The Breakdown - The Top Five Stories in Crypto This Week } SEC vs. Binance, Crypto Funds Raise and More

Episode Date: September 23, 2023

NLW looks at the top five stories in crypto this past week in a live conversation with Scott Melker. SEC vs. Binance Anti CBDC Legislation Advances Crypto Funds Raise SBF Parents No More Rate Hikes Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Saturday, September 23rd, and that means it's time for the weekly recap. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link at the show notes or go to bit.ly slash breakdown pod. Hello, friends. Welcome back to the weekly recap. We once again have a conversation with Scott Melker and I about the top five stories that we saw this week. As I say at the end of the show, I think this was very, very much a liminal week, one that represents the in-between that we find ourselves, firmly after

the worst of the bear market, but certainly not yet at the beginning of a bull market. In that, there is still cleanup from the last set of things that happened, as well as inklings of people positioning for the future. And that certainly is the story that we saw this week. So with With that, let's get into this conversation, which aired live on Friday morning. How are you? Good morning. I'm doing well. I sound like at least physically, I'm doing better than you at the moment. Yeah, yeah, yeah. Actually, I feel pretty fine. I was in rough shape about two days ago. The combination of jet lag and COVID, I couldn't really understand what was going on, but the 12-hour difference from Singapore is pretty brutal. Yeah. Yeah. I literally, like,

got a sore throat on the plane like three hours before we landed. Of course. This is telling you it's coming. Well, glad you're back. Glad you're here. Thank you. Let's actually dig into what matters here. Obviously, this Binance story is first.

And I could pull up 15 articles about what's been happening with Binance. But I think we'll talk about what happened this week, which is that the SEC made some claims about shaky custody, effectively saying that, I guess you pronounce it safeu, right? That's what I've been saying, yeah. turns into Seifu and that maybe they were, you know, using that custody for U.S. assets, meaning that they were basically an off-ramp into Binance International. What do you make of this story?

So when it comes to understanding where things are with Binance and the SEC, everything is sort of just part and parcel of the biggest question that they're trying to determine, which is how much control of Binance U.S. did Binance International actually have? That's what the SEC is basically saying that there's actually no differentiation in practice. And that's the sort of core. That's the crux of their case. The part that we were discussing this week is around this company, CEFFU, for those who have seen it but not heard it. And the question is, is that actually a Binance company, which the SEC basically claims that it is. Is it? And if so, is it, does Binance US custodying its assets with Sefu effectively mean that there's no

barrier between those two? Now, the part that we were dealing with this week is actually kind of procedural because it relates to an agreement that the SEC and Binance made as part of this, that Binance International would have no access to Binance U.S. funds during the proceedings. Remember a few weeks ago, or three months ago at this point, the SEC actually wanted to freeze all of Binance U.S.'s funds so that they couldn't flow out to Binance International. Basically, they didn't get that approved, but they had sort of a more, the judge went back and said, find something more reasonable. And the more reasonable thing was Binance U.S., not, you know, them agreeing to not have any interaction with finance international, but the fact that they're

still custodying with Sefu, that's a potential complication. Now, if this feels like a lot of nuance, it is, it's relatively immaterial, probably in the last. long run for how the case resolves. It matters in terms of how much leverage in the short term the SEC has to impose sort of more punitative things against Binance U.S. Basically what the judge said was, I'm not prepared to compel, you know, any more document creation, but Binance U.S., you got to kind of, the judge basically slapped them both around a little bit and said, stop asking for, you know, preemptive judgments, SEC, and by finance, US, you've got to do more than you've been doing. But all in all, it just kind of continues to

to be a weird stalemate. And, you know, frankly, the market is doing the SEC's jobs for it, you know, to the extent that they're concerned with funds flowing to international because there aren't no funds left, you know, I think we should. Yeah, they killed Binance US merely with some claims, whether right or wrong. That is not the democratic way, in my opinion. I mean, as you said, you got the judge asked finance US and SEC to simmer down a dispute over document. I mean, you guys need to chill. Basically, like, this is too much. But I mean, to wrap a bow on this, I think it's just this is not going anywhere.

The SEC is going to continue to push against finance, but it might take quite a while for them to sort this out. And then, of course, we will wait and see if there's any criminal, you know, DOJ activity coming. But for now, I think this is just a continuation of the story that we've been telling for weeks here. 100%. Yeah. Next, USDBC efforts opposed in legislation advanced by House Republicans. The House Financial Services Committee approved a bill meant to prevent a U.S. Central Bank digital currency. Now, we've seen this taken up by a few states. A few governors have sort of used it as a talking point to say they'll never be a CBDC in the United States.

Now, coming out of committee, now listen, this is the same group of Republicans, the Tom Emmer's, the Patrick Benhnerys, the Warren Davidson's that continue to push forward crypto-friendly legislation. But this one basically saying we will never have a CBDC in the United States. So this is interesting. I think that, one, I think a lot of people are surprised that this has become sort of a meaningful issue to Republicans heading into the presidential election season, but it certainly has. And I think that it's starting to actually make more sense. If you watch the way that the discussions even of crypto and the crypto industry are evolving. So there was the Senate Oversight Committee hearing last week with Gary Gensler. And crypto really wasn't a big focus on it. it. What was clear is that Republicans have started to wrap crypto into a larger narrative, which is government expansion and sort of bureaucratic expansion. And they're sort of using crypto as Exhibit A, right, where what they are arguing is that the government under the Biden administration has tried to sort of expand its authority outside of what Congress has allowed it to do, look at the crypto industry as an example, look at Gary Gensler as sort of the chief

example. I think in some ways then, if you look at this sort of anti-CBDC legislation, in many ways, it is a preemptive strike against an expansion of government authority, in this case the Federal Reserve, and it starts to make a lot more sense as part of that overarching picture of what they're trying to argue going into the next election season. Now, the good thing for people, regardless of where they find themselves in the sort of political spectrum, is that it is rising right to the surface, really important issue. of surveillance, of power, of money questions. So it's kind of like the fact that these things are being marked up in committee,

which is what happened this week, is probably a net positive thing, almost regardless of what side of the aisle you find yourself on, assuming that you are sort of against surveillance and, you know, expanded authority over our lives. Yeah, but here's the part that got me. And this is the story in my mind. We all know Maxine Waters, of course,

She, you know, famously taking pictures with SBF, the head of these committees. This is what Maxine Waters had to say about this because the irony of this is just bewildering to me. It will keep the United States behind other countries, including China, as a race forward to develop a global standard for central bank digital currencies. She said that Republicans are taking a deeply anti-innovation stance on the technology, which has been embraced by other nations. The legislation, she said, would stifle that research and prevent. us from moving forward, even if it means that the dollar loses its status as the world's

reserve currency, and even if it means the U.S. citizens lose out on faster, cheaper, and simpler payments. Holy shit. Isn't that literally what we've been saying to her about crypto the entire time? Yes. And in fact, I bet we could dig up a quote from Brad Sherman or someone else that says something to the effect of China isn't worth following all the time. You know, it's just it's the nature of the beast. Listen, it's going to get a lot worse for. for us over the next year or so, year, whatever, 14 months, it's gonna get just sillier and sillier and sillier with the contortions

of politics heading into the election. But she's making the claim that like she's pro tech and then we should not stifle innovation and we should support faster, cheaper payments. I mean, she literally just described crypto but put it in the bundle of a CBDC instead. Well, that's me, I mean, doesn't see the nuance. Yeah, I mean, that's the,

but that's the, this is the reason people are concerned about CBDCs is that they feel like a co-optation of a lot of the things that are appealing about cryptos, but with sort of like the retained authority of the government and, you know, a mass expansion of power that comes with it rather than a distribution or a dissolution of power that comes with sort of a non-governmental system like crypto. Yeah, I agree. I just made my brain hurt when I read those comments. It was just, yeah, nothing makes me surprised anymore, but that one that one got close. Now, the next story here we have is kind of interesting because we've had a narrative that there's no money coming into crypto, right? No new money, no new funds being raised.

Everybody's having trouble fundraising. I can tell you that being in Singapore last week, I was able to outright anecdotally dispel that myth because the amount of money being spent in crypto in Asia is absolutely astounding. And I think they've taken all their budgets out of the U.S. to spend there. But it's not just anecdotal anymore. We have a few announcements just this week. CryptoVC blockchain capital scores $580 million for two new funds. I mean, you can see their portfolio. It's literally everybody in crypto. We have Nomura's Laser Digital starting a Bitcoin adoption fund for institutional investors.

Investment firm Revery launches 20 million crypto venture firm. That's a drop in the bucket. And then finally, that Tether is making a massive bet on chips and moving into AI. But do you think that we're at the point of the cycle now where we can stop talking about there being no new money in crypto or no investment and that it's all dead? Well, the interesting thing, the interesting nuance on this is that if you have talked, anyone who's talked to sort of institutional investors over the last however many months, there's been a slight different story, which is that things are a lot more quiet,

but money hasn't vacated quite the way that it seems like it might have from the outside, right? Certainly in certain, you know, pockets of areas like NFTs being down 95% to the surprise of no one. You know, like things like that, I think, are. valid, but that gets wrapped up with an overarching idea that, you know, all the money flowed out of the system. And that actually hasn't been true. What has been true is that no one has, there hasn't been a lot of action. It's been still, right? The capital hasn't been flowing. Certainly projects haven't been funded nearly the same degree, but you wouldn't really expect them

to be necessarily, right? You know, if you see this sort of cataclysmic event and you're a venture capitalist and you've got a whole slew of startups that are trying to survive, which, by the way, is the scenario for all of venture capital right now, not just crypto, because we're in a totally different environment than anyone's been in venture capital since 2007, you know, then you don't necessarily pour more fire under the problem by having more people raise. But eventually you start to, that starts to shift and you start to get rewarded for having, you know, stories of funding hit the wires and, you know, movements start to happen again. People start to position. We've been, you know, you and I have talked about this. We're in the hinterland between sort of the

worst of the bare market ending, but there's certainly not a bull market that's begun. And that's the part where at some point in there, people start positioning for the bull market that they know is inevitable. And I think the fact that you had, there's actually even another fund that launched Oak Grove, which has been out, I think, maybe of, they used to be at Sino Global, I think, one of the people there. in any case, the fact that there's three or four of these announcements in a single week suggests at least that maybe we are starting to kind of hit that period where people want to get a little bit louder again and they want to start sort of attracting capital. You also saw a couple of, we didn't put this in the story, but there were a couple of sort

of big picture funding announcements as well. A company called Bastion raised $25 million X, A16Z guys, building Web3 infrastructure for brands. So, you know, you had a slew of announcements that felt. more lively than we've seen for a while all happening at once. Feels like the industry is like the Black Knight guy in Monty Python. I'm not dead yet, but you lost your arm. Yeah, we are. Yeah, there we are.

Still fighting. Still fighting. I love that movie. I need to watch that again. Maybe while I'm sitting around doing nothing. I can add that to my list here. But the next story, obviously, is a crazy one. It's the FDX, Suez Sam Bainman-Fried's parents to clock.

back funds. Listen, maybe we all knew that this was happening. But, man, when you read this Bloomberg article, which by the way, is a tome, it's a book, right? How Sam Bainman-Frieds elite parents enabled his crypto empire literally goes into like the details of what diapers they used to put him in and how his schooling was. I mean, this is really deep. But seems that they opened a lot of doors, obviously protected him. And even at the end when likely they were insolvent took effectively a 10 million dollar gift and about 16 million in properties in the Bahamas. I mean, listen, you were pretty close to all this when it was happening, obviously. What do you make of the, the bankman freed's? A couple things. One, I think that even for folks who were there, the depth of engagement, or maybe not so much

the depth of engagement, but the, the sleaziness of some of it is surprising. You know, I think that it was quite clear to people who are inside the company that, at least Sam's dad's role was bigger than what was publicly perceived outside. It wasn't easy from inside the company to get a handle on whether it was like the actually materially important role or kind of like the kooky uncle hanging around. Frankly, it felt a little bit more like that. So there's one of the examples that is called out in the lawsuit from the FTX estate around Joe hiring his sister to run a charity hackathon in Miami.

And this is the one time in my life. I'm the guy who, like, people get credit for in the group project because I do it all. This is the one time in my life that I was like, I'm not touching this project with a 10-foot pole. I will do anything to stay away from it. But my perception was, again, Joe being kind of like the kooky uncle that Sam had, I mean, it was his dad, but it had given him the ability to do whatever he wanted. It was clearly ridiculous that he hired a sister. She was a nightmare from the get-go.

But again, these things, there's a lot of things that looked like managerial incompetence and kind of whatever from the inside, that when it turns out their exhibit 19 in a story that also involves Sam's dad setting up 100 shell companies look a lot different, you know, after the fact. I mean, listen, I guess on the giving the benefit of the doubt, anyone with connections and power would help their child. Okay. I get that part, I guess. But it seems like his mother was certainly behind the massive slew of political donations. And a story just came out claiming that she told him to hide them. Yeah, I mean, listen, the smoking guns to me,

which this will be litigated so we can speculate it all we want. It doesn't matter. It'll go through the courts. One is, it seems that Barbara was deeply involved. in the plan to have donations put in, you know, come through loans and put in the names of other people, which is illegal. So like if that is proven true, if all those emails are true, that's just, you know, it is what it is. There's no kind of debating that. Secondly, it appears, and this sort of does, I think, reflect, you know, people's perceptions, at least somewhat internally, that Joe had a significant role in structuring the company, which we know, now was structured in ways to explicitly obfuscate things, you know. But I mean, he talks about hiring,

you know, picking who was going to be hired for the law firms and stuff. And I mean, listen, Sam's whole, the thing that strikes me is weird going into this trial is that the indications that we have so far is that Sam's defense is going to largely rest on the idea that he got bad legal advice and that, you know, he was just doing what the lawyers told him to do. And, but his dad chose all the lawyers and set up the whole so it's like i don't know that's it's gonna it feels like there's gonna be a weird tension there it feels like there's gonna be a very weird tension there i think the story that really got me was where his father was pushing for a higher salary right he's only 250 000 a year wanted a million and if the story is true i mean i just looped in his mom oh my

basically said oh you don't want to give me a million talk to your mom we're going to deal with a lot of this stuff. I think the other the other interesting sub-story around SBF this week, he had tried to get out of jail in advance of the trial, but that was denied this week. So he's there until they get out. To the extent that the prosecution's goal with having him in detention was to put pressure on him to not delay the trial endlessly, which, you know, my betting a few months ago before he was locked up was that they were going to delay this trial as much as they possibly could. right? Just try to get it out of the headlines, try to get it away from the worst of the crypto cycle. Things start going well again in crypto. There's a very different public perception, whereas right now it

still feels like it's dead because of him. You know, like my guess had been that they would try to delay. Boy, as soon as he went to MDC, that changed. He was like, nope, let's do the trial. In fact, can we move it up, you know? Can we do September 25th? And they hit him with two million documents or something. I mean, just absolutely astounding. The guys in there with like a 14-4 dial-up internet trying to to go through two million documents. Yeah. This guy's not going to win. It feels like it's, I mean, I don't know, I should, we should check to see if there

are prediction markets for whether he please out at the last minute because it feels like, I don't know. I just don't know how he thinks, like he, everyone has rolled on him, like literally every single person. The only person that we don't know who would be in a position to roll on him is Trubuco. Where is Trubuco? Well, the fact that there's nothing that has been happened to him suggests that he did role and it just happened earlier than everyone else, you know? Or he's the world's greatest

hider, you know, but it doesn't even seem like they're trying to find him. So, I don't know. It's maybe he got out earlier enough. But I mean, when you look at that sort of incestuous relationship between Alameda and FDX, there's no way that he was completely oblivious to it and had no part in it. But that's just conjecture. And then the final story, obviously, is FOMC and the Fed, right. I mean, obviously, this is Bitcoin price action as a result, but we basically saw Jerome Powell do the expected 99% predictive markets had it at no rate hike for September, but he was relatively hoggish in his tone and gave the message that we would likely be higher for longer, which I think everyone is expecting. But it finally seems like markets are starting to react to that, right?

It's almost like nobody's believed the guy for a year and a half and all of a sudden they believe him today. Listen, there's a lot to critique Powell for, particularly how long they waited, I think, to start, you know, trying to pursue inflation after it happened. I think history will judge them harshly for that. But subsequent to getting on the page, he's followed through to the letter with everything that he said at every point, despite the fact that for the entire time, markets have, you know, flipped their nose at him and said, we don't believe you. I think that you're right, that the story of this time was that it finally seems like they're buying the story, you know?

That's my feeling as well. I was literally just trying to pull up a chart to see how bad the markets were looking at it. It's not great. I mean, this is the first time. I think it's the worst week that the markets have had since last year since December. I think we had some of the worst days that we've had since December. And actually, I'm kind of encouraged that Bitcoin is sort of just hanging out. Yeah.

I mean, you and I kind of talked about this, I think, two weeks. ago that it feels like we might finally have hit the rational price bottom for this part of the cycle where it's sort of it's not the like scary things are going bad all the time you know price and it's also not the hey things are probably getting better now price but it's sort of just the we're fine to live here forever forever as long as it takes price you know who knows that could change but the lack of reaction or at least the very temporary reaction to all of the sort of macro news this week suggests that to some extent, I think. I just find it really surprising that when he did exactly what he said he was going to do once

again and nothing changed, all of a sudden there seems to be this panic. I mean, do you think that it's just been hanging by such a thin thread that's, you know, anything, maybe he needed to say something positive? What do people expect? I just don't understand what the anticipation was. I don't know that we've ever had, I mean, this would be interesting for market historians. the degree to which enthusiasm around artificial intelligence has backstopped the market this year is fairly astounding. And to your point, nothing has really changed at all throughout this entire

year in terms of high interest rates have been there. It has it. There's been no indication that anything around that is going to change. Powell continues to say that, you know, the, I mean, the dot plot shows that by and large, I think 12 out of the 19 predict there's at least one more hike this year. We're down to potentially two reductions next year from the four that were anticipated back in June. So none of that's changed, right? We live through the banking crisis. It's just that, you know, this sort of enthusiasm around not just specific stocks, although that's obviously a big piece of it, but the idea that we are on the verge of unlocking a fundamental productivity gain and the fact that this market hasn't wanted to believe the bad stuff for so long,

so they were able to cling on to that. But it's, you know, the question, I think for a long time has been how long can that countervailing force hold back the tide of just sort of the general malaise of the rest of it? And the answer was never going to be forever, right? So I don't know. Maybe, maybe again, it's just kind of part and parcel of the market accepting the higher for longer thing. And, you know, maybe they'll rebound again.

I was just saying maybe we're talking next Friday and we're back at the highs and it was, we're like, why does we cover that story? To the extent that it's, to the extent that I and other people who have argued this are right, that it's a lot driven by the AI theme, there's going to be a lot of product announcements this fall because the competition is on aggressively, you know? And so who knows what combination of, you know, Google announcing Gemini and Facebook racing the Lama 3 and all these sort of things might change that again. especially if the market continues to do what it seems like it's done for the last 18 months,

which is just look for any sliver of positive news that it can pile in on rather than dealing with the reality of the situation. For sure. How much do you use AI personally? I mean, listen, you create content. I use chat GPT every day. You? Nonstop throughout the day.

I mean, I have five or six different categories that I use on a fairly daily basis. on chat so jet gpti images image creation editing uh social media curation voice uh synthesis stuff is not daily but it's probably you know every every couple weeks uh and then and then i from a sort of pure learning but it's not for any applied purpose the video generation stuff is something that i'm playing around with but certainly for for me actually the image generation is the stuff that i use most Because it's just, there's so many thumbnails to create, you know, so many newsletter images to create. That's my number one. Do you primarily use mid-Journey?

I do. I haven't tried it yet. That sounds sad to admit. I'm a mid-Journey stand, although OpenAI just announced Bally 3 coming to ChatGypte plus. It does. Yeah. And ChatTPT eventually got rid of the web search part, which I found quite annoying. Yeah.

So it's interesting because they were, they were sort of pressured into doing it. I don't think that they wanted to. I think that they had concerns from a safety perspective because it kind of nullifies the whole, you know, it creates new risk, let's put it that way. And they kind of got pressured into it from a market perspective. And then they turned it off because people were using it to get around paywalls. And, you know, either one, they haven't figured out how to solve that problem or two, it's a convenient reason to keep it turned off for the moment.

You know, I think either is plausible. All right, man, I love it. We knocked that out in 30 minutes. I think that I think this was a 30 minute week. There's a lot, a lot of stuff, but still very, very in between, very liminal, right? Is Binance continuing to, you know, be in this fight, continuing to recede from the U.S., continuing to, you know, figure out where it's going to land globally? it's, you know, the beginnings, the embers of capital, you know, kind of showing its head again

in the space. You know, it's all these sort of things that are, you know, it's not big, like, pounding news. It's, you know, stuff that's going to show up and be relevant in a few weeks, few months. I'm glad it doesn't mean it means we don't need to talk it all to death and we can cover it rather quickly. Guys, everybody follow NLW. You can check this out off obviously on his audio and YouTube channel as well. And I will once again, every single week tell you just listen to the breakdown every day and you won't have to listen to anything else. Thank you so much, man. I appreciate it. As usual, see you next Friday. Cheers, guys.