The Breakdown - The Industry Coalesces Around Ripple’s Battle Against the SEC

Starting point is 00:00:00 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.io, Circle, and FtX, and produced and distributed by CoinDesk. What's going on, guys? It is Saturday, November 5th, and that means it's time for the weekly recap. One note before we dive into that, though, there are two ways to listen to the Breakdown podcast. You can listen on the Coin Desk Podcast Network feed, which comes out every afternoon and features other great Coin Desk shows, or you can listen on the breakdown only feed, which comes out a few hours later in the evening. Wherever you are listening, I would so appreciate it if you would take the time to leave a rating or a review,

Starting point is 00:00:48 it makes a huge difference and I appreciate each and every one. Lastly, a disclosure as always. In addition to them being a sponsor of the show, I also work with FTX. All right, guys, well, for this weekly recap, there is so much news that we didn't have a chance to explore. so let's try to cram the most important stuff in. One of the big themes of the week is what the heck is going on with Web 2. Now, we recently talked about Reddit's digital collectibles, aka NFTs, and how they had brought a whole new group of users in,

Starting point is 00:01:16 why the rebranding maybe mattered and why it suggested that these sort of fun avatars actually might have legs. However, of course, one of the things that this week will be known for in the future is as the first week that Elon Musk was at the helm of Twitter. On that front, it has been a week of tremendous change. Earlier on the week, I did the TLDR up to that point, including the back and forth on the blue check conversation. The update on that is that it's going live. On Tuesday, Elon tweeted, Twitter's current lords and peasant system for who has or doesn't have a blue check mark is bullshit.

Starting point is 00:01:48 Power to the people. Blue for $8 a month. Price adjusted by country proportionate to purchasing power parity. You will also get priority in replies, mentions and searches, which is essential to defeat spam and scam, ability to post long video and audio, and half as many ads, and paywall bypass for publishers willing to work with us. This will also give Twitter a new revenue stream to reward content creators. There will be a secondary tag below the name for someone who is a public figure, which is already the case for politicians. Now, it has been unbelievable to me just how much debate around this policy there's been. Elon's been in fights with politicians, with journalists,

Starting point is 00:02:23 you name it. Now, I will say that one of the silliest parts of this discourse has been the attempt to branded as some sort of anti-elite thing. Elon Deputy David Sacks tweeted, The entitled Elite is not mad that they have to pay $8 a month. They're mad that anyone can pay $8 a month. I have a general rule that if someone is using the word elite or elites non-ironically, they're a politician trying to sell you something, no matter what their actual job is. Kobe retweeted Sacks and said, bro, the elite are the ones trying to make us pay $8 a month.

Starting point is 00:02:51 The richest man in the world wants everyone to pay him $100 a year, and he and his Silicon Valley billionaire friends are positioning this as anti-elite. to pay too, not a complaint about paying. Also think verification should be much more widespread, too, to counter spam. But the actual elites, richest man on earth, SV billionaires, biggest VCs in the world, are now the private owners of Twitter. They are the elites. I'm happy to pay. Twitter needs the money and I get a lot of value from Twitter. But come on, this is not a fuck you to the elites. Maybe it's a fuck you to the New York Times journalist who thinks he's better than everyone because he has a checkmark. Fuck that guy, sure. But if you think the New York Times

Starting point is 00:03:22 journalist is probably more of an elite than Elon Musk and David Sacks, A16Z financers, etc., well, Yeah, all right then. Anyway, back to NLW. I think the verbal sparring is funny, so whatever. And also, as I said on my earlier episode, I think that the experiment of putting in an actual subscription model on a social network is potentially a highly relevant one. A bigger deal in real life is the huge number of firings

Starting point is 00:03:44 that were slated to happen on Friday. It is, frankly, a mess. I think it's part and parcel of something that we talked about earlier in the week again, the radical cost-cutting that has to happen all at once, the Band-Aid rip-off period. I also think there is a broader resetting of headcount at tech firms beyond Twitter as well in a world where investors don't care about growth at any cost and in fact want to see profitable companies again. Whatever the case, it is unlikely that these Twitter firings are going to be

Starting point is 00:04:09 clean and easy. There are already class action lawsuits for violation of a California workplace law that requires 60 days notice for layoffs of 50 people or more. And even if a dramatic cut is the right thing for Twitter as a business, I definitely feel for everyone living through that chaos. Now, as you would expect, with fewer human resources, some projects are going to have to get shelved, and it appears that at least one is crypto-related. According to Tech News Source platformer, Twitter is set to shelf plans to build a crypto wallet under its new ownership. One of the big losers of that news is Doge, which is down 10% since the news broke, although that could also just simply be a retracement, given that it had doubled in price following the Elon Takeover News.

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Starting point is 00:06:07 with up to 85% lower fees than competitors. There are no fixed minimum fees, no ACH transaction fees, and no withdrawal fees. One of the largest exchanges in the U.S. FTXUS is also the only leading exchange that supports both Ethereum and Solana NFTs. When you trade NFTs on FTCX, you pay no gas fees. Download the FTCX app today. and use referral code breakdown to support the show. Twitter was not the only Web2 company making news around crypto.

Starting point is 00:06:40 On November 2nd, Meta tweeted, soon you'll be able to make and sell NFTs on Instagram, starting with Polygon. You can also now connect to Solana and Phantom Wallet and see information about your OpenC collection. So what happened is that Meta announced that it would launch a feature allowing digital creators to mint and sell NFTs directly on Instagram in the near future.

Starting point is 00:06:58 In late September, Instagram enabled the connection of crypto wallets for the purpose of showcasing NFTs, but this latest feature is billed as an end-to-end toolkit for NFT creation and sale, both within and outside of Instagram. Meta said they would not be charging fees for displaying NFTs and will not charge additional fees for selling NFTs until at least 2024. However, in deference to Apple's recent policy shift, NFT purchases will be subject to the relevant app store fees. Also at launch, Instagram will be covering all gas fees. Meta is also following in Reddit's footsteps by adopting the digital collectible branding.

Starting point is 00:07:29 There's a strong push from the folks at Meta to position this in the context of creators. Stephanie Casreal, who leads commerce fintech and web 3 at Meta, wrote, it's Creator Week at Meta and we're announcing a bunch of new tools to help creators build their businesses, including a way to make and sell digital collectibles, NFTs, write on Instagram. Blockchain has a role in this because it can enable entirely new business models for creators that give them more control over their work in audiences and how they monetize.

Starting point is 00:07:54 But for this tech to truly boost economic opportunity for creators, it needs to be easier to use. By introducing NFTs natively on Instagram, we hope to achieve this and facilitate. facilitate new forms of connection between billions of people and their favorite creators. Chris Cantino tweeted 95% of Instagram users have never owned crypto or experienced NFTs in the wild. Now they're about to witness many of their favorite creators make and sell digital collectibles for the first time. This is the journey to mass adoption, and things are starting to get interesting. Now, Polygon, who are powering a lot of these features for Instagram, were also featured in another bit of news.

Starting point is 00:08:27 Just this week, J.P. Morgan announced their first live trade on blockchain. Ty Lobin, who runs Web3 products and Onyx digital assets at Onyx by J.P. Morgan tweets World! J.P. Morgan has executed its first live trade on public blockchain using defy, tokenized deposits, and verifiable credentials. First, we used Polygon for the trade because we wanted to do this on Ethereum and needed cheap gas fees for some expensive operations around identity verification. Future phases of Guardian will explore other blockchains, too, given the MAS goal for open and interoperable networks. Second, we used AVE so that we can leverage their permission pools concept. We deployed a modified version of Ave Arc so that we could

Starting point is 00:09:03 set certain parameters such as interest rates and foreign exchange rates. Third, we issued tokenized Singapore dollar deposits. This is a deposit token, which is a general liability of JPMorgan. It's a native token given stable on-chain value without the scalability issues of stable coins. This is the first issuance of tokenized deposits by a bank. Now, tie goes on, there's a huge amount going into this, and I think it's a really good description of just how complex it is for one of these firms to move into this very new way of doing business. Will Clemente included this J.P. Morgan news in a tweet that's a perfect embodiment of the post-narrative institutionalization theme that I keep harping on. Will writes, this year, BlackRock announced a Bitcoin offering to its clients. Fidelity has

Starting point is 00:09:44 offered Bitcoin in retirement accounts and commission-free crypto trading. J.P. Morgan just used a defy application. Visa has a crypto debit card. Google announced a blockchain node service. The list goes on. Now, you might have noticed among that list Fidelity launching commission-free trading, so what's that about? On Thursday, the company tweeted, get on the early-access list to trade Bitcoin and Ethereum and discover educational resources that make crypto a lot less cryptic. TLDR, on Thursday morning, Fidelity opened an early-access waitlist to users for a commission-free crypto brokerage. The way the commission-free works is that the firm is factoring in a 1% spread on every trade execution, which means that it isn't exactly really commission-free, but it's labeled as such, and to the extent that this reduces the feelings of barrier to entry, I suppose that's a good thing.

Starting point is 00:10:29 At the beginning, it will offer just Bitcoin and Ether and will use custody and trading services from Fidelity Digital Assets. There is a $1 account minimum. Now, in a statement shared with CNBC, Fidelity said, quote, Where our customers invest matters more than ever. A meaningful portion of Fidelity customers are already invested. in and own crypto. We are providing them with tools to support their choice so they can benefit from Fidelity's education, research, and technology. Now, it's easy to write off Fidelity as always

Starting point is 00:10:55 having been a little bit ahead of the curve when it comes to crypto. But let us not forget that they're a $9.9 trillion asset manager. And they're telling CNBC they're just responding to customer demand. Now, looking to other parts of the crypto industry, there is definitely some legal opinion alignment coalescing going on. Coinbase has petitioned to file a friend of the court or amicus brief in the SEC's case against ripple. The exchange joins the blockchain association and seeking to weigh in on the lawsuit. The Coinbase brief focuses on whether the SEC provided fair notice to ripple prior to bringing enforcement action. This echoes a common critique that the SEC has failed to provide clear guidance to the industry. Coinbase's filing said,

Starting point is 00:11:34 quote, given the absence of SEC rulemaking for the crypto industry, the question of whether the SEC has given fair notice before bringing an enforcement action against sales of one of the thousands of unique digital assets will often be highly fact-intensive, which makes it particularly ill-suited for adjudication on summary judgment. The filing also highlighted the inconsistency in the SEC's enforcement approach, creating unnecessary uncertainty for the industry. In addition, they write, existing SEC registration requirements for national securities exchanges are currently unsuitable to the way digital asset platforms operate. Existing SEC requirements, however, only allow broker-dealers to be members of registered securities exchanges, meaning that

Starting point is 00:12:10 Retail customers can only trade assets on exchanges indirectly by using the services of broker dealers that charge transaction fees and add intermediation risks that could be avoided on digital asset trading platforms again to the benefit of customers. Now, when it comes to the Blockchain Association's amicus brief, Jake Trevinsky, the head of policy at the Blockchain Association, tweeted a long thread which I'll excerpt here. He wrote, I'm proud to announce that blockchain association has filed an amicus brief in the SEC's case against ripple. In short, the SEC is wrong on the law, and its pattern of regulation by enforcement is harmful to both U.S. crypto companies and the investors that it's meant to protect.

Starting point is 00:12:43 From our introduction and summary of argument, SEC Chair Gary Gensler recently opined without significant explanation that the, quote, vast majority of tokens are securities. Put simply, that view should not be, cannot be the law. For years, the SEC has refused to provide guidance on the definition of an investment contract. Instead, the SEC pretends the law is clear, and then pronounces its views for the first time in actions like this one. That's regulation by enforcement. Yet again, the SEC has expressed its views on crypto to a federal court in a motion for summary judgment, rather than to the American people in guidance or rulemaking. The SEC's views are wrong as a matter of law and policy. Now, the big thing that Jake and the blockchain association get into here

Starting point is 00:13:22 is that the SEC fails to distinguish between primary sales, i.e. the first time a token is sold versus downstream transactions, the permissionless transactions that happen without any knowledge or control by whoever started the project in the first place. Going back to Jake's thread, As a result, the SEC doesn't even seem to bother analyzing whether secondary sales of XRP qualify as securities transactions, despite alleging violations through the present day. Instead, the SEC apparently takes a position once a security, always a security, no matter what. The distinction between primary and secondary sales is critical. The SEC's allegations about the secondary market led U.S. trading platforms to delist XRP in December

Starting point is 00:13:59 2020, causing a dramatic price crash and hurting the same XRP holders whom the SEC is supposed to protect. The SEC carries the burden of proving not only that XRP was a security in the past, but is a security now. It didn't even try. The SEC instead relies on an extremely broad view of Howie, far beyond with the law supports. The SEC takes a test meant to define a specific type of relationship between transacting parties and reimagined it to capture basically every asset in the world with the marketplace. Seemingly to justify, expanding its own authority over crypto as much as possible, the SEC stretches all four prongs of Howie beyond the limits of logic and legal precedent. I wish the SEC would take more sensible positions on crypto, but until then,

Starting point is 00:14:38 there's sadly no choice but to fight this out in the courts. The whole thread has as clear as worth a read. Now, a last note before I let you guys get out of here and onto your weekend, an interesting survey from Grayscale. Fears over inflation and the struggling economy have caused growing interest in crypto for a quarter of respondents to Grayscale's recent poll of American voters. Among young and diverse voters, economic concerns were an even stronger driver of interest in crypto. Nearly 40% of voters under the age of 45 reported being more interested in crypto due to the current economic climate, compared to only 15% over the age of 45. Around a third of black and Latino voters said they were interested in crypto due to the economy, while only 21% of white voters answered

Starting point is 00:15:17 in the same way. Over half of the voters who did not already own crypto said they were waiting for the economy to improve before investing. Roughly a third of black, Latino, and younger voters already owned crypto assets. Part of the objective of this survey was to find out how people felt heading into U.S. midterm elections, which are being held next week. And as a quick aside now, and I'll probably mention it again, instead of Veterans Day Off, which is at the end of next week, CoinDest takes off Election Day, so there will be no show on Tuesday. Anyways, 37% of respondents said they would factor in a candidate's stance on crypto before casting their vote. While the importance of crypto policy among voters is still yet to be determined,

Starting point is 00:15:53 gray scale's polling at least indicates that the overwhelming majority of voters want more crypto-savvy politicians. And they want those politicians to get moving on establishing a clear regulatory framework for crypto. Over 80% of Democrats surveyed and 77% of Republicans want clearer regulation, both for the industry and for investors. Three quarters of voters said they don't understand current regulations, and 57% said they'd be more interested in investing in cryptocurrencies if regulations were clearer. What's more, over 80% of both Republicans and Democrats agree they wanted the government to take a consumer-first approach to regulation, i.e., allowing individual investors to make their own decisions about if and how to invest in the crypto markets.

Starting point is 00:16:31 I don't think crypto is going to be a huge point of contention in this particular election. I do think this election is going to have significant implications for crypto. And I think what's clear is that if you take a longer term horizon, this is an issue that is growing in importance for a growing number of voters across both sides of the aisle. It is one that is simply put, not ignorable any longer. For now, I want to say thanks again to my sponsors, nexus.com.com, and FTCS. And thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace. Thank you.

The Breakdown - The Industry Coalesces Around Ripple’s Battle Against the SEC

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