The Breakdown - Regulatory smackdown, DeFi on Bitcoin, and Jack Dorsey’s protocol dreams

Episode Date: December 12, 2019

The last few days have seen significant regulatory action, from SEC charging Shopin’s CEO with fraud over a $42m ICO to a major coordinated federal action against a $722m crypto Ponzi scheme. Over in the world of decentralized finance, meanwhile, a new project aims to show DeFi isn’t just for Ethereum. Finally, Twitter is launching a Square Crypto-like skunkworks to support or create an open social media protocol. This and more on The Breakdown.

Welcome back to The Breakdown, an everyday analysis breaking down the most important stories in Bitcoin, Crypto, and Beyond with me, NLW. The Breakdown is distributed by CoinDesk. Welcome, welcome for the first time ever to The Breakdown. We're going to start with regulators and what's happening on the regulatory front. We're going to go into this question about defy on Bitcoin, which seems to be coming up more and more. and then third and finally we're going to get into Square's new Blue Sky Initiative. So in August of this year, Jake Chrivinsky, who's one of kind of the leading voices in the Crypto Legal Corps wrote on Twitter, eventually the vast majority of crypto-related lawsuits

will be common and unremarkable. Cases will be filed, litigated, and settled without much notice or fairfare. Fanfare. The fact that we're so interested in tracking these cases today shows how early we are and how far we have to go. I think that was kind of prophetic because just over the last 24-48 hours, we've seen a bunch of SEC enforcement action that kind of looks like that. In fact, Stephen Paley wrote, it was another legal expert in the crypto field. He wrote, the SEC's ICO enforcement work has quickly

become indistinguishable from other types of enforcement litigation. Crypto's novelty receives no special treatment like any other securities offering. You have to register, you can't make misstatements, and you can't misuse funds. So the case that they're talking about is the SEC charged Shoppin, the CEO of Shoppin, Iran Ayal, with basically securities fraud over their $42 million ICO. So CoinDesk writes, the SEC announced Wednesday that Ayal had been charged with defrauding investors by selling unregistered securities in the form of Shopping tokens, while Ayal was supposed to develop a platform which would store and track customer profiles

across different retailers. Shoppin never built out the system, the agency alleged. They also get into complaints around misuse of funds for personal use. But then this other one was really important. The complaint alleges that Ayal made at least four misrepresentations in marketing, including by claiming that Shoppin had successfully conducted a pair of pilot programs that the company had ongoing partnerships, and that an unnamed, quote, prominent Silicon Valley blockchain entrepreneur was an advisor to the company. So basically, this was kind of standard affairs in 2017, early 2018, right, where people would be like, we're partnering with ex-company, where really they were just part of the referral program, right? Or they would kind of say that they were being

advised by someone that, you know, at best they had just had a random coffee meeting with. So this was standard activity, but it was clear even then, even to the people who were interested in the possibilities of token, that that was just fraudulent, right? That it was trash. And that in fact that that was rotting the rest of the space for everyone who was trying to experiment with the idea of tokens as a mechanism to align incentives across networks to organize human labor in new ways, right? And all the things that tokens were supposed to be about, other than just a massive buglew for fundraising that you were never going to have to do anything with. So that was a, this has been kind of, it's big news in the sense that it's obviously that it shows that the SEC is cracking

down and that they have a long, long historical vision. And then they're not going to just kind of let these things go away. It's not big news in the sense that this is clearly a scammy effort, right? This is the type of thing that for those folks who are interested in the possibilities of tokens, they get incredibly frustrated about because it diminishes everything. Speaking of diminishing everything, the big news, I guess, in terms of regulatory action that's broken into mainstream news, this comes from the New York Times, five charged in New Jersey in $722 million cryptocurrency Ponzi scheme. Federal prosecutors said the defendants operated BitClub Network, a bogus investment scheme that they promoted as the most transparent company in the

world and almost too big to fail. The details almost don't matter. It's the same story of, basically they said that they were going to give people join a pool to share in the earnings from Bitcoin mining, in which people race to unlock new Bitcoin by solving complex algorithms, blah, blah, blah, blah, blah. And it was, again, just a great big Ponzi scheme, a clearly fraudulent activity. And this is the thing, I think this is so frustrating again for people who are actually legitimately interested in what crypto can be, whether it's Bitcoiners who just are focused on the idea of a digital gold or the idea of Bitcoin as an undemasible non-sovereign money, it's frustrating for people who believe that tokens have an interesting role to play. All of this

diminishes everything that everyone basically in this industry is trying to do. So, you know, the crappy thing about this is that, you know, my father-in-law sent me this headline this morning from the Wall Street Journal or whatever publication he was reading instead of the headline about how people are using Bitcoin in Argentina to evade capital controls, which I sometimes get from him, right? And it's like the narrative matters, right? We're kind of trying still to come out of this idea of this is all just scams and trash, and this stuff hurts.

However, I also kind of think it's part of the painful cleanup, and it's just a fact of life. So it's happening, it's worth keeping note of, but let's move on for now to an interesting topic around defy and Bitcoin. So CoinDest tweeted out this morning, Justin, the Bitcoin community may soon have its own version of Ethereum's flagship decentralized defy platform maker Dow. So the story is about a new startup called Money on Chain,

which is basically launching a defy platform built off of the side chain rootstock. So rootstock is a Bitcoin side chain. and in a lot of ways, money on chain is trying to mimic a lot about the Maker Foundation, right, in terms of using collateral to mint tokens that allow people to have access or exposure to, you know, dollar or fiat peg stable coins, but using Bitcoin as the collateral instead. And so there's a lot to unpack in here. I think there's a couple things that are interesting. One, let's just talk about the project itself first because I am actually personally really interested in this.

So root stock is based, I think, in Argentina and Buenos Aires, and money on chain is in the process of moving to Uruguay and converting to a nonprofit trust. And Uruguay is really interesting for a lot of reasons. The Latin American Bitcoin conference is happening there this week. I got married there, so it's got to be interesting. No, but seriously, Uruguay and Argentina are kind of fascinating case studies in some ways about how people might use cryptocurrencies and for what. And the argument of the folks behind this money on chain project is that this is basically a MakerDAO specifically for the Latin American community making a bet on Bitcoin and the long-term durability of the Bitcoin blockchain as opposed to Ethereum. Now, there's actually a meaningful community of MakerDAO staff who actually are based in Buenos Aires, including Mariano Conti, who's their head of oracles for a while and now just kind of does everything, who recently spoke about how he had avoided Argentine. hyper or not hyperinflation, but Argentinian inflation over the last few years by having his

salary paid entirely in first Bitcoin, then Ethereum, then Maker, and now multi-collateral die. So there's already an interesting defy community in Argentina. So it'll be interesting to see whether the Bitcoin version of this actually picks up steam in any way. Now, the debate about this or the conversation about this has been less about the merits and interest of kind of what they're going for as a project and more about the old holy war between Ethereum and Bitcoin. So Anthony Sassano says, will the Bitcoiners hate on RSK's version of MakerDAO, or is something only a bad idea when it's built on Ethereum? I think we all know the answer.

And this maybe comes out of a little bit of a debate that's been happening over the last few days where Blockstream effectively announced a token sale on their liquid network and had raised a bunch of money. And obviously, these are folks who have been extremely against and publicly and vehemently against, you know, Ethereum-based token sales. And so the question is, are tokens bad because of Ethereum or are tokens bad because they're bad? And I think that the question and the feeling of hypocrisy that the Ethereum folks are relating to is that it's not necessarily clear from the kind of conversation which of those it actually is. Now, for my part, I think that the most interesting thing to me is not kind of the Holy War

and the debates. It's actually about the state of Defy and what these efforts mean. You know, Defy was the narrative shift for the Ethereum community after the ICO boom, right? The energy and attention that had gone into tokenize the world, tokenize everything, started to find its way into, well, what about if we just focus on this idea of programmable money and what we can do with programmable money? And that's really where open finance came from in a lot of ways in decentralized finance. And then over the course of kind of the end of 2018, but in particularly 2019, that narrative really consolidated. It is now pretty unarguably at the very

core and center of the Ethereum community. Now, there are other things that people work on. Dow's seem poised for a big breakout next year in terms of just sheer amount of attention and energy on them. But this defy idea was, I mean, absolutely intrinsic. It's one of the narratives of 2019 for sure. And I would actually argue that I think it's so big and so full of possibility that it would be very surprising to me if it had stayed exclusive to the Ethereum community. There's nothing inherently Ethereum exclusive, let's say, about the idea of decentralized finance, about the idea of permissionless kind of programmable money and these sort of algorithms, based approaches to loans, collateral credit, et cetera.

You know, it was built on Ethereum because of the specificities of what that network can do and what that blockchain can do. But, you know, we have seen Tron, even at Consensus last year, try to claim some of the Defi title. And so it doesn't surprise me that Bitcoin, which is, you know, inherently so decentralized and has that as its principle is going to start to experiment with this. Now, people can debate whether that's a good thing or bad thing, but my point, I guess, is that the defy narrative is too big to be contained by any one chain.

I think that it could be wrong, it could be flawed, it could have a major systemic failure point coming, but as an idea, as a concept, as something that's getting people excited, and as a possibility set that changes things about how the world and money is organized, I can't imagine that it's going to stay just within the Ethereum community, and that will be really interesting to watch as other chains come into it, right? So that's number two for today, is this idea of defy on Bitcoin, but really just the ascendance of the defy narrative beyond where it began. But with that, let's move to our final topic for the day, which is, let's call it orthogonal to crypto. So Jack Dorsey is obviously kind of the probably the most popular CEO among Bitcoiners in particular, but just I think crypto in general, at least in terms of kind of the big tech CEOs.

And there's a bunch of reasons for that. One is that he's obviously had this stated commitment to Bitcoin that's come up a lot. But I think it's more than just a stated commitment. There's a reasoning why that is really powerful. And, you know, Jack has spoken eloquently about the reason that Twitter will never do a Libra type coin is that he believes that the internet native money has to come from an internet native protocol that's not the providence of any one tech platform right and that's to him is Bitcoin right that's why he's so interested in Bitcoin now Square crypto has obviously

been you know making headlines all throughout this year for being just effectively a skunk works that doesn't have to show direct benefit to Square to continue and is hiring really talented developers and marketers and designers and things like that to actually work on whatever they determine are the most important things to be working on in Bitcoin. So there's some precedent for this idea of a skunk works to do something different. So on December 11th, so that's yesterday, Twitter, this is from Jack, he writes, Twitter is funding a small independent team of up to five open source architects, engineers, and designers to develop an open and decentralized standard for social media. The goal is for Twitter to ultimately be a client of this standard. And he goes on, and I think this is worth reading a little bit more.

Twitter was so open early on that many saw its potential to be a decentralized Internet standard, like SMTP email protocol. For a variety of reasons all reasonable at the time, we took a different path and increasingly centralized Twitter. But a lot's changed over the years. First, we're facing entirely new challenges. Centralized solutions are struggling to meet. For instance, centralized enforcement of global policy to address abuse and misconduct. misleading information is unlikely to scale over the long term without placing far too much burden on people. Second, the value of social media is shifting away from content hosting and removal

and towards recommendation algorithms directing one's attention. Unfortunately, these algorithms are typically proprietary and one can't choose or build alternatives yet. Third, existing social media incentives frequently lead to attention being focused on content and conversation that sparks controversy and outrage rather than conversation which informs and promotes health. This is obviously, and now this is Nathaniel again cutting in, this is perhaps the central defining challenge of the social media business model as it relates to human society is the incentive on the one hand to promote the outrage that gets clicks and gets attention while on the other hand being good stewards of human conversation and human relationships.

This is back to Jack now. Finally, new technologies have emerged to make a decentralized approach more viable. Blockchain points to a series of decentralized. solutions for open and durable hosting, governance, and even monetization. Much work to be done, but the fundamentals are there. And he continues to go on. He relates it to Square Crypto. Square is doing exactly this for Bitcoin with Square Crypto. For social media, we'd like this team to either find an existing decentralized standard they can help move forward or failing that, create one from scratch. That's the only direction we at Twitter Inc will provide. Why is this good for

Twitter? It will allow us to access and contribute to a much larger corpus of public conversations, focus our efforts on building open recommendation algorithms which promote healthy conversation and will force us to be more innovative in the past. It goes on to talk about how it's hard, yada, yada, yada. This isn't going to happen overnight. It will take many years to develop a sound scalable and usable decentralized standard for social media that paves the path to solving the challenges listed above. Our commitment is to fund this work to that point and beyond.

So super, super interesting stuff, right? I think a lot of it, the part that's worth noting is the engagement, acknowledgement of the challenge for for social media CEOs frankly right and this is Zuckerberg's brought this up at congressional hearings jack has discussed this um these companies exert such a different type of force uh in society based on the the collective energy and attention that they aggregate that we're in really uncharted territory as it relates to um what you're supposed to do with them right and almost every decision in some way involves either uh either you know being completely uncensored in letting any voice, no matter how deplorable, you know, have its space. And in fact,

based on the way that algorithms are designed often rise to the top, or to become the thought police, right, to become the voice police. And both of those scenarios are kind of abhorrent to the people who actually run these companies. Now, again, we can debate what the right is. There's plenty of folks who are pure libertarian who just feel like everyone should have the same voice in agency in the public commons. However, there's an additional factor, which is what, uh, what regulators demand of this, right? Which is in itself a constant flux. One of the things that happened at, uh, it's happened at numerous of the Libra hearings, uh, in Congress and before the Senate is that Congress people have used that context to try to almost bully, uh, the folks who are testifying

into a commitment that Libra wouldn't censor people, uh, on the basis of politics, right? It was kind of an attempt to try to get them to on the hook for not correcting political correctness or whatever, what have you. So this is a really untenable situation. And we're seeing so many examples of it. Twitter saying that they're not going to do political ads at all. Facebook saying that they're not going to fact check political ads. All of these are part of this larger conversation. So I think it's fascinating in the context of that larger real world scenario that Square is taking this approach.

to try to basically get themselves off in some ways by having this decentralized standard. Now, what have people's response has been? There are certainly some who are skeptical. So Bruce Fenton says, am I the only one who's entirely skeptical about Jack and Twitter? The current platform is extremely biased. It bans people based on unpopular political speech, participates in coordinated platforming, favors mainstream media and highlights topics based on woke political opinion.

So that's kind of the skeptical take is the idea. may be good, but the messenger can't be trusted. And the person who's supposed to implement this can't be trusted. Now, it's a reasonable take. I think to some extent, you have to look at two things. One is your faith in Jack Dorsey to take him at his word that Twitter won't interfere. And then the second, what they actually do to make it such that there's a commitment to the funding in the project that is not conditional, right? How do they enthrine that more than just Jack saying so in a tweet. So that's one side. Selkiss, meanwhile, Ryan Selkis from Masari has a different opinion. He says, I want to believe, Jack, and he talks about how Twitter has become the central communication platform for crypto, basically, how it's kind of accepted the mantle from Bitcoin Talk before it and Reddit, sorry, read it before it and Bitcoin Talk before that. And so for him, he's basically talking, his belief is that this is incredibly big, incredibly bold, incredibly ambitious, much bigger in some ways for Twitter as a company than even Square Crypto was,

but that if anyone is worth being interested in seeing what they do, it's Jack Dorsey. This sentiment was echoed by Nick Carter, and I think this was maybe my favorite thing that I read about this, I don't expect a Twitter-funded outfit to build the winning standard for decentralized or federated social media, just as Linux didn't come out of Microsoft or Bitcoin from JPM. But the fact that Jack knows where we are headed is so impressive. I couldn't have a higher opinion of Jack Dorsey. He's easily my favorite entrepreneur. I know he gets a lot of flack, but that's because he doesn't submit to the people who want to control his platform for political gain.

Reflected on this some more, that Jack has the ability to zoom out and understand that these digital fiefdoms will soon be organized on an opt-in basis around legal systems, TOS. It's frankly astonishing, given that he deals with public market short-term pressures and shareholders. So basically, Nick's point is that Jack has correctly assessed that this is basically the place where this is all heading. And it's worth being supportive of the efforts and cautiously optimistic about the efforts for that reason. In fact, someone says, it's not that astonishing when you realize it's never going to actually happen. And Nick bites back, he says, absolutely it will. It's the inevitable conclusion of centralized fiefdoms that try to organize the world under a single more.

moral code. That's obviously impossible. There's no universally acceptable morality or legal system. Fragmentation is inevitable. So I think it's super important, it's super interesting because, you know, again, when we are talking about Bitcoin, when we're talking about cryptocurrencies, these things all have a context in the context of the world that we live in. These things wouldn't have been invented if there weren't systems that needed to be upended that needed to be changed. And, you know, there are some folks, again, for whom this whole space boils down to, they don't believe that money should be debased through printing and that that creates a whole host of ills from war to inequality and beyond. And that is the big game. That is the singular focus for them.

Those folks tend to be focused on Bitcoin, obviously. And I think that's a completely reasonable intellectual position. However, there's a huge number of additional people in this space who are looking at things like the way that social media power is exerted and controlled by corporations. who even if benign and didn't mean to have the control that they do do now, and are looking to these sort of decentralized solutions to break that apart, right? And one of the challenges is that demand may not come from below. I think that's one of the takeaways for some from the ICO movement is that people aren't necessarily demanding their own privacy.

They're not necessarily demanding decentralized alternatives. They don't necessarily care about decentralized alternatives. They just want better experiences. They don't think necessarily about the downsides because they're so systemic rather than individual on any given moment. So to see someone in a position of power use some small piece of that, even if it is a very small piece, to try to upend and build something different, I think is a powerful thing. And it's going to be exciting to watch as pretty much everything that Square and Jack and Twitter do in this space right now. But anyways, guys, we went on a little long today, probably because I'm just so excited to be back.

Thank you for hanging out for the very first breakdown. As I said, for those of you guys who have been watching or listening for a while, I'm going to do this podcast only for, I don't know, at least the rest of this year. And maybe we'll turn the video back on at the beginning of the year. And then for those who are just joining or finding out about this for the first time from CoinDesk, welcome. I am at NLW on Twitter. You can go to nLW. substack.com to get an email version of this. And welcome. I'm so excited to have you guys here

participating in the conversation. I think the rest of 2019 is going to be really exciting. We're going to spend some time on all this awesome end of the year content. And yeah, thanks for hanging out, guys. All right. See you next time.