The Wolf Of All Streets - Silvergate Drowns Crypto | Will We Get A Bitcoin ETF? Dave Nadig, James Putra, Lucas Outumuro

Episode Date: March 9, 2023

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The Silvergate Bank saga is coming to an end with the liquidation. And of course, Elizabeth Warren and friends are taking it as an excuse to once again attack the crypto industry, coincidentally not mentioning the failure of Credit Suisse, which is also likely to go bankrupt and has nothing to do with crypto. But I guess that's neither here nor there when you're trying to push a narrative. Also, Grayscale had a great first day in court on Tuesday. The odds now shifting, in many's opinion, to them actually winning their case against the SEC, who have been consistently dunked on by judges all week.

We have a lot to talk about today, and I have three incredible guests. Of course, James, Lucas, and Dave, who have all been here before and need no introduction, so they're not going to get one. Let's go. What is up, everybody? I am Scott Melker, also known as the Wolf of Wall Street. Before we get started, please subscribe to the channel. And once again, grab your Shiba Inu eating ramen oven mitt and drop it onto the like button. I got that at Epcot Center, but you guys know that by now. It was in Japan, not the real Japan, the Disney version of Japan.

So basically a couple hours from my house in Orlando. I hope you guys are all having a wonderful day. I think it's pretty clear by now that my favorite days of the week are the ones where I don't have to rattle on by myself and get to bring on really smart people to do all of the hard lifting for me. So I'm going to go ahead and bring them all on right now. I've got Dave, Lucas, and James, of course, who you guys should all be familiar with.

And we have a strange unicorn occurrence here that James and I are not wearing matching black shirts. Actually, three of us are in gray. But strangely, we're seeing a trend change. Dave, myself, and James are all standing while Lucas is sitting. And I was just tweeting about standing desks yesterday. I can't say that I'm a standing desk influencer, actually. I'm not really in crypto. But I'm glad, Lucas, we're going to get you standing up by the next stream, okay? Is that going to be the next cycle

move? I'm compelling the bull market. I won't sit until the next bull market. Go long standing desks. Yeah, that's right. We're all long standing desks. Sorry, guys, I forgot to tell you, I'm actually being paid by the standing desk lobby. It's not financial advice. So nobody wants to hear my ramblings about standing desks and black t-shirts, but they probably do want to talk about all of the good and bad news that's been happening in the crypto space. I think that we'll start with Silvergate. Lucas, actually, I want to talk to you because this morning in the newsletter, Into the Block, which you're the head of research, you guys once a month now write up a piece for me

and you chose Silvergate and GBTC, which are also the two topics basically that we're starting with today. So I would just love your take on what's happening with Silvergate and of course, whether you think that that's going to be another source of contagion for the crypto industry or if it's just a bank failure. Yeah. So another failure of risk management, unfortunately, from the information that we have it seems like they were investing in long duration bonds but they did so when the rates were you know significantly lower so as rates increased effectively those bonds were worth less and less over time and it also coincided uh with the moment that you know the FTX uh fraud started getting on wine

unwound so uh therefore there was also a lot of demand to exit and they were forced sellers of these bonds at lower prices uh and effectively that led them to become what seems insolvent and now they're just liquidating uh their positions um so yeah that's silver it's one of the largest partners of course for uh crypto exchanges in principle uh and so we might see some headaches there with you know institutional money entering crypto becoming uh more difficult uh but I don't see like contagion in the same way in terms of, I'm correct me if I'm wrong, guys. I don't know if you guys might have a different take. But yeah, I see it might have some troubles attracting capital near term, especially large sizes.

But I don't see contagion, at least in the same way that we did before. No, it seems pretty orderly. I mean, this seems like just classic bad bank management. I mean, we could get more hyperbolic about it, but it turns out running a bank isn't just about pushing a button on a spreadsheet. You actually have to know what you're doing. You have to match your assets and liabilities. Clearly, this is an asset liability mismatch.

And also, it's a little bit like a land war in Asia thing. The number one thing about the long bond is you never buy it during a hike cycle. You wait till the hike cycle's over. Like, I don't understand how you end up in this position unless you have a whole lot of people who don't understand core banking running your bank. Yeah, I think that there's some hurdles, but it's not, so as an operator, it's definitely a bit of friction, but we've been watching this's definitely a bit of friction. But we've been watching this unfold for a couple of weeks and interacting with most of the partners where it's not the only bank. It is a big bank for many of the different partners that we have.

I would say, by and large, the partners were orderly in how they migrated away from this. And no real issues that we've been able to see. There are some folks that maybe were not as on the ball, but it's not unexpected to see typical financial services folks, which crypto exchanges are more like our typical crypto financial operations now, having multiple avenues to be able to interact with the customer base. Yeah. So it sounds like everyone's in agreement that this is effectively a banking collapse and not a crypto banking collapse. And it's just an easy narrative because they were the first and only at the time, I guess, to really bank the crypto industry to some degree. It's kind of sad. I've said this before. Obviously, it's business. So Coinbase, Kraken, Circle, et cetera, all bailed within 24 hours.

And they had to. But it's sad to me because Silvergate, I almost said Signature in a Freudian slip, Silvergate was there from the very beginning and was the only one willing to sort of take the risk. But that should not be conflated with the crypto industry crashing this bank. Yeah, I see this a little bit as like what we've seen in other industries like cannabis, any place where you've got a high growth, somewhat on the edge of sort of current regulation, current best practices, and then you get the financial system paying attention to them, you end up with some folks get out over their skis. And as these things get, you know, they expand and contract, they sort of breathe. The folks who are most out on the edge are the ones that tend to get beaten up. We've seen this in banking crises,

honestly, for hundreds of years. The folks who are out there doing the early lending on the high growth opportunities, whether it's building railroads or real estate in South Florida or crypto, when things turn, if they've managed their risk wrong, they're usually the canary in the coal mine that says, ah, okay, we've got some problems here. This is where the crossover is. Whether it's Silvergate that's this case, whether it's JP Morgan, who knows where the end of it goes. I agree. I don't see a lot of opportunity for contagion here because usually that's when you've got multiple banks interacting and you end up with sort of cascading liabilities between banks that sort of were underrepresented or under managed in terms of risk. At least from what I've seen, I don't see any of that in the Silvergate stuff. No, even if the entire balance sheet was in Bitcoin and had to be liquidated, it's not a tremendous amount. I mean, the market

would take a little hit, but it's not like you're trying to dump trillions of dollars on the market. And Silvergate did not have an extensive balance sheet of Bitcoin on that balance sheet. They had some customers they were servicing that had exposure in there, which may pose some challenges, but it doesn't seem like it's the major downfall of this operation. I think if they had had Bitcoin on the balance sheet rather than these bonds that were bought at sub 1% interest rates, they may have actually been in better shape. They'd be in great shape. Because literally nobody in the world is going to buy a bond that's yielding a quarter of what you can just buy from the government directly right now. I mean, it's just not going to happen. I just want to pull this up really quick because I just happened to search it. If ever you feel bad as a retail investor about your decisions, about losing money on FTX, any of these things, these are the people who are going broke, not going broke, but who are losing their money with Silvergate.

Vanguard, BlackRock, 6% ownership, Morgan Stanley, Two Sigma, Columbia Management. I mean, you guys may not even know, but until very recently, these people were reinvesting and doubling down on Silvergate to sort of help the bailout thinking that they were getting it cheap. Right. I mean, this reminds me it reminds me to some degree of like a bunch of people. I can say speak for ARCA, you know, the hedge fund and crypto who are like, we're going to double down on Luna. Twenty four dollars. It's a great buy. right? I mean, it's a speculation. You know, you can put your money to work on almost anything if you really want to go out there. Yeah. But I mean, this is not like some fly by night operation. They were heavily backed. I mean, BlackRock owned 6% of this bank, Vanguard owned 9% of this bank, right? Yeah. Well, I mean, the ecosystem was

trying to create this bridge between TradFi and DeFi. I mean, that was the story for the last couple of years. I think what we're seeing is the unwinding of a lot of those bridges. And it's not just this, it's what we're seeing in grayscale. It's what we're seeing out of the regulatory environments around the world, frankly, maybe with the exception of Europe. This is the unwinding of that marriage we were trying to make happen. I actually don't think it's the end. I think that it comes back together. But there's no question that this has just created this valley in that journey that I think a lot of us weren't expecting. Yeah. Sort of the fear is always there, especially in the market we're in now.

The backdrop is concerned that there may be further downside. This is likely what we saw with the sell-off in the last couple of days was just a fear of additional contagion. I don't think we're going to see major moves down as a result of Silvergate. There may be some other items lurking out there, but risk seems to be to the upside. It's where the max pain is and people missing out on being low risk assets. Are you concerned about the sort of cascading liquidity problem? Again, not so much a contagion perspective, but I mean, Nick Carter wrote that piece in Pirate Wires earlier this week or last week about choke point 2.0 as sort of a theory for what's going on here with the idea that this is whether it's nefarious

and coordinated or not, the end result is the same, which is, oh, Silvergate goes down. So now somebody else can't do a micro loan to somebody else who's trying to get $10,000 on this. And it creates this cascading crunch of liquidity, which I mean, I don't think to see that so much as a contagion, but just as a giant brake pedal on the activity. Do you agree with that? Or do you see something else going on here? I think it's a slowdown. I mean, if you asked me this at four o'clock when the news posted, I'd say I was a little more concerned. But as all settlements come in, no problem across all channels. You're like, OK, there's still risk, but it doesn't look like it's a catastrophic failure or a lockup on the flow of funds. I would say it would probably slow down the recovery process to a certain extent as

it becomes harder for new money to enter this space. So probably we're going to see like more money rotation from one narrative to another, but less new capital flowing in as it'll be harder for that, at least over the next few months. Hopefully another bank steps in and fills that liquidity eventually, but it'll be hard as you mentioned. So then the question becomes, and you kind of just all touched on it, but is this a concerted and coordinated attack by some entity to choke off crypto's access to the banking system or did Silvergate just kind of fuck up? I'm not personally a big conspiracy theorist. If I can describe something to incompetence,

I generally assume that it's incompetence, not malfeasance. It also requires you to believe that the regulators talk to each other enough and like each other enough that they'd actually collude to do something like this. Now, you can go back and read what Biden wrote a year ago in his executive order, and you can sort of see the tone of what he wanted to happen. And some of this sort of follows suit in that. There's a lot of protective language in it. There's a lot of cross-coordination between regulators in Biden's language. But I think the idea that somehow there's a back room somewhere with a bunch of bulk smoking cigars where they're saying, you know what we do this week is we take this one down. I just don't think that that's actually what happens.

I think that there's a lot of misunderstanding among regulators about how any of this stuff works. And what we're seeing is more sort of cascading ignorance and sort of mismanagement than any kind of conspiracy in my opinion. Yeah, totally agree agree collusion would imply cooperation which seems to be lacking in most of the lawmakers and regulatory agencies there definitely has been pressure and friction from early days of crypto getting access to the banking systems and a lot of hesitancy from the uncertainty but silvergate doesn't seem like they were kneecapped or or chopped to be an example out of lucas what do you think just uh poor poor banking or do you think that we could actually have legitimate concerns here about the crypto industry effectively becoming unbanked

no i mean as as the information came to, it seemed pretty clear that was some at least some mismanagement involved. You can extend conspiracy theories if it extends to the rest of the industry. But in Silvergate's case in particular, there was definitely some bad risk management. So I'm going to go ahead and share tweets. Go ahead. Go ahead, James. There's an argument to make complete exile from the banking system may not be horrible and it may just accelerate further DeFi or further interactions where we're more peer-to-peer pushing the industry out. I'm not advocating for it. Definitely not. But it is, I think that the ethos and sort of the fundamental principles lend itself well to not being reliant on a banking system. Oh, the irony of Silvergate unbanking themselves.

Right. I agree with you that it's good for the core ethos, but it's also really good to be able to pay your kids school tuition and your mortgage and cash with the money that you made in crypto. So I'll be sort of on the fence on the fence on that one until we live in a world where you can somehow use a stable coin to pay for your everyday expenses or Bitcoin, for that matter, if you chose. I think it's very important, obviously, that we still do have on and off ramps. And that could theoretically be a choke point, whether that's what's happening here or not. But let's look at the political opportunism that came along with this. Elizabeth Warren, of course, as the bank of choice for crypto,

Silvergate Bank's failure is disappointing, but predictable. I warned of Silvergate's risky, if not illegal activity. Literally, no, you didn't. Never. People have looked into this. She's never said anything about it.

And identified severe due diligence failures. Now customers must be made whole and regulators should step up against crypto risk. Now listen, I guess it's just because it's my feed and it's people that I follow. But the amount of like reverse 360 one handed dunks happening on Elizabeth Warren in the comments are incredible. I mean, Mike Dudas, congrats on causing a bank run. You should feel deep pride that your op eds and letters combined with regulators cautions to clients of Silvergate led to a full on capital flight. Fortunately, they are dissolving in an orderly manner, despite your best efforts to destroy deposit or counts.

There's here's Nick Charter. You didn't predict it. Right. I mean, what do it. But that's the thing. Right. So she's not she's not I wouldn't say that her comments are indicative of the full political spectrum or what they would agree. But this is what has to worry you, because whether it is a choke point or not, it will be used. I tweeted something to the effect yesterday that Silvergate is the exact ammo that they need to more heavily come down in the crypto industry. I don't believe that because it's true. I don't believe it's because it's true. I believe that because people like her will attempt to utilize this narrative. I actually think that they don't need any more ammunition, right? I mean, I think they can just

look at the pile of US investors who are losing money out of FTX, and that's all that they need to do anything that they're going to want to do. The numbers there are so much larger, right? And they have decimal points on what we're talking about with Silvergate, that I don't think they need to lean into the banking system to do this. I also think the banking system is the wrong place to approach this. I mean, there's no viable crypto regulation I've seen anywhere that starts at the FDIC. I mean, sure, we talked about CBDCs and stablecoin regulation, and we can get into that. But other than a narrow use case, this is not a banking issue, right? That's why I think this is so ridiculous. I think that we'll be forgetting about Silvergate in about two weeks and always the porn won't be able to remember what it was

yeah I love this comment from Drew Spine meanwhile she's screening her questions by sending them to Garen Gensler so he knows what questions she will grill him on I don't know if you guys saw that a few weeks ago but her hard line approach to questioning Gary Gensler were softball questions that she had said to them in advance so I mean we know that we're watching Kabuki theater here, right? I mean, this is all it's all politics and none of it is real at all. So let's move on from Silvergate. I think we're all in agreement that this is a bank failure and the crypto industry will likely come out the other side very soon and be completely fine. Let's talk about Grayscale.

Dave, you're my ETF expert. Yeah, good day. And I haven't talked to you about it. So they had their good day in court. The judge heavily questioned the SEC, said, you know, what are your grounds? The futures and spot are effectively the same. If future is supposed to be following spot, then as following spot, then why wouldn't a spot ETF do the same effectively? Right. What do you make of this? Do you think that it actually increases the chances that we see a spot ETF? I think this is a good day and I think that's about all it is. So So I think we have to work

backwards from the end state of let's imagine Grayscale gets just an amazing victory in court. Everybody sides with them with such a clear definition from this panel of three judges that the SEC doesn't even go for appeal. They don't put it on bank. They don't send it to the Supreme Court. They're just like, you're right. You got us. It was capricious and arbitrary. That does not mean that Grayscale then gets to turn this into an ETF, nor does it mean that they then approve a spot Bitcoin ETF the next day. Those things could happen. I would take the under on those in a big way. If Grayscale wins, I actually think the most likely outcome is that within however much time the courts then give the SEC to remediate their failure, what they end up doing in that 90 or 180 days is simply passing regulation, which they could do without congressional oversight or anything like that,

just saying, hey, you know what, we made a mistake. So we're now going to clarify the regulations and the futures products will go away. I actually think that's a much more likely outcome than all of a sudden we have five Bitcoin. So we could lose the futures ETF and have nothing effectively and go back to, for people who want access to Bitcoin in their IRA, they can just go and buy GPTC at a 42% discount. Or just not do it at all. And so I think that's actually the bigger fear I have is that I think this is a very heavy handed way to try to approach the SEC. And Grayscale knows that. They've admitted that. They didn't do this lately.

But I do think that the end result of them winning is not going to be what folks think it is. I think it's more likely it becomes effectively pocket regulation against the entire ecosystem. And the existing products would have, like BITO, would have to get shut down because the SEC would say, here's a new set of rules. Here's what we're defining as acceptable. These products are now out of bounds. They have to unwind a certain amount of time. It's not unprecedented. The SEC has passed regulations before that have just dissolved whole classes of things, portfolio insurance, you name it. I mean, there's all sorts of products that get taken off shelves because the rules change. That I think is more likely than a blanket. Hey, everybody, we can just be like Canada and we can put up a US version of

BTCC and we're done. Yeah, I think the market is getting ahead of itself um definitely a bit which you know in crypto happens quite often i'm seeing here like gbtc is up 15 while bitcoin is down about eight percent this week uh and that to me you know some people of course are pricing in a higher chance that it'll turn into an etf but it's also part of the animal's spirit still in crypto, going around and seeing what's the next bet that they can get a high payoff. So they're like, oh, 35% discount, it can still go all the way to zero. And we're seeing a lot of that type of speculation in liquid tokens, like Stacks or before that aptos getting massive spikes so it's it's uh it seems very speculative to me rather than you know um the market actually betting on

on this turning into an etf uh yeah i agree there doesn't seem to still be a clear path forward for the etf it would be great to have more avenues for capital to flow in so that we don't have this tidal wave of excitement for folks that couldn't access and can suddenly access. It might not be a bad time to start opening some of those doors where the demand is low, as opposed to while the floodgates are open, ripping off a bandaid then. But it still doesn't seem there's a near-term path for a spot ETF, although I'd love to see one. Damn it, Dave. You're just right. I really hadn't thought of it that way.

So here's my thinking. Let me just back up one second. No judge can make a regulator do a thing. That I understand. Right. So no judge, like the Supreme Court, cannot tell the SEC to approve a product. They can say that certain rules or laws or guidelines were misapplied or

are unconstitutional or something like that, but they can't narrowly decide a specific action proactively that a regulator needs to take. It just doesn't work that way. So you have to imagine one of two outcomes, either the SEC wins, in which case this never happens, or the SEC loses, in which case they backdoor this by just clarifying a bunch of rules. That clarification is not going to go our way. I don't understand why everybody thinks that all of a sudden means it's going to go our way. Right. So basically, right, this was my take in from talking to quite a few people over the past few days on this show and spaces and such, was that even if Grayscale has this rousing victory, as you said, it's really just saying that the premise that the SEC had has been, you know, disallowed.

But they can just come back with any other premise they want. I didn't really take it a step further and say that we might lose the futures ETF as a result, but that does make sense. My more optimistic view is that Grayscale would win and then the SEC would kick them to the back of the line, frankly, right? And take the next one that's up and re-evaluate it on different grounds. And then we would be more likely actually to see somebody else get an ETF approved than Grayscale, especially with what's going on with TCG. I can't see Gary Gensler like excitingly throwing, and I'm not saying that the baby should be thrown out with the bass water. I'm not saying Grayscale is complicit in anything happening with the Genesis bankruptcy, but I'm saying there's a perception there that I'm assuming after being burned by FSBF, Gensler's not trying to align with.

A really critical thing on the spot Bitcoin ETF thing, too, is that there's a huge difference between some of the clean filings like VanEck and Valkyrie had some really clean filings for a Bitcoin spot ETF that would be very easy to approve. No hair on them whatsoever. Those, to your point, if those things are at the front of the line and they decide that they're going to say yes, those things go out the gate first. What they're trying to do by converting GBTC off the pink sheets has hair all over it. Even if they were trying to do this on an S&P 500 fund that happened to be trading on the pink sheets, that has hair on it. They're never going to lead with that. They would approve something extremely clean, like they did with GLB a million years ago, and then let people build off that. So I, you know,

the fairest thing to do would be to set a starting gun date and say like, okay, on June 1st, everybody can get these things trading. They never actually do that, even though everybody knows that's what they should do. Yeah. I mean, it feels to me like there's literally zero chance we get any ETF with Gensler, period. I take that bet. Yeah, I don't think so. Yeah, I think that we're not getting, definitely not getting much clarity, even on the lawmaking. It's probably not likely to see material lawmaking done in this congressional session.

Implied cooperation in order to get the law through. So it's likely that we're two years out before we start to have a chance to get meaningful lawmaking and rules outside of just regulation. Do any of you think this is really an election issue? I mean, I know I'm fired up about it. I know all y'all are fired up about it.

That's an echo chamber narrative. Well, let me explain one point to you, though. Senate at the Ad Committee versus the financial services committee both of those are by both of those have independent oversight so they oversee the sec versus the cfdc why do they want the territory of regulating these spaces future donors they get a whole entire industry if the sec ends up taking their jurisdiction there's an entire donor base for that set of congressional leaders in the CFTC. We're just not seeing that anyone willing to give up that potential power.

And in both instances, they have to figure out how they're going to give spot authority over those each agency, which doesn't currently have spot authority from the donor standpoint that makes a bit more sense but I don't buy the people are saying like oh there are 100 million people who own crypto which already sounds 12 of us four of us are here there's 12 other ones yeah but I don't crypto right I've seen that in Twitter and and I don't buy that people will be that passionate about voting just for the pro crypto candidate, you know, maybe the people tuning into this, but definitely not the wider amount of holders. I think there are tens of thousands of people who are extremely passionate and aggressive about this. And I think that that's totally fine. But I think maybe in a few jurisdictions and a few races, there might be someone who's

swayed by a crypto argument. But in general, I think that's an echo chamber narrative because we're so passionate about it and we live and breathe it every single day that we think that's going to happen. But I tend to agree with you. But I want to touch on something you guys, we were just talking about the Agriculture Committee, obviously, James, right? That's the CFTC versus the financial side being the SEC deeming everything securities. Well, we did just have this piece of news that was coming through and being talked about yesterday. The CFTC chairman is saying very clearly that Ether and stablecoin are commodities, while

Gary Gensler is over on his side saying literally anything not named Bitcoin is a security, right? is over on his side saying literally anything not named Bitcoin is a security. Right. So, I mean, what do you make of the fact that we're still seeing this sort of power struggle between the two regulators? Does that mean that we effectively can't get anything done because our regulators can't even agree? Do we need our own regulator? I mean, I think we all agree that ETH and stable coins are commodities and not securities. Can we start there, maybe? This boils down to the lawmakers. I agree that it's not a campaign winning issue, but whichever committee ends up gaining the authority to rule the space is the one that's going to drive it. And if you look at the two proposals, the SEC is doing a lot more around

rulemaking by enforcement, where the CFTC have been sort of somewhat quiet on this. They have a proposal around more collaboration between the agencies, but we're still not getting much clarity out of Washington over who's going to be the ultimate, which is the ultimate direction we're having. And with the CFTC going into stable coins, it starts to get into banking area again. So now we're seeing a really interesting tug of war over who is ultimately responsible. Yeah, I'm not a big fan of the theory that the CFTC should be, it's the natural regulator of stable coins. That one doesn't make a lot of sense to me.

We have really good rules. I don't think stable coins are a security or a commodity. They're money market funds. Like, I mean, let's just call them what they are. Like, we could just change the money market fund rules and those things could actually live pretty cleanly. They're not that complicated. And I've always thought that's where we should start because it's the simplest thing in crypto. I can explain the stable coin to anybody who's ever bought a fund of any kind. It's so straightforward, but it doesn't belong at the CFTC. If it belongs

anywhere, it probably belongs over with money market funds. But to your point, James, like this doesn't get resolved without law. I don't think, I don't think that all of a sudden the CFTC starts playing nice with the SEC. They never really have, they have very different mandates. They're literally have different jobs, different sets of constituents. And the CFTC has always done things much more in the favor of the industries it serves, whether that's farmers or whether that's ag producers or whether that's folks who are just buying a lot of corn to make ethanol. It doesn't matter. They've always been very pro industry because that's their point. They came out of existence to support the agriculture industry. That's why they exist. So I get why we get more interesting action out of the CFTC,

but I think it's a losing argument to say, well, if there's a natural regulator here, it's going to have to be a law. And for me, that means we're not going to see anything on this for three years. Yeah. And that gives the authority to regulate spot markets to either agency that doesn't currently regulate spot markets. Yep. Yeah, and so you touched on something I didn't intend to talk about, but stable coins are money market funds, right? And so we've seen a grand move by most stable coin providers, Tether most namely, into short-term treasuries and cash to make sure that they're fully backed.

So a lot of the thought about commercial paper and the way that they were backed has seemingly disappeared. But isn't that just about timing like Silvergate? What if they were all in short term treasuries from a year ago rather than today? And I am not a tether futter. I believe in stable coins. But playing devil's advocate, if everything's backed by treasuries that, in theory, if rates go shooting up, could not be liquidated without a massive discount, are stable coins actually a problem? And in that regard, I don't know, maybe they are security. I mean, part of the reason we have the money market fund rules is because they do things like limit your exposure to duration, right?

I mean, the things that money market funds are allowed to own is very small and very short duration and has gotten shorter and smaller over the years, right? It has become a more and more regulated industry to the point where you don't actually make any money in your money market fund anymore. It's effectively just a cash vehicle that gets SIPC insurance as opposed to FDIC insurance. That's the reason people use them is because they're a way of storing money that gives you a little bit better insurance than an excessive bank deposit. So it's a natural place to live. I actually think that stable coins are also interesting because they're one of the best bridge assets. Like for somebody who's trying to come in from a trad fire world, it's the easiest thing to do. Just say, hey, you've got $100,000 in cash. Just put it in a stable coin. You'll get your wallet set up. You'll

learn how the ecosystem works. You don't have any exposure to all these crazy assets. You don't know how they work. You're just putting it in cash in a different place. I know a lot of financial advisors really leaned into stable coins and then subsequent sort of cash management products that were available over the last couple of years. It's such a natural on ramp. I don't understand why we don't spend more time talking about that and less time talking about Bitcoin, honestly. It was interesting when there was interest on it. That's where we saw a lot of a lot of folks drive into it, which hindsight definitely didn't look as good as it could have done. But I think, Scott, you're making a bit of an argument that's interesting because it leans it closer to like OCC bank stall regulation, which puts it further

away from CFTC, the original starting topic of this conversation. Yeah. And I think at the end of the day, we might see some implications on the industry depending on where these stable coins are um you know registered um like a month or you know a few weeks ago when the Paxos news came to light of that might being a security we actually saw in DeFi a lot of people withdrew from the curve 3 pool which is one of the largest d5 pools for stable coins people were withdrawing usdc and uct there were a lot of swapping for usdt so people were beginning to prefer usdt because it's you know internationally uh settled so that's that's something interesting that could be you know a secondary effect if we see stable coin crack down locally it might actually benefit

tether which is something you know a lot of people weren't expecting at the beginning of the year now that we're going down this road what do you make of the fact that the regulator attacked paxos but specifically over busd without mentioning usDP, which is Paxos' own stablecoin. I will go out on a limb and say attack against Binance, like openly, and not against stablecoins, but maybe I'm wearing a tin hat and sipping the Kool-Aid. It's hard to jump inside of the mind of a regulator, but it is easy to make that leap that it was targeted against specific entity. Yeah, I mean, for sure. For sure.

They're not going after the security. They're going after the entities. Yeah, I agree. And that's the first thing I thought. One thing that I saw that kind of changed my mind that it might not be the same is that part of the BUSD revenues from the you know the bonds uh were apparently being used to burn uh bnb and someone fact checked me on this and but i'm pretty sure it was a good source for this um which you know does drive value back to bnb and has that expectation of profit clause

uh the infamous one so in that sense it's like you know it seems a bit of a stretch uh but there can be potentially an argument and i think that's the same argument they had with usd ust and terra you know that they had to burn luna so it's kind of right to me that's just how do you differentiate between the asset that's being minted by paxos because they went over to paxos right i think that there's a very good argument that once b usd by Paxos because they went over to Paxos, right? I think that there's a very good argument that once BUSD left Paxos and went into the Binance ecosystem, there were some shady, I don't even know shady, but some interesting things that were happening, the way they were wrapping it, moving it around and potentially utilizing it. But to me, that

has nothing to do with Paxos. That would have to be an international regulator going after Binance for something that they saw. Yeah, I think an important thing to remember here is that for a lot of TradFi regulators, you know, guys my age, women law globally, not just in the US, is about who the issuer of a security is. The problem with so many token systems is that it's really becomes very impossible after they're initially launched to say who is the issuer anymore. Because it doesn't happen in a traditional sort of closed treasury environment where new securities get approved and then some treasurer signs a thing and now you can buy 100,000 more shares or another tranche of bonds or something like that. The very nature of the way token economics work sort of means the issuer disappears once the dang thing is launched out of the gate. And that I think has given a lot of regulators significant anxiety because what they really want to know is who's on the

hook. And with so much of crypto, the answer is, well, kind of nobody and or everybody. Yeah. So I want to just piggybacking on the Binance concept because now it's on the top of my mind as a Voyager creditor. We obviously saw the SEC step in aggressively to attempt, they failed, to stop the buyout of Voyager by Binance US. Didn't really step in when FTX, that was literally a fraud, attempted to buy Voyager, but stepped in and said, we don't like Binance. We don't have the evidence that they have the money to do this. They may be now, this one killed me, like this is going to be a transfer from Voyager to Binance of unregulated securities, which if that's the implication means nobody could bail out Voyager ever, right? Because at some point those assets have to move.

So that lends a little more credence to me that there's sort of just a general vibe from the SEC that they want to go after Binance. That's one thing. But circling back to Grayscale and the judge speaking somewhat in favor of the crypto industry, or at least saying that the SEC is out of bounds here, the judge in the Voyager case went extremely hard against the SEC. I mean, here's one quote. I have no idea how long I can do nothing and wait until Congress and the competing regulatory authorities sort out amongst themselves just who has what authority over what aspects of this, what kind of authority. I have no idea how long that's going to take. And we can't do

that in bankruptcy. We can't just put everything on pause just because we don't know for sure how the regulators will eventually make up their minds on points that they seem to have been debating for years. Isn't this so obvious? I mean, that's so happy to read all that. There was so much more than that. And I would love to like dig up every quote and say it. But isn't it so? And this goes back even to the Kraken staking as a service, right? The issue is not whether that was a security. That can be debated all day. The issue, as Hester Peirce and Jesse Powell point out, is that there was no way to get registered as a security. There was no clarity onto how to do that. And that's basically what the judge is saying. They're making all these outrageous

claims, but there's no way for anyone to become compliant because there's no rules. So is this this is a strong reminder. I'm sorry to go on my soapbox when I have three amazing guests here. But isn't this a reminder that people should remember that just because Gary Gensler says everything's a security or just because a regulator has an opinion, it still has to be codified in law. Right. Or at least or at least litigated through the courts, right? Somebody at least has to make an opinion that has the force of law behind it. And we've seen just tons of this sort of capricious regulation in the last, frankly, 10 years, both regulation and deregulation, stroke of a pen, change the rules on people, and then expect them to have complied with where you ended up. And that's really why I liked what the judge there was saying was because the core of it was, give us a rule, then we as a court can tell you whether

or not it was a good rule, a bad rule, whether they followed it or that he didn't. But you don't get to come in and say, but we're going to have rules that would make this bad. So I'm hoping that the judge there effectively kicked the SEC out of the case. I don't think legally, but from what I can tell, it's just going to let this be a normal bankruptcy proceeding now and let those things get resolved in the benefits of the creditors like those things are supposed to do. Right. And you get Lucas, James, either of you have a take on that? It's OK not to. I mean, at this point, no, not more no i don't want to talk about the sec anymore yeah i got it yeah i know they're coming all four of us get a knock on our door at the exact same time um but and interestingly in here and you guys were speaking about the fact

before that you don't think we'll see legislation anytime soon, along with any clear regulation. This judge pointed to that as well and mentioned Congress here. But interestingly, next month, the Lummis-Gillibrand bill is coming back. And I've been sort of critical of the fact that we heard about it last summer. We were excited and it seemingly disappeared. Didn't hear anything about it. Nobody moved. Well, apparently it's coming back a lot leaner and meaner, more direct on the low hanging fruit, the things that they think they can get done. I mean, listen, Lemus is a Wyoming Republican and Gillibrand is a New York Democrat, right? This has bipartisan support. But is this yet again, just a no way. I mean, you guys think there's a I think there's almost no chance. Maybe we get some like stable coin laws and maybe we get like $400 transactions and lower are not taxable on crypto. I think we could get something like that.

I mean, it'd be nice if they just even if it's a small incremental adjustment, but I don't see meaningful change yet happening. I mean, I'm not the deepest expert on the bill that was written, but my recollection was the key thing was pushing it three-sentence bill, which we've seen before, saying jurisdiction on digital assets was reverted to the CFTC. That's the entire bill, and it could be that simple. I'm not actually sure it even gets to the floor in this car. Oh, that would be outright rejected in the Senate, I'm sure. Unfortunately. I could see it passing the House, but it's starting at the Senate, so that's irrelevant. People will try to find a reason to fight about it. And that's just because of the political culture we're in.

I actually think behind closed doors, you'd get a lot of people way more than you would need the votes for to sort of say, yeah, this makes a lot of sense. But then once it gets down on the floor, you're trying to score a political point against an opponent in an unrelated field. That's politics right now. And securities regulation writ large, much less crypto and innovation securities regulation, just doesn't have a horse in that race. They're just not part of the political argument. So it only gets bolted on to somebody else's argument. Yeah, I think it's the same. Yeah, go ahead. Yeah, the same theme we're seeing all across that. Unfortunately, we're still you know waiting on a lot of regulatory clarity and that's why I'm I'm not focusing as much as my attention

personally there as I see more progress in other parts of the industry which you know right now at least they can uh play their way without that much regulatory scrutiny. And I think it's frankly where I see more growth coming in near term than institutional capital. I think we're reversing the trends from like 2021 and now being more retail focused and smaller players taking the lead again as they can potentially escape that regulatory trouble. Okay, let's do that. That's the silver lining. Let's be positive here. We've got 13 minutes left. Let's talk about the things that are actually happening that are positive. And if we're going to have to pivot away from looking at regulation and legislation, and those are not going to happen anytime soon. What is still being built regardless of that? Lucas, I mean, you're looking at on-chain data, right, to support

whatever you have. So maybe we go right back to you and start there. What evidence do you have that that is happening? What is retail interested in? And what are sort of the positives of what you just described? Yeah, I'll say that there's more focus on DeFi. New users are increasing, though not dramatically so. But I'm very optimistic on things like Uniswap launching a wallet, that vertical integration, where ideally it'll make it easier for new users to be onboarded into DeFi and not have to depend on things like Silvergate for banking, but more in the spot. Smaller amounts of capital, of course, can enter this way.

But I see it as a potential next leg of growth. Also like liquid staking derivatives, which just a few years ago were some startups with less than 10 people. Those that now have tens of billions in capital accrued and they're becoming a core part of crypto uh so i'm seeing uh at least some of the seeds being planted for further growth in d5 um ideally it'll be matched with more seamless um onboarding and account abstraction at which just got implemented which should make it a lot easier as well um so yeah in in spite of the regulatory scrutiny i think we're still planning the seats

for crypto to continue to grow it's it's interesting because every time we have a cycle the third cycle now uh we leave behind these very interesting building blocks of the puzzle. And in the beginning, it was more focused around on-ramps and getting those stood up. And I mean, it's an ICO excitement, the NFT, the Web3.

We're starting to get a lot of these Lego blocks that you can build on top of. I have a very financial services view. And what we see is much more at the access points and the on-ramps are becoming much more stabilized and sophisticated. The access and connectivity to DeFi is starting to become potentially viable for financial services. We're still not there yet. There is definitely a drive and an incentive to have those DeFi service platforms become more stable and robust. I mean, if you look at like Uniswap and some of the other ones, they did pretty well throughout this last kind of craze and while centralized service providers struggled.

So that's pretty optimistic for us. We're also just, we're starting to see how people are stitching together these interesting building blocks, whether it's through the Web3 world, through the Spot world, the DeFi world. The other, I would say the last piece that's been a bit of a story, but come in really in a big way is the derivative side. If you look at Coinbase, their futures offering crack and their futures offering, they're cultivating a new wave of futures traders that first got next start, first had exposure to us trading through spot Bitcoin or other spot products and now we're

starting to get into futures and it's creating a real challenge for cme and others that are used to having this core model and that's going to shift a lot of the way the futures markets and derivatives markets work in the u.s and should drive out some costs which is pretty exciting so i think overall good for the consumer a lot of the pieces that are happening as a result of the crypto space in the financial services. And I'm also pretty excited about the different innovations that are happening around the building blocks that have been left behind. I'll give you a completely left field answer on this. I think my biggest concern thinking about the whole world as all markets is institutional decay,

whether that's the banking system, which we're seeing many examples of us today, or governments or academics or you name it. And one of the biggest things to come out of the last round of crypto innovation was DAOs. I think the passage of the Utah Dow Act, which was like a week ago or something like that, sort of following on the heels of what's going on in Wyoming and several countries that have done that. Those things to me are really interesting. I mean, I know it tends to get much less big headlines, but the fact that

a bunch of people are putting a bunch of money in a Dow to go buy a golf course in Scotland is actually really cool. And we should pay more attention to the fact that that's really cool because that's just using the rails we built for DeFi in a different way. And I think those things, I want to celebrate and push more of that stuff out there because that's taking those building block streams you were talking about and doing really innovative, interesting things that cross that bridge into the physical world. That to me is where we can probably do a lot of work before regulators pay much attention to it. We can start doing that stuff at the state level. That to me is where we can probably do a lot of work before regulators pay much attention to it. We can start doing that stuff at the state level. And in the US, at least, if you can start codifying stuff like this at the state level with real money, real organizations,

and real constituents, that tends to move the needle at the federal level eventually. I mean, just look at cannabis. I think it's the best example of that. You start doing stuff in a structured, formal, legal, old school, boring, wearing ties way, state by state, and all of a sudden you can't stop it anymore. So I'm really encouraged by what we're seeing in DAOs at the state level. Lucas, it's interesting you said that we're seeing new people come into DeFi. I would take a win in crypto as a win, and I don't mean this as a joke, anywhere that we're not. Right. So the fact that it's not even just flat and we're actually seeing new users come in, even if that's minimal, I think that's a huge and I think that would be true of any market.

I think that all markets, people have their question marks and generally are exiting and slowly. So is this on all protocols? Are you seeing it in a specific place? Is this, you know, primarily on Ethereum? What are you actually seeing as sort of this rise of DeFi? Yeah, I'll put an asterisk there. I mean, that it's new addresses, which, you know, potentially could be the same person. Unfortunately, we can't differentiate. But we're seeing new addresses at least, which there's little purpose to having multiple addresses for existing protocols in like uniswap ave euler blur of course as well so we're seeing renewed interest at a

smaller scale of course and like you know peak hype but we're seeing new addresses interact with protocols test new features and at the same time we're seeing new addresses interact with protocols, test new features. And at the same time, we're seeing some innovation from these protocols launching new features and new types of services as well. So the activity in total is less than it was, but at least we're bringing in new people, it seems. Again, asterisk that it's an address, but given that those already have tokens and by and large, there doesn't make too much sense there couldn't be farming airdrops.

So I do see some positive growth there, still in the thousands, hundreds of thousands at most, I think Uniswap has the largest and open c in terms of users um but it's promising science and with account abstraction and more wallets becoming easier to integrate um optimistic and further growth there yeah i think it's interesting i've just said we have to figure out a way to get to the next billion what are we going to do to get to a billion users in this and i am a trade let's say junkie and it's not going to come through trading in my opinion it's going to come through something like uh web3 or the nft side look at what nike's doing with their products between digital and physical that stuff is much

more comprehensible for every person and i think that's where we do get a larger swath of users um it's not necessarily going to drive a ton of participation in like bitcoin or eth holding potentially but it's it's where we bring in the participants and they start to interact with the upper layers of these technologies and that's where things get really exciting about how the space can move and that comes from a trader who's at a trading company who's running the crypto side of that trading company oh man are you gonna get in trouble but we need one billion traders too uh but i think still that stable coins were going just circling back. That could just continue to be the killer app that brings in all those people. I mean, if you live in somewhere with hyperinflation and no access to dollars, as much as I would love to say, go buy Bitcoin and whatever.

People want stable coins. They want dollars. Well, and honestly, I think we're headed towards a world where people are going to start moving money into a stable coin that's sitting in a wallet somewhere. Pretty soon, they're then going to be able to go buy a 20-year treasury fund on a token basis if they want to. Now, whether that happens in a broad, open ecosystem like we have now, or whether you have to be in a secure chain, lots of arguments around that, lots of regulation around that. But the industry is pushing that way.

I mean, folks like WisdomTree and Franklin Templeton, they're all trying to lean in and figure out how to get all this old school stuff on chain somehow, on somebody's chain somehow. And I think that we're going to get there. And to James's point, I think it's those real consumer applications that aren't intra-ecosystem. They're, oh, I bought sneakers, or, oh, I want membership in this museum, or, oh, I want to go play this golf course in Scotland, and I can go buy a piece of it. Those start becoming real consumer connections. And that I think is ultimately where the next billion comes from. I saw some story in passing today, and now I'm going to misquote it, but something with Planet Hollywood and Animoca Brands opening an NFT club

in LA. Anybody see this? Am I making this up? Yeah, I got to look it up. Planet, Ali. I mean, so I just want the point is that this, yeah, I'm not lying. This is on BusinessWire. Yeah, no, I see it right now. Yeah, here we go. See, guys, I don't have a plan here. Just making it up. Animoca brands a plan to Hollywood to launch Club 3, a physical private club with exclusive perks and experiential programming for Web 3 community.

Planet Hollywood. Who would have thought? Are we going to get a hard rock cafe in the metaverse next but to your point though that i mean this is really happening whether it succeeds or not i don't know but people are putting real capital and effort behind this yeah yeah i think that we have um the downside of some of this that not to end on a negative note the the capital investment capital was flowing heavily into the space from a bc driving innovation and it's starting to find other areas uh ai has just let everybody exciting that some several folks were crypto were nfts now they're AI. It's an interesting transition.

But the money flowing into these spaces is still going to be a big driver of where the innovation comes from. We still are likely to see consolidation. We've had a lot of experimentation in these projects, and it's going to be some good consolidation, some good survivors. And I'm excited to see what comes out the other side of this. For sure. and i'm excited to see what comes up the other side of this for sure and i'll add uh last thing we're i think we're seeing different players so perhaps there's less vc money perhaps not there is entering crypto but now we see brand interests remain you know incredibly resilient that that's just the latest example the starbucks one red those are, you know, better examples. We'll see if Meta eventually actually integrates Instagram NFTs as they've been testing.

So I think that'll just bring, again, that retail crowd further back into crypto, while institutional, you know, remains in a bit of a more difficult position and in a way brings more of a grassroots interest into crypto, which I'm excited for. Yeah, I mean, Dave, did we get... Yeah, go ahead, Dave. I was just going to say, did we kind of get what we wanted with... Didn't we sort of get what we wished for,

unfortunately, with the institutional involvement in the crypto anyways? Yeah, I do think that this shakedown period, as painful as it is, is ultimately very needed and very important. And we've seen this in every piece of innovation in financial markets when ETFs launched, various insurance industries, derivatives, there's always these periods of sort of overexpansion and then contraction. I think NFTs are a really interesting one because none of the regulatory proposals really touch NFTs.

So I'm really curious to see how that evolves because that's going to be a little bit of a wild west, I think, for the foreseeable future because even the Gilbrand bill puts NFTs off to the side. Yeah, absolutely. Guys, we're against time. Unfortunately, a really awesome conversation. Wish I could do it for a lot more hours,

but this is when I go record podcasts, so I can't. Although I think I have one other thing before that. So everyone, please follow. They're in the description. Lucas into the block, Dave from Vetify, James Puchra from Trade Station, all three of my favorite incredible resources who you'll see back on the show quite often. I will be back again tomorrow on Fridays. I rant about the news of the week and generally lose my mind. So you can tune in for that if that sort of thing appeals to you. And then I'm actually going to be largely off next week because my kids spring break. So get it while it's hot.

Dave, James, Lucas, thank you guys very much. Always a pleasure and an honor. Great. Thank you so much. See you guys later.

Bye.