The Breakdown - The State of Crypto in 3 Themes

Starting point is 00:00:00 The CFTC seems to be looking over at the SEC, seeing what they're doing, and saying to themselves, maybe instead of waiting around for Congress, we're just going to claim our territory like the SEC is clearly trying to do as well. In either case, as an outside observer, it's pretty clear that Congress needs to get its whatever together and make a decision about how this is going to be regulated. I don't think an ever-escalating interagency turf war is the right way to approach an extremely important new growth industry for anyone at all, basically. 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 nexus.com, and FTCS, and produced and distributed by CoinDesk. What's going on, guys? It is Tuesday, July 26th, and today we are discussing the state of crypto via three themes. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating,

Starting point is 00:01:00 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.orgly slash breakdown pod. Also a disclosure as always, in addition to them being a sponsor of the show, I also work with FTX. So today we are doing a big survey of what's going on in this crypto space. As you guys know, I'm still catching up a little bit from everything that happened last week and this week shows no signs of slowing down. And interestingly, I noticed that there are sort of three sub-themes that one can organize the news into. The first is around the regulatory sphere or related to the relationship between crypto and governments. The second theme is around institutions.

Starting point is 00:01:42 Now, to read crypto-Twitter, the institutional narrative of this industry is completely dead, moribund, for the old cycle, no longer relevant. But I'm not sure that that's the case. Although what emerges as the new type of institutional engagement might look a bit different than what we thought last cycle. And finally, the third theme is new products being released, a key part, I believe, to any emergence of a new crypto cycle to come. Let's start with that first section, the regulatory sphere. And where I want to begin is with a follow-up to yesterday's discussion. Now, if you remember, yesterday was all about the Securities Exchange Commission joining the Department of Justice's charges of insider trading against a former Coinbase employee and two associates.

Starting point is 00:02:29 The weird thing about the SEC jumping on this case is that it was claiming that nine of the tokens traded were securities, but neither Coinbase, the platform where these supposed securities were traded, nor the token issuers were parted to the suit. This means they couldn't fight the accusation that they were, in fact, securities. It seemed too many like a very roundabout battle for trying to set precedent that these tokens were securities for a specific set of reasons, while not actually allowing either the issuers or the platforms to argue the counterpoint. A number of legal professionals basically said, listen, if you want to go after Coinbase, go after Coinbase, don't do it in this weird roundabout way.

Starting point is 00:03:11 Well, perhaps the battle is a little less roundabout than it first appeared. Ali Versbril, a crypto reporter at Bloomberg, wrote last night, Scoop. Coinbase is facing a U.S. probe into whether it improperly let Americans trade digital assets that should have been registered as securities, according to three people familiar with the matter. The probe by the SEC's enforcement unit predates the agency's investigation into an alleged insider trading scheme that led the regulator last week to sue a former Coinbase manager and two other people. So basically, as this tweet said, Coinbase is now facing a probe from the SEC around whether it allowed Americans to trade digital assets that should have been registered as

Starting point is 00:03:47 securities. This is not a formal press release from the SEC or Coinbase. This is a news report that is citing sources that are familiar with the investigation. Coinbase had previously disclosed regulator's scrutiny on its Q1 earnings report earlier this year, stating that the exchange had, quote, received investigative subpoenas from the SEC for documents and information about certain customer programs, operations, and intended future products, including the company's stablecoin and yield generating products. Now, some crypto critics were like, see, shut up about the inconsistency of the insider trading case, but that's not exactly the point. The point of frustration with regards to the SEC suit is due process. The problem with the charges was that the SEC

Starting point is 00:04:27 made allegations about the status of tokens without giving exchanges and the projects a right of reply in that case. What we're finding out now is that the SEC may also be interested in going after Coinbase, but unless they actually are bringing a case against them, it doesn't really change that critique. Anyway, apparently all the folks like Jake Chivinsky saying that this SEC insider trading case was something of an opening salvo have a bit more evidence in their favor today. Now, staying on the regulatory thread, the other regulator recalls, covered as part of the story yesterday was the CFTC. In the wake of the SEC joining these Department of Justice charges, a commissioner from the CFTC took the extremely

Starting point is 00:05:07 unusual step of releasing a press release condemning her fellow regulatory office for, quote, regulation by enforcement. Many have pointed out that this is a clear escalation of the crypto-turf war that has been shaping up for more than a year now between the CFTC and the SEC in the absence of real clarity around who is supposed to regulate what. Well, another news story today is that the CFTC is expanding its oversight of the crypto industry by transforming its long-running FinTech team, which was previously called Lab CFTC, into a new full office with its own director. At a Brookings Institute event on Monday, CFTC chief Rustin-Bedham said,

Starting point is 00:05:47 we have moved past the stage of digital assets as a research project. He explained that in the absence of new congressional authorization, the CFTC will be quote, thinking creatively about how to address problems in the industry. Quote, regulators must be nimble and new challenges must require us to dig deeper, take a different look into how our organic statutes promote our growth alongside the markets we regulate. In the absence of new legislative authority, we at the CFTC continue to look at how we can work to protect markets and investors within the bounds of our existing authority. Now, this is notable for a couple reasons. The biggest one being that the Lummus-Jillibrand

Starting point is 00:06:22 responsible financial innovation act gives explicit authorization to the CFTC around most crypto assets. In fact, that legislation would create a new designation of a type of commodity that looks security like for a certain part of its life, but then graduates into a commodity. Obviously, that's a pretty controversial piece of legislation, and it's not clear where it's going to land. And I think that it's reasonable to read the CFTC's actions as them not exactly having confidence that that legislation, at least as written now, is likely to go through anytime soon. What's more, it's hard for this not to feel like something of an arms race now between the SEC and the CFTC. Basically, the CFTC seems to be looking over at the SEC, seeing what they're doing, and saying to

Starting point is 00:07:05 themselves, maybe instead of waiting around for Congress, we're just going to claim our territory like the SEC is clearly trying to do as well. In either case, as an outside observer, it's pretty clear that Congress needs to get its whatever together and make a decision about how this is going be regulated. I don't think an ever-escalating interagency turf war is the right way to approach an extremely important new growth industry for anyone at all, basically. In times like these, security of your assets should be your number one priority. If you want to offset risk as much as possible and still stay in crypto, you need a trusted partner by your side. Nexo is a security-first company that manages risk by relying on mechanisms such as over-collateralization, real-time auditing,

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Starting point is 00:08:42 FtXUS is the safe, regulated way to buy and sell Bitcoin and other digital assets 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. FDX U.S. is also the only leading exchange that supports both Ethereum and Solana NFTs. When you trade NFTs on FTCS, you pay no gas fees. Download the FTCS app today and use referral code breakdown to support the show. Yet another department with a stake in crypto regulation is the Treasury Department. Another small bit of news, U.S. Congressman Josh Gotheimer has produced an amendment to the federal budget bill that would give the Treasury

Starting point is 00:09:23 Department and additional $3 million to fight crypto-related crime in 2023. The additional funding would go to the Office of Terrorism and Financial Intelligence to better purchase blockchain surveillance tools, enhance officer training, and add investigative support to the unit. Now, this is a group that has been asking Congress for more money since 2021, and the bill currently doesn't provide any additional funding to the Treasury Department or its agencies. Another area where Treasury has been engaging has been around stablecoins. In the U.S., we are anticipating major stablecoin, like, and the U.S. we are anticipating major stablecoin legislation. However, a bipartisan stablecoin bill that has been in the works for the past month has become bogged down in negotiations according to three anonymous sources. This is not

Starting point is 00:10:04 unexpected. This happens in Congress, and the bill is now expected to be held over until September when Congress returns. Lawmakers who are developing the bill are considering releasing draft language to encourage wider input. The bill has a narrow focus on establishing a regulatory framework for stablecoin issuance, including issues such as deciding whether non-bank firms are going to be allowed to issue stablecoins, determining what capital and liquidity standards for reserves there will be, and now these folks who are familiar with the negotiations are saying that there are some additional points of contention that include, one, a potential ban on commercial firms issuing stable coins, and two, the Treasury Department seeking to expand the bill in additional

Starting point is 00:10:42 areas of consumer protection, such as requiring issuers to segregate customer funds from company funds being a mandatory part of wallet design. Apparently, Republicans are arguing that wallet design should be a matter for state regulation, but treasury officials are making it clear that this is a key sticking point and that they will not support any legislation without these protections in place. Now, of course, underlying all of this is just the political reality of this moment and the question about whether there is any real appetite to get this done in advance of the midterms. That is where we'll end the regulatory side of the story for now, and I think this is going to be one of the biggest drivers of narrative in the crypto space for the rest of this year at least, and really until there is more

Starting point is 00:11:21 clarity in the U.S. We're approaching the end stage of regulatory discussions here where something, somehow, some way is going to get decided, and whatever is decided is going to have a major impact on how different types of institutions get involved. Indeed, one of the biggest implications with this regulation has to do with traditional financial institutions, and what their approach to the crypto industry will or won't be. But as we wait for that, it's interesting to see which firms in Tradfai are still making moves. Which brings us to theme two, the continued interest of the Tradfai space in the crypto industry. A few stories reflecting that theme. The first is that investment bank Mollis and Co. has started a group to focus on venture deals in the blockchain and

Starting point is 00:12:01 digital asset space. The bank is led by billionaire Ken Mollis, who, in a speech last year, likened the crypto space to the 1848 gold rush. Mollis is untroubled by the recent downturn, stating, quote, any disruptive technology is going to have volatility, and the bank has already been involved in a number of different crypto legal proceedings. So this isn't particularly novel or interesting, except in so far as it shows that slowly but surely these types of investment institutions are pointing their eyes towards crypto and finding out what their stake in this industry is. Speaking of which, UK Bank Barclays will be among the investors in cryptocurrency custody firm Copper's upcoming funding round according to a report from Sky News. Barclays is one of the UK's largest banks with total assets of

Starting point is 00:12:44 around $1.4 trillion last year. Barclays is expected to invest millions as part of the raise, which will reportedly value copper at $2 billion. Although copper is technically a UK firm, it is chosen to become regulated in Switzerland after being unable to register with the UK's Financial Conduct Authority. Finally, some prognostications from one of the financial institutions that has had the largest footprint in crypto, Alan Lane, the CEO of Silvergate, is saying that he sees more pain ahead for digital markets. Quote, but at some point, all of that will be done and then we'll just be waiting for what's the next catalyst. Lane reasserted that Silvergate continues to be interested in Bitcoin lending despite problems with the industry. He said, quote, we're absolutely still

Starting point is 00:13:26 interested in lending against Bitcoin. We believe that is some of the best lending we've ever done, and we want to continue to grow that. In January, Silvergate purchased the technology and other assets from the winding up of DM Meta's stablecoin project. They also said that their stablecoin project is on track to launch later this year. So there is theme two continued institutional interest. And theme three, and where we'll close today, is what's actually getting built. Two interesting stories on that front, and the first is Whole Punch slash Keat. There are a lot of words and companies and names and projects associated with this one. So the TLDR is that Tether and BitFinex and P-to-P infrastructure platform HyperCore have launched

Starting point is 00:14:04 Whole Punch, which builds itself as a peer-to-peer platform intended to allow developers to more easily build Web3 applications. The companies involved have committed $10 million to the buildout, and the platform will move to open source later this year after alpha testing. The first program using the protocol is Keat, which is a free video calling, text chat, and file sharing app that uses P2P. In a statement, Tether CTO Palo Arduino said, Web2 requires users giving up control of their data, which has led to the rise of monopolies and growing privacy concerns. That is why Tether and BitFinex chose to participate in the development of Whole Punch and Keat. It believes that freedom of choice, communication, and finances are the lifeblood of the future,

Starting point is 00:14:43 and anything that will enhance those freedoms is worth amplifying. Now, there's a lot more to dig into here than I particularly have time to do in the context of today's show, but one interesting note is that the Whole Punch tech stack is part of a growing trend that includes Blocks TBD project, which are focused on producing distributed protocols that are blockchain agnostic and not centered around a native token or a native blockchain. hole punch features native payments APIs that support tether's USDT and Bitcoin's Lightning Protocol. Now when it comes to the difference between WholePunch and things that Block is working on, Namseos from Bitcoin Mag tried to parse out the difference.

Starting point is 00:15:20 Quote, when it comes to Bitcoin, Keat will, through Whole Punch, provide primitives to support the P-to-P payment option in a non-custodial form. BTC and Tether payments are add-on features to provide payment rails for people using apps or that plan to offer services through Whole Punch. The creation and development of P2P infrastructure that, despite the Web3 fuss, doesn't leverage blockchain technology at all, is picking up. Recently, Jack and TBD announced Web 5. Paulo Arduino told Bitcoin magazine, quote, Web 5 has a more complex and predetermined structure

Starting point is 00:15:49 than Whole Punch. Whole Punch provides a set of primitives in the scaffolding to build applications without trying to force specific patterns. So, in terms of the response, you're seeing a lot of Bitcoiners fairly interested, but also a number of skeptics. There's a lot of deeply technical discussion, which if you're interested, go check out CSU Wildcat on Twitter who has worked on decentralized identity forever and now does so with Block for some of that. There are also a lot of people who hate Tether, who are, of course, not interested in this.

Starting point is 00:16:16 But I think the key thing to keep an eye on is this Web 3 without tokens and blockchains theme. Is this an actual trend that gets picked up? But lastly, the other build theme worth noting is kind of in the opposite sphere. That is the Web 3 with blockchains and tokens very much a part of it. it. And the piece of news there that's worth noting is the funding for APDOS. What was announced yesterday was a $150 million series A led by FTX Ventures and Jump Crypto. I will note here that I have no role with FTX ventures. It is completely outside of the purview of what I do with FTX. But what I want to flag is the provenance of the project.

Starting point is 00:16:52 Aptos is one of two big blockchain projects to split off from the former teams at Facebook and Meta who are working on Libra DM Novi. Two are Aptos and Swee. And I'm a lot of although those projects failed inside the Facebook context, I think you're going to see them as real narrative points for the industry this year. Some will cynically say there are already too many L-1s, and that this is just an attempt to capture value for a new, hypey project. There will be others who say that the L-1s that we have haven't solved all the problems to make blockchains of mainstream technology, and so bring on the competition. Whichever side of that wins out, it is going to be a narrative driver this year. And if you don't think so, just look at the history

Starting point is 00:17:31 that L1s have of driving interest, rightly or wrongly. So for now, that's all I'll mention on that front, and we'll come back to the actual specifics later. So as you can tell, things are very liminal, very in-between right now. Regulation is at an in-between and contentious state. Institutions are dabbling, but trying to figure out where they're actually going to place their bets, and kind of waiting for some amount of regulatory clarity to come as they do so. And of course, what's being built is going to be shaped by all of these discussions as well, but we're starting to see the inklings of where people are placing their bets. One thing is for sure, it will not, not be interesting. For now, I want to say thanks again to my sponsors, nex0.io, chain alysis and FTX, and thanks to you guys

Starting point is 00:18:11 for listening. Until tomorrow, be safe and take care of each other. Peace.

The Breakdown - The State of Crypto in 3 Themes

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