The Breakdown - The Great Repricing Comes to Crypto

Starting point is 00:00:04 Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexo.com, near NFTX, and produced and distributed by CoinDesk. What's going on, guys? It is Wednesday, June 8th, and today we are talking about, well, so many things going on in the crypto industry. 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 dig deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. Also, a disclosure as always, in addition to them being a sponsor

Starting point is 00:00:51 of the show, I also work with FTX. Now, you have been hearing me talk about the consensus event happening down in Austin this week for months now, and I wanted to give you guys just a quick heads up that because of the event and a little bit of chaos with people on the production team of the breakdown going down there and planning on some really cool interviews for later this week, we're going to be recording things a little in advance. So I'm actually recording this on Tuesday night. And that's fine because I had planned on covering just a slew of crypto news before the Responsible Financial Innovation Act came out today and pushed it all aside. But if at any point you're listening this week and you're thinking to yourself, hey, didn't that

Starting point is 00:01:29 happened yesterday, that's why now you know. So where we're going to start today with this grab bag of crypto industry news is actually a bit of a follow-up to the Lummis-Gillibrand Responsible Financial Innovation Act. The reaction so far as I can tell within the crypto space continues to be mainstream positive or at least optimistic. You have some Bitcoiners who think that any regulation is going to reduce the rights of Bitcoin holding Americans, and you also have the other side of the Web 3 folks who are really concerned with some of the definitions surrounding Defi and those issues, but in general, people think that we have here a good starting base, and everyone recognizes that this is likely to be a long process. Now, when it comes

Starting point is 00:02:15 to the mainstream, some consumer advocacy groups were not really happy. Better Markets is a Washington base group that often seeks to counter financial industry lobbying, and crypto has now become a target for them as well. Dennis Kelleher, the CEO, said the bill gives the industry what it wants most, the commodities futures trading commission as its primary regulator, even though it exists to police markets where physical producers and purchases of commodities like corn, wheat, oil, natural gas, hogs, and cattle hedged their price risk to facilitate the delivery of everyday goods to the American people.

Starting point is 00:02:49 Kelleher argues that the crypto industry simply wants the CFTC as a watchdog because it's the smallest regulator with the smallest budget. Now, in my experience, the crypto industry wants the CFTC to be involved with regulation because they believe that mature cryptocurrencies better resemble commodities than securities. The CFTC has also been involved with this industry for a long time. But frankly, more important than any of that opinion is that this bill is arguing for a new definition of something called an ancillary asset that looks like a security and indeed meets parts of the Howie test but is a commodity in practice.

Starting point is 00:03:24 You are crazy if you think that this isn't going to create a huge amount of debate. It represents a potential challenge to the Howie Test as the chief determinant of what a security is or isn't. And so I just sort of think that if that's your belief, you're going to have your chance to fight that battle. Another consumer advocacy group, which by the way is really great political branding, given that it's really just another type of lobbying association, is the Americans for Financial Reform. Mark Hayes, a policy analyst for that group, pretty well outs himself as just angry at this industry here, saying, too many lawmakers are rushing to introduce legislation that, in the name of fostering innovation, could legitimize bad actors and bad practices. Just because an industry that pumps millions into the political process claims it is innovative does not mean it deserves its own special rulebook.

Starting point is 00:04:13 At the risk of dignifying that with a response, I think that the reality is that we're dealing with an internet-native world. Crypto assets, digital assets, this whole new world of different types of tokens, are a byproduct of what we can do with technology now and how it intersects with financial markets. No one is asking for a special rulebook. People are asking for deliberate consideration based on the realities of these new opportunities. Luckily, it seems like a lot of folks in Washington are starting to get exactly that. Nexo lets you easily buy crypto with your bank card and earn industry-leading interest rates. Earned up to 16% on crypto and up to 12% on stable coins. Nexo makes passive income

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Starting point is 00:06:17 When you trade NFTs on FTCS, you pay no gas fees. Download the FTCX app today and use referral code breakdown to support the show. There was some more interesting news specifically on the front of the SEC. Earlier this week, Bloomberg reported that the SEC is investigating whether Binance's BNB token was a security at the time of its sale in 2017. Binance released a statement, it would not be appropriate for us to comment on our ongoing conversations with regulators, which include education, assistance, and voluntary responses to information requests.

Starting point is 00:06:54 Now, this one generated very different reactions in the crypto space. Anthony Sassano, who's the founder of the Daily Gway, said, why are people surprised that the SEC thinks BNB is a security? Besides XRP, I think BNB is the most obvious security in crypto. I mean, it lives or dies based on the activities of one centralized mega company that owns most of the supply. Jake Trevinsky, the head of policy at the Blockchain Association, responded to Anthony saying, surprised because it took them five years to figure out.

Starting point is 00:07:23 others like J.W. Verrett, who is a policy advisor at Masari and a securities law professor, had the exact opposite take from a legal perspective. He writes, B&B is clearly not a security. Sales of B&B are not a sale or offer of a security. That analysis is a no-brainer. It is also worth noting that just because the SEC is investigating something doesn't mean that an enforcement action will be taken. This is exactly the type of story that offers great headlines, even though it's very in-media's race and doesn't necessarily have a lot to go on. This, however, wasn't the only Binance feature in the news. Crypto Bobby Rob Payone, the founder of Proof of Talent, wrote, Reuters article about Binance

Starting point is 00:08:06 drops a few hours before the SEC announces a probe regarding Binance and B&B. Surely can't be coordinated. What he's referring to is a new report from Reuters that stated that Binance was used to process transaction totaling at least $2.35 billion in illicit funds, including stolen by the North Korean Lazarus Group. Reuters said that between 2017 and 2021, Binance was used to process these transactions with these billions of dollars that were associated with hacks, investment frauds, and illegal drug sales.

Starting point is 00:08:38 Binance seemed to know that this story was coming. They had last week published an extensive piece about AML and their practices there, and when the story broke, they released a statement that said many Binance team members were involved in the initial investigation. We proactively share intelligence with law enforcement, to map out North Korea's modus operandi globally.

Starting point is 00:08:57 CZ also took to Twitter to respond saying, Build, debunks, FUD. This is 50-plus pages of email records between our cybersecurity team, ex-law enforcement background, and the cherry-picking misleading and time-wasting journalists. If you have time to waste, see the details and truth for yourself.

Starting point is 00:09:14 Now, moving on from Binance, there was another SEC story that I thought was really interesting, although something that I think I'm going to cover later in the context of a different piece. Apparently, the SEC is weighing changing stock market rules to try to go after payment for order flow. That's the process by which large wholesale brokers such as Citadel Securities pay retail brokerages like Robin Hood to process their orders. This has come under focus as Robin Hood used this

Starting point is 00:09:39 strategy to offer no commission trading, and many have looked at it as part of the problem around the GameStop saga, for example. Now, I am planning a show later this week recapping the GameStop saga and everything that happened there and catching up on what's been happening with retail investing since then. So I will save much of this for later, but I just wanted to flag it as something interesting. Now, staying on the pain train, I have called what's going on in public markets the great repricing. What I mean by that is that I think markets aren't just punishing tech stocks for being risky. I think they're going through a more core reevaluation of the relationship to public market valuations between public market valuations and fundamentals, revenue, profit, all that

Starting point is 00:10:25 sort of, you know, business stuff. Effectively, in a world of unlimited liquidity, fundamentals didn't matter all that much. Everyone was pushed farther and farther out on the risk curve looking for yield. In a world where the Fed is actively extracting liquidity, where yield is coming back to traditional areas, well, then fundamentals start to matter again. I also think that it's not just the Fed. Obviously, that is a big part, but there are other factors too. Some of this has to do with the settling of post-pandemic behaviors. Things that seemed like a revolutionary and all-encompassing part of the future that maybe now seem less dominant than they once had appeared.

Starting point is 00:11:03 There's also the VC subsidy game, which is starting to dry up. For a very long time, the paradigm has been growth at any cost. And many commentators have noted that business models of companies like Uber were sort of reliant on private market capital to make business models work. It's probably worth a whole show about all of this, but the point for now is that there is a great repricing. It's started in public markets and now we're finally seeing it move to private markets as well. This week, that came to crypto. Frank Jeparo, the news director at the block, says Scoop. BlockFi is raising a downround at $1 billion valuation according to sources. Firm raised at a $3 billion valuation in March 2021. Private valuations

Starting point is 00:11:45 are being adjusted. So there aren't that many details here yet, and all of this is according to three sources with knowledge of the process, but it appears that BlockFi is in the process of closing what's known as a down round, where funds are raised at a lower valuation compared to previous raises. BlockFi closed around in March of last year that was a $350 million raise on a $3 billion valuation, but in the summer and fall, it was reportedly raising funds at a $5 billion valuation. Now, the vast majority of the majority of the cost of the cost of year. Now, the vast majority of of the commentary that I've seen followed something from Jason Choi, who was formerly at the Spartan Group and also does the BlockCrunch podcast. He writes, 66% discount to previous round for BlockFi's

Starting point is 00:12:27 latest. Primary markets beginning to adjust. I think though that it's more complicated than some of the chatter on Twitter is making it. BlockFi isn't just a private crypto company going through the great repricing. That $5 million round was halted by serious legal battles coming to Block Fy's front door. These are battles that are fairly existential for BlockFi and are about whether they are allowed to offer their core product. There remains some serious lack of clarity around those battles even today. So I don't think it's as clean as just saying that down rounds are coming to crypto, although I do think that this great repricing is going to come everywhere. Still, we don't know about all of the internals and to what extent this has to do with the legal troubles versus just the

Starting point is 00:13:12 general market conditions changing, and so I do think that it's okay to focus on the question of whether those market conditions changing are going to have impacts elsewhere. Ryan Selkis from Masari seems to think so. He tweets, just received a private OTC bid 35% lower than 30 days ago for a high-flying crypto startup. My answer is still no. VC markets catching up to public markets and no one is safe from mean reversion. Ego hit for some founders, good for literally everyone else on the cap table. Crypto companies are also reeling in the public markets. The big thing you've probably heard about this week is the hiring freeze from Coinbase. Now, this is pretty brutal.

Starting point is 00:13:51 They went from pitching how many people they were going to hire this year, to saying that they were in a hiring freeze but not rescinding offers, to actually rescinding accepted offers, which just sucks. Now, I don't think this is about cash, obviously. Coinbase has a lot of cash on its balance sheet. It's about coming into a bare market when your business is, heavily retail-driven and realizing that you just might have hired too many people. Still, rescinding accepted offers is really tough and clearly Coinbase thinks that the negative

Starting point is 00:14:21 PR fallout from that was going to be less bad than Wall Street's reaction to it. As you can probably tell from today's show, we are in some turbulent times in this industry. And that's to be expected. We are coming off of a big bull run. We are in the midst of a total transition in terms of the dominant monetary parity. that we are living within, and we are all building ultimately on what is just shifting sand. If there is something to be optimistic about, it's that these times are always really, really important for this industry to sluff off some of the excess to re-evaluate what's important and to concentrate resources on what's worth doing.

Starting point is 00:15:00 For now, I want to say thanks again to my sponsors nexo.io, near an FtX, and thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace. Hey, Breakdown listeners, come join CoinDesk's Consensus 2020, the festival for the decentralized world this June 9th through the 12th in Austin, Texas. This is the only festival showcasing and celebrating all sides of blockchain, crypto ecosystems, Web 3, and the Metaverse, and is designed for crypto-newbies, investors, entrepreneurs, developers, and creators. Use code Breakdown to get 15% off your pass at CoinDesk.com

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The Breakdown - The Great Repricing Comes to Crypto

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