The Breakdown - Worldcoin Iris Scanning Shut Down in Kenya

Episode Date: August 5, 2023

On this edition of the Weekly Recap, NLW looks at Worldcoin's issues in Kenya; the NYT's weird defense of SBF's leaking of Caroline Ellison's journal; guilty pleas from the Bitfinex hacker and more. Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribeto 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, August 5th, 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. All right, friends, happy weekend. Today we are doing a full-on grab bag. We are going to touch on a bunch of different topics, some updates from stories from earlier in the week or last week, some things we haven't had a chance to cover yet. And where we start is with the latest in-world

coin. And to kick it off a quote from Maya Zahavi, on Wednesday she tweeted, the most predictable blowback against crypto-colonialism. No government would allow its citizens to risk their biometric data to a company that has shown no remorse in blitz collecting data. So far, France, Germany, and Kenya are investigating Worldcoin. Now, Maya was far from the only person talking about this. The same day, Muhammad Hersey, the former chairman at the Kenyan Tourism Federation, wrote, A foreign firm can just walk in and set up office in Kenya and start harvesting iris scans. The iris is the only unique identity a human has, so with a small token, Kenyans are falling

over each other to allow their iris to be scanned, and we think it's just a cool, harmless thing? It's the duty of the state to interrogate such firms. So, the that desperate Kenyans are not duped into something they hardly understand. Cabinet secretary, you need to step in. Personal data should be a security concern and the state must be convinced that it is a good clean thing. These chaps can't just walk in and start scanning the iris of gullible Kenyans. So indeed, World Coin operations have been suspended in Kenya. The nation's Ministry of the Interior said in a Facebook post on Wednesday that, quote, the government is concerned by the ongoing activities of an organization calling itself WorldCoin,

which is involved in the registration of citizens through the collection of eyeball-slash-iris data. They added that the relevant security, financial services, and data protection agencies will investigate to, quote, establish the authenticity and legality of WorldCoin's activities, as well as, quote, the safety and protection of the data being harvested, and how the harvesters intend to use the data. The ministry added that it was, quote, critical that assurances of public safety and the integrity of financial transactions involving such a large number of citizens be satisfactorily provided up front. Now, prior to the shutdown, Kenya's minister for the digital economy,

Elu D'u D'uwaolo defended WorldCoin's practices in a television appearance. He stated that Kenya's data protection regulations may need an overhaul, but that WorldCoin were acting within the law. Of course, since the very early days of WorldCoyne before the formal launch, critics had raised concerns that the project would be taking advantage of citizens in Africa and across the global south. Kenya has been one of the largest markets for signups. In December, WorldCoin boasted that over a quarter of a million people in the capital of Nairobi had handed over their eyeball scans to one of the 45 orbs in the city. At launch, WorldCoin claimed to have 2 million users, primarily made up of residents of the global south. Alfred Matua, the Kenyan Secretary for Foreign and

diaspora affairs said, let us all support the stoppage of Kenyans being used and guinea pigs in their data being harvested. Being paid is important, but you have to ask yourself why your eyes are being scanned, information gathered. What does it mean and what will it mean to you and your offspring? Now, outside of Kenya, several European regulators have also opened investigations into World Coin, primarily on data privacy grounds. Last week, the UK's Information Commission's Office, which regulates personal data, said that it would be making further inquiries into the project but had not yet opened an investigation. It noted that organizations, quote, need to have a clear lawful basis to process personal data, where they are relying on consent this needs to be freely given and capable of being withdrawn without

detriment. Worldcoin, for their part, have claimed to be fully compliant within the European general data protection regulation. Now, although investigations into Worldcoin are more widespread, Kenya is the first nation to take the step of shutting down operations within their borders. Kenyan's capital markets authority also issued a cautionary statement on Wednesday, stating that neither the project nor the tokens were regulated. The statement warned of, quote, potential fraudulent schemes that may emerge in over-the-counter market of crypto tokens. That said, the CMA said it was willing to work with WorldCoin through its regulatory sandbox. Now, WorldCoin said it would pause Kenyan operations in a statement, but appeared to be

more concerned with crowd control after one location was shut down by police earlier this week. They said, out of an abundance of caution and in an effort to mitigate crowd volume, verification services have been temporarily paused. During the pause, the team will develop an onboarding program that encompasses more robust crowd control measures and work with local officials to increase understanding of the privacy measures and commitments WorldCoin implements, not only in Kenya, but everywhere. Now, separately on Wednesday, Reuters reported that WorldCoin intends to allow governments and corporations to use its iris scanning-based ID technology. This, of course, raised further concerns regarding the organization's data privacy policies and longer-term intentions.

Ricardo Masiera, the general manager for Europe at Tools for Humanity explained, the idea is that as we build this infrastructure and that we allow other third parties to use the technology. The example he used was that a coffee shop could have eventually use the technology to distribute free coffee to customers, ensuring that each customer could only claim a single coffee using WorldCoin's technology. Boy, I've got to tell you guys, it is very hard to keep up the normal level of breakdown objectivity when it comes to this. Not because of any big belief that anyone who's at WorldCoyne believes anything other than exactly what they're saying, but more because the combination

of biometrics and f*** around and find out thinking just seems really, really dangerous. Moving on to our next topic. Coinbase announced a strong earnings beat for the second quarter. The company exceeded analyst revenue estimates by 12.7%. Now, of course, revenue contracted for the quarter, falling by about 18% compared to Q1, but estimates had called for a 22% collapse in revenue. Losses were also significantly less bad than expected, coming in at 42 cents per share, compared to analyst estimates of 76 cents per share.

This is the six straight loss-making quarter for Coinbase, however. The company appears to have stem the worst of the bleeding. During the second quarter of last year, for example, Coinbase chalked up a loss of almost $5 per share. Now, the big story was the shift in business model that has taken place during this bare market. Trading volumes on Coinbase continued to collapse. Volume fell by more than a third to hit $92 billion for the quarter after holding steady in Q1. Interest income also fell by 16.5% to reach $201 million.

This line item is primarily driven by earnings from an interest-sharing agreement on USDC stablecoin holdings, which brought in 151 million for the quarter. However, revenue from blockchain staking services increased by 18% for the quarter and now stands at 87.6 million. Quarterly staking-related revenue has increased by almost 30% compared to last year. In fact, for the first time, Coinbase brought in more revenue from subscriptions and services than it did from trading fees. That means that in aggregate, staking services, custodial fees, earned it. interest and subscriptions made a larger contribution to the bottom line than the exchange. There's also the potential for a major tailwind to hit the relatively small custodian arm of the business,

should BlackRock be successful in its ETF application? Remember, Coinbase will be custodying all of the Bitcoin held on behalf of the BlackRock ETF. CEO Brian Armstrong heralded the quarter as a success, but foreshadowed that there was still more work to do, stating that Q2 was a strong quarter for Coinbase as we executed well and showed resilience in a challenging environment. We've cut costs, are operating efficiently, and remain well positioned to build the future of the crypto economy and help drive regulatory clarity. Coinbase shares were up over 10% in aftermarket trading following the release of earnings. Continuing on to a super weird one, Zach Guzman, the founder of Coinage Media writes, I don't think I've seen this before. The New York Times just

submitted a letter to the court in Sam Bankman-Fried's case about why he was fine to share Carolyn Ellison's diary entries with them, and why the judge shouldn't revoke bail and detain him now. So, what's going on is that the New York Times has submitted a filing in SBF's criminal case, arguing that the court should defend First Amendment rights related to free speech. You will undoubtedly remember that Sam recently came under fire after leaking parts of Carolyn Ellison's journal to the newspaper as part of a story. Ellison was, of course, the Alameda Research CEO at the time of the FTX collapse, and is a material witness in the case. Following that, prosecutors had asked for Sam's bail to be revoked, and for

the court to issue a gag order, thus preventing him from making public statements or communicating with journalists about the case. Their concern was that Sam had been attempting to intimidate Caroline by releasing her private writings to journalists and would be likely to make further attempts to manipulate public opinion via the media as his trial date approached. Despite those specific concerns, the judge issued a broad gag order rather than one that restricted Sam's communication only in relation to interfering with the trial. This is what provoked the response from the New York Times. After the gag order was issued last week, they wrote a letter to the judge addressing freedom of the press issues. They argued that the public had a right to know details on the case and should not be restricted by the court without due consideration of free speech issues.

Their letter claimed that the gag order, quote, overlooks the public's legitimate interest independent of this prosecution in Ms. Ellison and her activities at the cryptocurrency trading firm. Quote, she has confessed to being a central participant in a financial scheme that defrauded investors of billions of dollars, a scheme that was not detected by government regulators and law enforcement agencies until the public's money had disappeared. It is not surprising that the public wants to know more about who she is and what she did, and that news organizations would seek to provide to the public timely pertinent and fairly reported information about her. However, in a filing late on Thursday, the DOJ reiterated their position that Sam had gone way beyond making, quote, fair comment in releasing Carolyn's journal to the press. They stated that, quote, the record here establishes that the defendant went beyond benignly exercising a constitutional right

to speak to the press. He took covert steps intended to improperly discredit a trial witness and taint the jury pool. Prosecutors pointed out that SBF had created a, quote, media atmosphere that amplified Ellison's prominence prior to her testimony. They said, quote, what is clear, regardless of whether the defendant was the first source for stories regarding Ellison, is that the defendant, rather than deny his guilt as he correctly now says it is his right to do, shared materials with the press obviously designed to intimidate, harass, and embarrass someone he knows is slated to testify against him, and provoke an emotional response and color a potential juror's view of that witness. The DOJ also noted a bizarre fixation with the

comments of current FTX CEO John J. Ray III, who took over the firm after bankruptcy. They wrote, It is notable just how much of the defendant's various letters focus on his interactions with or perceptions of John Ray, an individual who is not a witness in this case and whose communications have no relevance to any issue at stake here. The defendant's argument should be seen for what they are, an attempt to deflect from his own conduct by pointing at another person whom the defendant apparently views in a negative light. The judge is expected to make a decision on whether Sam should be jailed until his trial shortly, but may call parties back into court for an additional hearing on the matter prior to making that decision. Coinbase Chief Legal Officer Paul Grewell wrote,

In all the years of bail revocation hearings I did, never did anyone or any organization claim a First Amendment right to facilitate witness intimidation. And for good reason, that's not how the First Amendment works. Autism Capital summed up, so basically as we understand it, the NYT have had an open line with Sam Bangman Free this whole time, convinced him in his mania and desperation to give them dirt on Caroline, it backfires on Sam and potentially will land him in jail before his trial, the NYT sh-s their pants and immediately goes to bat for SBF, not because they feel bad, but because they don't want to scare off their pipeline of juicy leads from other suckers. And now they have to deal with a backlash of the optics of defending SBF.

Chef's Kiss. I don't know, man. It seems pretty hard to me to be in the New York Times seat here and actually trying to defend this, especially as the prosecution revealed that there had been something like over a hundred calls between Sam and New York Times reporters. As the prosecution said,

that's not just Sam making comment to the effect that he's not guilty. That's an intentional strategy carried out by press with the press's complicity because they get a juicy story. Now, certainly the New York Times is well within its rights to take advantage of a defendant who wants to talk that much.

But the idea that that somehow justifies leaking someone's personal journal and trying to pass it off as an essential and material to the case is just ridiculous. Speaking of ridiculous, lastly, today, Ilya Dutch Lichtenstein and his wife, Heather Rosal Khan Morgan, entered guilty pleas on Thursday in relation to the 2016 Bitfinex hack. Lichtenstein pled guilty to one charge of conspiracy to commit money laundering, and in admitting to the prosecution's facts in the case,

identified himself as the Bitfinex hacker for the first time. Lichtenstein had only been charged in relation to the money laundering, not the hack itself, leading some to speculate whether there was an additional unknown person that carried out the hack. Prosecutors said, Lichtenstein used a number of advanced hacking tools and techniques to gain access to Bitfinex's network. Once inside their system, Lichtenstein fraudulently authorized more than 2,000 transactions, in which 119,754 Bitcoin was transferred from Bitfinex to a cryptocurrency wallet in Lichtenstein's control. He then took steps to cover his tracks by going back into

Bitfinex's network and deleting access credentials and other log files that may have given him away to law enforcement. Following the hack, Lichtenstein enlisted the help of his wife, Morgan, in laundering the stolen funds. The stash of nearly 120,000 Bitcoin was worth around 70 million at the time of the hack, but swelled to a value of over 4.5 billion over the years since. This made the Bitfinex seizure the largest ever recovery of stolen cryptocurrency when law enforcement arrested the pair in February of this year. Ninety-four thousand Bitcoin are known to be recovered from the heist. Lichtenstein faces a maximum sentence of 20 years in prison, but his assistance in recovering additional funds since his arrest could mitigate that penalty substantially.

Now Lichtenstein's wife, Heather, aka Rosal Khan, an amateur rapper, also played guilty to charges of conspiracy to commit money laundering and defrauding the U.S. government. The self-proclaimed crocodile of Wall Street faces a maximum sentence of five years in prison for her role in the crime. cleanup year continues, and good Lord, we can't get through it fast enough. That is going to do it for today's episode. Thank you for hanging out and listening. Until next time, be safe and take care of each other. Peace.