The Breakdown - The Breakdown Weekly Recap | Jan 11 2020

Episode Date: January 11, 2020

All 5 episodes of The Breakdown in one long file. By popular demand, this is an experiment to see if it's useful to have the full week's episodes compiled in a single file. I've also summed up what I think is most important about the week. Let me know if you like this format or if you just find it repetitive @nlw on Twitter. 

Welcome back to The Breakdown, an everyday analysis breaking down the most important stories in Bitcoin, crypto, and beyond, with your host, NLW. The Breakdown is distributed by CoinDesk. Welcome back to the Breakdown. It is Saturday, January 11th, and today we are trying something different. And this is basically a request from people that I've seen on Twitter who want a full string, effectively, of the week's episode. episodes of the breakdown, right? So my friend Chris said he does long runs on Sunday. He'd love to have them all together. So we're going to try this and see if there's a demand for it. If people like having all of the previous week's episodes in one grouping. So if you like this, let me know it'll be, it'll mean a lot to me just to get that feedback at NLW on Twitter. And I guess just to

kick it off, I'm going to, like I said, I'm going to string all five episodes from the week before together. But to kick it off, I wanted to give you just my overall take of the week. And I think in some ways this week was a lot about seeing the narratives that are battling for attention and trying to define 2020, right? We have the idea of Bitcoin as a macro asset, which came up in the context of Iran, obviously, and the response of Bitcoin and the Bitcoin price to Iran's retaliatory missile strikes. We have regulatory issues and arbitrage as it relates to in the U.S., telegram in their battle with the SEC and how they have done. decided or announced that a ton their native token will not be in the telegram messenger.

We have it in the context of companies leaving European shores in order to avoid having to deal with AMLD5. Deribit is moving to Panama. So this question of regulatory issues and regulatory arbitrage is all over this week. Around a similar issue, we have the idea of increased enforcement actions. Cracken has seen more than a 50% rise between 2018 and 2019. in the request for regulatory inquiries. So that's another huge issue, what that means in terms of compliance costs and who gets to actually pay to play.

We have, of course, the question of China, right? So China, each of the last couple weeks has made some small announcement relating to its forthcoming digital currency, clearly intended to make it clear that they are ahead of the curve and trying to be ahead of the curve as it relates to the digital currency battle. This week, it was all about a paper that said that the top-level design of their digital currency had been completed. And then lastly, we had an announcement from Aragon that they were recruiting jurors for their Aragon courts, which I think is a great context to look at the emergence of DOWs as a force in 2020, as a complete and distinct area or part of this industry.

So lots of really interesting topics. No one bit of news, no one story dominated the conversation. it's more that these are all of the things competing right now for our attention and competing to define 2020. So with that, I will kick it over to Monday's episode and then it'll go right on through to Friday. Like I said, guys, if this is something that you like, if it's useful, if it's valuable, please let me know by reaching out at NLW on Twitter and hope you're having a great weekend. Catch you on Monday. Welcome back to the breakdown.

An everyday analysis breaking down the most important stories in Bitcoin, crypto, and beyond. on with your host, NLW. The Breakdown is distributed by CoinDesk. Welcome back to the Breakdown. It is Tuesday, January 7th, and today we're going to be talking about the cost of compliance and what it means that there are pathways now for crypto projects and crypto-related organizations to do well by the regulations of the jurisdictions they participate in, but at a certain significant cost.

What's that going to do to the crypto economies? Second, we're going to talk about mining and the recent actions that are interesting in the context of the having coming up. And third, and finally, we're going to be looking at an op-ed from the IMF's chief economist on digital currencies. So first, let's dive into this question

of the cost of compliance. So Cracken released its, annual transparency report. The long and the short of it is, is that the cost of compliance is increasing. So let's look at some of these statistics. Cracken, the banner statistic was that Cracken received almost 50% more law enforcement inquiries from global regulators as compared to 2018. So they received 710 requests in 2019 as compared to 475 in 2018. That's almost two per day, and almost three per day, if you take out the weekend. Of that, 61% came from America.

That's down as a total percentage. Last year, 66% came from America. So other jurisdictions are growing as well. The folks that had the greatest number of requests included the FBI with 116, the DEA with 73, the Homeland Security with 65, and the SEC made 20 requests. So still, again, a lot about law enforcement. Now, importantly, in tweet exchanges with Preston Byrne, who had written an essay about this, or more an essay about just what to do if your company is subpoenaed or is targeted

with legal action. Jesse Powell, the CEO of Cracken, said that the cost to service the 2019 request was actually over a million dollars. This is a substantial cost. A lot of folks reacted kind of with depression to this news. So Eric Voorhees, who's the CEO of Shapeshift, wrote, crackin has to deal with two formal surveillance requests per day. This is so sad that the productive industry is being diverted like this. It makes a poorer world. The government is spending Cracken's money to do police work. So obviously a very libertarian take, which is authentic to Eric,

but still I think that a lot of folks feel like this is a huge burden as well. The challenge here is that maybe this is just the cost of doing business in the crypto industry, but if it is, it has really big implications. So the thing that it made me think of was in July of last year, Blockstack made news when it hosted or held the first officially SEC qualified reg A-plus exempt token offering. And it was heralded as a major moment in the industry, right? It showed that there was a path to work with the SEC in the context of the constraints that were already set up to actually access U.S. public markets, which is a powerful thing. There's huge opportunity. And so for a company like Blockstack, it says, hey, we can do this. And if you participate with us, you're fully compliant. For the SEC,

it says, hey, look, here's a path to compliance. However, there's a catch to all this. And so this is a tweet from Kerman Kohli who says, this is great to see, but isn't practical for most startups. Blockstack had to spend close to $2 million on lawyers and accountants. Maybe it makes it easier for future startups, but this still means you need to raise a bunch of VC money to get crypto money, which screws token distribution. So the point here in that he's raising is that this cost of compliance actually has a deterministic impact on the range of available experimentation because you simply cannot go through this funnel without doing fundraising and capital formation in the same old way that you did before, right? You have to sell either pre-mines or equity in some centralized

entity in order to even get to the point where you can sell tokens, which the whole idea of that was to, in some ways, break apart and separate the distinction between a network's owner and a network participant. If all of a sudden you have to have network owners simply to pay for the cost of compliance, well, all of a sudden, the cost of compliance, even if theoretically it makes viable the ability for these crypto projects to function within the existing legal apparatus. Effectively, it means they can't actually change an experiment within that structure, particularly because of the constraints of capital formation. So this is a cost of compliance that is not just in terms of the $2 million it's spent

to actually make this all work, but in terms of the limitation and the fundamental limitation of the experimentation inherent in this industry. So this is one big cost of compliance. Blockstack came up again in a tweet from Larry Sermak when the news broke around Block 1, which is the company behind EOS, their settlement with the SEC. So Larry Sermak from the block says, this is October 1st of last year or just after the news had broken. If I was Blockstack, I'd feel like shit right now. Blockstack raised $23 million in a compliant utility token offering. They spent $2 million to comply with all the regulations, which is 8.7% of the total raise.

They also can't list their tokens on cryptocurrency exchanges, meaning no liquidity. Eos, on the other hand, didn't ask anyone for approval, skirted all regulations, imaginable, and ended up allegedly raising more than $4 billion. The SEC slapped them on the wrist and they paid a $24 million fine. That's 0.6% of the total raise and they are listed everywhere. Eos has a huge advantage over BlockSack in nearly every way. The SEC's fine yesterday sets a horrible precedent. Why would anyone do what BlockSack did, struggle for cash and get no liquidity if they can go for a

mega raise, advertise on Times Square, and get away with it. To demonstrate how ridiculous the $24 million fine is, EOS issuer paid $6 million more for a website this year. The SEC's fine was a smaller sting to them than buying voice.com. This is another aspect, I guess, of this cost of compliance, which is that, like every other old world system, there's an argument to simply raising so much that you can fight legal battles on the other side, right? The cost of compliance actually creates incentives in some ways to not comply so aggressively that you can deal with the cost of compliance on the backside as a fine. And Larry points out just what a big deal this is. 0.6% of your raise, which was the fine that Eos had to pay, versus 8.7% of your raise,

which is the cost that BlockSack had to pay to wait around to have a more constrained set of opportunities. Now, of course, there are other things, other benefits that you get with compliance theoretically, but it makes it really difficult. I think that the point in why this Cracken story is interesting is not just about Crackin itself. I think that there is inevitability around the cost of compliance increasing for anything touching cryptocurrencies, anything touching digital assets, because we're moving from an era where cryptos to regulators were a pesky law enforcement problem to something that in the wake of Libra and Central Bank digital currencies and IMF chief economist articles like we're reading, governments are paying attention

and not just governments in general, but specific bodies within governments. And as we've seen over and over again in the U.S., every government body thinks that cryptocurrencies are somehow under their jurisdiction, right? The CFTC thinks their commodities, the SEC thinks their securities, the IRS thinks their property, and so on and so forth. So this is a reality of the crypto world that the cost of compliance is just going to go up. and up and up and up. Two big negative externalities that I can think of. One is that a real fundamental limitation of the Overton window for experimentation, I guess you could say. And second, a real incentive to leave the most regulated places and just play the regulatory arbitrage game,

which while not new for crypto, I think as a net loss for the jurisdictions that don't find ways for companies to be there and comply without overly burdensome rules. So to me, this crack and story is much more about a reflection of, I think, a larger trend and a new set or a growing set at costs, at least, that this whole industry faces that will have serious implications for where things happen and how. With that, actually, let's get to another question about where things happen and how and talk about Bitcoin mining in Texas. So in October of last year, a story went up about Bitmain and Rockdale, Texas. So the story was on Coin Desk, and it was called Why Bitmain is building the world's largest Bitcoin mine in rural Texas.

So basically, Bitmain has chosen old Alcoa aluminum smelting plant in Rockdale, Texas for a new Bitcoin mine. The initial power size is supposed to be 25 megawatts, which will quickly be expanded to 50 megawatts and potentially then 300. megawatts, and this brought up a huge amount of attention to mining coming back to the U.S. and the idea of mining being back in the U.S. and also just mining heating up again, particularly in the lead-up to the Bitcoin happening, which happens in the first half of this year. The story is amazing. It goes through a lot of just why Texas has become an interesting destination for Bitcoin

mining in terms of the low cost of energy, in terms of how most of it is kept in state, in terms of the availability of space. It goes into why locals are skeptical, right? A lot of the folks who are in this town of just under 6,000 lost their jobs about a decade ago when this smelting plant went out of business and that most of them don't understand Bitcoin. There's a fascinating larger context, I think, in terms of the globalization of the world and how, you know, this company that's based outside the U.S. is coming to the U.S. to Texas specifically for Bitcoin mining.

And this story was made even more interesting today by news that in that very same town, there will be new customers at a massive Bitcoin mine. So SBI Holdings and GMO, Japanese corporate giants, are going to be renting mining capacity at a Rockdale, Texas facility that was recently put into construction by Weinstone. This facility, when it will be up and running, will be the biggest Bitcoin mine in the world, which will start at 300 megawatts and expand to one gigawatt. by the end of 2020. So you have two of the biggest Bitcoin mines in the world, both setting up shop in this same little town in Texas. There's a couple of things that I wanted to say about this.

One, I think it's interesting in the standpoint of there is going to be an ongoing conversation about what the impact of the having will be on Bitcoin's price, on Bitcoin mining, and seeing more of this activity kick up and spin up in the lead up to that is interesting. Now, these companies are pretty resolute that they're not looking at crypto prices in the context of, you know, months at a time they're looking at years at a time. However, you still are seeing this energy and attention and focus come back to this section of the industry in a major way. So that's interesting. A second, I think, is a narrative that I'm seeing spin up around U.S. base mining. And, you know, one of the big questions with Bitcoin mining, obviously, is the energy consumption.

If you look at Nick Carter's original Bitcoin Fudd dice, energy consumption was one of the key or one of the first sides of that dive. It's a standard thing that has been thrown around forever. One of the narratives that I see starting to emerge this year, which was theoretical last year, or people were arguing about it theoretically last year, is this idea of Bitcoin capturing energy that might otherwise be lost. I think that's something to watch for this year. If you're interested in hearing more about that, I touch on it with my end-of-year podcast with Marty Bent. The reason that I wanted to focus on this today is just almost to flag for you a narrative watch around Bitcoin mining in the lead-up to the happening and specifically

Bitcoin mining in the U.S. But with that, let's move on to our third and final topic for the day. So earlier this morning, an op-ed popped up on the Financial Times website. It was called digital currencies will not displace the dominant dollar. Proposals of a synthetic hegemonic alternative face steep obstacles. It was written by Gita Gopanath, who is the chief economist for the IMF. And before you say, well, of course, I roll the IMF thinks that the dollar is going to beat out digital currencies, the reason that it's interesting to note, I think, is in the larger context of the conversation that is going to be, I think, center stage in major economic circles, not just crypto this year, about digital currencies, digital alternatives to traditional fiats,

corporate alternative traditional fiats. And in a lot of ways, this article was less a critique of Bitcoin per se. I mean, this is like much of this level of discourse, not even really addressing the potentiality of something that is a independent decentralized network-based model like Bitcoin to challenge centralized models. But it's more about the response that the governments have had to Libra. And in particular, it looks at a proposal from Mark Carney, who's a Bank of England governor, around a synthetic hegemonic currency. So each year in Jackson Hole, the Kansas City Fed hosts a meeting of big thinkers, you know, basically Davos, but for just money. And at that, the Bank of England Governor Mark Carney said that they should maybe question whether the dollar

was really serving the world as a global reserve currency, and instead they should look to a synthetic hegemonic currency. Digital basket of reserve currencies effectively, but made by central banks. So in some ways, Mark Carney looked over at what Lieber was doing and said, hey, that basket of reserve currency's model is really interesting, but it shouldn't be you, Facebook doing it. It should be us, the central banks of the world, creating this synthetic hegemonic currency. There were a lot of things that were interesting about this. The first of which was just, I think, in terms of the fact that all of a sudden there was an openness at the very highest level. levels to talk about the role of the dollar in the world, which I think is new, at least in

mainstream circles. The fact that a Bank of England governor was proposing this alternative to the U.S. dollar has to be worrying to the U.S.'s role. The other interesting part about it was just that in some ways, Carney was riffing on Libra's central design conceit around this basket of currencies. And other folks like Raoul Paul have pointed out how to them that was, in fact, the most interesting feature was the replacement of a single currency with a basket of currencies. The point of this article is basically that when it comes to global reserve status, the most important part of a currency isn't the features, but the institutions. And so she says, advances in payment technologies do not address fundamental issues of what it takes to be a

global reserve currency. Consider the euro, which has been the leading contender to replace the dollar over the past 20 years. Its impact on the dollar's dominance has been modest at best owing to financial fragmentation, inadequate fiscal risk sharing, and slow progress on the euro area's governance framework. Uncertainty about the long-term stability of the eurozone does not help. It is difficult to imagine how technology would address these issues. The dollar's status is bolstered by the institution's rule of law and credible investor protection that the U.S. is seen as providing. Simply raising the supply of an alternative currency will not be enough to surmount these considerations. Chinese efforts to internationalize the Remenby have met

only limited success despite his policy push and liquidity support through bilateral swaps with more than 30 central banks. So the point is that, again, for her, it's not about the features of a technology, it's about the underlying institutions. And more specifically, it's about the trust and faith and the social stability in some ways. And I think that one of the really interesting comments, so I tweeted this out this morning, and John Riley wrote, it's a fair assessment, but misses the fact that the biggest innovations coming from Bitcoin aren't technical at all. And I think that that's a really fascinating point that is maybe missed in these discussions of what are the new features or how does it reduce cross-border payments or what's the,

you know, transactions per second or whatever, which is the question of the social momentum behind a currency and what it takes to actually get people bought in. So I wanted to present this op-ed more as just one more bit of evidence in a couple of conversation that I think is going to be one of the most important, certainly this year, but obviously in terms of implications in a much bigger way throughout the coming decade and even longer. We are facing questions that we have never faced in a real way at all levels of policy, government, business around the future of money and the future of currency. And this world that Bitcoin and Satoshi have unleashed is now reaching the very, very

highest echelons. And that's pretty fascinating. Check out the op-ed. I'll link to it when I share this article. I'm interested to see what you think. But for now, guys, thanks for hanging out. Thanks for listening. And I will catch you tomorrow. Welcome back to The Breakdown. An everyday analysis breaking down the most important stories in Bitcoin, Crypto and Beyond with your host, NLW. The Breakdown is distributed by CoinDesk. Welcome back to the breakdown. What's going on, guys? It is Wednesday, January 8th. And today we are going to be be starting by looking at this ongoing question about whether Bitcoin is a safe haven asset with some new evidence from last night during the retaliatory strikes from Iran. And that will feature comments from Travis Kling, who's an investor at Aikai and who has actually joined us on

the show before to talk about whether Bitcoin is or is starting to act like a safe haven asset. Next, from there, we're going to be looking at the SEC, who has just published a set of priorities, including a set of priorities for crypto in 2020. And third and finally, we're going to be looking at a recent senatorial appointment, one of the first crypto-native people to be appointed to the Senate, and their new role on a committee that oversees the CFTC. And we're going to talk about whether there might be a conflict of interest or whether it's actually good for the industry. So that's where we're going for today. And first, let's dive into this question of Bitcoin as a safe haven asset. Ever since the middle of last year or so, there's been this ongoing and kind of background

conversation around whether Bitcoin is a safe haven asset or whether it might start to act more like a safe haven asset as the world gets more unstable. So a safe haven asset being akin to gold, as opposed to a risk asset, which is something like traditional venture capital. And there's a wide variety of perspectives on this in the industry. There are folks who are very sure that it is still a risk asset. There are folks who are pretty convinced that it's starting to show behavior like a safe haven asset. And there's a lot of perspectives in between. This question has gotten another context and sort of accelerated again around the Iran situation with the U.S. So people started to ask this again last week as we saw Trump take military action

against Iran, and now last night we saw Iran respond and bomb U.S. interests in Iraq. And as that was happening, the price of Bitcoin went up. Bitcoin peaked between 8,400 and 8,500. Now, it's withdrawn slightly since then, but there's no doubt that over the course of the evening last night, the Bitcoin price increased pretty significantly and continued to as the news started to sink in. Now, interestingly, Travis Kling, who's an investor at Aikai Asset Management, had tweeted out a chart on January 6th about the price of gold, crude, and Bitcoin. So it showed all three prices in a single chart. From a few weeks before the Soleimani assassination headlines, up to now. And you can see very distinctly that all three of these assets are growing in pretty close

tandem, right? And there seems to be some indication that all three of these assets are having a similar response to the increased instability, the questions around whether there's going to be more conflicts, what Iran's going to do next. And then he updated that chart last night to show just how at the point at which the Iran missile attack headline started to come in, all of those assets, again, similarly went up. And by the time the evening had ended, he was actually starting to watch all of them retrace a little bit in kind of correlated fashion. So I thought it would be interesting. Rather than me try to give my analysis of this, have Travis come on and actually explain it for himself. So I talked to Travis last night about this particular set of correlations

and what it might mean for Bitcoin as a safe haven asset. What's up? Nathaniel and Crypto-Twitter. On January 3rd, I posted a chart on 15-minute intervals of gold versus crude versus BTC. When the Soleimani assassination headlines first hit and crude and gold spiked on that news, Bitcoin spiked shortly thereafter. They both kind of continued to move up over the next several days, although crude gave back some portion of its initial gains. And then just last night, I posted an update to that chart showing crude and gold and Bitcoin all spiking in totally real time on the Iran missile attack headlines.

First thing I want to say is I don't want to make light of the seriousness of the underlying situation. It is a gravely serious and sad thing to be happening. And my heart goes out to the soldiers and to the people in that part of the world that affected by it. I certainly wish none of it was happening. Just from a market's perspective, this is something that I talked about on a video with Nathaniel last year that I think he's going to post a link to around quant macro funds, CTAs and risk parity types of strategies that are trading Bitcoin alongside other global macro assets, and those things are moving in concert

with one another. There's also the discretionary human traders that are, watching really big current events unfold and BTC spiking in real time along with gold and crude. And actually just as of very recently the last call it hour, gold and crude are starting to pull back off of their highs and BTC has pulled back some along with them. You can sort of say whatever you want to about correlation and causation and that sort of thing. I think instead of posting commentary about it on Twitter, I just posted the chart and let people decide for themselves.

So the interesting thing for me is that it keeps coming back to this question of, is Bitcoin a safe haven asset or is it going up at the same time other safe haven assets are because people are treating it like a safe haven asset? And I do believe there's a distinction between those two things. One is based in historical precedent. One is based on future speculation. At the same time, I do believe that markets are subject to powerful forces of self-fulfillings. prophecy. And that to some extent, if every time there's a major event which triggers a spike in the

price of safe haven assets, and we see correlation with Bitcoin when that happens, at some point that speculative future looking becomes self-fulfilling prophecy. And we get further and further away from the idea of it just being a speculation about it being a safe haven asset and more in terms of behavior to suggest that it is behaving as such. Now, again, we're still really early days. I'm hesitant to call it a safe haven asset now. However, it has to be noted that it keeps behaving like one, even if it's just speculators betting that at some point in the future it will be. So interesting stuff and certainly a situation to continue watching.

But let's move on for now to our second subject, which is the SEC and their crypto priorities for 2020. Okay, so the SEC has an office called the Office of Compliance Inspections and Examinations, O-C-I-E, that each year publishes a list of their examination priorities. And this year it was interesting because while in previous years this report and these priorities have mentioned digital assets, they tended to do so in very passing fashion, right, very brief fashion. So in the past, it was a brief mention of initial coin offerings, ICOs, and just sort of a general warning of the risks of digital assets for retail investors.

This year it was much more explicit about what their priorities were. They got very kind of tangible about that. So Catherine Wu, who is an investor at Notation Capital, formerly of Masari, who's contributed to the breakdown numerous times. She was on our end of year program. She summed it up as such. She said that the SEC's 2020 priorities in crypto include one investment suitability. So are people actually investing in things that make sense for them?

our investments actually right for the types of people who are putting in money. Two, portfolio management and trading practices. Three, safety of client funds and assets. Obviously, this is a huge issue as it relates to investor protections and the frankly not always great track record of exchanges and other ways that people custody assets. Pricing and valuation, obviously over the course of the last few years, there's been huge concerns around market manipulation,

around wash trading, around exchanges basically withholding information to make things look different and to cover up certain bad behaviors that might be artificially inflating prices. Number five, effectiveness of compliance programs and controls. Basically, they want to make sure that if they're creating compliance programs that are intended to keep investors safe and to make digital assets a safe space to mess around in, that those things are actually working. And finally, six, supervision of employees outside business activities. You know, in any industry, there's a question about information as it relates to people who have inside information about big news that might change the price of assets and what those employees do with that information.

This is the major part of what the SEC does in traditional markets. So that's a priority for crypto as well. So in a lot of ways, I think that this is largely positive. And here's why. It tends to be worse, I believe, for the crypto space and for digital assets in general when regulators only pay attention when things go badly. Now, the risk when regulators start to pay much more attention is we get overburdensome regulation or over-involved regulators or whatever. But I think that perhaps the biggest challenge from a regulatory standpoint in some ways is the fact that regulators have to create new mental models and new actual frameworks for how they regulate, how they think about these digital assets, which really do represent a different category that doesn't fit neatly into boxes.

And the only way that that happens was, frankly, with more time on task, with more special. researching with more time spent trying to understand. So the fact that we're seeing this six-part list that, frankly, looks both like a traditional set of investor protections, but also seems to recognize some of the unique challenges of this space. I think to me that that signals a seriousness with which they're taking it. Now, all of that said, there have been folks who have basically put a flag in the sand or a line in the sand and said they simply don't believe that the SEC under Jay Clayton will ever be truly friendly to digital assets. And maybe that's the case. You know, maybe this is actually bad news for crypto because it just ends up with more and more

of these regulators trying to put it in these traditional boxes. But I have to be at least a little bit optimistic that being more comprehensive and thoughtful about it ends up benefiting the industry. But I want to turn now to another dimension of regulation, which is congressional oversight. and specifically a story around one particular congressional officer who is now going to have specific oversight over a different regulatory body, the CFTC. Last year, we found out that Kelly Loeffler, who is or was at the time the CEO of BACT, was being appointed to an open Republican seat for Senate in Georgia. Now, the appointment happened.

There was some intrigue there. It was apparently it was a governor appointment that, Trump was not in agreement with. But for those of us in the crypto industry, it felt like holding aside any other political positions that might be, there was finally a person who was native to this industry in some ways who was there to speak to the crypto industry's interest in the Senate. So it was widely received as a both positive and momentous bit of news. Now just yesterday, news broke that Loeffler will be serving on the Senate Agricultural Committee. And the Senate Agricultural Committee, among other things, basically defines the remit for this Commodity Futures

Trading Commission, the CFTC. They do things like approved nominations for commissioners and chairman. It reauthorizes the CFTC officially as a federal regulator. So it has the fundamental and core oversight of that body. The CFTC is obviously one of the most important bodies as it comes to crypto regulation. We've seen crypto dad, Giancarlo, who was sort of a pro-crypto CFTC chairman replaced by Heath Tarbert, who's also shown signs of being positively engaged with the crypto industry. He came out last year and said that the CFTC officially thinks that Ether is at this point a commodity. So obviously the CFTC has a big stake in this, probably as much as the SEC in some ways. And we've now got a person who's from the crypto industry who will have

some role in oversight for the CFTC itself, right, and who has influence in appointments and nominations. Now, the question is here whether there is a conflict of interest, and there's kind of two parts of it. The first is, obviously, when Loeffler took this role as a senator, she had to relinquish her role as the CEO of BACT, but still, obviously she was just working with that company a matter of months ago. So one area of potential conflict of interest has to do with that. another area of potential conflict of interest has to do with her family. So Loeffler is married to Jeffrey Sprecker, who is the founder, chairman and CEO of ICE, the intercontinental exchange, which is the owner of the New York Stock Exchange as well as the owner of backed, the parent of

backed. So there's just been a bunch of questions about whether this is actually a conflict of interest. The Wall Street Journal asked this, and Loeffler's response was basically that this obviously is on everyone's radar and that she had, quote, worked hard to comply with both the letter in the spirit of the Senate ethics rules and said she will recuse herself if needed on a, quote, case by case basis. So that's their answer. And obviously this is, you know, going forward. So it's more a question now of our conversation. Earlier today, I tweeted out and asked folks whether they thought that this was a, A, conflict of interest. B, thank goodness, someone who understands these things is involved, or C, all of the above, right?

So my question for the crypto Twitter community was, do we think that there is an inherent conflict of interest here where the business interests are too aligned and that this is part and parcel and reflective of a larger problem of the tight relationship between business and government? Do we think that there is, on the other hand, like value in the fact that a person who is in this industry or has been in this industry natively and who's built businesses in this industry is now involved in some way in the oversight of it. And I opened up the possibility of it being both at the same time, which is kind of where I tend to fall a little bit.

It's hard to not think that there is some inherent conflict of interest, but at the same time, there is something nice about a person who has actual experience in this industry being involved. Now, the responses were really interesting. I've had something like 60 or 70,000 people who have seen this, hundreds of people who have responded. The most popular response so far, I think, is someone who wrote D, finally a conflict of interest on our side. So, you know, basically acknowledging

that there is almost inherently a conflict of interest here, but at the same time, this is one case where it probably benefits us. Now, of course, we're not talking right now about the larger system and structure of U.S. politics and what it means that there is this tight relationship between business and government. I was asking strictly in the context of the crypto industry. But interesting stuff and certainly will potentially change the texture of some of the regulatory conversations we have this year. So we'll be fascinating to watch. Anyways, guys, that is it for today. Slightly shorter episode. Appreciate you hanging out and listening and I will be back tomorrow with another breakdown. Cheers, guys. Welcome back to the breakdown. An everyday analysis

breaking down the most important stories in Bitcoin, crypto and beyond with your host, NLW. The Breakdown is distributed by Coindesk. Welcome back to The Breakdown. What's going on, guys? It is Thursday, January 9th, and today we're doing a special narrative watch edition. So for those of you who have never heard one of my narrative watches before, it's basically where instead of the three daily topics like usual, I hone in on one kind of theme or story or narrative that I see as a part of the ongoing conversation.

In particular, I'm always looking at things that are changing and emerging into more significant parts of the industry. And so today's narrative watch is about DAWS and whether 2020 is poised to be the year of the DAO. So let's talk historically about DAOs first. So the term DAO decentralized autonomous organization originally referred to a specific organization. And it was meant to fund projects in the crypto space and of course was famously subject to a hack, which ultimately led to the split between Ethereum and Ethereum Classic. And there's a lot more to get into. but I think what's worth noting about that history and the history of Dow's is that Dow's sort of escaped the worst excesses of the rational exuberance of the 2017 ICO boom.

And what I mean by that was that people were so cool already on the idea of Dow's because of this hack when the ICU boom happened that all of that energy and attention kind of passed them by. Now, of course, there were some projects that were still passionate about that. there were projects like Colony and Aragon who were working to build a new infrastructure for these decentralized organizations. And within those communities, there were obviously lots and lots of people who, just because of the hack, hadn't given up the idea that these new types of organizational forms might matter. But it really didn't, you didn't see an explosion in the number of DAOs or people trying to build DAOs, as you did with people just trying generally to create token projects and go sell

their tokens. And I think in some ways that was actually to the advantage of the entire Dow's space. Now, the idea of Dow's and why Dow's matter is for a lot of the folks who are in this space, it seems crazy to them that there is no formal organization structure between, on the one hand, you know, an informal Facebook group, let's call it, and on the other hand, a formalized nonprofit or business. That doesn't seem to fit the world that we live in where groups come together and form in many, many different ways and for many different purposes at all kind of levels of types of coordination, intensity of participation, duration of participation, type of participation. And DAWs for those who are passionate about them potentially answer and explain and give a new

form that can accommodate all of that middle range that isn't a formal and enduring kind of legal structure but is neither an informal kind of group or association. So anyone who lives in the internet can think of different contexts where they're happens. But of course, a lot of the folks who are in the DAO space are focused on DAOs that are organizing and coordinating people and resources around different crypto communities and different crypto projects. Going to this idea of, is 2020 going to be the year of the DAO. Well, let's look back at 2019 first. So in 2019, Stefano Bernardi, who was at the time working with Aragon, he's an investor in crypto companies. He's been a publisher. He had a newsletter that was

one of the best in crypto for a long time called Token Economy that still does a great great job of summarizing technical developments in the space. He wrote a post called why 2019 will be the year of the Dow. So obviously, this meme has some precedent, but he pointed to six different trends that he thought were a reason that Daos were poised to be on the rise. So the first of the trends he pointed to was the globalization of talent and the transformation of work. So obviously this refers to the idea that we no longer live in a paradigm where working means popping down to the office in your locality. It often means signing into your computer. or your Slack Room or whatever, a world away.

And in that context, the way that we organize work and how long people work for an organization, what they contribute, how they get remunerated for that contribution, all of these things are shifting. And right now, we still more or less live in a paradigm of corporations that coordinate efforts. But, you know, it's not impossible that the freelancer sites you see around the world and remote teams

are actually sort of just part of a larger shift where you may even see the way that companies are organized shift. And so Dow seemed useful for that. He talked about stakeholder networks needing coordination. That was the second trend. So obviously this gets into these crypto communities that have these big asset pools and treasuries that are trying to do things differently and want a different way to allocate resources that isn't just the traditional command

and control corporate model. He talked about the emergence of defy and what requirements that might have, again, in terms of governance and coordination. And indeed, governance is his fourth trend as well. the normalization of governance participation. Dow's are inherently more involved. It's not like a blockfi or a nexo where you park your crypto assets and they do something for you. The idea of dows are inherently more participatory. And usually, you know, even the DAOs that we've seen, which are explicitly about resource coordination, involve an element of agency and autonomy and

decision making. So the more that people get used to participating in governance in these crypto asset networks, the more normalized that becomes. His fifth trend that he pointed to was deplatforming growing as an issue. So this gets kind of into the Web3 critique, let's call it, of the existing web infrastructure that we have today where people are likely or subject to be de-platformed based on their political or social statements or beliefs. Especially at the beginning of 2019, there was a lot of buzz and hype and talk about that. And that persisted throughout the year. We've talked previously, we talked, I think last Friday about whether decentralized social networks are just a pipe dream, but certainly, at least in some nascent way, there is demand there.

Finally, he pointed his sixth trend was an upswing in political organization. I think this one is somewhat obvious in the wake of a world that is increasingly unstable, increasingly volatile, and has growing sets of populations that feel like it is just not working for them. The system that we have been gifted is not going to do. In the context of more political organization, which inherently doesn't fit easily into these long duration type of organizational structures, but needs something more than just, again, joining the Facebook group. This seems like an interesting opportunity. So that was at the very beginning of the year. It was January 17th that he published that. So the question then becomes, what is the tale of the tape? What actually happened in 2019?

And the short answer is a lot. I think one of the most important things was that we had our first notable DAOs in the wake of the first DAO, right, the DAO. So I think chief among them for a lot of people was Malik. Malik was convened by Amin Soleimani from Spank Chain and a number of others and basically was designed as a funding mechanism for public infrastructure for Ethereum projects, right? So they believed that a lot of these different projects that were building on Ethereum had similar needs, similar sets of tooling needs, similar challenges, that really what they needed was a public shared infrastructure, and that perhaps a DAO was a great way to do that. And I think Mollick was notable in a couple ways and had a couple big significant impacts on the industry.

The first was that it was actually in some ways a simplification from what some of the other Dow folks were talking about, right? Even in Stefano's piece, there's, you know, this huge array of types of DAOs that he's implicating from the way that work gets done to defy kind of crypto things to political organizations. Well, Malik is taking a very different and took a very different perspective, which is that this is about resource coordination. The purpose of the DAO is one thing to pool resources and make decisions about where those resources go. That simplified vision, I think, was to the benefit of the whole DAO space by really refocusing. the energy and efforts on that very clear use case. And I think that in a lot of ways, it is this use

case of coordinating a shared pool of contributor resources is the thing that makes the most just logical next step sense when you look at over the last 15 years, let's say, the normalization of crowdfunding, right? Crowdfunding has been normalized to potentially a scary degree. If you look at the percentage of U.S. health care costs that actually are funded by GoFundMe and people have to raise from their families. There's actually even major questions about the system that it brings up, but nevertheless, the point is that crowdfunding and contributing to shared pools of resources has become normal. It is not a particularly difficult extension to say in certain contexts, you want not only to contribute to that shared pool of resources, but you actually want to have a

stake in how those resources are used. Certainly that becomes a different type of beast, but that's really what Mollick centered the narrative and the focus of Dauz around. It was from here, I have some money, to here have some money and I want to say in where it goes. And I think that that's a powerful and natural shift. A second thing that Mollick did was it created a template for others to split out from. Mollick is this very strong brand. It comes from a Ginsberg poem. Mollock was the Canaanite god of sacrifice.

So this is not the brand that everyone wants to be a brand. associate with it, even though I think it's freaking awesome and have always liked the kind of more gritty revolutionary side of things. But others, that wasn't what they wanted. And moreover, it wasn't just the brand, but maybe they wanted to focus on different things. Maybe they didn't want to fund the same types of projects. Well, we saw Metacartel spring off and kind of build both a different brand in terms of what they wanted to be seen as and how they wanted the community to feel, but also something that was slightly different focus in terms of moving away from just funding shared infrastructure for Ethereum projects to really thinking about different types of DAPs and just, again,

creating another shared pool of resources. These things aren't competitive in my mind in the sense that when you're talking about coordinating pools of capital to do things, there's going to be a lot of things that people do and different pools are going to be specialized for different different outcomes and different desired outcomes. So you saw Mollett create a template for DOWs like Meta cartel. But you also saw that even continue. So you saw that. the Lao, which was announced towards the end of last year, which is about limited liability autonomous organization. So this is a collaboration with folks from Malik and Metacartel and Open Law that is looking at how you could expand them to for-profit ventures in a way that doesn't

run afoul of the law, which is obviously a whole different dimension. You saw within the context of Ethereum, the actual the marketing doubt was announced towards the end of the year. And this is meant to be a Dow that funds, effectively, Ethereum as a decentralized protocol doesn't have a marketing department. And so marketing Dow is effectively a decentralized outsource marketing department that can accommodate the contributions of lots of people. And is theoretically, you know, they're going after projects like, I think their first initiative is to memeify Ethereum in the same way that there's a digital goal. They're looking into what the right core meme for Ethereum is, which as anyone who listen to my show for any longevity knows this has been an ongoing debate within the context of

Ethereum and what the narrative is forever, right? And it's a constantly evolving thing. I've spoken about the marketing Dow before specifically. I think it's a fascinating effort intellectually. It'll be interesting to see because I think that marketing decisions are so much more usually about gut-level sensibilities from a heretic than they are about any sort of group think. But maybe they will prove me wrong. I have both interest and skepticism. But the point relevant to this question of the tale of 2019's tape was it relates to Dao's, is neither here nor there on what I think about any one specific DAO. It's about the fact that they are starting to pop up in a much more significant way.

The very end of the year saw Ryan Zer, who previously been at Polychain Capital and then was at the Web3 Foundation, split out from the Web3 Foundation to start a new project called the Dow. So in his estimation, this is the closest thing to the intention of the original. Dow for funding in different token projects and really being a totally different take on capital allocation than the venture capital organizations that we've seen before. And again, with a for-profit model, with a lot of different mechanisms to solve some of the early issues, both from a technical standpoint, but also just from a governance and checks and balances standpoint. And so again,

when you have someone like Ryan who really can pick his type of project, his community to work than in this larger crypto community, deciding to focus on effectively resuscitating this idea that maybe got cut short because of this major hack, you have to think that there's something significant there. And lastly, just from a pure numbers perspective, Aragon, which is one of the leading infrastructures for Dow creation. They have a set of tools they've been building for three years now, building out the tooling for Dow's, had more than a thousand Dow's on Mainnet created last year. And obviously a ton of those are small experiments and, you know, one-off things. And that's fine. Like, that's kind of the point of having tooling that makes it easy is to let a thousand flowers boom. But still, the fact that it is actually a thousand flowers last year is really, really significant. And so Errigan was actually the context for doing this narrative watch now. They just announced the other day that they had started recruiting jurors for a tokenized court. And so basically, they are trying to create a, uh, subject or offline human-powered infrastructure that coordinates with the objective online

resource coordination to allow for more complex use cases for DAOs. And so I think that this is really interesting. Obviously, we could spend an entire episode just talking about objectivity, subjectivity, human participation, what it all means. But I wanted to actually turn it over to Luis from Aragon, who's one of the founders of the organization, to talk a little bit about a few things. So, first I asked him, what was the significance of the courts, why they were a game changer, what different capacity they enabled. So that was kind of question one that you'll hear in this little interview. Question two was, what's an example of time and when a DAO would need to call in these courts? What does that actually look like? And question three, which is sort of the

broadest was, you know, how much different is 20s-20 starting in the context of DAO's than 2019? is this really a sea change? Is this evolutionary? Is this revolutionary? And what does it look like for 2020? So let's turn it over to Luis Quende from Aragon for the answers to those questions. Atagon Cork is a game changer in terms of what Daos can do, because previously Daos were restricted to smart contracts. And smart contracts don't handle subjectivity very well. So otherwise, smart contracts really thrive when we're talking about interactive. that can be measured on chain. But when you think about our human interactions,

that once we do with people we work with, they are usually very subjective. So you have a bunch of things that a blockchain cannot decide. So that's where you want a court. That's what you want people to resolve disputes because they can get into the human skin and they can actually understand subjectivity. There are many examples where the court may be useful.

I think one example, for example, let's say, DAO's handle a lot of bounties and a lot of contractors because of the nature of a DAO, which can be an open DAO and then anyone can join and work for it. So I think contractors being kind of an escrow between different parties, it's quite an interesting use case for RO1 court. So you may basically have one party, which is the DAO, and this DAO wants to contract someone in instance for work the same way that protocols do that all time via work tokens. And so this DAO may need some guarantees that the contractors.

actually going to perform the work. But sometimes that work is not very objective. Sometimes that work is not just mining a block of Bitcoin and submitting a hash. So it's harder to measure what's right and what's wrong. And so there the Dow may use the court. And the contractor may also use the court to get certain guarantees that if the work is completed, the contractor is going to get paid. I think those are way better position now than they were in 2019.

I think a lot of the infrastructure now it's built. we at Oregon spent nearly three years just building this core infrastructure to make something possible that wasn't possible before, which is Daos themselves. And I think now it's a matter of finding the use cases and actually creating them and iterating on them. And I am so excited because we spend so much time building this infrastructure so that people can create Daos in literally minutes. And we have started seeing those use cases flourish in the end. So I am very happy about that, I think the prediction that I have for DAOS in 2020 is that we're just going to see another thousand of them. So we launched our going in late 2018 and now we have a thousand

dows on Mainnet. I think we're going to easily see another thousand, if not many, many more. So I'm looking forward to that. So there you have it. A thousand Dows in 2019, a thousand Dows or more in 2020. I certainly think that in some ways, that's actually a safe prediction. I don't think there'll be any less attention or interest. I guess the bigger question for me is what they actually do and will within all of these experimental use cases, there be one type of use case that really proves itself as the big opportunity. I think that any time, obviously, you start to deal with trying to herd cats, i.e. coordinate people, especially when you're coordinating people around money and you're trying to coordinate

around making decisions about money, it's an immensely complex affair. And I think that Dow's need to still be in this category of experimental. But I do think that in the same way that we saw, I believe, defy split off in a lot of ways from many other aspects of the crypto industry to really be its own sub-industry, its own phenomenon, its own community, its own set of unique challenges and opportunities that are, if related in some way, basically fundamentally different than the world of Bitcoin and money, I think that Dow's might be, or at least have the potential in this year, to carve out a similar fundamentally differentiated space.

I think this is what it looks like to see the quote-unquote crypto industry mature. People are finding their way to the part of the industry that makes the most sense to them. And often it's for very different purposes and very different outcomes. and in fact, by the time they land where they want to be, it is so fundamentally a field from other things that people call crypto or label as the same industry, that it's hard for them to abide by that label anymore. I don't know if Dow's are going to get there in 2020, but I certainly think that among the emergent phenomenon, it has to be seen as one of the most interesting experiments that has the potential to really grow into something much more significant

that it is today. It's hard for me to imagine that over the next decade, we won't fundamentally change the way that we organize. I think that organizational structures and institutional structures lag from the way that people communicate and coordinate already. And I think that they're at their breaking point in a pretty fundamental way. And maybe DAWS are part of the way that that changes. Maybe it's something else after DAWS. Either way, I think it's fascinating. I hope you enjoyed this conversation. I hope you enjoyed hearing from Aragon. So that is narrative. watch, that is The Breakdown for today. We'll be back for a recap of the week and a normal breakdown episode tomorrow, but until then, thanks for listening, and I will catch you soon.

Welcome back to The Breakdown, an everyday analysis breaking down the most important stories in Bitcoin, Crypto, and Beyond, with your host, NLW. The Breakdown is distributed by CoinDesk. Welcome back to The Breakdown. What's going on, guys? It is Friday, January 10th, and today we're to be talking about what I think is probably the most significant shaping factor in our entire industry, which is the role of governments in the crypto industry. And in particular, China and the rest of the world responding to China getting into the digital currency game. So we're going to talk a little bit about the latest news from China around its digital currency project. Then we're going to look at some new regulations going into effect in Europe and what they might mean and what

they're actually doing vis-a-vis crypto companies. And then third and finally, we're going to look at a couple different examples of U.S. regulatory arbitrage within different states and how state-level regulation is impacting crypto companies as well. But first, let's start with China. In my estimation, the most significant narrative or story of last year of 2019 was the combination of Libra and China's response to Libra. I think that if Libra had just happened as it is, it would have gotten a lot of governments to pay attention more to this industry. Certainly the U.S. government, for example, perked up in a huge way in a way that Bitcoin or ICOs even hadn't been able to make them do because of, I think, two things. One, Zuckerberg's clear track record of not particularly caring

what U.S. regulators thought. And two, the fact that he was bringing two billion people to the digital currency party. That got them thinking about digital currency in a whole different way. That got them treating Libra as a threat in a whole different way. However, what really set the trigger of the rest of the world, I think, was the additional impact of China's response to Libra and how China almost immediately started talking about how they had accelerated efforts on their digital yuan project that had started in a research and development capacity more than five years ago in 2014 and how, you know, they were talking then, and this was the middle part of last year, about how they might even be testing as early as the, you know, the winter of this year.

So the latest is that a new paper that has been released from the People's Bank of China says that, quote, the top-level design of the digital currency has been completed. It was reported on a bunch of Chinese news sites, and then it was picked up by the block. It was picked up by a couple of the folks like Matthew Graham, who are crypto-twitter, denizens in the U.S. but are based in China. And so basically the paper said that the top level of design, standard formulation, functional research and development has been completed. And the next steps are basically more testing, following the principles of stability, security, and control. And this was all from the head of the digital currency research institute at the PBOC. So basically,

everything is progressing smoothly. What does this actually mean? Well, one, we still don't have a date for when it actually launches. But two, it suggests to me that China is trying to show that they are ahead of the curve when it comes to this whole blockchain thing. They are moving more quickly than anyone else out there, that they are progressing in a way that no one else can claim to be, and that they are going to be the leader. They are going to put their stamp on this. I actually took to Twitter to ask a question about what people thought about this. Now, admittedly, Twitter is not full of China experts. It's not even really full of crypto experts, necessarily. It's full of a lot of people who have a lot of passion, a lot of strong feelings,

who are working their butts off to learn, right? So take that with a grain of salt. But I asked people basically, and this was quoting Matthew Graham, who I mentioned earlier, no global power takes blockchain more seriously than China. And I said, agree or disagree. And by and large, most people were agreeing. However, there was one comment from a friend of mine, actually a college friend of mine who I started a magazine with back in 2003 named Graham Webster, who's a China expert. He runs a China project for Yale and Stanford. And he wrote, there's an element of recognizing it is a something and trying to make sure that something supports rather than undermines the current system. So basically he's saying, China clearly thinks there's something here and they

want to direct it towards what's good for them, right? So they want to co-opt it towards their own ends. Secondly, he says, this leads to loud propaganda and a few initiatives, but hard to say if there's any, quote, serious engagement beyond vague control efforts. Now, I think a lot of folks, would point to headlines about hundreds of millions of dollars or tens of millions of dollars being spent on a provincial level around blockchain initiatives, and those seem like serious efforts, but maybe they are really just about this idea of controlling the narrative and controlling the space, and this is just part of a larger geopolitical game. Either way, I still believe that it's impossible to argue that when it comes to world powers, anyone is moving as rapidly and as quickly

and certainly as loudly as China when it comes to digital currencies. I continue to think that this will be the key story for this year and potentially beyond. And of course, one aspect of that story will be what U.S. regulators actually allow Libra to do, whether they actually allow Libra to go forward. Now, interestingly, on that front, another little bit of news, Mark Zuckerberg has just unveiled a 10-year vision plan for Facebook. And it says a ton about financials. services. It talks a lot about the opportunity to, quote, decentralized finance and business. Here's a quote directly from the post about it. Over the next decade, we hope to build the commerce and payments tools so that every small business has easy access to the same technology

that previously only big companies had. Zuckerberg says he hopes his company's efforts will, quote, go a long way towards creating more opportunity around the world. What he doesn't mention is Libra. Libra is nowhere in this. Really interesting, no matter what, but at I think that there's two possible explanations. First one is that they are playing a strategic game where a central part of their argument to regulators is that Facebook and Libra are separate, that Facebook was the initiator of Libra, but Libra is the Libra Association, and that Facebook's involvement in Libra going forward will be Calibra, the subsidiary, that builds tools for the Libra cryptocurrency.

So in this estimation, the point about not including Libra is a strategic decision that's part of ongoing attempts to get regulatory support and an argument that Facebook and Zuckerberg in particular himself have distance from the project. The perhaps more cynical take is that they're hedging and that Zuckerberg wants to give himself outs to basically fold and wrap up that project or let it kind of go by the wayside. And this is something I've talked about on this podcast before. And I certainly don't think this is the case with the people who are working on Libra for Facebook. the David Marcus's and Morgan Bellers of the world. I think they're all in it and pushing their little faces off. But it's not impossible to envision a world in which Libra ends up being a

sacrificial lamb, let's call it, for larger policy objectives as it relates to Facebook. There are still lots of outstanding questions around Facebook, around antitrust, and many other issues that are separate from Libra and potentially threaten their core business. And you can, without too much imagination, I think, see a world in which the barriers to get, Libra pushed forward are so high that they actually use it as a way to basically say, look, you know, we're willing to play ball. In fact, you know, we're willing to kill this project, which we've invested a lot of time and resources into because we couldn't get you comfortable with it. And look at us. We're turning over a new leaf and being the type of company that you

want to work with. So we'll have to see, but I certainly think that this new 10-year vision and this 2030 vision is pretty interesting as a piece of evidence one way or another. So speaking of Facebook, let's turn to another topic that relates to the kind of the global game of coins and this global regulatory arbitrage game that crypto companies have to play. We're going to be talking about a new piece of legislation called AMLD5, but first I think we have to look back at the last major European regulatory experiment called GDPR. So GDPR was a data protection act. It was intended to basically make people's data safer. And what has happened in point of fact is that it has created an entirely new compliance burden that totally benefits large companies over startups. So Antonio Garcia

Martinez, who's the author of Chaos Monkeys, he's written for Wired and many others, and his deep experience at Silicon Valley wrote, GDPR is working exactly as everyone who knew the first thing about ads thought it would. GDPR kills upstart competition by making the compliance onus even greater, which startups generally don't have the resources to deal with. This is born out in a chart that he was tweeting about that shows that Facebook and Google have each grown 80 billion over the last four years while the rest of the online ad marketplace has shrunk. The cost of compliance is so high that it actually forces competition out. It benefits rather than just burdens the largest companies because they can afford to pay to deal with the burden.

They can hire people to deal with the new compliance challenge. AMLD5 is a different type of registration. It is the fifth anti-money laundering directive, or AMLD-5. It's a European Union statute. And in the context of crypto, the challenge is that it basically requires exchanges and any custodial service providers to do a lot more, right? They have to register with a local regulator. They have to demonstrate compliance, go deep on KYC and AML procedures. and it gives basically all of the authorities and powers that be much greater power to get involved. It gives law enforcement much greater power. Let's talk first about what could be good about this.

In the long run, the companies that are able to abide by this and actually participate with it, it does bring them into the financial mainstream in a more major way. It allows potentially other financial institutions in Europe to have a higher grade of trust and so on and so forth. Anytime that a thing gets more regulated, there's some portion of the market for whom trust will increase in those entities that are now better regulated. The challenge is basically the same as GDPR in terms of who can actually pay to play, right? Who can actually deal with the new burden? An article on CoinDesk today showed that this seems to already be having an impact. So most notably is the derivative exchange Derribut has moved from the Netherlands, where it was based in Amsterdam, to Panama.

It's basically picked up and moved from Europe to get out of the way of these regulations. And basically they're saying, quote, if Deribit falls under these new regulations, this would mean we have to demand an extensive amount of information from our current and future customers. We believe that crypto markets should be freely available to most, and the new regulations would put two high barriers for the majority. of traders, both regulatory and cost-wise. It's not new to see crypto companies playing this regulatory arbitrage game where they move away from major jurisdictions to places that have more crypto-friendly policies. Obviously, finance has been on a continuous rock-skipping journey around the world. A circle left the U.S. last year. So this isn't new, but it just is another indication that we're going to continue to see crypto companies, one, be willing to move when

there's regulatory issues, and two, basically have to move. It's dramatic only in the context of seeing, on the one hand, you know, these governments that are putting so much emphasis on blockchain, you know, whatever that means, while others are effectively trying to strangle this nascent industry in its bed through regulatory. Now, of course, most regulators wouldn't say that they're doing that. They're just trying to, you know, ensure that this industry isn't used for nefarious purposes. However, it amounts to effectively the same thing. Now, the last thing I wanted to talk about today is the fact that this isn't just an issue of nation states. It is in the context of U.S. also a state-level regulatory issue. If you've ever tried to use a crypto product, for example, in the state of New York, you've probably been geofenced and geo-blocked based on where your IP address is. And that has a lot to do with the New York Department of Financial Services, NYDFS, which created a notoriously difficult license called the Bit License, which forced many companies, notably and famously, exchanges like Cracken, to leave New York because it was just so burdensome.

The latest out of New York is that the governor, Andrew Cuomo, wants to give NYDFS even more power in regulating certain types of licensed entities, including crypto companies. Basically, they feel that there are certain loopholes in terms of having to pay for assessments and oversight requirements that companies are using to get around and they want to close those loopholes. And, you know, on the one hand, this is fine. Every state has its own prerogatives. They get to decide what types of businesses they want in their jurisdictions or not. But it is starkly contrasted with the approach of other states.

For example, obviously, there's everything that's been going on in Wyoming, which has been working very hard to be the state-level pioneer of what pro-business, pro-crypto policies look like. But in other places, too, it's not just in Wyoming. Just today, news broke that Illinois had legalized blockchain contracts. They were recognizing smart contracts and other blockchain-based records as legitimate legal tools, basically. This is a area where there's obviously a little bit of a difference between smart contracts and blockchain-based contracts, and cryptocurrency businesses, on the other hand. I'm not trying to smash and minimize these different distinctions.

However, it shows, I think, the just different attitudes of policymakers and the fact that this is still such a fragmented landscape when it comes to regulatory consensus, even in the context of the U.S. The summation of all of this is that we still have a highly dynamic global regulatory environment when it comes to crypto, crypto assets, digital assets, and blockchain. And obviously, these distinctions mean something when it comes to regulatory action, when it comes to regulatory attitudes. You know, China is very clearly pro-blockchain, whatever that means, but very anti-crypto.

They're very interested in their own digital currency that uses some of the same tools while making it useful for them from a control and surveillance perspective. In Europe, they're focused on things like data and consumer protections that are running into challenges when it comes to crypto companies coming online. They're obviously antagonistic towards not only Libra-style corporate coin, but also to Chinese digital currencies and are looking into their own digital currencies at a European or national level. You have other jurisdictions around the world that are taking advantage of the big global powers antagonism towards these digital assets. assets to create friendlier pro-crypto environments. Obviously, Malta has been one, but Panama's on the scene now, as we see from Deribit. So the global game of coins is going to continue. It's going to continue to be dynamic. And I think that for crypto companies, honestly, they just have to be

prepared to pick up and move shop, which, if nothing else, is a very strong argument for remote work. Anyways, that's it for this week. That's the breakdown for today. I'm interested to see what you think. you think that China is the most aggressively involved in blockchain government in the world? Do you think that China's approach to blockchain is inherently antagonistic towards Bitcoin and the principles of Bitcoin? Do you think that they are ideologically opposed in mortal enemies in some way? Let me know what you think on Twitter at NLW. And as always, thanks for listening this week, guys, and I will catch you on Monday.