The Breakdown - Post-Narrative Institutionalization vs. Regulatory Enforcement

Starting point is 00:00:00 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 nexo.io, Circle, and FtX, and produced and distributed by CoinDesk. What's going on, guys? It is Wednesday, October 12th, and today we are talking about post-narrative institutionalization, the SEC going after apes, so much going on. I can't wait. But before we dive in all that, a quick note. There are two ways to listen to the breakdown. You can hear us on the Coin Desk Podcast Network, which comes out every afternoon and features other great Coin Desk shows in addition to the breakdown, or you can listen on the breakdown-only feed, which comes out a few hours

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Starting point is 00:01:30 slash ideas. All right, folks, well, listen, I have been planning on doing a crypto catch-up, but good Lord, was there a flurry of news yesterday? Let's start with the good stuff, adoption and the latest in post-narrative institutionalization. The world's largest asset custodian and the oldest bank in the U.S., the Bank of New York Mellon, or BNY Mellon, has added crypto to its custody services. This according to a press release on Tuesday. Select clients are now able to custody Bitcoin and Ethereum with the bank. CEO Robin Vince said, quote, we are excited to help drive the financial industry forward as we begin the next chapter in our innovation journey. The move comes after the results of a survey from the bank revealed that 91% of

Starting point is 00:02:10 its institutional customers were interested in investing in tokenized products and that 41% already held crypto investments in their portfolios. Carolyn Butler, the CEO of custody services, said, quote, as the world's largest custodian, BNY Mellon is the natural provider to create a safe and secure digital asset custody platform for institutional clients. We will continue to innovate, embrace new technology and work closely with clients to address their evolving needs. Now, if you've been paying attention at all, this is right in line with what we've been seeing throughout this bear market. Institutions are not abandoning the crypto space. In fact, they are taking advantage of this quieter period to get their infrastructure up and running for what they seem to believe will be an inevitable

Starting point is 00:02:49 return. They're not doing it for headlines. They're doing it for practical business purposes, and that's what I mean when I say post-narrative institutionalization. David Marcus said, congrats to BNY Mellon for this important milestone. It's truly great to see such a respected institution lean into the future in such a way. Alex Gladstein jokingly said the bank that Alexander Hamilton founded will now help its customers hold Bitcoin. Jefferson's ultimate revenge, question mark. However, there's one interesting little wrinkle in this story. Speaking at DC FinTech Week, Custodia Bank CEO, Caitlin Long, hit out at the Federal Reserve for preferential treatment of BNY Mellon. Custodia is currently suing the Fed for

Starting point is 00:03:26 unduly delaying their application for access to a Federal Reserve. Master Account. Caitlin Long noted that BNY Mellon is regulated by the Federal Reserve and now has entered into the crypto custody space. Quote, we've been waiting for two and a half years to do that. Long said this move by Mellon begs the question of, quote, whether crypto truly is risky within the traditional banking system. Custodia will be adding a filing to their lawsuit addressing what they see as further evidence of preferential treatment by regulators. Tony Edward, the host of the Thinking Crypto podcast said, incumbents are fighting hard, my friends, not to kill crypto, but to slow it down. The banking cartel won't let crypto startups front-run them. They block Caitlin's

Starting point is 00:04:01 application in Greenlight B&Y Mellon. SEC stopped Coinbase lending and uses enforcement. See what is happening? Jesse Powell, the former CEO at Cracken, says absolutely infuriating and unjustifiable treatment. It's risky, except when your homies want to do it. Godspeed, Caitlin Long. Preston Pish says, it's insane. The system is so corrupted. Luckily, on the other side of this, people like Caitlin and many others like her are going to be the ones holding all of the monetary units, and they will construct a world that's drastically different than the one we see today. Her damages in Bitcoin terms are unrecoverable from what was contrived against her in the company. So perhaps this is exciting news in the sense of it showing the inevitability and the continued institutional

Starting point is 00:04:41 infiltration of crypto into the Tradfi space, but also the risk of how it finds its way there. The next story is sort of related to this post-narrative institutionalization idea, although it's focused on Web 1.0 adoption. Google has partnered with Coinbase to accept crypto payments for cloud services from select customers starting with crypto projects. At the announcement during Google Cloud's next conference on Tuesday, Thomas Curie and the CEO of Google Cloud said, quote, we want to make building in Web3 faster and easier, and this partnership with Coinbase helps developers get one step closer to that goal. Now, Google has been making some small nods to the crypto space recently.

Starting point is 00:05:15 They provided a countdown clock to the Ethereum merge at the top of search results, and this week they made Ethereum addresses searchable in their search engine. The partnership will start with payments, but extend to cross-compatibility between the two company's infrastructure offerings allowing crypto developers access to Google services for Web3 projects. They'll also look to Coinbase for custody. Brian Armstrong tweeted, excited to share that Google Cloud has selected Coinbase to expand their crypto offerings. Today, I presented at Google Cloud Next to introduce Coinbase's integration with Google Cloud. Google Cloud will begin using Coinbase Cloud's node service to make BigQuery crypto data sets available to Web3 developers,

Starting point is 00:05:49 Coinbase Commerce to enable crypto payments for select Google Cloud customers, and Coinbase institutional for custody. This is just the beginning. I expect we will continue to see big tech companies embrace and help build the future of Web 3. Preston Byrne, a partner at Brown Rudnick said, Google and Coinbase announced strategic partnership. B&Y Mellon starts custody services. The next wave is going to be absolutely huge. Honestly, this lull and excitement feels like 2015, except the space has been growing exponentially in the meantime and is likely to continue to do so. I haven't been doing a lot of crypto tweeting lately, A, law firm move has occupied a lot of bandwidth, and B, the macro situation is potentially as bad as I've ever seen it, maybe even worse than

Starting point is 00:06:26 2007, and this has been enormously distracting. But the amount of growth in this space is just insane. Even lesser known protocols ranked 100th or lesser market cap terms have dozens of companies building on them. Protocols nobody has ever heard of have more full nodes than behemots like Dogecoin. A dev looking to get into crypto in 2024 will have more options for starting a business within a single protocol ecosystem than you would have had in all of crypto all protocols combined in 2014. Then there's this. Adoption is crossing. a critical point where crypto is filling gaps that legacy finance can't or won't. With de-globalization fully underway, there will be more gaps only crypto can bridge. I think Preston's tweets there

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Starting point is 00:07:53 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 FTCX, you pay no gas fees. Download the FTX app today and use Referral Code Breakdown to support the show. Speaking of the bear market, it wouldn't be a day in 2022 without something involving the SEC, right? In an unsurprising, complete non-twist, Wisdom Tree has had its spot Bitcoin ETF rejected by the SEC. It was rejected on the grounds of not enough investor protection, and this is the company's second attempt at registering a spot Bitcoin ETF, having previously been rejected in December of last year. And the more interesting thing on this topic is that Grayscale has filed its opening brief in its lawsuit against the SEC over rejection of its application for a spot Bitcoin ETF.

Starting point is 00:08:53 The filing claims that refusal to approve the conversion of the Grayscale Trust to an ETSA, harms the 850,000 investors who already owned shares in it. Quote, given that the commission did not approve the trust to trade as an ETP on the exchange, the value of its shares cannot closely track the value of the trust's underlying Bitcoin assets, depriving trust shareholders of billions of dollars in value. Grayscale's legal argument focuses on the SEC's uneven application of the law in approving futures-based ETFs, but refusal of spot ETFs. Grayscale Chief Legal Officer Craig Somm explained that it is a distinction without a difference

Starting point is 00:09:24 in the context of Bitcoin, because, quote, CME Bitcoin futures themselves are priced under the spot Bitcoin market. He also noted that the Administrative Procedure Act and Exchange Act require rules and regulations to be applied without favoritism for one type of product or another. The filing argues that the SEC applied special harshness based on the SEC's opinion about Bitcoin's merits as compared to other types of investments and ultimately called the decision to reject Grayscale's application, quote, arbitrary, capricious, and discriminatory. The SEC is due to file its response on November 9th. In a thread about the filing, Grayscale wrote,

Starting point is 00:09:55 the SEC's decision back in June was disappointing, but we were prepared for all possible outcomes. That same night, we took action. We've now reached the next milestone in the legal process. Our opening brief is the first substantive document submitted to the court that explains the legal basis for our arguments. These include. We believe the SEC arbitrarily treats spot Bitcoin ETFs differently from ETFs that hold Bitcoin futures, even though they carry the same protections and deriving their price from the same underlying Bitcoin markets. The SEC's application of its significant market test is deeply flawed. because it doesn't achieve the intended effect of protecting investors against potential fraud

Starting point is 00:10:29 and manipulation in the underlying Bitcoin markets. Nor has the SEC adequately explained why their test should be considered the only valid test, let alone why it's applied stringently for spot Bitcoin ETFs, but leniently for futures. Our legal team argues that there is only one reasonable conclusion to draw, that the SEC is arbitrarily treating spot Bitcoin ETFs with special harshness, inconsistently and unfairly compared to other types of investment vehicles without adequate justification. So yes, if you are wondering if now is the time, to get the popcorn and watch that case, it is. Still, somehow this wasn't the biggest news involving

Starting point is 00:11:01 the SEC. As per Bloomberg reporting, the SEC is conducting a probe into Yuga Labs, the creator of the BoardApe Yacht Club, to determine whether they violated securities laws. The key issue, according to Bloomberg's unnamed source, is whether some BoardAped NFTs are closer to stocks than collectibles, and therefore are required to follow SEC disclosure rules. The SEC has apparently been looking into this legal question since March. The probe is also reportedly concerned with the distribution of ape coin, the BordApe governance and utility token, which had 15% of supply airdrop to NFT holders with the rest distributed to insiders, donated, or held in the community treasury. A spokesperson for Yuga Labs said, quote, it's well known that policymakers and regulators have sought to

Starting point is 00:11:41 learn more about the novel world of Web3. We hope to partner with the rest of the industry and regulators to define and shape the burgeoning ecosystem. As a leader in this space, Yuga is committed to fully cooperating with any inquiries along the web. At the time of the token release, it was noted that Yuga had gone to great lengths in press materials to separate out Apecoin from the NFT collections, presumably because club-style NFTs that deliver long-term benefits to members in the form of financial assets can look a lot like investment contracts. During the sale of Metaverse land, Yuga went one step further, ensuring that offshore partner was the entity technically offering the land-deed NFTs for sale, thus attempting to avoid

Starting point is 00:12:14 U.S. jurisdiction. Now, it's important to remember that an SEC probe doesn't necessarily mean that charges will be filed or that any enforcement actions will be taken. Faroke wrote, Yuga Labs, the group behind BoredApes, NFTs, and ApeC is being investigated by the SEC. This was expected, to be honest. They are one of the biggest companies to come out of the space

Starting point is 00:12:31 and did a $4 billion raise on top of launching a token. It does make a solid headline, though. George Grant writes, here's what could happen with the SEC investigation on Board Ape Yacht Club. One, Yuga gets a fine, pays it, we moon. Two, Yuga is cleared of wrongdoing. We moon. You're welcome. Jimmy.Eath, the co-founder of the Gallery of Digital Assets,

Starting point is 00:12:50 in my opinion, the SEC probe of Yuga is a necessary step in the overall adoption of NFTs and Web3. I expect their brand to come out of this stronger once this business wraps up. Mel, Be Like Water 893, says, I think this is really off. This is a play to bypass the proper clear and fair path for regulation by making it regulation through enforcement, and it's not good for any legitimate builder in the space. Marissa Toshman-Coppel, a policy council at Blockchain Association, seems to agree, saying, the SEC's jurisdictional line may expand yet again by examining whether Apecoin given to at BAYC NFT holders is a security. As the number of years since the SEC issued guidance grows,

Starting point is 00:13:25 so does the number of enforcement actions. Doesn't make sense for a regulator. Steve at NFT bark says whether we like it or not, regulation is coming to Web3. Court cases like RR versus BAYC, BALAAPR, and OS Insider Trading, will help shape what these assets are. The SEC investigation will help to find them. It's inevitable and it's an important part of the growth of Web3. And then finally there was this great quote from MilkBags who said, to a friend who has some pull at the SEC. He says that Gary Gensor's son lost seven apes, and now this is personal. A reasonable question, as so much discussion around regulation and regulation by enforcement is happening, is how these sort of things actually shift what's going on in

Starting point is 00:14:05 crypto more broadly. The director of the Department of Justice's national crypto enforcement team, Yun Yong Choi, told the audience at DC FinTech Week on Tuesday that crypto mixers haven't necessarily slowed us down, her words. She explained that crypto crimes are much like other crimes where the DOJ has to trace funds and wait for them to move in order to track them back to a suspect. The DOJ is instead more worried about how crypto tools have made facilitating crime easier. Quote, we're really looking at the multiplier effect. So mixers, tumblers, and money laundering are important because they have a multiplier effect. They facilitate all sorts of criminal activities, different sorts.

Starting point is 00:14:39 By making sure that we are addressing that activity, we will hopefully lessen the impact of crypto crimes. She said that part of the DOJ's strategy is increasing coordination across law enforcement via the newly announced digital asset coordinator network. Quote, that's important for us just because there's so much work to be done. We need to make sure we have available resourcing and subject matter experts on the ground

Starting point is 00:14:58 and in the field in order to help their respective offices. The team is very focused on just building expertise. Choi also lauded recent seizures, saying we've had multiple rounds of successful, I think very successful public announcements relating to seizures of different cryptos, which I think most people would not necessarily have known we were able to do. Anyway, some of this is a little vague,

Starting point is 00:15:17 but it still shows you how this one department in the government looks at their little piece of the crypto pie. CFTC Chair Rosten Benham also spoke at DC FinTech Week and discussed the CFTC's recent action against Uki Dow. He said that the conduct of the Dow was, quote, so egregious and so obvious that the SEC had to pursue enforcement action. He also said that people getting involved with Dow should be aware that they are not immune from government attention. The CFTC had previously settled matters with B0X, the predecessor of Uki Dow, for offering illegal trading and lending services, but took the unprecedented move of suing the Dow for the same conduct. Benham said, quote, it was hardly decentralized. There were a few individuals who were very much at the center.

Starting point is 00:15:57 He also added that, quote, it was pretty clear that a few individuals were clearly trying to evade our rules and saying that the Dow was openly started in order to avoid regulators. Benham said that the CFTC would have been, quote, failing to do our job if we didn't bring this case. Now, as you're probably aware, the CFTC is in the middle of making its pitch to Congress and the industry to be assigned the role of head crypto regulator. The Uki-Dao case made some people pretty nervous about that, and it seems like Benham is trying to say, while you should understand in general that Daos don't insulate you from legal action, this particular Tao is hardly the paragon to be held up and defended. He also noted that there are going to be significant challenges in regulating crypto.

Starting point is 00:16:35 We're going to have to adapt, he said. There's no doubt about it. This technology is very different, It's very new, and all the agencies are going to have to adapt. So that is the view of crypto from where I sit. And in many ways, this could have been another episode titled A Completely Standard Day in the Crypto Bare Market of 2022. You have on the one hand, the continued development and nearing endgame of crypto regulation in the U.S., and then on the other hand, you have this infrastructural buildout that's happening quietly and all over the Tradfai space just waiting for the next Cryptoble

Starting point is 00:17:07 market. I don't think either of these two forces are likely to go away anytime soon. For now, I want to say thanks again to my sponsors, nexus.com, and FtX, and thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace.

The Breakdown - Post-Narrative Institutionalization vs. Regulatory Enforcement

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