The Breakdown - Regulatory clap back / Why co's should fund open source / N. Korea crypto

Episode Date: September 19, 2019

Major regulatory and law enforcement clap back as SEC targets ICOBox (who would have believed that a company named ICOBox wasn't completely above board?) and an early Ethereum advisor is arrested for extortion. Get your breath back after that one, then let's talk about, first, why for profit companies that owe their existing to open source protocols should support the development of those protocols, and second, another look at why cryptocurrency is an inherently political force, featuring North Korea creating a bitcoin-like currency for itself.  Watch: https://www.youtube.com/nathanielwhittemorecrypto

Welcome back to another Crypto Daily 3 at 3. What's going on, guys? It is Thursday, September 19th, and today we're going to talk about a couple actions of regulators and U.S. law enforcement clapping back on bad behavior in the crypto industry. Second, we're going to talk about the role and responsibility of companies in the crypto space. Should they be funding specifically open source contributions? what are their obligations to participate in this industry? So we're going to talk about that.

And then number three, we're going to talk about North Korea launching a crypto and companies looking at Argentina as a potential crypto zone. And basically just we're going to be coming back to this question of the political nature of cryptocurrencies and Bitcoin. But let's start with the regulators clapping back. So yesterday there are a couple different. stories in the news that reflected this theme. The first was that the SEC was charging ICO box with securities violations. So first of all, don't use an acronym that's popular at the moment and then stick box on it. I feel like that should be a finable offense all on its own. Second,

this is basically so right down the pike of kind of the scummy side of ICOs. So the quote here said from the complaint, defendants claim that ICO Box would be successful and the ICO's tokens valuable due to the efforts of ICO Box's management team who would curate potential digital asset projects and attract 100 plus clients per month as of the date of ICO Box's offering. ICO Box had yet to support a single token sale to completion. Basically, they're just laying out the how we test in such clear terms. Common enterprise, effort of someone else to create profit, promise of profits. So really clear right down the pike sort of regulation.

Catherine Wu summed it up. She said, this whole thing is so scummy. It really made me cringe to read the complaint. So much 2017-18 ICO flashbacks. Pro tip, please don't give your money to anyone who claims to be a vision director for a shitty ICO project and also multiple CEO positions of random unclear companies. I think the point that Catherine makes, which is really relevant, is that when things are too good to be true or they sound too good to be true, they are too. too good to be true. And there was a weird aberrational window in which this sort of thing could get

away with. It was really like six months-ish, maybe a little bit longer, but the core was a really short amount of time. And, you know, I would love if the crypto industry never goes through another phase like that. I can't imagine that it'll go through exactly the same thing because we'll find new ways to be weird. However, if it does, let's be better prepared next time to not try to ride the wave in quite the same way. But with that, let's move on. to the second, it's not even regulatory action, it's law enforcement action. So this comes from Mike Dutus. This story is bonkers. Even early Ethereum advisor, Stephen Nairoff, was charged with good old-fashioned mafia-style extortion of a cryptocurrency project. So this is kind of a crazy

story. So let's actually go back over to Catherine for a second. So she says, TLDR, Nehroff and his associate, as advisors to an ICO project, threatened to destroy that. project and the founders' children if they weren't paid an extra 10,000 Ethereum. That's 10,000 Ethereum, not $10,000 for those of you watching. Neirov's associates falsely claimed to be a former member of the United States military and a former government agent who had worked with the NSA, the FBI, and the CIA. And then it gets weirder. In the middle of the night, the defendant walked into the room where Jane Doe was sleeping

by herself. The defendant pulled up the lights, pulled up a chair to the bed where she was sleeping, and told her in Summon Substance that if Company One did not agree to his demands, which, among other things, included a demand for $10 million and a large amount of Company One tokens, then, quote, we will crush you by, among other things, driving down the price of Company One's tokens. At some point later that night, the defendant also entered the room. He told Jane Doe in Summon Substance that he would destroy her in Company One, but that he did not want to and asked Jane Doe if she wanted to, in Summon Substance, thrive or be destroyed.

shortly thereafter the two defendants demanded that company one provide them a purported 10,000 Ethereum, 10,000 eth loan. So this is just absolutely nuts. Meltem here says this is the best known secret in crypto for the last two years. So much more will come out. It's more court documents are filed. And, you know, Catherine makes the important point, as did J. Trevinsky elsewhere, that we live in a society where people are presumed innocent until proven guilty. So I don't want to get too much into the people themselves behind this. They'll have their day in court. But what I will say is that this type of behavior, right, we're involved in creating

what is potentially a disruptive, transformative, and immensely valuable to the world, new approach to money, to business, to networks, and that this type of activity to the extent that this is real and to the extent that this is true. which it certainly seems like the case is pretty laid out, can't be allowed to exist. We can't just recreate the same structures, right? When we talk about accidentally reintroducing centralization into these platforms, that's bad enough, right? We're fighting against that. We're fighting to allow people to engage trustlessly, permissionlessly, to not have to surrender undue data.

These are the things that we're fighting for day in and day out as we try to recreate a financial system that's more equitable, that's more open, that's more transparent. So then to layer on top of it, this sort of like just bulldozing, extortiony power, like it's going to happen. Let's not be naive. This sort of thing, anytime that you're introducing money, and guess what? The recreation of money has a lot of money involved. You're going to see this sort of stuff. But man, let's try as an industry to stamp it out as aggressively as we can.

So that's my little soapbox on that. Let's move into another area. for soapboxing, what the obligations of companies who are building on crypto should be. Okay, so Wells Fargo announced a couple days ago how they would be getting into the cryptocurrency industry. Basically, news came out that they were developing a dollar-link stable coin that will be as well as Fargo digital cash is the name. It'll be used as a pilot as an initial settlement layer across borders, yada, yada, yada. So this is kind of a similar thing we've seen before. Companies experimenting with a blockchain and a stable coin to facilitate cross-border

transactions in a more efficient, cost-effective, faster way. So we've seen this happen a lot, right? So this is JPM coin. There's lots and lots of versions of this that are happening. And this kind of what I wanted to say is that no knock on Wells Fargo, obviously. This is a battleground, right now we've talked about the trifurcation of crypto before how we're kind of dividing the world into the permissionless chains the permission corporate chains and the government you know surveillance money on the other hand and it's i think we should expect that you're going to see huge amounts of this type of effort but i do think that there's a meaningful question to me you know in this case they're building on you know kind of their own proprietary thing so it is what it is however there are a lot of

companies and for-profit companies that are building on top of permissionless chains and building on top of open source software. And there's an interesting question to me about what we believe the expectation should be on those companies for how they support the protocols that they're building on and the protocols that they're benefiting from because there isn't a company to hold rights that they have to pay access to. There isn't a company to demand X and Y, Z sort of tribute. It's really just about social pressure. And so what got me thinking about this is two things. First, I saw this tweet from Udi yesterday where he said, I'll probably get it blocked by half of my followers for this, but this is pretty cool. Whatever you think of Grin, it's evident that this is a true donation with

no strings attached, and I hope more exchanges commit to plans like these. Maybe for Bitcoin too, cough. So this is a Polonex tweeted out. We've made our seventh donation to the Grin general fund as part of our year-long commitment to support open source development of the Grin Mimble Wimble ecosystem. So basically, if you'll remember, Grin launched to much fanfare in January of this year. It was a purported fair launch, right? It was kind of the narrative peak of the idea of fair launch where there was no pre-mine, there was no pre-sale, everyone theoretically had an equal shot to get in. Now, there's a whole question about whether there's any such thing as a fair launch possible anymore because huge amounts of VC dollars went into specialized

mining operations for Grin. But a couple weeks after that fair launch, which had gotten so many people excited, there was an interesting moment in which one of the developers, who goes by Yeasplum, was having trouble fundraising. Basically, he wanted to go full-time. He was looking for $50,000 to support six months of full-time work on Grin. And he just put it to kind of a crowdsourcing platform in order to get that rather than, you know, it coming from there's no founder's reward or anything like that in the Grin, the way that Grin is mined and built. So after, I don't know, a week or two, he'd only raise something like $3,000. And so you contrast this with the tens of millions of dollars that estimatedly went into VC-backed mining operations for Grin and this total

lack of support for people building the fundamental protocol. And Ignotis Peveral, who's the, that's the, obviously the pseudonym for the guy who kind of initiated the Grin project, went to town and made a big stink about it and Yisplum ended up, Michael is his actual name, ended up getting funding. However, it remained or it left the larger question of what is the right way to fund open source development and open protocols that don't have a company behind them.

This has been a recurrent theme through the year. So you've seen obviously a lot of the effort around Dow so Mollick Dow and Meta Cartel has been one answer to this question. Those are basically funding Dows that are trying to support public infrastructure, you know, in their case on the Ethereum blockchain. But again, these are, that's an evolving solution set to this question of how open source software gets funded. So Poloniacs, I think in the wake of this of this grin hullabaloo, made this commitment to funding it kind of no strings attached for a while. And that's, I think, what Udi is referring to is really cool, is this idea that, you know, Polonex is a for-profit company that takes advantage of and is built on top of the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the, the.

world of, you know, permissionless chains. And it's reasonable, I think, to ask that type of company to be involved in supporting the health of the ecosystem. So that's a really interesting indicator. Now, there is one actor that I think is pretty exemplary like this in the Bitcoin ecosystem now, which all of you guys will know, is Square Crypto, right? So Square Crypto came about a couple months ago when basically Jack Dorsey, who has been a loud and vocal supporter of Bitcoin in particular, effectively said that they felt that it was important to be involved in supporting the development of the Bitcoin protocol and committed to it in a financial way, not just kind of a moral way, right, or a publicity type of way. And so they created Square Crypto, and the mandate of Square

crypto was to be this little squat team funding body, whatever it wanted to be in order to help Bitcoin. And so the hires that they've made, just a few hires so far, are, their mandate is to figure out what is best for Bitcoin, what they think is most important for Bitcoin, and to just do it, right? And it doesn't have to be about Square's bottom line. They're not held accountable to how it makes money for Square. And so recently at the Baltic Honey Badger, Hottle Hottled Hottles, Baltic Honey Badger of last weekend, I think, they announced that they were giving $100,000 to BTC Pay Server, and they wrote this really interesting thread about it. So let me go through some of the parts of the thread. They said, we're giving money, a bunch of money to BTC Pay Server, a product that

appears to be in direct competition with our mothership. It isn't. Here's why. Everyone benefits from open sourcing, often in ways that are intangible. And as Bitcoin's ubiquity increases, existing payment companies have to make a choice. Adapt or be left behind. Square got where it is by embracing and adapting to change. This isn't an investor and a competitor. It's an investment in the future, something that Square obviously has a stake in. So that's really, really good.

And they go on to talk specifically about why this company is such a powerful actor and why this sort of U.X gap that keeps open source back is a huge barrier that they're trying to break down. But this is a really powerful signal to the market that, they are committed to the health of the ecosystem as a whole and that they recognize that they the benefit that they're getting and they are getting a huge benefit cash app is now one of the biggest ways that people buy bitcoin it is a driver of revenue for cash app they understand that it is in their interest to make this ecosystem as healthy as they can and that the best way that their alignment is more than just short term in terms of you know every dollar having to be accountable to a

short-term objective. It's long-term in the health of Bitcoin. I think that that is an all-too-unique point of view from major companies right now, and I would really love for it to just become the norm that these very traditional in some ways for-profit companies that are built on top of the Bitcoin and the crypto ecosystem see as their obligation some amount of commitment to open-source funding. And I don't think that we have to be prescriptive about what that looks like. I don't think it has to be the same for every company. I don't think that there's minimums. in terms of the amount spent. I think it's about acknowledging the new type

of business ecosystem that we're playing in that has, it has to have a relationship between for-profit companies and non-company, non-profit, whatever you wanna call it, protocols. So I encourage all of us to be advocates for that point of view. Great way to do that is by supporting companies like Square Crypto, like Polonex, who are trying to innovate that and being loud about it, right? So with that, let's go on to number three.

So if you guys watched narrative watch this week, it was called Bitcoin is Political. And basically, I was talking about how in the wake of Libra and the explosion of interest in central bank digital currencies that has come from Libra and the questions about Bitcoin and just non-sovereign currencies that it has arisen, that Bitcoin is inherently a political force. And so I revisited this topic earlier this week because Naval tweeted out something really interesting. He said, crypto may be an industry that is more valuable with a small set of users that don't attract nation state attention than with a large set who do. And basically, this is a point that has come up frequently in the crypto community, which is that we continue in some ways to fly under the radar.

And part of the reason that we may have not seen this sort of incredible antagonistic response to Bitcoin from the U.S. government in particular, as we did. to Libra is that it doesn't raise their hackles. It doesn't seem threatening in the same way, right? Like the narrative that they're adopting is that it's a digital goal, this is an alternative store of value. And that doesn't compete with the dollar in the world stage. They're worried about Libra because Libra as a stable coin that has a basket of currencies seems to compete in a more direct way. It's meant to be a unit of account. It's meant to be a medium of exchange. And what's more, it is led ultimately, despite the protestations of the Libra Association, by a figure in Mark Zuckerberg,

who the government is extremely wary of based on his power, based on the power of two million, or sorry, two billion people around the world who use his products. And so, again, to me, what this has demonstrated over the last few months is that Bitcoin and cryptocurrencies more broadly are a political force. And my point in acknowledging this is to allow us to understand that that is simply the case and that it will, it has implications for what we do. It may have strategic implications for what we want to drive towards, the narratives that we want to tell, the stories we want to tell. So this brought up a lot of interesting questions. So I had a number of people push back and say, no, Bitcoin is apolitical. And so Vortex here, he says, the protocol itself,

is apolitical, what the end users project onto the protocol is another story. We had Elizabeth Hunker who said, BTC is apolitical. Don't be like libertarians and transhumanists who make adoption and experimentation way more difficult by insisting on value being contrarian more than they value being effective. And so I want to make sure that the point is really clear and then give a couple examples. Vortex actually even got this. He says, understand your point, though, that Bitcoin will shake the very foundations of the nation-state, which is very, very political. And that's exactly the point that I was trying to make. I think that by its existence, by creating an alternative for the first time in modern history

to this sovereign money paradigm, Bitcoin is inherently a political force. Simply by adding competition to the market for what the nature of money is, it is inherently a political force. And what's more, the way that people are adopting it and the way that different jurisdictions and polities around the world are adopting it, makes it a political force. So just a couple quick examples of that. One, a lot of people were tweeting about this yesterday. North Korea is planning a Bitcoin-like cryptocurrency to sidestep sanctions.

And this came in a report from Vice. And basically, like the Petro, the new crypto may be pegged to an asset within North Korea. Now we're in the phase of studying the goods that will give value to it. So this is, it's, it's the reference to the petrol, I think, is where a lot of people went in the first place, right? Venezuela created a petro-backed cryptocurrency that so far basically no one is used except through basically mandate of the government doing some shady things in Venezuela in terms of having pensioner accounts, have them switch from, excuse me, pesos to, to the petro dollar or whatever the, the, whatever it's called the petrotoken, rather. And so this is, I think it's hard to deny that this is a political act, right? They're trying to get around sanctions, to try to avoid sanctions.

That is a political force, right? And to the extent that the U.S. regulatory regime sees this sort of action and sees countries that are being sanctioned, use cryptocurrencies to go around sanctions, it becomes an even more political force. Now, I will say that there is at least some, I think it's better that they try to do this with their own, you know, kind of localized cryptocurrency, the North Korea buck or whatever it ends up being, then using Bitcoin to evade sanctions when it comes to where the U.S. points its ire. However, again, this to me reinforces this idea that this is political, right? The cryptocurrency is inherently political force. Let's talk about another one. So last week, it was all about France and Germany blocking Libra, but being open and interested

in their own cryptocurrencies, their own kind of blockchain projects. Well, that was reinforced this week. Germany Pasha's national policy to explore blockchain, but limit stable coins. So effectively, they want to dig into all the implications of blockchain, from money to also identity to voting or whatever, right? Like, they want to look at that full set of things. However, they've also been vocal about actually being interested in whether their own version of a digital currency makes sense.

However, they do not want the competition of private stable coins. They have been clear about that, right? And they are, yeah, so here's the quote. They said, in principle, there is a regulatory regime for stable coins in the European Union. At the European and international level, the federal government will work to ensure that stable coins do not become an alternative to state currencies. So they are inclusive of everything, not just Facebook's Libra.

They do not want a private stable coin competing for money in, Germany. Again, this is political. Like, this is a political act. It's about the power that the government has to print money. Crypto is political. Here's another one. We have Huobi expanding crypto exchange to Argentina amid peso devaluation. Obviously, I've talked about it a lot. The peso has been hammered over the last couple years. Argentina is, again, kind of a never-ending economic turmoil in some ways. And what has happened recently is that they have reinstituted currency controls. When the current president came to power, they got rid of currency controls that had been part of the province of the previous regime. And now they're back. There's limits to basically how much money

can be moved out of the Argentinian peso at any given time. And that's their way of trying to prevent peso flight effectively to the U.S. dollar or to something else. And what's happening is that people are starting, it seems, to use cryptocurrencies to work around these sort of currency controls. And you have an example here of an exchange that is basically taking advantage of that and trying to make it easier for Argentines to do that. Camille Russo pointed out that in Argentina, Dai is trading at 71.6 pesos while the US dollar rate is at 56. That's a huge premium to hold digital dollars.

tightening currency controls. So Argentina's dollar premiums, black market USD is at a 7% premium, Bitcoin is at a 12% premium, which is something we talked about last week, and Dye is at a 27% premium. So the point here is that a government, in this case Argentina, is trying to institute currency controls in order to limit the kind of free-falling value of its own currency. And what's happening is that the value of these alternative assets is rising compared to other parts of the world because of that. That is a political force. That is the definition of a political force. There's simply no way to get around it. So again, for me, the point of all of all of this is not that these protocols have like inherent politics, right? You don't need to be a libertarian. You don't even need to care

about Austrian economics. You don't need to have support any one type of person, candidate, belief system, whatever. And that's part of the beauty. the permissionless nature of a system means that you don't have to think anything like anyone else who's involved and you can still use that asset. That's not what I'm saying when I'm saying Bitcoin is political. What I'm saying is that this is this entire industry, this entire movement, this entire ecosystem, is a political force whether we recognize it or not. And I think it behooves us to recognize it and to understand the implications of our actions in that context,

to understand how regulators and governments, are going to perceive those actions, to perceive these new assets, to the extent that we want to be actually viable in the market and build these products into something that can be used in the mainstream, we have to understand the context that they're coming in, and that context is political. But anyways, very soapboxy today. Apologies, guys. But it is what it is. It's a fall Thursday, and I guess I'm thinking big. So anyways, thanks for listening. Thanks for watching, as always. And we'll be off tomorrow. I'm going to be down in New York. We're doing a little podcast. with Ryan Selkis over at Unqualified Opinions at Masari.

So watch for that. But otherwise, guys, I will see you on Monday for our next narrative watch. Peace.