The Breakdown - OCC: ‘No Contagion’ Post-Terra Collapse

Starting point is 00:00:00 He said that he has come to see crypto's potential and understand why there is excitement around it, but still thinks there are some challenges, including a highly fragmented system that has features like cross-chain bridges that can be prone to attacks, and also argued that some of the rules for custody and ownership rights are underdeveloped relative to how big the industry has become. Honestly, if that sort of dispassionate fact-based approach is what all the agencies brought to this party, I think we'd be in a good place. 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.

Starting point is 00:00:37 The breakdown is sponsored by nexo.io, near an FtX, and produced and distributed by CoinDesk. What's going on, guys? It is Wednesday, May 25th, and today we are talking about, well, all sorts of things. From regulations to new funds to a change of the guard in the stable coin space. 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 dig deeper into the conversation, come join us at 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. And finally, if you have not bought your tickets yet, I highly recommend

Starting point is 00:01:22 you check out CoinDesks Consensus 2020. It's happening in all. Austin, Texas, between June 9th and June 12th, and the thing that makes it different is it's got such a wide array of topics from within this crypto ecosystem. If you are interested in the sort of big picture power shift side of crypto that we talk about so much here, you won't want to miss speakers like Congressman Patrick McHenry or Senator Kirstenjilibrand. If you are interested in going, use code breakdown to get 15% off your pass at coindesk.com slash consensus 2022. So it has been another bare market newsday, but one of the things that I've been watching closely is how regulators are likely to view the Terra collapse, and more specifically, if and how it changes the way

Starting point is 00:02:08 that they look at the industry for the worse. On that front, acting comptroller of the currency, Michael Sue, spoke at the DC Blockchain Summit earlier this week. He noted that although half a trillion in market cap had been lost in the crypto space around the UST depegging, quote, there has been no contagion from cryptocurrencies to traditional banking and finance. We are starting off positively. That said, he's really talking more about the resilience of the existing system than the crypto industry. He went on, the resilience of the traditional banking system to the recent events in crypto is not an accident. Rather, it is due, at least in part, to federal bank regulators continued and intentional emphasis on safety and soundness and consumer protection. And in fact,

Starting point is 00:02:53 he had some not so nice things to say about crypto. Quote, the industry has grown too fast and suffers from a hype-based shoot-ready aim approach to innovation and value creation. The recent events in crypto should serve as a wake-up call and an opportunity to reset and recalibrate the problems the industry is trying to solve. Now, Sue came into this role after predecessor Brian Brooks. Brian Brooks had previously been the general counsel at Coinbase and was extremely pro-crypto using his very short window in office to put out a number of interpretive letters which expanded the way that stable coin issuers in particular could interact with the banking system. Sue, for his part, wasn't particularly pro or anti-crypto, but came in at least as something of a skeptic by his own

Starting point is 00:03:35 admission. What's more, by simple virtue of the fact that he wasn't Brooks, he was inevitably going to be less pro-crypto than the previous comptroller. He pumped the brakes on many of Brooks' rulemaking, including an interpretive letter last year, which, quote, warned national banks that crypto activities are only permitted with compliance to applicable consumer protection laws. That said, skeptical starting point or not, Sue has done work to try to understand this space. In the same speech, he said that he has come to see crypto's potential and understand why there is excitement around it, but still thinks there are some challenges, including a highly fragmented system that has features like cross-chain bridges that can be prone to attacks, and also

Starting point is 00:04:12 argued that some of the rules for custody and ownership rights are underdeveloped relative to how big the industry has become. Overall, the industry was pretty pleased. SBF called it a well-calibrated and reasonable approach from the OCC. Indeed, honestly, if that sort of dispassionate fact-based approach is what all the agencies brought to this party, I think we'd be in a good place. On that, there seems to be some room for optimism as well. The Chamber of Digital Commerce's DC Blockchain Summit was where Sue spoke, and it was the first time since 2020 that the summit was in person. Last time it happened, there was only one member of Congress, Representative Tom Emmer who spoke. This time, there were three members of the House and four senators, including Corey Booker, Steve Danes, and Kirsten Gillibrand.

Starting point is 00:04:57 McKenzie Sigalos of CNBC sat down with Corey Booker at the event, and he said, I hear a lot of patronizing things about this crypto space, and I'm with the people on the real concerns, but I'm tired of people not seeing the potential and value and genius. He went on to say that one of the most compelling use cases in his estimation is disintermediation of financial institutions, including check cashing, remittances, and swipe fees. And if you're wondering whether some of this shift in tone from regulators is making a practical difference, Rob Massey, who's a partner at Deloitte's tax service said, for the first couple of years, I think we were careful about highlighting externally that

Starting point is 00:05:30 we were engaged in crypto. And now, with the executive branch talking respectfully about blockchain and crypto, I think as more regulators engaged thoughtfully and in a balanced tone, it's easier for us. Still, if Terra hasn't yet raised its head in the regulatory discussion in the U.S., it is certainly doing so in South Korea, where Terraform Labs was incorporated in 2018. On top of it just being a Korean company, there were a ton of Korean retail investors. The Financial Intelligence Unit of the country's Financial Service Commission put the number of Luna holders in Korea at 100,000 before the collapse, with another 80 to 180,000 racing in the

Starting point is 00:06:06 10 days after U.S.T. lost its peg, which is pretty wild. The FIU called the collapse a vortex of death, and so far they're just in the investigation stage. That said, South Korean police have requested that exchanges in Korea freeze the assets of the Luna Foundation Guard, with the goal to be able to investigate embezzlement of funds or any other fraudulent behavior. A piece from the IB Times says South Korean authorities are determined to get to the bottom of Terra's crash, including involvement of Terraform Labs and its CEO and founder, Doe Kwan. To prove its commitment, authorities handed over the investigation to the Grim Reaper's, the South Korean Special Investigative and Prosecutorial Team. Lots of folks on Twitter

Starting point is 00:06:46 are calling for and or saying that Do Kwan will get prosecuted on criminal charges, but so far, that is hearsay and speculation. Looking for ways to step up your crypto game? Then go with NXO. For starters, you get free crypto for each purchase or swap. How about earning guaranteed yields? up to 17% paid out daily. Ideal for you hardcore hodlers. You don't even need to sell. Instead, borrow instant cash against your assets. Get the most out of your crypto with NXO at nexo.io.

Starting point is 00:07:22 That's N-E-X-O.io. This episode is brought to you by NIR, a climate-neutral, high-speed, and low-transaction fee, layer-one blockchain platform. NIR is a blockchain for a world reimagined. Through simple, secure, and scalable technology, NIR empowers millions to invent and explore new experiences. Business, creativity, and community are being reimagined for a more sustainable and inclusive future. Reimagined your world today at NIR.org.

Starting point is 00:07:56 The breakdown is sponsored by FTXUS. FTXUS 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 FTCS app today and use referral code breakdown to support the show. One more interesting fallout from the Terra situation, there has been something of a changing of the guard in the stablecoin space.

Starting point is 00:08:41 Coin metrics recently released data showing that stable coin whales, i.e. addresses that hold more than a million dollars in either USDC or USDT, had recently shown a shift in preference. Before the collapse of UST, there were around 3,500 USDT-Eth addresses with a million dollars or more, and about 3,000 that held that much in USDC. Today, that has almost exactly flipped. Tether is still bigger overall, but the trend line has been clear at least post-crash. Tether is over 10% down in terms of supply while USDC is 7% up. This is also good news in terms of those $10 billion of redemptions. I mentioned how one of the things that's nice about the crypto ecosystem is that money tends to stay parked in these stable coins during bad times. That makes it easy to move to trading venues

Starting point is 00:09:27 like exchanges when things get better again, i.e., people don't really leave the space. With a huge amount of tether redemptions, the question was, were those people exiting the space entirely, or were they moving to other perceived safer stable coins? It seems more to have been the latter. That said, Kyle Waters from Coinmetrics pointed out that it might have been short-term arbitrage opportunities as much as it was derisking. He said, this likely reflects the fact that only large holders are generally privileged to redeem USDT and mint new USDC to capture an arbitrage. But it also might be the case that some large accounts are derisking their holdings, turning to the perceived assurances of USDA's monthly attestations and full reserve backing.

Starting point is 00:10:06 The other big topic that I wanted to touch on today was something that we've been discussing a lot, which is the continued fundraising of big venture funds that could serve as a counterweight or a countercyclical force to the Bitcoin and crypto-bair markets. Now, it's important to note that fundraising is a fairly lagging indicator of where the market sentiment is, as the funding process can start months before venture rounds are completed. What's more, venturing things are a 10-year-plus business, so inherently have some greater immunity to short-term market fluctuations. Still, venture capital that exists can be deployed during bare markets, and the reason that matters is that it can be used to build new products, services, and infrastructure that get

Starting point is 00:10:45 people excited to drive back in. With that in mind, standard crypto has raised a $500 million fund. Like so many other crypto funds, these are ex-Web2 investors from benchmark and lightspeed, who first got started in 2019 and had some early positions in biggies like Yuga Labs and OpenC. The fund had initially gone out to raise $150 million and clearly more than 3xed that. Another funding announcement came from Suna Amaz's Volt Capital. Their second fund is a $50 million fund, and in announcing it, Suna wrote, we're at a key moment in crypto. Product categories are evolving at lightning speed, entrepreneurial talent is flooding the market, and a strong foundation has been built for the next generation of companies and protocols to scale. This is a phenomenal

Starting point is 00:11:27 time to be doubling down. Rather than play the long game and rely on fundamentals, we see fairweather players without the technical chops to understand their investments, watch the market drop, give in to their fears and jump ship. Though we may be entering a market winter, we are very much in a builder spring. Some are worried we're headed into a bare market as bad as late 2017 and 2019, when OpenC, Uniswap, and FTX were founded. As we've seen time and time again, crypto pushes forward regardless of financial markets. Mercenary founders move on to new shiny things, and missionary founders remain to build steadily over time. The latter are the founders we choose to back. Congrats to Suna on that raise.

Starting point is 00:12:04 Still, the one that is dominating the attention today is A16Z's Crypto Fund 4. This has been in the works for a while, being reported in January, but it is now officially announced. It's a $4.5 billion fund with $1.5 billion set aside for seed investments and $3 billion for later stage investments. In their announcement post, they reiterated the importance that they put on this new industry. They write, since the advent of computing in the 1940s, there has been a major computing cycle every 10 to 15 years, including PCs in the 80s. the internet in the 90s, and mobile computing in the aughts. We believe blockchain will power the next major computing cycle, which we call crypto or Web3. They go on to list some of the categories that they're interested in, including Web3 games, Defy, Decentralized Social Media, Self-Sauverentity,

Starting point is 00:12:49 Layer 1 and Layer 2, Infrastructure, Bridges, Dow's, and Governance, NFT Communities, Privacy, creator monetization, regenerative finance, new applications of ZK proofs, decentralized content and story creation, and more. Now, previous funds of A16Zs have mentioned, BITs Whereas this one explicitly doesn't. And so as is fairly clear, these guys are really focused on what used to be called tech crypto, as opposed to money crypto. I see this less of an indictment of Bitcoin in their eyes and more of a sense of where they sit. These guys are some of the folks that created and funded Web2 models, the same Web2 models that they're now trying to upend. They're in a privileged position to see what has gone wrong and to be excited about things

Starting point is 00:13:29 that might change the paradigm. But of course, not everyone agrees with all of their investors. Yesterday, they invested in an on-chain carbon market startup that elicited some strong reaction on crypto Twitter for having Adam Newman from WeWork as a co-founder. One thing I think that is quite healthy that's happening is, in the wake of Terra especially, a lot of the enfranchised crypto community is asking about venture incentives and alignment, whether it even makes sense as the model for financing protocols and projects that are supposed to be eventually decentralized. These are really important conversations to have.

Starting point is 00:14:01 Web 3 doesn't have to inherit Web 2's venture model a priori. It's also important to have these kind of conversations in the context of support for folks like Adam Newman, who has a history of dubious financial behavior, let's say. But as it happens, the bigs are going to keep throwing their weight around. Zach Vol pretty well summed it up when he said Web 3, more like Web 16Z. Now, there continues to be debate about the macro and how deep into a bare market we are and when it might come back, and ultimately a lot of that is unknown. What is clear, though, is that there is going to continue to be a ton of investment capital flowing into this space to create something. What it

Starting point is 00:14:42 creates will be largely up to the people who stick around. For now, I want to say thanks again to my sponsors, nexus.io, near and FTX. And thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace. Hey, Breakdown listeners, come join CoinDesk's Consensus 2020, the festival for the decentralized world this June 9th through the 12th in Austin, Texas. This is the only festival showcasing and celebrating all sides of blockchain, crypto ecosystems, Web 3, and the Metaverse, and is designed for crypto newbies, investors, entrepreneurs, developers, and creators. Use code Breakdown to get 15% off your pass at CoinDesk.com

Starting point is 00:15:27 Consensus 2020.

The Breakdown - OCC: ‘No Contagion’ Post-Terra Collapse

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