The Breakdown - The US Is Officially the Global Leader in Bitcoin Mining

Episode Date: October 14, 2021

This episode is sponsored by NYDIG. Today on “The Breakdown,” NLW looks at how the United States has been perhaps the greatest beneficiary of the Great Hashrate Migration away from China following the country’s mining ban in May. This has political implications for how bitcoin is treated in the U.S. At the same time, the U.S.’ overall regulatory stance toward crypto remains confused. NLW looks at comments from three separate SEC commissioners that show three separate perspectives on the industry.  NYDIG, the institutional-grade platform for bitcoin, is making it possible for thousands of banks who have trusted relationships with hundreds of millions of customers, to offer Bitcoin. Learn more at NYDIG.com/NLW. Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Join the discussion: https://discord.gg/VrKRrfKCz8   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW “The Breakdown” is written, produced by and features NLW, with editing by Rob Mitchell and additional production support by Eleanor Pahl. Adam B. Levine is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsor is “Only in Time” by Abloom. Image credit: Yurchello108/iStock/Getty Images Plus, modified by CoinDesk.

This is the moment to reinforce and to claim the U.S.'s role as a leader in this emergent space and as an innovator in this emergent space. And it would be a damn shame to take this unforced error from one of our biggest geopolitical competitors and do nothing with it. 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 Night. dig and produced and distributed by CoinDesk.

What's going on, guys? It is Wednesday, October 13th, and today we are covering a major shift in the global balance of Bitcoin security, as well as the continued regulatory debate around crypto in the U.S., particularly as regards the SEC. So let's kick off with this title story, that the U.S. is now officially the global leader in Bitcoin mining. To understand this, we need to go back to April. At that time, the bull market was in full swing. And this is, of course, the bull market that started really in the wake of the COVID-19 shutdowns, as Bitcoin looked resilient and hedge funders like Paul Tudor Jones and then Bill Miller

and then Stanley Druckin-Miller started to come to the Bitcoin table, recognizing it and calling it out as a potentially valuable inflation hedge. And what's more, an inflation hedge that could actually actually actually. attract young millennials with money. That institutional narrative fed into the corporate treasury narrative that was obviously kicked off by Michael Saylor and micro-strategy and then was supercharged with Elon Musk at the beginning of this year. What's more at this time, and remember, we're in April 2021 now, the institutional Bitcoin narrative had been driven by NFTs as another driver of excitement around crypto. NFTs including the profile pick avatars as well as ZNBA Topshot were really

starting to seem like they were more than a passing fancy. Hell, Tether had even settled with the New York Attorney General knocking out potentially one of the biggest sources of Fudd out there, although, as we have seen Tether Fudd, like a goonie, never truly dies. So what then was the Achilles heel of this extremely exciting bull market. The environment was certainly pretty high up there, or more specifically, resurgent environmental fud. There was a portion, especially of the U.S. institutional investor audience, who were, as Bitcoin got bigger, more and more concerned with at least appearing to ask those questions. Folks like Kevin O'Leary got on TV and talked about how they didn't want their Bitcoin to be dirty. They didn't want the provenance of China coal-mined Bitcoin

And so the issue with China was two part. One, it was their record around human rights, but two, it was also just the energy mixture used to mine Bitcoin. This all came to a head in May. On May 12th, Elon announced that Tesla was reversing course and would no longer be accepting Bitcoin. It hadn't sold its treasury allocation, nor had he sold any of his personal Bitcoin, but Tesla was going to have to make this decision because they couldn't on the one hand accept Bitcoin as payment while also having these serious concerns about its environmental footprint. Now, we don't need to relitigate the sort of weirdness around keeping the Bitcoin on the books, but not accepting it for payments, nor do we need to re-question why in their diligence just a couple months earlier hadn't they come across the environmental issue? associated with Bitcoin. Ultimately, most people seemed to think that it felt like external pressures that were driving this decision. Kathy Wood in a conversation with me later referenced, for example, the environmental crusade that BlackRock and Larry Fink are on. And she didn't go so far as to say it was pressure specifically from Larry Fink or BlackRock, but she held it up as an example

of the growing ESG narrative among mainstream Wall Street. Either way, that was a big hit to the institutional Bitcoin narrative. And a couple weeks later, we also got an actual, factual, no-joking ban in China. Now, I, like many felt when we first started to hear rumblings from the People's Bank of China reaffirming their previous exhortations against Bitcoin, I wasn't really thinking that it was going to be much of a thing. But when the vice premier of the country stood up and said that they were looking into a Bitcoin mining ban, boy, was it a different story. Most notably, it was something that domestic Chinese Bitcoin miners immediately took seriously and immediately started to make new plans around.

Over the next month, around half of the hash power securing Bitcoin left the network. And the question was, even then, where would it go? How much of it would come to the U.S. versus simply flowing over the borders to closer, greener pastures? It is clear now that the U.S. is in many ways the single biggest beneficiary of the great hash rate migration. In April, the U.S. accounted for 16.8% of hash power. Now, that number stands at 35.4%, which makes it by far the global.

leader, almost double second place, which is Kazakhstan. Kazakhstan also benefited from the China mining ban. Its share of global hash power stands at 18.1%, which is up from 8.2% in April. In third is Russia, another beneficiary of this shift, which now has 11% of global hash power up from 6.8% in April. In many ways, this confirms what a lot of folks thought would happen. Some number of well-financed operations moved to the U.S., while others moved simply across the border. Frankly, it's hard not to see this as an absolutely monumental win for the industry. China's share has, quote, effectively dropped to zero, according to the Cambridge Center for Alternative Finance, which just published these numbers. Keep in mind that in September

2019, just a couple years ago, China's share of mining stood around 75%. By the way, Canada is in fourth globally with 9.6% of hash power, meaning that North America is encroaching on nearly 50% of global hash power in the Bitcoin network. That is more likely to be clean, it's regulated in bigger markets, it's not subject to the same sort of political shocks. In short, this is a huge opportunity for the U.S. and for Bitcoin. After the more recent crypto trading ban, Senator Pat Toomey tweeted, China's authoritarian crackdown on crypto, including Bitcoin, is a big opportunity for the U.S. It's also a reminder of our huge structural advantage over China. Beijing is so hostile to economic freedom, they cannot even tolerate their people participating in what is arguably

the most exciting innovation in finance in decades. Economic liberty leads to faster growth and ultimately a higher standard of living for all. In China, meanwhile, Binance is delisting the Chinese Yuan from its trading platform and has switched all Chinese users to withdraw only and is running inventory to ensure that none of its remaining users are from mainland China. And as if the exchanges weren't already keen enough to get out of there, WeChat is now apparently seen. censoring searches for Binance and Huobi, something Waybo and Baidu were already doing. When you search for them, now it says no more results. Responding to Senator Pat Toomey's tweet, Squares Miles Souter wrote,

Now let's do something about it. I couldn't agree more. This is the moment to reinforce and to claim the U.S.'s role as a leader in this emergent space and as an innovator in this emergent space, and it would be a damn shame to take this unforced error from one of our biggest geopolitical competitors and do nothing with it. This podcast is sponsored by NIDIG, a firm that's making Bitcoin accessible to banking customers on Main Street and Wall Street alike, as part of their mission to bring Bitcoin

to the people. Find out more at Nidig.com slash NLW. That's NYDIG forward slash NLW. Let's turn our attention now to the SEC. There has been a lot of discussion recently around the idea of safe, heart. This is an idea that Commissioner Hester Purse has been floating for years now, but they've gotten new life because over the last couple weeks, Congressman Patrick McHenry has introduced the Clarity for Digital Tokens Act that takes a lot of what Commissioner Purse has been advocating for

and actually proposes it as the new law of the land. The central question in these laws are can a security-type thing become not a security? Can a token, which looks like an investment contract, which looks like something that people are hoping appreciates and makes them profit based on the work of others, become something that is less clearly tied to the work of a centralized group of actors. If it can, what's a reasonable time period for it to do so, and what does its unbecoming a security actually require? Now, we've seen SEC Chair Gensler seems pretty clearly on the side of no, there's no need for this sort of thing,

and now SEC Commissioner Caroline Crenshaw has thrown her hat into the ring and says, instead of a harbor, my hope is that we can build a bridge. In other words, she's throwing her lot in with the come in and talk to us crowd. This is, of course, without resolving, Coinbase's claim that they tried over and over and the SEC wouldn't talk to them at all. In her comments, Crenshaw used the ICO boom to justify her reasoning. Had a safe harbor been in place during the initial coin offering or ICO boom of 2017 and 2018, I think the results would have been even worse for investors in the markets. ICOs and other digital assets raised billions from investors, but most never delivered on their promises, said Crenshaw. So I was no big fan of the ICO movement, but I don't agree with her premise at all.

The ICO boom was the simplest, easiest, fastest fundraising in history, and it had absolutely no quality control. There was no gauntlet of investors to get through. In fact, there was just incentives for investors to dump on you if you came in a little bit later than them. A safe harbor proposal would likely have had significantly more upfront disclosures in terms of the things that would have actually mattered, such as token ownership, who had bought in on earlier funding rounds, what their lockup terms were, all of the things in other words that would have helped you understand what the incentives of the other members of this community were. Were they to actually build and deliver on the promises promised in some white paper or roadmap or whatever it sat on the website? or were they just setting up to dump on you? Safe Harbor rules don't say, do anything you want for three years and then get slapped on the wrist if it doesn't go well. There are a specific set of rules about information, disclosures, and operating expectations followed by the project having to mount a legal defense of their position or face the consequences. This would have absolutely

destroyed and just prevented in the first place a huge number of ICOs, which at the time all they had to do was get five or 10,000 people in a telegram to unlock serious capital. My ether wallets, Taylor Monahan goes on an epic profanity-fueled rant, which I highly recommend. But her TLDR is that the only thing that really prevents people from getting wrecked is knowledge that combats the greed and opportunism. About 20 tweets deep in the thread, she writes, because you know what normal people need to not get wrecked? It's not blinders. It's not daddy protecting them. They need knowledge. They need to know how to make the right decisions and how to avoid making the wrecked decisions. If we want to play what if Safe Harbor existed in 2017, then sure, let's play. Safe Harbor would have given

normal people one more chance to see one more red flag. It would have been one more indicator in a sea of indicators that, if spotted, would have helped them make the best decision. More importantly, it would have encouraged legitimate players to play. A lot of calculated and established founders in the space skipped ICOing because the regulatory uncertainty was too great. They had teams and payroll and stuff to lose. They had risk, which means only the most risk-tolerant could ICO, like brand-new folks, scammers, schemers, idiots, people who moved to an island on a whim. So any investor running headlong into any ICO had a greater probability of investing in a scammer or an idiot island. Good work. But most importantly, having Safe Harbor would have allowed you to

feel powerful while not preventing trillions of dollars of value being created over the following three years. The people who got wrecked by ICOs in 2017, the people who the SEC wants to, quote, protect, are the same people who helped build the ecosystem we have today. They were the first builders and helpers and supporters. They and their knowledge and experience helped create trillions in value. No one gets into crypto when it's down 2,000%. So tell me, who TF was desperately chatting up the telegrams every night without fail in through 2018 and 2019. Who is uniswap and compound and open sea building for exactly? It wasn't the 2014-Eth pre-sailers, cashed out millions or the folks who won 2017 ICOs, it wasn't some pack of nobs who bought

ETH in 2019, LOL. Overwhelmingly, it was people who got into ETH in 2017 and stuck around. The ones who, by definition, got wrecked by unregulated ICOs. They bought when ETH was at 1000 and forgot to dump so many shoddy ICO tokens. They got wrecked. They probably bought even more Eth at 400 and 215 and Eighty-7. They got wrecked. They need protecting, right? Their life would have been better if there had never been any ICOs, right? deliberately willfully stifling knowledge and experience and access to insight is one of the worst things that can happen. And frankly, anyone who uses their position of power to do otherwise or say otherwise shouldn't be in that position of power. Ultimately, here's the deal. The SEC's

current policy is f*** around and find out. There is literally no way to look at this and see it as a success, whether your criteria is investor protection or innovation protection. On the innovation side, rule by enforcement incentivizes the worst actors to try to get away with what they can in the time they have, or it incentivizes people to make as much money as they can so they can just fight big legal battles later. Neither of those is pro-competition or pro-innovation. On the investor protection side, the SEC is out here enforcing laws around BitConnect now more than four years later after the thing happened and they want a cookie. There's a strong argument that the only possible paths forward are one outright ban on all token-related everything, or two, an upfront framework that projects

have to actually go through, such as some version of a safe harbor. Of course, we continue to continue. We continue to get to the same impasse because this current crop of regulators will just say, we have that framework already. It's the Howie Test and the Securities Act of 1933. And so here we are forever and ever. However, this wasn't the only SEC Commissioner to speak up on something related to crypto. A block headline reads, Rise in privately funded crypto unicorns worries SEC Commissioner. Here's the key section. Since 2009, private capital raises have exceeded public raises. The situation has resulted in the growing number of Unicorns, a term that refers to private companies with valuations over $1 billion. Commissioner Allison Heron Lee called unicorns, quote, a new but no longer rare or mythical

kind of business. Quote, despite their outsized impact, there is little public information available about their activities. Although some of these large firms are subject to industry-specific regulation, such regulation may be quite sparse as with the growing number of crypto-related unicorns, or does little to address financial transparency. So there is so much problematic with this. One, crypto unicorns aren't any less regulated than any other private company.

If there's a private company raising venture capital, they're subject to all the same laws. The crypto aspect of their business, sure, may have questions, but guess what? That's your job. Second, the government decrying the shift of money from public investment, which has transparency, to the private sector, without acknowledging the structural impact of government intervention in markets as a causal factor just rings hollow by definition. Where do these folks think all the new money coming into private capital markets is coming from? Is it just that the risk takers got richer? Sure, maybe a bit. But it's much more about formerly conservative players who are forced farther and farther out on the risk

spectrum looking for yield. If we do not acknowledge that is a fundamental starting point for all of these questions, we're just addressing symptoms. Third, if one was serious about investor protection as fairness and a quality of information and access, rather than just prohibiting some people from investing in things because you don't think that they're smart enough to do it, you'd have to seriously reconsider accreditation laws, which at this point pretty much only serve to reinforce the rich getting richer. Nothing so challenges the notion of accreditation laws as crypto. It's the first mass wealth creation event in recent history that by its very nature allowed people to participate without those accreditation systems. And when it did so, it made an

extraordinary number of young unaccredited investors wealthy. Far more I would contend than it wrecked. These unaccredited investors did a front run around the entire institutional world, which is now racing to catch up and buying in 100x where these folks bought in. So tell me again who you're trying to protect. Now, one thing I will give Commissioner Lee in the SEC is that there are certainly questions of transparency that matter as they relate to private capital allocations that are totally fine to discuss. Issues around hedge fund, transparency and situations like Archigos earlier this year definitely warrant a conversation about what the reporting requirements of private capital should be. But don't blame the

crypto unicorns because it's a good soundbite. Crypto unicorns don't exist because of loose regulation. They exist because crypto is one of the fastest growing industries in history and retail, quote unquote retail, beat everyone else to it and now the institutions are racing to catch up. Now, there was some good commentary coming out of the SEC from our old friend, Commissioner Hester Perce, in her comments at the Texas Blockchain Summit, in which she basically reclaimed the Wild West term that her boss, Gary Gensler, has been so fond of throwing around lately. However, I think I'm going to read that whole speech for Long Read Sunday this week. So I will leave you now just saying that we have allies, we have detractors, and we have a whole

lot of people in between, and it's our job to just keep beating the drums of the things that we believe over and over again. Until tomorrow, guys, be safe and take care of each other. Peace.