight questions to help Congress understand how they can better address these questions and more. The official Twitter handle of the Agriculture Committee followed up, saying, more Americans are trading digital assets, but there's still a lot we don't know about the risks. We are calling on CFTC to help us further understand the benefits and risks presented by digital asset markets and related emerging technologies. The take that I liked best about this came from Jake Chivinsky, the head of policy at the Blockchain Association.

Starting point is 00:11:01 He wrote, the CFTC has always taken a thoughtful and constructive approach to crypto, rightly acknowledging its benefits while honestly assessing its risks, and above all making sure the industry and technology can flourish in the USA. It's great to see Senate Democrats asking the CFTC to lead. Now, another member of the Blockchain Association, David Grimaldi, the head of government relations, also tweeted about a different congressional action around crypto as well. Grimaldi tweets, breaking, the interest in all things crypto and blockchain is stretching across Congress and will no longer reside solely in the congressional committees that exist to oversee the financial industry. Moments ago, the Energy Commerce Committee announced a mining hearing for 120.

Starting point is 00:11:38 Entitled, cleaning up cryptocurrency, the energy impacts of blockchains, the E&C committee's Subcommittee on Oversight and Investigations plans to explore the impact of crypto mining on power grids, the ability of miners to utilize solar, wind, and other alternative sources of energy. There is a strong likelihood that this hearing will be as civil and probative as the FSC Dems hearing, which is mostly memorable for its lack of drama, bomb-throwing crypto fear and demagoguing. The subcommittee wants to hear the as-yet-unounced witnesses discuss energy consumption, how to moderate energy use in times of crisis, e.g. deep-freeze temperatures,

Starting point is 00:12:09 how hydropower can be moderated during droughts and more. witness list to come. The increased interest in crypto from Congress committees is here to stay. So not everyone, I will say, shares Grimaldi's confidence that this is going to be civil and probative. Many are concerned that this is going to be a big chance for grandstanding and flamethrowing and demagoguery, exactly the things that he said it won't be. I think our first indication of that will be who is actually on the witness list. But I will say it's hard for me to imagine any scenario in which having a case, hearing, especially a hearing that allows Congresspeople to hear directly from the industry itself, doesn't do more to dispel notions around energy that are largely thrown around in the media

Starting point is 00:12:51 and in the popular consciousness, then make them worse. Knowledge, education, information, the chance to discuss, even if it comes with the side of demagoguery is better than the alternative. Finally, let's move over to markets to wrap up. First of all, there has been a general rally. I discussed a little bit yesterday that risk assets had been coming back since Powell softened his stance on quantitative tightening. However, there's another interesting dimension of the story, which is China, from Reuters. Chinese shares rose on Wednesday as slower than expected December producer inflation made room for more monetary easing in the world's second largest economy, with new energy vehicle makers advancing on data showing strong sales momentum. Basically, the idea

Starting point is 00:13:35 here is that China is seeing inflation numbers come in lower than expectations, exactly what we're looking for in the U.S., and because of that, they've been empowered to keep monetary policy really easy. Lin-Alden, of course, is on this saying, while everyone is focusing on what the U.S. is doing, China is starting to stimulate a bit after a tight 2021, setting up a potential west-to-east theme for 2022 in terms of equity performance. This is something I'm going to keep an eye on so we can dig into more. Meanwhile, let's close with comparative hedge fund performance between traditional finance and the crypto industry. Remember how we were recently talking about how only three of the major hedge funds beat the S&P 500 index in the last year, how do you think crypto funds performed?

Starting point is 00:14:15 While traditional hedge funds returned on average 10% last year, a lot less than the S&P 500's 26%. According to numbers from the firm hedge fund research, crypto hedge funds returned on average last year 214%. That's the second best performance after 2017 since the firm started tracking in 2015. What's more, it's not just a matter of these funds having strong beta to the industry, although that's a part of it. Bitcoin returned 48.5% last year. The Bloomberg Galaxy Crypto Index meant to track the industry as a whole, posted a 153.39% return, and T-CAP, which is a crypto that leverages oracles to track the entire market, gained 185%. The hedge funds beat all those numbers. That said, there were lots of buy-in-holds that did beat the funds as well, ETH, for example, having a

Starting point is 00:15:01 400% return year. Now, of course, some of this is just market immaturity. Jeff Dorman from Arca says traditional finance hedge fund portfolios look very similar and passive indexes largely outperform active management in today's picked over market. Contrast that to digital assets, and there really isn't much competition at all yet. Still, you got to think it's pretty good to see that performance. There's a lot more happening this week. I'm excited to bring you more in future episodes. I want to say thank you again to my sponsors, nexo.io, Abra, and FTX. And thanks to you guys for hanging out. Until tomorrow, be safe and take care of each other. Peace.

The Breakdown - Meet the Bitcoin Legal Defense Fund

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