Unchained - 2023 Crypto Year in Review: Is a Bull Market Around the Corner?- Ep. 586

Starting point is 00:00:00 Hi all, happy bull market. As we end 2023, this past year felt like we were still closing the chapter on 2022, and frankly, even the chapter on the entire 2020-2020 bull cycle. Not only because of things like Operation Choke Point and because of the various bankruptcies, arrests, and one big trial, we're looking at USBF, but also because prices, volume, and activity largely dwinded, with the last gasps of layoffs coming this fall. And yet, as brutal as this crypto winter was, probably the harshest that I've covered.

Starting point is 00:00:40 And even though most normies believe crypto is dead, not only has it not ended with a whimper, but in January, it looks like we're gearing up for what will be a very strong start to a bull market, with spot Bitcoin ETFs likely to launch very soon. We'll have more on all the upcoming excitement and look forward next week. But first, we'll look back on this year. Refresh our memories, have some fun, and assess how various predictions bore out. Arbitrum's leading layer two scaling solutions can provide you with lightning-fast transactions at a fraction of the cost, all while ensuring security rooted on Ethereum.

Starting point is 00:01:17 Arbitrim's newest edition, Orbit, enables you to build your own tailor-made layer 3. Visit Arbitrim.io today. Streamline your defy with VaultCraft, the ultimate on-chain toolkit for deployment. deploying custom automated Defy products on any EVM chain. Join Valkraft's referral program, Unite with the community, and supercharge your crypto. Details on Valkraft.io. This episode is brought to you by Uniswap. You may know Uniswap is one of the largest decentralized protocols, but it's so much more.

Starting point is 00:01:50 From Uniswap Labs' self-custodied wallet to zero gas swaps with Uniswap X, Uniswap is building protocols for seamless swapping across DFI. Visit app.uniswap.org to get started. First up is Larry Sirmak, now CEO of the Block, who in the first episode of 2020 said, It's going to be slightly slower and quieter than we saw in 2022. As a reminder, when 2022 ended, BTC was trading at about 16,500, and ETH was trading in about 1,200. So even though prices are way up now, we went on quite a journey before all that happened. We started the year with Gemini co-founder Cameron Winklevoss, accusing Digital Currency Group CEO, Barry Silbert, of using, quote, bad faith stall tactics regarding a $900 million debt owed by DCG's subsidiary, Genesis, to Gemini's earn users.

Starting point is 00:02:45 Winklevoss claimed Silbert avoided discussions for resolution and misused funds for personal gain. Silbert refuted these allegations, stating DCG had not defaulted on borrowings and had proposed a resolution. solution to Gemini, which remained unanswered. On the pod, Ram Aluallia said that this could force Genesis into bankruptcy. Gemini could force Genesis into Chapter 11 through involuntary petition. Look, the picture is grim. Genesis is insolvent. They had $2.5 billion loaned to three hours capital. It's defaulted. Not only that, we know that the value of three hours capital assets have declined over time. Those tokens are trading down worse. than the overall market.

Starting point is 00:03:29 So there should be yet another impairment that Genesis is experiencing here because they should expect to receive less recovery. And by January 20th, Genesis had filed for bankruptcy. In February, an examiner report on Celsius's bankruptcy revealed significant mismanagement and potentially illegal operations. Key issues included Celsius's financial troubles starting in 2020, CEO Alex Mishinsky's $68.7 million gains from selling cell token. internal acknowledgement of operations resembling a Ponzi scheme,

Starting point is 00:04:02 manipulation of the sell tokens price using customer funds, risky financial strategies involving FTCS and much more. Kadeem Schuber, investigative reporter at the Financial Times, said, Initially, it seemed at the very start of Celsius, the cell token was just allowed to have its own price. But from about 2020, Celsius began spending its own money, spending its customers money, spending investor money, to prop up the price. So they would tell the community, well, we buy a certain amount of sale from the market

Starting point is 00:04:35 to pay the rewards that we owe you. In fact, they bought to keep the price where they wanted it to be. One of the reasons was so that insiders, executives, people like Alex Mishinsky, so that they could sell their own holdings of sale without affecting the price massively. Another reason is keeping the price of sale up had a major positive impact on Celsius's own balance sheet. So Celsius had its own holdings of cell token. It recorded it on its own balance sheet as an asset. And therefore, by spending money that investors were giving them crypto assets that customers were giving them on buying sale,

Starting point is 00:05:17 it could inflate and protect its own balance sheet. A few weeks later, we already started to see some hints at what, many in the crypto community called Operation Choke Point 2.0. On February 9th, Crypto Exchange Cracken agreed to close its U.S. cryptocurrency staking operation and pay a $30 million fine to settle a Securities and Exchange Commission enforcement action for allegedly selling unregistered securities through its crypto staking as a service program. On February 13th, the New York Department of Financial Services ordered Paxos Trust Company to cease issuing the Binance USD Stablecoin, BUSD. not only a shot at Binance, but also a major regulatory action affecting one of the largest

Starting point is 00:05:59 dollar-pegged cryptocurrencies. At that time, it had a market cap of $16 billion. It now has only a little more than $1 billion. Days later, the SEC proposed amendments to federal custody rules, expanding their scope to include crypto assets, which would require crypto exchanges to obtain or maintain specific federal or state registrations to custody customer assets. Graywall Chief Legal Officer at Coinbase said, Well, I think that at some point, these actions line up in a way that you have to wonder, is it all just a coincidence? And I think beyond that, you have to ask, why are we confronting restrictions, withdrawals,

Starting point is 00:06:43 debanking of legal, recognized, highly regulated companies in this country? There are all sorts of fair questions to ask about the operating. operations of different firms in crypto. And I would point out outside of crypto. But the notion that somehow the right way to constrain activities that give rise to concerns is to cut off their oxygen or slowly deplete them of oxygen, which, of course, in the financial world, there's no more important source of auction than banking services. I think that's something that is as much as anything explaining the strong reaction we're

Starting point is 00:07:21 seeing not just inside of the crypto community, but in the broader financial services community as well. That's a dangerous precedent. And it may be that crypto is currently the object of that particular approach. But if the government gets away with that with crypto, what's to say and what's to stop them from getting away with it as to a whole host of other legal, safe, regulated industries in this country that happen to be out of favor with policymakers. Echowing Paul's sentiment, Rebecca Reddigg, Chief Policy Officer at Polygon Labs added,

Starting point is 00:07:55 I think the statements that really do cause fear in the crypto ecosystem, and again, with retail users, because the statements, you know, may happen. And then Chair Gensler's on Squawk Box the next morning talking about it and really speaking to, maybe not even retail users, but what we'd call normies, you know, just traditional people who are in the financial markets. And the message they're getting is crypto is bad, crypto is for criminals. And so I think that there is this massive chilling effect, even through these one-off enforcement actions. I think the other piece of it is, enforcement actions are not precedential law. They don't set the law. One of the major things that happened this year around the Bitcoin ecosystem was the

Starting point is 00:08:37 introduction of ordnals, or what people later called Bitcoin NFTs. What's so unique about them, Manib Ali, co-creator of Stacks, said they have a very particular selling point. complete ownership. Imagine that you're Beeple and you're creating something really unique. And on Bitcoin, you can literally store the image on the Bitcoin blockchain.

Starting point is 00:08:59 And now it's almost like indestructible. Like you know that as long as Bitcoin is around, this thing is going to be around. And I think that's very powerful. Like that thing instantly clicks with a lot of people. That Bitcoin's block space is precious. It's very durable. As soon as you put something out there,

Starting point is 00:09:16 it's probably the most indestructible media on the planet in a way. However, the launch of ordnals wasn't embraced by some members of the Bitcoin community, often referred to as Bitcoin Maxis. Meneve explained why he thinks they're wrong. But if you look at the arguments, it sort of like don't make sense, because over here, ordinals are resulting in higher fee markets, which is good for Bitcoin mining. It's actually really good for long-term security of Bitcoin.

Starting point is 00:09:43 One of the biggest criticisms is, you know, in the next 10, 10 to 15 years when the Coinbase rewards the newly minted Bitcoin, it goes down a lot. What's going to happen to the Bitcoin security? And this is the first real data point where we have seen is sustainable sort of a use case that is actually giving more revenue to miners. In fact, in November, Bitcoin's daily transaction fees surpassed Ethereum's for the first time since 2020, mostly attributed to the introduction of ordnals inscriptions. In March, with the U.S. economy still weak and interest rates rising, we entered a phase

Starting point is 00:10:16 of bank failures, which ended up affecting the crypto industry significantly. Silicon Valley Bank, which ranked as the 16th largest banked in the United States, with $209 billion in assets, collapsed after a run on deposits, thwarted its efforts to raise capital. Most significantly, Circle had a big part of its deposits in SVB. This caused one of the most stressful events in the year for crypto investors. USDC, the second largest stable coin, depegged from the U.S. dollar for an entire weekend. reaching lows of 80 cents. Robert Leshner, founder of Compound and Superstate, sat on the chopping block.

Starting point is 00:10:53 Well, I definitely think this is one of the great reminders for people about why crypto even should exist. So many sophisticated, well-intentioned people over the weekend had no idea if their money was going to be there come Monday. And that's mostly what Bitcoin and crypto assets were designed to prevent, which was this like uncertainty due to someone else having the control and not you as the user or the market participant. And I think it's a really loud reminder. The second thing that I think is vindicated and reaffirmed coming out of this weekend is, you know, all of these banks were being shut down

Starting point is 00:11:32 because of opakness and uncertainty about their balance sheet and inability to trust management and all of these things. And we're sort of joking earlier in the show when we said like, oh, but D5 fixes this. But it does. Right. DeFi Protocol would have been able to present to regulators the radical transparency of knowing exactly what the health of the market was or the withdrawal queue or whatever it is, right? And it really does prevent a lot of the same sort of issues that we're at the heart of these bank failures. And so I see this as just a nice reminder of wake-up call for everyone building in this space that we're headed in the right direction, even, you know, if moment's a moment,

Starting point is 00:12:12 you know, it doesn't feel like that. Later, Signature Bank and Silvergate Bank followed similar paths. The problem, these were the main banks used by crypto companies and startups. Nick Carter of Castle Island Ventures was sure that crypto as an industry was being targeted by banking regulators. A lot of what we're talking about is simply banks doing business from a Fiat perspective with firms that touch blockchains or their software providers for the crypto space. and there's implicit costs there. So certainly what bank executives are telling me on a widespread basis is, if you are engaging with crypto depositors,

Starting point is 00:12:52 you just fundamentally face more scrutiny, higher demands for more stepped up, MLKYC requirements, and more frequent and burdensome data requests. Custodia Bank CEO, Caitlin Long, did not mince words regarding the signature bank situation. Scandal. Outright scandal. This is theft of private property by regulators who did not have the authority is to take a solvent bank and put it into receivership. And I do suspect that there will be

Starting point is 00:13:21 litigation over that. Did the regulators have the right? Again, finally, you're having some of the regulators be in a position where they can sue the regulators for overreaching. But that's what it takes. And the fact that these regulators have not had anyone sue them for decades, they've just grabbed power that they didn't actually have. They've way overstepped their bounds. And if this is correct, and I don't have any reason to doubt Barney Frank, because he did have inside information. He was a director of the company. And he himself admitted that he was a bit of a cryptoskeptic. So for him then to say that the regulators put a solvent bank into receivership, I can't I think the stock was trading at something like $40 before it was put into receivership.

Starting point is 00:14:13 This was not a stock that went to zero or close to zero. So that is theft of private property. And it's going to be challenged. Coin share CSO, Milton Demir, chimed in. It's banana republic-level shenanigans. And what's wild to me is when you tell people there is something foul happening here. This is not due process. is not what happens in a democratic country that respects private property and the right to form

Starting point is 00:14:43 private enterprise. When you tell people that they're like, oh, conspiracy theory, you're biased because you're in crypto. Like, what are you smoking? If you think they're just coming for crypto, you're on something because it's crypto first and everything else is next. Again, banana republic level moves. I just, I am, I'm appalled. And what's even worse, Caitlin, as you pointed out, is nobody's holding these people account. Nobody. There is zero due process, zero accountability, zero appeal. So like the question is, what do you do in this situation? Well, people are voting with their feet. Half the people that I work with are contemplating moving to a different jurisdiction. The crypto crackdown continued

Starting point is 00:15:23 with the SEC issuing Coinbase a Wells notice. In the industry, including House Representative Tom Emmer, did not take it lightly. I mean, let's just talk about Gary Gensler at the SEC. He's a Warren disciple. This guy, in my mind is a bad faith regulator. He's been blindly spraying the crypto community with enforcement actions while completely missing the true bad actors. He says he's got an open door, Laura, but a company like Coinbase, which accessed that open door and started working with Gary Gensler's SEC. By the way, Coinbase, I would argue, is one of the most regulatory, compliant crypto companies out there? Well, guess what? Gary Gensler might have an open door, but it is an enter

Starting point is 00:16:10 at your own risk door because what he does is despite several meetings over several months, Gary Gensler's SEC refused to provide feedback on a product. It was called the Earned product that Coinbase was looking to list. And instead, after all these meetings and nothing happening, the SEC slap Coinbase with a Wells notice regarding the very issues on which Coinbase was asking for their feedback. Clearly not the way the government should be serving Americans. And it sends a clear message, I believe, to the broader crypto community. And that directly is Gary Gensler is not regulating in good faith. During this time, major technical advancements kept a pace. In April, Ethereum, which enabled staking in the beacon chain in December 2020,

Starting point is 00:17:04 finally enabled withdrawals of Staked Eath in what was known as the Chappellea upgrade, which was really two upgrades, Shanghai and Capella, in one. That brought the network's multi-year journey to proof of stake to a close. Tim Bako explained on Unchained. So the Chappellella upgrade, which is Shanghai, Kiskepella together, is like this upgrade where we allowed validators to take the stake that they have on the beacon chain and either exit the whole thing, stop being a validator. I think maybe a way to think about it is like proof of steak V1 is now fully complete.

Starting point is 00:17:36 There's probably a bunch of chains that will happen, you know, to Ethereum's consensus in the future. But the sort of initial vision of the entire chain is running on proof of state. You can validate. You can enter and exit, all of that. This is now live and working. Meanwhile, the regulatory battle between the crypto industry and the SEC took an interesting turn. Not yet launched trading platform, Prometheum, acquired a special purpose broker-dealer license for digital asset securities, a first of its kind. And Aaron Kaplan, co-founder of Prometheum Capital, came on unchained to excoriate the crypto industry.

Starting point is 00:18:11 For those of you who don't remember, Kaplan was the rare, perhaps even lone entrepreneur, who was a champion of Gensler. It's interesting because in the industry for a long time, people say, well, we go speak to the SEC and we get a well's notice. but they're not mentioning how they were conducting all this business activity that was improperly licensed and not compliant with the federal securities laws. They're conflating two concepts. One is how do we move forward, right? How are we going to become compliant? Not how we clean up the non-compliant activities that previously occurs.

Starting point is 00:18:43 There's really no way, like maybe in theory there's ways through no action letters and something and grandfathering, but you can't exercise those skeletons out of your closet. And I think that's one of the biggest issues when it comes to a lot of the legacy crypto financial service providers and the virtual currency exchanges is that there are a lot of skeletons there. And how then do you transition to an ecosystem where you're under strict enforcement and regulatory guidelines and reporting guidelines and it's a significant task? And I think that's why we see such intransigence from the virtual currency exchanges in being aloof or obtuse to the writing on the wall that digital assets are securities.

Starting point is 00:19:26 They argue that there's a lack of regulatory clarity because they're literally best served by the lack of regulatory clarity. Rodrigo Seda, Special Counsel at Paradigm, called him out on acting superior to other crypto entrepreneurs. The reason you alienated the community, Aaron, is because you called everybody a scofflow, and you should have a little bit more empathy for the entrepreneurs that have been, with the best intentions trying to make this work. And you go around saying that everybody's violating the law willingly and that you've somehow magically pulled, you know, a rabbit out of the hat, which this is like, frankly, like, this is a space where a lot of people have been, you know, actively working

Starting point is 00:20:04 on it. And it's even more insulting when you don't have anything really to show for it other than a license. What's a little bit insulting is that you basically say people who are trying to do it the right way are trying to do the wrong thing. And essentially what your argument is is that people who rush to market and disregard of the investor protections should be rewarded and should continue to be rewarded as new legislation takes a half a decade to go into place. Basically, you just don't care about the public and what's in their best interest. The scorebed app here with trusted stats and real-time sports news. Yeah, hey, who should I take in the Boston game? Well, statistically speaking, no more statistically speaking. I want hot takes.

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Starting point is 00:22:53 projects, and with the recent launch of orbit, Arbitrum welcomes you to build your very own tailor-made layer 3, or, as the Arbitrum ecosystem calls it, an orbit chain, directly on the Arbitrum tech stack. Designed with you in mind, Arbitrum empowers you to explore and explore. build without compromise. Propel your project and community forward by visiting arbitram.io today. In June, the SEC came back in full force. On a Monday, it sued Binance for mishandling customer funds, lying to regulators and selling unregistered securities. The next day, it sued Coinbase for operating as trading platform as an unregistered securities exchange, broker, and clearinghouse. The SEC also alleged that major cryptocurrencies like Saul, Ada, and Maddoch were securities.

Starting point is 00:23:41 Emily Myers, General Counsel at Electric Capital said, both cases allege that Binance and Coinbase were operating unregistered securities exchanges. And they list a number of tokens that they were allegedly trading illegally. They also both allege that both Binance and Coinbase were offering unregistered securities in their various staking offerings. What is different is that in the Coinbase case, that's pretty much where the allegations end. There are some additional allegations against Binance

Starting point is 00:24:24 that relate to fraud, to commingling of customer assets and self-dealing and manipulative trade practices that are not at all present. in the coin base action. But as we entered the second half of the year, the tide began to turn for the industry. In July, Judge Annalisa Torres gave an order establishing that XRP buyers trading on exchanges

Starting point is 00:24:50 were not, in fact, engaging in a securities transaction. Lewis Cohen, co-founder of DLX law, explained to Unchained. What she concluded was the people buying and selling the XRP tokens on the exchanges were not engaging in investment contract transactions, with Ripple. What she does say quite critically is that the individuals who bought XRP on in through the programmatic sales, what she writes is the vast majority of those persons who bought that

Starting point is 00:25:22 did not invest their money in Ripple at all. She points out that only something like 1% I think of all of the programmatic sales actually went to Ripple. So they were not necessarily, people were buying and selling XRP tokens on exchanges, mostly trading with each other, not necessarily providing money to ripple. Jake Chervinsky, Chief Policy Officer at the Blockchain Association, said, I think that the industry is viewing this decision as, just as we've been saying, as rejecting the SEC's theory that the assets themselves are securities. And what that means is even if they may be sold in, you know, as an investment contract or as

Starting point is 00:26:03 part of an investment contract by the creator at some point, those transactions are not happening on exchanges, which are running secondary markets and order books where the people transacting do not know each other and are not making any promises to each other, which are characteristic of securities transactions. Just after that, the SEC suffered yet another major loss in court. The agency was ordered to vacate its rejection of grayscale investments bid to convert the Gray-Scale Bitcoin Trust into an exchange traded fund or ETF. Judge Noemi Rao wrote, quote, The denial of Grayscale's proposal was arbitrary and capricious because the commission failed to explain its different treatment of similar products. The ruling, plus the filing for a spot Bitcoin

Starting point is 00:26:46 ETF by BlackRock, became the pillar stone for the hope of a spot Bitcoin ETF to be approved. Eric Balchunis, senior ETF analyst at Bloomberg Intelligence, said a spot Bitcoin ETF could potentially unlock $150 billion in investments. And so I think the advisor world, I don't think a lot of them naturally would want to plow into crypto, but I think some of them are younger and be like, this is a good hedge. And some of them might want to impress the kids of the boomers and be like, yeah, I'm going to get you so crypto. So even if 0.5% of that 30 trillion were allocated to the Bitcoin ETF, that's $150 billion.

Starting point is 00:27:24 Later in the year, when the SEC decided to not appeal its last, loss in the lawsuit with Grayscale, the chances that the ETF being approved jumped again. On Unchained, some analysts estimated how much money would come into Bitcoin if spot ETFs were approved. Matt Hogan's CEO of Bitwise said, quote, We made a, wrote a piece on this. And our estimate is, you know, it's something like 50 billion in the first five years, something like that. Bitcoin ETFs are like 1% of the market when they're mature. And the U.S. ETF market is, what, $7 trillion? So take 1% of that and you have, you know, $70 billion, right?

Starting point is 00:28:03 There's already 20 in GBT, so that leaves 50. That's your math that gets you to that point. Alex Thorne had a firm-wide research at Galaxy give a bit higher estimate. And we did make assumptions. And we think and we attempted to make them very conservative assumptions, right? So the top line numbers that people are taking from this, and I'll just state those briefly, which is that we think there'll be 14.5 billion in inflows year one of an ETF. ultimately going to like $38 billion in year three, so not cumulative like $38 billion of inflows

Starting point is 00:28:33 in year three, that is intended to effectively be a lower bound. As you all know, the class of FTCS in November 2022 was the most significant event in what had already been a very hard year for crypto. After that, Sam Pinkman-Fried was apprehended and brought to the U.S. from the Bahamas. He was initially allowed out on a controversial bail, which was later revoked because SBF violated the conditions. For instance, he leaked Caroline Ellison's diaries to the New York Times. He was remanded back to jail in August, and the trial began in October. The first week was marked by the jury selection, or, as Sam Inser said on unchained, the jury desection. The final jury was

Starting point is 00:29:14 mostly composed of people with non-financial professional experience. The prosecution strategy was clear from the very beginning, lawyer Joshua Ashley Clayman said, I think for the prosecution, I mean, what they're trying to show is no matter that it's a highly technical area, the allegations are this is simple fraud, right? This is untruths. This is misstatements and this is, you know, inducing people to trust or to invest or do other things on false, you know, pretences. And I think, so that is the message on the one hand. From the other side, you know, the defense, and certainly we saw this with the opening statements, but also throughout in some of the cross examinations today, which I'm sure we'll talk about, but trying to say like, look, this case is based on hindsight. Just because FTX1 bankrupt, just because all these things happened, that doesn't mean that there was fraud involved. That doesn't mean that there was conspiracy because guess what?

Starting point is 00:30:16 the whole digital asset space was going through crypto winter. And we had all of these other events. So maybe we'll go into some of the statements about, you know, bulletproof and things like that that that popped up. As testimonies lined up, there were some that really stood out. In the testimony of FTCCTO, Gary Wong, he revealed that Alameda had a $65 billion line of credit on FTX. Lawyers, Brian Klein and Sam Enzer explained why that number was a, quote, devastating fact, for the defense. I mean, and also 65 billion. I mean, again, clear yourself in the place of these jurors. Like, these are incredible amounts of money for anybody, right? And these are eye-opening

Starting point is 00:30:57 amounts of money. Like, you know, if it was 300,000 or some people were like, okay, a line of credit, I get it with my house. You know, these are numbers people can relate to. But when you're talking $65 billion, really nobody can relate to that, okay? I mean, that's just an, it was an incredible amount of money. So that's just a devastating fact for the defense. I don't know what they're going to, how they're going to try to spend that, but that's a worry about the stating five. Yeah. And I agree with Brian completely. And also, you know, one of the things the defense did in the opening was they said, well, they tried to weave this, they planted a seed that the reason Bankman Fried could believe that this was reasonable, that it was okay for Alameda to borrow customer funds, is that he reasoned

Starting point is 00:31:43 believed there was enough collateral, okay, that Alameda was putting up some kind of collateral, and this is a normal thing that happens, right? There's margin trading. It's okay. You give me collateral, I loan you money, no problem. Eight billion dollars. Where's the eight, where is the collateral for eight billion dollars of customer money? That's a lot of money. That's a lot of customer money. Where is the collateral for? What is the collateral to secure customers? How is that safe? After that, the second most important testimony of the trial happened. Caroline Ellison, former CEO of Alameda and ex-girlfriend of SBF, gave a damning testimony for the defense. Erie Redboard of TRM Labs said,

Starting point is 00:32:26 Caroline is a critical witness on a number of levels. One, she is the government's cooperator, right, which comes with baggage, but it also comes with the fact that she was very, very close to the defendant and has intimate details about both the sort of financials that were happening, the financial, issues that were happening in the company, but then also sort of the way the company was run, the way Bankman Fried operated. He had tremendous trust in her, and I think a lot of that came out over the course of the last two days. So really, really extraordinary moment. And look, I mean, this is such an important witness that essentially both parties, the government and the defense, both raised this witness in their opening statements because the opening statements really sort of gave a roadmap of what the jury was to expect. And one of the things that the

Starting point is 00:33:12 defense said is that you were going to hear from, you know, Caroline Ellison, who was the CEO of Almeda. And she was very much in control of that company, right? So the last two days, we saw a really back and forth between how much control did she really have and what decisions were hers alone, but then what decisions were really made in the background by the defendant. By that time, we didn't really know whether SPF would testify. Spoiler alert, he did. And his lawyer, David Mills recently described him as, quote, the worst witness he's ever seen. On Unchained lawyers, Sam Ensor and Greg Strong said before SPF trialed, that they wouldn't recommend that he do so. Let's move on to just discussing whether or not SPF should testify.

Starting point is 00:33:55 If you were Sam's defense lawyer, what would you advise him to do? My advice would be don't. And what I would say to him is, we're going to lose. We're not winning this trial. We have to think about sentencing. If you testify, you are going to add decades to. to your sentence. You're not going to change the outcome. And the judge will find in addition to being guilty that you not only didn't accept responsibility, but that you tried to commit perjury. And this is a

Starting point is 00:34:24 judge who will really slam you for that. It's a mistake. Now, I do think his only shot of an acquittal is to testify. The evidence is too overwhelming, as far as I can tell. And the only way to rebut the inference and the crosses have just not done enough to punch holes in the government's case. the only way to give the jury a competing theory would be for him to testify. But I think even if he testified, there's just too much going against him. There's too much headwind. And so I would say, don't do it. Yeah, I would agree with that. I think it's going to be complicated by the fact that I strongly believe that he will want to testify. And ultimately, it's his call. So he has to take the advice of his lawyers. But just stepping back, like my experience with people,

Starting point is 00:35:12 who, you know, have been able to accomplish wide-scale financial fraud is that they do it because they can be very convincing. And if they are very convincing to a lot of people over a long period of time, they sort of believe that they have this ability to convince people whenever they want to. And I think that's sort of going to play into this question of whether or not he will testify. And that's why I think he will want to testify, because I think he will believe, that he can convince people that he was, you know, maybe not as involved as is being portrayed in the government's case right now. By the end of the second week, it was clear that it was not going well for SBF.

Starting point is 00:35:54 The overall arc of the testimony, you've got multiple witnesses now confirming that customers were told their funds were theirs, would be segregated from proprietary assets of the company, that FTX was separate from its trading arm, eliminated. that Alameda would not have special privileges beyond those of other customers. And in fact, according to multiple witnesses now, they did have all kinds of special privileges. And it's hard for me to see how the defense is going to overcome it. We do need to see what their case looks like when they put a case on. And then SPF decided to testify.

Starting point is 00:36:35 And that did not go well at all, according to Sam Enzer. He begins right out of the gate with I didn't intend to differentiate. fraud, any one, I made mistakes, small ones, big ones, and the big one was, the biggest was no risk management, right? In other words, this was just a risk management problem. Well, that's not really what the government's saying, pal. I mean, what the government is saying is you lied, right? So whether you, risk management goes to, why did you actually lose the money? But even if you never lost a penny, you can't get money from people by lying about it. So it's like a non-sequitur. And I found a lot of his testimony, these long-winded sort of cutesy stories about his background and this

Starting point is 00:37:18 and that to be irrelevant to the heart of the issue. Even before the jury deliberations, it was all over for SBF. On Thursday, November 2nd, the jury took less than five hours to convict Bankman Freed on seven counts of fraud and conspiracy for stealing billions of dollars of his customer's assets. Most juries don't reach a verdict so quickly. Former prosecutor Rich Cooper explained why he thought the jury wrapped up within a few hours in this case. I think as devastating piece of evidence, after devastating piece of evidence came in, it couldn't help but affect each individual juror's mental scorecard as they're going along and keeping track. And so what the swift verdict shows is they were ready.

Starting point is 00:38:02 They were ready to get the case, I'm sure, far before they actually got the case. As a prosecutor, you want to try the quickest. this most direct, most powerful case you can. There's a tendency to over-try cases because you don't want to run the risk of leaving evidence and good evidence on the table just in case there's one or two jurors who have problems with it. But a case like this, when you look back in retrospect, you realize probably could have rested a week earlier, maybe could have cut one of the three cooperating witnesses, maybe could have called a few fewer witnesses. And in fact, I think the reason that the government didn't put on a rebuttal case may have been, it was, it was

Starting point is 00:38:40 was all going so well. And the cross-examination of SBF ended on such a high note that to do any more would just dilute the overall impact of what had happened. And so it was not a surprising conclusion. Despite being found guilty of all charges against him, SPF won't be sentenced until March 28, 2024. And the question looms, how many years could SPF spend in prison? This is a very tricky sentencing. And I think that in some ways, the closest analogy in recent memory was the made-off sentencing where you had a fraud that was so large in terms of the impact it had on victims and, you know, in the billions of dollars and guidelines that are stratospheric that could get you to the maximum of over 100 years in prison.

Starting point is 00:39:31 Meanwhile, also in October, a Wall Street Journal article that claims, claimed Hamas raised $130 million via cryptocurrency, sparked considerable debate, especially after Senator Elizabeth Warren used it as her sole source to ask for tighter regulations on crypto. However, the numbers were inaccurate. Jesse Brooks, CCO and legal officer at Ribbock Capital, talked about why she thought it was so important to get the facts right. I just have been frustrated by the fact that humanity and empathy have not been inserted

Starting point is 00:40:01 enough into this conversation. So I just want to take a moment, like, partway through this interview to put it back in. Because frequently people throw around the phrase illicit finance or terrorist finance without really thinking about what that phrase means and sits in the fact that, like, terrorist financing means that terrorists will have the resources, the dollars, the crypto, the financial access to mutilate attack and murder humans, like humans that we might know, humans that are on the other side of the world. Like that is what is at stake here. And that's why I don't mean to repeat myself, but the facts are just so important. And to focus in on crypto, if it's only a small amount, is important as we focus on every single amount going to terrorists. But I don't want that to overshadow the millions and millions of dollars that is going

Starting point is 00:40:54 to Hamas and other terrorist groups from other avenues. And that is really the conversation that needs to get broader because we all know on this call how Hamas is being funded and what the big sources of revenue are. And sure, crypto is a percentage of that that we need to stop as an industry. But that doesn't mean that that should overtake the conversation because there's a lot that needs to be done in the other avenues as well. One of the other huge stories of the year was the Binance settlement with the U.S. Department of Justice. The world's largest cryptocurrency exchange agreed to pay a $4.3 billion penalty to resolve a criminal investigation for operating as an unlicensed money transmitting business and violating

Starting point is 00:41:36 sanctions law. Binance CEO Chang Peng Zhao stepped down from the company he founded, also pleading guilty to violating the Bank Secrecy Act and agreeing to pay $50 million in penalties. Additionally, Binance will have to maintain an independent compliance monitor for the next five years. These monitorships will give the U.S. government inside access like it's never had before, according to Dorothy DeWitt, former director of the Division of Market Oversight at the CFTC. My sense is that part of the settlement is to enable the U.S. to really have full insight into the way the organization works, what products it has, what compliance it has, to be able to affect explicitly the company's culture of compliance, which is a major undertaking, and to be able to ensure that and test and validate ongoing for five years, the compliance function to make sure that it's adequate to achieve compliance with U.S. laws. five years of compliance monitoring, which can be extended to six, and in certain circumstances that we can talk about, it could go very badly and there could be bigger issues, which could have

Starting point is 00:42:43 happened in other industries. Five years in an industry that changes quarterly with a company that has only been around for six years is a really long time. And so, you know, this settlement agreement allows the U.S. to have extraordinary inside access to information and influence over the organization on an ongoing basis that it might or might not be able to have if there aren't future touchpoints to the U.S. jurisdiction. As we get closer to year end, everybody is talking about spot Bitcoin ETFs, which are expected to launch early in 2024. How will they impact the price? How much volume will they introduce? How much will financial advisors allocate? Rick Edelman, a guru to financial advisors, believes that,

Starting point is 00:43:24 once spot Bitcoin ETFs are approved, the percentage of financial advisors recommending Bitcoin to their clients will go way up for two reasons. 47% of advisors personally own Bitcoin, which means they get it. They understand that this is an innovative technology, that it has the potential for delivering outsized investment returns, and they're personally investing. Well, how are they going to explain to their client? when the client finally says, should I buy Bitcoin, what do you think? By the way, do you own it? For the advisor to say, oh yeah, I've owned it for years. I just never told you to buy it. Investment advisor credibility goes out the window. You might have an angry client. You might even

Starting point is 00:44:04 lose a client over that. So advisors realize they're having to deal with that conflict that I ought to but I'm not recommending it for you. That's a bad problem. Secondarily, not only do 47% of advisors personally owned Bitcoin, but 77% of advisors in the last, survey we've done on this and that we have seen others doing this show that they are waiting for the spot Bitcoin ETF to become available so that they can provide this to their clients because every compliance department will say okay to that product because it's just an ETF like other thematic ETFs. We use ETFs for investing in computer technology, oil and gas, gold and precious metals, emerging markets. This will simply be blockchain and digital assets.

Starting point is 00:44:49 And what about the price? Raoul Powell, co-founder and CEO Real Vision, gave his prediction. I've got three outcomes in my head that I'm juggling with. The 60% probability is we have kind of a very traditional cycle and that pushes, you know, Bitcoin up to the 100,000 to 200,000 range and, you know, all the other assets accordingly where they are on the risk curve. There's a 20% chance. This early start is signifying something much bigger, which, you know, which is the larger adoption and the more capital into the space, which leads to larger price rises than people expect. And did you think $100,000 to $200,000 was bullish?

Starting point is 00:45:30 Well, listen to Corey Clipson, CEO of Swan Bitcoin. It is a massive pro for price development. Yes, I expect this to usher in a ton of capital flowing into Bitcoin. I expect Super Bowl ads. I expect NBA playoffs to be papered every golf tournament next year. It's just going to be advertising Bitcoin ETFs. I mean, it's going to be a massive land grab for these guys because, you know, as you know, like when you want to trade NASDAQ, it's the Q's.

Starting point is 00:45:57 You know, most of the liquidity is in one ticker, right? And the spreads are tightest with the one ticker. And that's just how it goes. So they're going to really, really try to battle it out as much as they can and try to get as much of this market share. And it'll probably end up being, you know, 70% to one of those tickers and 20% to the second and everybody else will split the last 10 is usually how it works with these, category ETF. So yeah, they're going to go nuts next year trying to win that.

Starting point is 00:46:24 As the year wound down, a new trend in crypto started taking off, points. Leach in a variant fund explained the potential pitfalls of point systems and why they needed to be thoughtfully designed. Anytime you're introducing an extrinsic incentive program like a points program, it's actually going to change the mix shift of users that you get in your application. It doesn't just change user behavior on the market. in. It doesn't just convert less loyal users to more loyal users. It actually like brings people through the front door that you wouldn't have gotten otherwise. So we had designed this application with like fashion enthusiasts and shopping enthusiasts in mind. But instead, because of the existence

Starting point is 00:47:04 of these points and rewards, we actually got like coupon, extreme coupon hunter type of people or like bargain hunter types of people, people who are actually trying to earn money by using our app and doing it almost like a full-time or part-time hustle. So that was really fascinating. And I think you're seeing... Sounds like Axi Infinity. Correct, yes. I was just about to say,

Starting point is 00:47:26 I think you're seeing a lot of that sprout up in the crypto world and have seen it sprout up already through tokens and yield farming, where people are just doing the action, using the app, because of tokens. Now I think you just substitute out tokens or inflates them with points, and people are probably also engaging with these apps purely because of the point system, not because they were interested in the application at all.

Starting point is 00:47:48 That's it for our 2023 wrap-up. Thanks so much for listening to Unchained this year. I hope you all have truly heartwarming, memorable holidays full of laughter, love, cheer, and rest. Honestly, with the way it looks like 2024 will start off in crypto, we're all going to need it. Thanks so much for joining us today. To learn more about the biggest crypto events of 2023,

Starting point is 00:48:08 check out the show us for this episode. Unchained is produced by me, Laura Shin, with up from Nelson Wong, Kevin Fuchs, Matt Pilcherid, Wanda Ranovich, Megan Gavis, Shashonk, and Market Korea. Thanks for listening. Unchained is now a part of the CoinDesk Podcast Network. For the latest in digital assets, check out Markets Daily, seven days a week, with new host, Noel Atchison. Follow the CoinDesk podcast network for some of the best shows in crypto.

Unchained - 2023 Crypto Year in Review: Is a Bull Market Around the Corner?- Ep. 586

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