The Breakdown - Silbert Out at Grayscale; No 2nd Trial for SBF: The Biggest Crypto News from the Holiday Break

Episode Date: January 3, 2024

NLW recaps the biggest stories from the last week and a half, including Barry Silbert resigning from the board at Grayscale (clearing the path to an ETF conversion?) as well as the dubious DOJ decision to not pursue campaign finance charges against Sam Bankman-Fried. Today's Sponsor: Kraken Kraken: See what crypto can be - https://kraken.com/TheBreakdown Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

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. What's going on, guys? It is Tuesday, January 2nd, and today we are talking about everything that happened during the holiday break. 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 dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to Bit. slash breakdown pod. All right, friends, welcome back to a new year. I am so excited to be here with you all. And this one is kicking off a hell of a lot more fun than we were last year at this time. And you can see that in the stories that happened over the course of the holiday break. Now, there was a ton going on.

It was a busy time for the industry. And so today we are going to wham slam through the big highlights, which will set us up, I think, for the beginning of this year. Now, obviously, and of course, we have to do an ETF check-in to kick off. The final days of 2020, saw a rush of activity surrounding the Bitcoin ETF applications. Updated S1 prospectus filings came flooding in from most applicants. Now, in this round of updates, the final details are getting nailed down. For example, all products are now seeking to launch with cash-only share creation and redemption mechanisms.

This means that authorized participants won't be able to deposit and withdraw Bitcoin directly from the funds. There was a whole question around whether BlackRock was going to be able to do a hybrid structure, but that has been tamped down. Now, speaking of authorized participants, we also got our first look at which market-making firms will be servicing the new products. Each asset manager has a slightly different choice of partnerships, but the big names like Virtue and Jane Street are heavily represented. The major surprise was that J.P. Morgan

will be an authorized participant on a number of ETFs, including the BlackRock product. Turns out that whatever Jamie Diamond says in front of Congress, his bank is perfectly happy to participate in crypto. The final big piece of information is the disclosure of fees from some of the asset managers. Ark Invest and 21 shares had already disclosed a 0.80% annual fee in November, which Valkyrie will match. Fidelity has the lowest fee currently charging holders just 0.39% annually, and the big curveball came from Invesco. Their fund, which is partnered with Galaxy Digital, will charge 0.59% annually, however, the firm will waive the fee for the first six months, or until they attract 5 billion in assets under management. Bloomberg Senior ETF analyst

Eric Bocunas tweeted, told you all the fee war would break out before the starting gun even went off, and it won't ever end. This is normal life in the ETF Territome, though. The crypto exchange mind cannot comprehend this. These details finalized, ETFs are now ready to go. Attention now turns to when we should expect SEC approvals. Fox business reporter Eleanor Territ had said that asset managers were given a deadline of last Friday to finalize their documents. She clarified in a Christmas Eve tweet stating, the SEC has told issuers that applications that are fully finished and filed by Friday will be considered in the first wave. Anyone who is not will not be considered. In addition, the filings cannot mention in-kind creation or they will be rejected." End quote. Throughout the ETF

application process, analysts had warned that there could be a few weeks of delays between the approval and the launch of trading. It seems that might be off the table now. According to a Reuters article on December 30th, their sources said that, quote, issuers that met their end-of-year filing revision deadlines may be able to launch by January 10th. That is, of course, the final deadline for the ARC21 shares application to be approved or denied. Reuters added that their sources said, the SEC may notify issuers as soon as Tuesday or Wednesday that they have been cleared to launch the following week. Nate Garassi, the president of ETF store, said, so is everyone ready for these next two weeks? Spot Bitcoin ETFs could be approved and potentially trading, or this might go down

as one of the bigger rug pulls in crypto history, although I'd be shocked if that happens at this point. Buckle up, going to be a wild ride. Two key items I'm watching. One, what happens with GBTC conversion? Will it uplist on same-day competitors launch? Two remaining fee disclosures. Where does BlackRock land? That's the big one. Now, given that Bitcoin ETFs are no longer a matter of if but when, at least when it comes to the broad sensibility of market observers, speculation has now moved to focus on whether

the ETF launch will be a sell-the-news event. ARC CEO, Kathy Wood, thinks that traders will take the opportunity to close their positions in profit, stating in an interview last week that, quote, those who have been moving in and enjoying some nice profits will probably sell on the news. At the same time, Kathy recognized that the ETFs would have a more structural impact on Bitcoin's price, adding, that would be very short term because what we think is going to happen here is that the SEC is going to be giving the spot Bitcoin ETF the green light for institutional investors to participate. Now, structurally, BitMex co-founder Arthur Hayes speculated around

what ATFs could do to the Bitcoin network. In a blog post, he wrote that ETFs, quote, vacuum up assets, store them in a metaphorical vault, issue a tradable security, and charge a management fee for their quote-unquote hard work. They don't use the things they hold on behalf of their clients, which presents a problem for Bitcoin if we take an extreme view of a possible future. Hayes noted that, Bitcoin is the first monetary asset in human history that exists only if it moves. He played out the worst-case scenario, where ETF issuers control almost all of the Bitcoin in the world, and trades are largely settled off-chain. In this scenario, Hayes suggested, the end result is miners turn off their machines as they can no longer pay for the energy required

to run them. Without the miners, the network dies and Bitcoin vanishes. Still, Hayes was optimist, pointing out that this extreme example demonstrates that Bitcoin only has value if the blockchain is freely accessible and used. He wrote, It is beautiful when you think about it. If Bitcoin becomes just another state-controlled financial asset, it dies because it isn't used. Still, on price action, Hayes recognized that we are clearly not at risk of Bitcoin becoming worthless as an immediate result of ETFs, signing off with, may the pump be with you. Now, one good take that I've seen from a number of people was summed up by Gaborger Box, who's an advisor at Van Eckin said, in my view, people

tend to overestimate the initial impact of U.S. Bitcoin ETFs. I think maybe a few hundred million flows mostly recycled money. Long term, people tend to underestimate the impact of spot Bitcoin ETFs. People tend to hype the current thing, but remain myopic about the big picture. Bitcoin is forcing its own capital market systems and products well beyond the ETF, and that's not priced in. Macroscope wrote, it's impossible for something to be priced in if a huge amount of capital literally doesn't have access yet. Yes, currently eligible speculators in their available capital can buy ahead of an event, but that's as far as any pricing in goes if the pool of participants is about to greatly expand. Note, this is not predict what will happen immediately after

ETF approval. Vijay Boyapati had a slightly different take on that, but saying something similar, writing, the announcement of a Bitcoin ETF next week is definitely priced in. However, the wave of liquidity that an ETF will bring is not and cannot be priced in. The actual liquidity will have to hit the market. Now, one interesting sub-story that seems related or at least more related that it might initially appear to the ETF story, is the fact that Digital Currency Group CEO, Barry Silbert, has resigned as chairman of Grayscale's board of directors. The announcement came the day after Christmas and included DCG President Mark Murphy also departing from the board. Gracegale is, of course, a subsidiary of DCG and has emerged

out of the crypto winter as one of the most valuable companies in the crypto industry. At the same time, the past year has done serious reputational damage to both DCG and Silbert. Silbert's dealings during the Genesis bankruptcy have received particularly heavy scrutiny. In July, Gemini, which is a major Genesis creditor, sued DCG and Silbert personally, leveling allegations of fraud. The New York Attorney General's office piled on in October, suing DCG, Genesis and Gemini for fraud, and also naming Silbert and former Genesis CEO Michael Morrow personally. This string of alleged bad faith dealings have led many commentators to believe that Barry's

continued involvement with Grayscale could have been a dealbreaker for the SEC. Grayscale is, of course, one of the firms hoping to launch a spot Bitcoin ETF this year after winning their lawsuit against the SEC in August. The theory is that Silbert may no longer be viewed as a suitable person to serve on the board of a financial institution with products traded in public markets. Now, in addition to changes on the board, Grayscale updated their ETF filings over the Christmas break. The firm is no longer pushing for in-kind creations and redemptions, falling in line with the SEC's preference for a cash-only mechanism alongside other asset managers. Adam Cochran writes, and there it is. This step down is for sure an agreement for Barry to be out for Grayscale to join the ETF ranks. In another 2022 cleanup story, Terraform Labs have lost some critical parts of their lawsuit against the SEC.

Following the collapse of the Luna ecosystem, the SEC sued Terraform Labs, claiming, among other things, that the Luna token and the U.S.T. Stablecoin mechanic were unregistered securities offerings. The judge has validated those allegations, finding in summary judgment that, quote, there is no genuine dispute that U.S.T. and Luna are securities because they are investment contracts. End quote. Now, issues of fraud related to disputed facts. will be dealt with in a full trial, which is scheduled to begin later this month. Terraform co-founder Doe Kwan will also face criminal charges once his extradition is finalized.

A Terraform Lab spokesperson said, We strongly disagree with the decision and do not believe that the U.S.T. Stablecoin or other tokens at issue are securities. Further, the SEC's fraud claims are not supported by evidence, and we will continue to vigorously defend against those meritless allegations at trial. Today's episode is brought to you by Cracken. For far too long, the whole financials. system has been standing still, too slow, only on for certain hours, overly designed for some types of people, but not for others. Crypto, at its best, represents progress. It asks the

question, what if? It invites people in instead of leaving them out. It's on 24-7, 365, and moves at the speed of real life. Not everyone believes it. We've got our fair share of detractors, but that's the way it always is when you're building something new. Cracken is a crypto company that has been through the highs and lows of the industry, facing forwards towards progress throughout. And now they're inviting us to see what crypto can be. Learn more at crackin.com slash the breakdown. Disclaimer, not investment advice.

Crypto trading involves risk of loss. Cryptocurrency services are provided to U.S. and U.S. territory customers by Payward Ventures Inc. PVI, DBA, DBA, Cracken. Now, while the finding that Luna was offered as an unregistered security is in line with previous token cases, the finding regarding UST is a first of its kind ruling for a stable coin. The judge made this decision because of the bundled anchor protocol, which offered yield on the stable coin. According to the order, these factors allowed investors in UST to expect a profit based on the work of others, fulfilling those

elements of the Howie test. Now, of course, the case will have limited precedential value without an appeal. Still, the decision could have some implications for other companies who use stable coins as a key part of a yield-generating product. The highest profile offering of that kind is USDC deposited with Coinbase. Summing up, J.P. Coning wrote, is a stable coin a security? In SEC versus Terraform, a stable coin quote on its own is not a security due to the fact that it stays at $1 rather than generating a profit. But if it is promoted in combination with another platform that generates a profit, then it is a security. Now, lawyer Mike Selig pointed out that no one in crypto should be particularly surprised by this finding. He tweeted, the facts are so bad in

Terraform that it's hard to say how Judge Rakoff's decision helps the SEC. The decision is a compilation of all the things crypto lawyers tell clients not to do. Nice to have it all in one place for ease of reference. Now, generating even more attention was the fact that the second trial of Sam Bankman-Fried will not go ahead. Buried in between Christmas and New Year's, the DOJ informed the court that they would not be proceeding with six additional charges. The second trial was scheduled to take place in March and would have primarily dealt with campaign finance charges. It would have also likely included charges relating to bribing Chinese officials to unfree's Alameda research accounts. these issues had initially been separated from the first trial because they were not included

on documentation which led to Sam's extradition. Bohemian officials refused to consent to these charges moving forward. Prosecutors wrote in their letter to the court, proceeding with sentencing in March 24 without the delay that would be caused by a second trial would advance the public's interest in a timely and just resolution of the case. In other words, they were saying that Sam's sentencing would have been delayed by the second trial. Still, throughout the entire criminal process, some commentators had suggested that campaign finance allegations would eventually be swept under the rug rather than be aired out in open court. Sam was, of course, one of the largest contributors to the 2020 Biden campaign, but since then, allegations have swirled that Sam and his mother,

Barbara Fried, methodically bypassed campaign finance laws in the lead-up to the 2022 election. I will say that it is not just conspiracy theorists who have some questions about this decision. Cryptojournalist David Z. Morris wrote, I am inclined to go full tinfoil on this one. There's a very linear sequence of events that led to what looks like a kibosh and what would have been politically sensitive material. But it's all pretty convenient, including for Barbara Freed. Hero Systems co-founder Alex Miller writes, My apologies to folks who I said were tinfoil-hadding about this part of the SBF charges. This smells like a total political cover-up to avoid embarrassment on the campaign finance charges.

It doesn't change that he's going to jail for a long time, but I took the normal procedural moves around the campaign finance charges too honestly, and now definitely think this is a political game to keep egg off people's faces. Before the trial on September 21st, VC Nick Carter had written, at a certain point we're going to have to investigate whether Barbara Freed is being protected from prosecution because she is a Democrat dark money bundler. Last week, he tweeted, now that the campaign finance violations charges against SBF have been mysteriously dropped, we have our answer. This is a colossal travesty and a complete miscarriage of justice. We deserve to know what Sam accomplished in D.C. and who took money from him.

There is overwhelming public interest in that coming to light. Coinbase chief legal officer Paul Gruwell, who has also served as a magistrate judge, had an insider perspective on the issue tweeting, a few thoughts on the DOJ's decision not to pursue campaign finance charges against SBF. TLDR, I think it's a mistake. Line prosecutors and supervisors have far more information on a case than anyone on the outside ever will, so I'm always reluctant to second-guess an agency filled with good people trying to do the right thing. Resources and efficiency, as well as issues with the extradition,

are worthy considerations in weighing a second trial against a man who should go away for a long time either way. That said, I think this is a miscarriage of justice. The public interest in a public airing of charges almost always matters. Campaign finance charges are at the very top of this list. What politicians and others knew what and when are critical questions that deserve answers. Dropping this on a Friday night before a holiday only fuels public cynics about the politics of all of this. It's a damn shame. Former Democrat presidential candidate Robert F. Kennedy Jr., who's now running as an independent,

had an even clearer take on why this matters, tweeting, No one is even surprised. That is a bigger problem than the fraud itself. It shows how normalized corruption has become. Now, I think this comes down to a simple question. Does one think it's more in the public interest to learn about Sam's interactions with politicians or to save taxpayers the expense of a second trial? I tend to think that the vast majority of people have a very clear answer to that,

and it's not about saving money. Now, last couple quick hits before we get out of here, former Binance CEO, CZ, has once again been denied permission to travel outside of the U.S. ahead of his sentencing. CZ had placed a new application shortly after Christmas. without publicly disclosing the reasons for travel. His legal team suggested that the application should be sealed because it contained, quote, sensitive private medical information regarding CZ's child. The reason for denying CZ's ability to travel was also sealed, but he had previously

been viewed as a flight risk. In November, CZ, of course, pled guilty to one count of failing to maintain an effective AML program at finance, with sentencing to come in February, and an expectation of up to 18 months in prison. Next, micro strategy is preparing for the new year the only way they know how by adding another massive tranche of Bitcoin to their stack. Between November 20th and December 26th, Micro Strategy added 14,620 Bitcoin, paying $615.7 million or roughly 42,11010 per BTC. This month's purchases were slightly larger in dollar terms than the previous month, which had been their biggest monthly acquisition in several quarters. With $5.9 billion in Bitcoin holdings, Micro Strategy is clearly preparing for a big year and attempting to get their money in before

the ETF's launch. In an interview late last year, Chairman, and Michael Saylor called the ETFs the, quote, biggest development on Wall Street in 30 years. He said they could usher in a wave of fresh capital from retail and institutional investors who didn't previously have easy access to the asset class. Finally, Mount Gok's creditors got a surprise Christmas present this year as the estate began long-awaited distributions. Multiple users of a Mount Gok subreddit reported receiving small payments denominated in yen to their PayPal accounts. So far, no one has reported receiving Bitcoin repayments, though. The trustee of the Mount Gok's estate had flagged in November

that repayments would begin shortly, but the endless delays had creditors skeptical. No timing for repayments was provided, and the deadline for the estate to be distributed had recently been pushed back to October of this year. Of course, nothing about the Mankox bankruptcy has gone smoothly, and this was no exception. After a few days, reports began surfacing that creditors had received double payments. The estate has now requested the return of those erroneous payments. Now, we have no real indication of when the much more valuable Bitcoin payments will be sent out, but it seems that 2024 could be the year that the decade-long Mount Gawks' Baner's bankers' bankruptcy is finally resolved. And there you have it, friends, starting strong, starting loud.

The industry is kicking off, sloughing off winter, screaming into a new bull run. And I'm excited to be here with you for it all. Until next time, be safe and take care of each other. Peace.