We Study Billionaires - The Investor’s Podcast Network - BTC135: Binance & Coinbase Vs the SEC w/ Joe Carlasare & Hodl (Bitcoin Podcast)

Starting point is 00:00:00 You're listening to TIP. Hey everyone, welcome to this Wednesday's release of the Bitcoin Fundamentals podcast. On today's show, I bring back by popular demand, an expert digital asset attorney, Joe Carlosari, and we also have my good friend and resonant realist with American Hoddle. These two are the perfect mix to cover the Binance and Coinbase battle currently taking place against the SEC. This was a really fun and very enlightening conversation. So sit back, relax. And let's enjoy this one together.

Starting point is 00:00:34 You're listening to Bitcoin Fundamentals by the Investors Podcast Network. Now for your host, Preston Pish. Hey, everyone, welcome to the show. This one's going to be an exciting one. I got Hoddle here and I got Joe Carlosari. We're talking Binance, Coinbase, the SEC, and everything else in between. Where do we start here, fellas? This one's a whopper.

Starting point is 00:01:10 So Joe, do you want to take it away and just kind of provide your overview of what you've seen brewing and then what was actually dropped and then maybe just kind of a current status of where everything's at? Yeah, I'm just going to frame it and then we'll break it down piece by piece. Okay. I can tell you, I've been litigating and handling cases in the space since 2015. It was the first time I had anybody that was remotely related to Bitcoin, was working on some cases in Chicago on it. I can tell you that in the entire time I've spent monitoring the space, watching cases be filed regulatory actions, statements from policy officials. I don't remember as consequential or as important a week as the last seven to ten days, roughly. Let's just go over the broad strokes.

Starting point is 00:01:57 Number one, you've had major litigation filed against the number one U.S. exchange, Coinbase, right? And we knew this was coming for weeks, months now, since basically the Wells notice got issued, which basically said you're under investigation for a potential violation of some securities laws, and there will be a complaint coming likely in the near future. Submit what you want, but our minds are effectively made up. So we got the Coinbase action. And then you've got even more significant, in my opinion, is what's going on in a case against Binance, where there are portions of the Coinbase action that are copy and pasted right into finance,

Starting point is 00:02:29 But you also have all these additional allegations about commingling of user funds and wash trading and not monitoring your platform and using U.S.-based accounts to move money in and out of the United States and controlling a U.S. entity, which you're claiming publicly you have no involvement of. And there's basically a bifurcation and a wall between the two. So you've got major pieces of litigation. And on top of it, like a minor story in a litigation front is this action by 11 separate states where they issued rule to show causes for cease and desist or. orders about selling unregistered securities on your platform in the case of Alabama, Illinois, and many other states. So you've got that whole piece of it, right? Then you got this document dump from documents going back, you know, multiple years ago when this speech was given by Director Hinman, where he introduces this concept of sufficiently decentralized, which previously had no

Starting point is 00:03:21 precedent under U.S. law, right? The idea that something could start out as a security in unregistered offering and somehow morph into something else. And all the documents show confusion and a lot of questioning at the SEC. And then on top of all that, then you get this additional fight that continues to go on with Coinbase where they're petitioning the Third Circuit for something called the rid of mandamus, which is effectively a rulemaking position trying to get out in front of the public narrative and trying to convince people that you need to act government. You need to put in new rules and the current rules for this space are insufficient. So you've got all of this blowing out. You've got obviously issues in legacy markets, which are sort of related and liquidity issues that we can talk about how that may or may not be affecting some of the crypto basic issues.

Starting point is 00:04:06 But man, blockbuster all over the place. And on top of all the litigation filed, you've got a TRO hearing as of just a day ago that we talked about Preston very briefly about literally orders to freeze finance assets. So I'll leave that to huddle to unpack how we want to pull on that thread of tons of stuff going on. there's so much there and I think to me it's like none of it is surprising. I've been in the space now for eight and a half years and I think all of this was expected. Now it all happening in one fell swoop I think was certainly like, wow, we're in the center of the hurricane here. But to me, I look at the moves that Gary Gensler made and SEC enforcement made and they were very well telegraphed. I mean, basically, he told you over and over again repeatedly, like I, in my view, in the view of the agency, these things are all illegal security.

Starting point is 00:04:55 securities offerings. And, you know, some people will say, well, wasn't he capricious about the Bitcoin spot ETF? And it's like, no, if you read through the documents, like I've gone through with Joe before, you look through the documents and he says, basically, listen, we need surveillance agreements between these shady offshore exchanges, things like Binance, who, yeah, while they may have U.S. surrogates, I mean, it's a wink and a nod to U.S. consumers while they're advertising during the Super Bowl that says, hey, yeah, Binance, U.S., whatever.

Starting point is 00:05:22 Really, you're one VPN away from the really good. good stuff. And if you just get a VPN, then you can trade on 100x leverage and you can trade illiquid, illegal securities. And that was just a bridge too far for the agency. And they finally came in and enforced and did something about it. And obviously, the way you're going to do enforcement is you're going to go after the bottlenecks. And the bottlenecks, what are they? They're the exchanges. They're the binances, the coin bases, the FTXs. That's the easy pickings. That's the low hanging fruit for them. Can I share something, guys, real?

Starting point is 00:05:53 Yeah. That's really funny on this. Okay. So exactly to your point, Honol, there's this hearing that goes on, right, yesterday. And it's with Judge Amy Berman Jackson, federal court judge, right? They're kind of like many of them think that they breathe rarefied air, right? They have the ability to literally stop presidential orders with some of their rulings. So she has this emergency hearing and she's questioning the finance lawyers.

Starting point is 00:06:17 And I highlighted this part. I thought it was funny. She brings them in and is basically saying, okay, you've got serious claims here. Let's figure out how to deal with this. Let's figure out how to protect customer assets. We need to do this immediately on a temporary restraining order. And then she says, makes this comment. She says, you know, some of your claims that you're shocked, the SEC thinks you're dealing in securities,

Starting point is 00:06:39 they ring a little hollow. The surprise you're expressing, especially in light of CZ statements over the years, she's saying, and the fact that SEC banned Binance from doing business. to the United States in 2019. This appears to be an extension of that and overlapping ownerships and relationships. So she's basically, she's going in there, literally questioning, I'm saying, how are you guys realistically saying you're shocked

Starting point is 00:07:00 that this enforcement was coming, right? Literally, like, it's been all over the papers. It's been in every public statement, every public interview that he's given, Gary Gensler says, I look around at these exchanges, and I see nothing but unregistered securities. I mean, isn't that really kind of a little absurd to go out and say you're shocked that the SEC is filing suits?

Starting point is 00:07:17 And by the way, Coinbase, by extension, is saying some of the same stuff with their public statements. Wow, they're so surprised that the SEC would go down this path. Well, you also have this video that surfaced of Brian Armstrong, CEO of Coinbase, saying that he had a conversation with, was it Ginsler or the SEC? And they informed him a year ago that there's Bitcoin and then everything else is a security. was like he communicated in a recent video that he was in. This was disclosed to him a year ago. Oh, yeah. So this is the disingenuous nature of some of these arguments.

Starting point is 00:07:53 And I really think it's a PR campaign at this point, guys. Yeah, yeah. So let's just take public statements. Let's take him at their own words. So there's no debate. Brian Armstrong said in his own public statements on Twitter that he has met with the FCC 30 times. So whoever's saying, you know, that they won't sit down with them or give them meaning. That's total nonsense because Brian Armstrong is saying, we have met with them.

Starting point is 00:08:13 sat down 30 times. Okay. And then you now know that Brian Armstrong's taking the position. Well, they won't give us a path to register. They won't give us a path to compliance. So how do you reconcile those two statements? Combine with Gary Gensler's statements that everything in your platform is the security. I'm not in those meetings. I don't know for sure, but just speculating being in similar meetings, what happened in the meetings where they said, listen, you're not going to violate the law and come in here and beg for forgiveness and ask for us to give you an easy path to become compliant. We're not going to do that. If you want to get compliant, remove it from your platform, seek proper registrations,

Starting point is 00:08:47 don't come after you've violated things and beg for forgiveness, and we're not just going to, you know, slap you on the risk. So that's what happened. And if you're Coinbase and your business model is built on trying to push these things on the public, and that's how you make profit, there's no way you're going to give that up, right? Instead, you're just going to complain about how you don't like the rules. And this is the confusion in the space. They're shifting the narrative from there's no regulatory framework.

Starting point is 00:09:10 They're trying to push. There's no regulatory framework. we don't know, when in reality, they just don't like the current framework and they're trying to move around it. That's a major distinction. So there's, yeah, there's so much to unpack here. So let's just go through a little bit of it. In the old days, right, in the early 2000s, traditional tech VC was basically like, you know, you planted a bunch of seeds and most of them were going to go to zero or near zero and you might have one unicorn in there, but you weren't going to get liquidity on that unicorn for a decade, right?

Starting point is 00:09:39 It was a really hard game to play. So when these token economics came in, in 2017, when the ICO era popped up, you basically had this incentive mechanism where the key phrase that the VCs were using was short time to liquidity. This was all throughout the valley and all on Sandhill Road. Everybody was saying it. If you came in with a startup idea and your pitch deck didn't have a token in it, it was suggested heavily to you that you add a token to it.

Starting point is 00:10:04 Because that token allowed the VCs to take liquidity directly out of the public markets, day one. And then they didn't have to go for the ride. They didn't have to take the risk, right? And so this was a panacea for Silicon Valley VC. I mean, this fixed the core thing that was wrong with their industry. So you can see why they were so heavily geared up behind it. Now, you have this problem.

Starting point is 00:10:27 The SEC has a big problem with what's going on. And they deemed all of this behavior, illegal securities. And they say, listen, we went through this in the 1920s. And we know what is and is not a security contract. And it doesn't matter that you slapped a bunch of digital mumbo jumbo on it. These are still at base level regulated securities and you need to come in and you can't do this anymore. This was unpalatable to the Sand Hill VCs, the guys like Andresen Horowitz and A16Z. And they basically said, you know what?

Starting point is 00:10:55 We're going to do a regulatory end run around Gary Gensler and the SEC. And in fact, this went so far that they were actually championing a new enforcement agency that would allow them to continue to play three card Monty with the general public. Now, this is something obviously that was a bridge too far and it went on and got so big post the liquidity that came in after COVID that it had to be shut down eventually. But you can see why the VC's thought that an Uber style approach, right, where you basically, you break all the rules, you do what Joe was talking about, you come in and ask for forgiveness after the fact, they thought that this was going to be their best shot forward. And this was an all-out blitz from them. They bought lobbyist and

Starting point is 00:11:36 DC, they did everything they could to try and get the SEC to see their view. And if the SEC was not going to see their view, then they wanted a new agency, which would see their view. Obviously, this was never going to be allowed to take place because the SEC is not a paper tiger like the taxicab authority. The SEC is a strong financial regulator. And they're going to come in and clean your clock. And it took them a long time to do so, but they finally did so. And I think they had a lot of tailwinds on this. Like, for instance, you know, with ride share, Yeah, the tax cab authorities didn't like it. Local authorities didn't like it, but riders loved it.

Starting point is 00:12:10 Well, retail investors got hosed during this last cycle, and they got hosed in 2017. And it seems like basically twice was enough for most people. And if you look at the polling on, you know, cryptocurrency, it's negative basically across the board. Because the public, it took them two cycles, but they finally got wise to the game that was being played. And they realized that they were the suckers at the table. Dang. So Jason and I talked about back when before FTX, blew up. You had Sam Bankman-Fried, they're working the hill and getting the CFTC to have a much

Starting point is 00:12:43 larger, stronger position. To Hoddle's point there, was this all part of the VC like charade that was being played to circumnavigate the SEC? Or is this, was that? Because I mean, Jason was very scared about like what was basically being brewed out of SBF's antics on the hill. this is probably two months before FDX collapsed, where everybody on the Hill was basically taking money from the guy. He was shaping the regulatory side, the laws that were being, or not the laws, but the bills that were being shaped. Was that what was happening, Joe, in your opinion or Hoddle?

Starting point is 00:13:20 Like, what was, was that something completely different? To touch on that real quick, I think we can get to Binance from there, because something that happened during the FTX topacos, yeah, Sam Bankman-Fried was donating to, both parties across the aisle. And he had also promised up to, I think, a billion dollars, which was reported in the headlines for the 2024 election. So this guy was a major player in Washington. And basically everybody had taken money from him. Okay. So when FTX blew up, there were a lot of very powerful people that had a lot of egg on their face. And that's

Starting point is 00:13:50 never a good thing. Now, if you remember, the way this blew up was on Twitter. And where do the political elite hang out? They hang out on Twitter. So this happened in the public square in full view in front of everybody. And the perception was, whether this was right or wrong. The perception was the CZ Binance, okay, took Sam Bankman-Fried out in the middle of the street and shot him in the head. That's what everybody saw on Twitter. That's what people in Washington saw. And when you do something like that, you paint an extremely large target on your back. And there had been investigations into CZ Binance from U.S. regulators beforehand, but now it was like, the game is on. We are coming for this guy. We're going to get

Starting point is 00:14:27 this guy. I'll just tell you, I do not think these cases would have been filed if they would have gotten a bill through Congress, some sort of crypto-omimus bill. And as Hottle knows, I've been saying for months that I think that the green light to file these litigations, which just so happened to coincide with the collapse of FTCS and a lot of upset investors and a lot of politicians who had A on their face through associations with FTCS and with SBF, they said, okay, we need to do something now. You, regulators, go take care of it. We're going to do what's best as politicians, you know, pretend like we're doing something and not actually do anything, right? That's the genesis. of it because there was real optimism from the more pro-crypto lawyers and more pro-crypto

Starting point is 00:15:07 lobbyists in the space that we could really get something done in 2022, that SBF was throwing money through lobbyists to try to manipulate the Congress into doing something. And there were a lot of very positive pro-crypto bills that had support, bipartisan support, you know, among Republicans and Democrats. But again, once it all blew up, I think that all fizzled and they said, okay, take the gloves off. Go get them, SEC, CFTC, DOJ. Let's also not forget that a valid criticism that the, you know, the crypto guys who are rightfully very upset at Gary Gensler might have against Gary Gensler is that he was real cozy with that whole FTX thing that was happening. And there was actually talk, it never went through, but there was talk of FTX getting safe harbor treatment for what we now know to be absolute insane. It's worse than Enron. The guy who took over said it's worse than Enron. So imagine giving safe harbor to a shady offshore exchange run by millennial drug addicts that's worse than Enron.

Starting point is 00:15:59 It's absolute craziness. And he would know. Right. Well, so these are, these were super high powered VCs that we're talking about here that had all these investments that were trying to just, I love the Uber example because I think it's a perfect example that everybody can understand where they're just trying to move so fast that they just outflank the regulators. But when we think about the revolving door between high powered financiers and people,

Starting point is 00:16:29 government bodies like the SEC, I guess I'm surprised to see them come down, especially when you have such high-powered people at play here, like Andresen Horowitz, like, my lord. And I mean, they're just, they're just one of many that were involved in this, this total scam with quote-unquote crypto. Do you guys, are you surprised that they're coming down so hard considering the people that are at play or do the rest of the people that are the participants in the market, the, the, traditional financiers, the Wall Streeters, are leading the charge against some of these VCs? To me, I think it's obvious that there is sort of a covert cultural war going on between elites and America. It's very East Coast, West Coast. It's very old money, new money, right? And I think this was

Starting point is 00:17:17 the East Coast traditional elite establishment basically saying, no, to the West Coast. Like, no, you do not get your own rule sets. You do not do rulemaking. We do rulemaking. And they basically cracked the whip on them. So to me, it was expected. It was always going to end this way because the power is still in New York. It's not in Silicon Valley. Joe, there's some Ripple stuff that's been brewing, too. I know when you went down through your overview, does Ripple play the case that's been ongoing there? Does that play into any of this as kind of a precursor to what they need for case law or anything like that? Let's tackle this a couple ways. So just to clear the record, okay, about the SEC and their success rate.

Starting point is 00:18:01 They filed more than 150 cryptocurrency-related actions. To this date, they have not lost a single one, despite the folks that have been continuing to focus on Ripple Labs, which admittedly is a very long, drawn-out suit. I mean, it was filed back in December of 2020, and we don't have a motion for summary judgment. I've been on this podcast a few times talking about it at least, and even when we get the order, guys, I'll just guarantee you.

Starting point is 00:18:23 One thing I know for certain is if the SEC wins, it will most certainly be appealed by Ripple Labs to the next. next level. And if Ripple Labs wins, they will peel the order as well, the SEC will, to take it to the next court. I don't think this is resolving anytime soon. But I guess the big news in how this is all playing in is because I referenced the earlier release of the so-called Hinman emails, which I referenced earlier, those have been all over the XRP armies, you know, Twitter feed these days talking about how there was confusion about the status of Ethereum. And Ethereum was referenced as potentially at the time not being a security because it had been

Starting point is 00:18:59 quote unquote sufficiently decentralized, whatever that means. But aside from that, that doesn't really affect Ripple directly, right? There aren't documents or least extensive documents where the SEC is opining on the legal status of XRP. There's some mild references, but they're not anywhere near as supportive as some of the things they were said about XRP. And I guess the argument that's being advanced in Ripple Labs to the extent that it relates is this notion of fair notice, okay? There's this defense under the law. It's a constitutional defense that says if it's too hard to understand the law, if we can't understand what an unregistered securities is, then we, of course, cannot comply with it. It would be unconstitutional for you

Starting point is 00:19:41 to bring an enforcement action when it's not capable of being known. There's major problems with that, okay? One of which is that we know from the SEC's own documents that they obtained from Ripple Labs, that their own lawyers advise. them that these things were potentially securities. So it's pretty hard to go forward with a straight face and say, we had no idea these things were securities when your own lawyers are telling you that they could be securities. And then you're taking that document, guys, and you're pushing it towards exchanges

Starting point is 00:20:10 to try to get XRP listed. That's how it became, you know, what would ordinarily be attorney client privilege would only be between the client and the law firm. They were turning it over to exchanges to say, list our token. Here's some arguments why it might not be a security, but we kind of think it is. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer.

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Starting point is 00:24:38 I mean, listen, so there's been a lot of discovery, a lot of rulings, we're going to get an order on it. I don't expect it to resolve it, like I said, because there's going to be appeals. But at the end of the day, the securities laws in the United States are fact-specific. So even if you get an order that says XRP in the original token sale is in fact a investment contract, it was unlawful, Garlinghouse and Larson, I have to pay a ton of money back and have to be disgorged of any profits, it's just for that particular sale and token, right? It's not, it gives us some precedent, right, for other things, it wouldn't apply retroactively to everyone else who issued an ICO.

Starting point is 00:25:15 There'd have to be separate actions filed against all those different folks. So it would be good, right, to the extent that it gives you clear precedent. But, you know, in some of these other tokens, they didn't do some of the egregious allegations that Larson and Garlinghouse are being accused of, like, literally intervening in the spot market. One of the allegations in Ripple Labs case is that the SEC found documents that they would go and prop up the price whenever there was a sell-off and also pump the price to attract retail attention. That's the SEC's allegation, and they put forward documents to support it. Could some of that be used? Let's say they do get a ruling. Let's say they don't appeal it.

Starting point is 00:25:50 Could they then take that and use it as they're fighting some of these exchanges to say, look, this token is just like these other 10 tokens on your exchange and they're all security. So like, stop it. Yeah, no, I mean, listen, if they have a ruling from a federal court judge finding implicitly that a certain token or asset is a security, and then they turn around and file a lawsuit against an exchange. It's pretty easy for that issue to be, have been resolved in the other forum, right?

Starting point is 00:26:19 This underlying issue about what the thing is is precedential and has been resolved by another court. But you've got to remember the Coinbase loose lawsuits, so we can get into it some of the allegations, but it's really three parts. And this is the thing that I think it would be helpful for the listeners to understand. The Coinbase suit alleges, number one, okay, that they have this coinbase lawsuit,

Starting point is 00:26:39 base earn program where they're using the proceeds of staked assets and they're paying effectively a yield. And the SEC is saying that itself, that activity is in fact a security. It's an investment contract and you can't do that. The second part of the suit is you're listing all these various different tokens and you're aiding and abating the sale and facilitating the sale of these things. And those things that you're selling are in fact securities. The third argument that they're making is that you as an exchange itself, okay, you are not properly registered. You don't have the proper qualifications and accreditations to be in exchange, a broker dealer, a clearinghouse. You don't have the proper registration statements. So it's really like three parts to that core argument.

Starting point is 00:27:26 And any one of them, in my opinion, is very bad for Coinbase that they prevail in any of those theories. Let's talk about the staking in a little bit more detail. So they're acting on behalf. Like, anybody can go out there and stake coins. And I'm just going to try to argue the counterpoint here. And then I'm going to let you take it from there. Hoddle or Joe, if I have, I think the numbers around like $50,000 worth of ETH. If I, like around $50,000 of ETH and I've got a lot of coding experience, I guess I could stand up my, my own stake to validate transactions and earn yield with my own, you know, set up here at my house. Because that's such a high threshold for most investors, they're outsourcing

Starting point is 00:28:14 that to exchanges to do that on their own behalf. When I'm looking at a stock, let's say it's Apple stock, I don't have a choice whether I'm going to collect the dividend or not. I'm going to get the dividend if I hold that particular stock. With Ethereum, that's not the case. If I'm holding Ethereum, and I don't stake it, I don't collect any yield. But if I do decide to stake it and put it to work, I am collecting the yield. So it is slightly different from like the mechanics of how you're collecting the yield there. Like you're not guaranteed a yield unless you're doing certain engineering functions. Right.

Starting point is 00:28:56 And so like I guess I'm trying to look at it from the SEC's vantage point of like how they're saying that's like a security when it is a little bit different. the mechanics of it. The mechanics are different, right? There are, depending on which asset you're talking about, there's different mechanisms and vehicles through which they can do it. But overall, I think the SEC's issue is this. The very activity of doing the back end, right, staking it yourself through chain, they're saying that the customers are relying on you to do that technical part of it.

Starting point is 00:29:27 And then, you know, Coinbase is taking commission on that. As alleged, the SEC complaint, it's somewhere between 25 to 35%. So you wouldn't even get the amount, the same amount, a commensurate amount, if you were doing it natively on yourself, right? They're skimming off the top. So that's a concern, right? You built a business model off of being a middleman and doing the hard part for them and then taking a portion of that and refunding it back.

Starting point is 00:29:51 But the other problem from the SEC standpoint, if you're either complaint, is that they're saying, well, you're putting this out into the marketplace and you're encouraging people to stake your assets there. And in many cases, they're offering yields higher than they would natively on change. How does that work, right? Like that's an interesting little wrinkle in it. It's not the same as if you were to go out and do it on your own, through some back end, maybe pooling of assets or issuing loans.

Starting point is 00:30:15 Somehow they're monetizing that beyond what the native protocol yield would be. And they're taking a commission out. How is that weird there? Without rehypification. How is that possible? Well, no, they are rehypothicating in the Ethereum ecosystem. So the minute you stake your ETH, you get a proxy token. Well, you don't get one, but you have to go to the market to get one.

Starting point is 00:30:34 a proxy token called Staked ETH. So if you can prove that you've staked your ETH, you get a proxy token called STE. And so basically they just immediately re-hypothicated all of the staked Eth. And it's a massive problem in the theorem. If the STEth peg ever unwinds, it's catastrophe, essentially. I'm like a mouth wide.

Starting point is 00:30:55 I can't even like comprehend what you guys just said. That's insane. Listen to this part. This is from Allegation 319, that's coin-based complaint. running a validator node is often expensive. This is at the SEC's allegation. They say it's often expensive due to the cost of the equipment and the software needed to stake. But through the Coinbase staking program, investors are paid those expenses and are avoid paying those expenses because Coinbase operates its own validator nodes to earn and pay investor awards.

Starting point is 00:31:22 For example, CGI Coinbase's February 21st, 2023 annual report on a form 10K filed with the SEC states, quote, staking independently requires a participant to run their own hardware, software, and maintain close to 100% uptime. We provide a service known as delegated proof of stake, which reduces the complexities of staking. Similar to Coinbase acknowledged on its website that becoming a validator is a major responsibility and requires a fairly high level of technical knowledge. The reason all that allegation is in there, right, is because the whole core of the Hally analysis, the core of the securities analysis is that you're making money, you're getting an expectation of profit based on the hard work of others.

Starting point is 00:32:01 And Coinbase is going out into the marketplace and putting on their 10K that they're doing all this hard work for you. They're making it much more simple. They're doing it and you can expect to yield. Guys, that is Howie. That's a security. That's the whole point.

Starting point is 00:32:14 Don't buy the Orange Grove directly. Buy shares of our Orange Grove and we'll give you some of the profit. That is a security. So I'm still battling this, right? So when I think of a security, there's employees that are inside that corporate veil that are performing a product or they're building a product or they're making a

Starting point is 00:32:34 service, right, that's adding value to a customer, right? This would be equivalent to, let's just, let's just go to like Robin Hood, right? And let's say I own Apple stock and I have it on the Robin Hood. The productivity that's happening inside of Apple, the company, and let's just say Apple's paying a dividend. That is earnings, that is profit that's being generated by Apple employees that's then being paid to an owner, which would be me. In this example that we're talking about with Coinbase, this would be like me taking that Apple stock, sticking it on Robin Hood, them re-hypothicating and doing all these financial gymnastics, which are completely independent of Apple, completely independent of Apple to create a yield by borrowing and lending through a fractional reserve,

Starting point is 00:33:27 you know, disaster, but they're doing it and they're creating some type of yield, and then they're paying me that yield from Robin Hood. Like Robin Hood employees are performing those actions and then paying me, which I see as being very different than Apple's security token or stock or whatever you want to call it in this case. I see those activities as being very different. Yeah, I mean, they go into pretty fine detail, right, on how that the actual native staking on chain and what you see with the Coinbase Run Program are very different things. For example, there's a quote in here in the complaint that talks about how Coinbase no longer purports to maintain reserves of stakeable assets in and around October of 2022 in response to an FIQ on this website, can you trade or send funds while earning rewards? Coinbase states, you'll typically be able to cash out your cryptocurrency that's earning

Starting point is 00:34:17 rewards as you would any other currency. It is not natively staked. Cashing out may be subject to different factors, including but not limited to your account history, transaction history, and banking history. So there's a lot going in under the hood with the management of the assets where the Coinbase employees, in your example, they are doing things. There are, you know, there's pools, they're lending, they're engaging in various different activities that is not just, okay, we're going to stake it on change. So now let me argue with myself. So in the example that I described earlier, if Robin Hood was performing these functions, I would be paid in dollars from Robin Hood employees. I would not be being paid in additional Apple stock from Robin Hood employees.

Starting point is 00:35:00 And when we look at the coin base scenario, you're being compensated in additional ETH that's coming out of the protocol. And stuff that's not coming out of the protocol. That's the point. There are bonuses for their staking program as well. They're contributing additional crypto from God knows where into the stake services to make it more attracted for customers. Stake, it says, they offer staked bonuses to participants during special periods. For example, there's a quote from June 22, stake at least $100 to earn a $10 bonus.

Starting point is 00:35:31 We'll deposit $10 an Eth to your account within 45 days. That's it. You don't have to do anything else. That's from a promotional item on Coinbase's website. So that's a customer acquisition marketing scheme, yeah, which is independent from the protocols payout. They're going to have to buy that themselves and then pay that to the customers. So if I'm just trying to play devil's advocate, right, and I'm looking at this and I'm saying, well, you know, like this is different than stock, like Apple stock, right? Like if I, going back to

Starting point is 00:36:02 the example that I had with Robin Hood, like them paying me or getting something issued out of the company that's like programmatic to issue more stock for basically depositing and not moving the equity around is basically why they're paying it out is so that it drives the price up, right? That's the mechanism that's being employed here. I don't know that you've necessarily seen something like that. I think they're better case from if I'm playing the SEC's role is to really go after that there's all these videos of Vitalik. And I'm just going to use ETH as an example. There's plenty of others tokens that we could use as examples.

Starting point is 00:36:45 But the ETH one is so well documented with Vitalik. I mean, there has to be five or six videos that just clearly demonstrate that this was an equity from day one. As they were using Bitcoin to basically finance them standing up, they're stating that they have marketing teams, that they have this, many coders. I would think that that would be such a stronger case to say, hey, Coinbase, you have a listed equity token here on your platform and you can't have those because you're not even a registered exchange. Don't you think that that's a much stronger case than the staking piece? It almost seems like it's an attack on proof of stake. I would agree with that. But keep in mind, that's in the suit. I mean, they list numerous assets. Okay, forget the earn program,

Starting point is 00:37:31 forget the staking program. In this particular suit, they list numerous assets they believe are, in fact, unregistered securities and Coinbase is selling them. So that's part of the suit. That's the first category we were talking about. And then they have even a broader category, which is, okay, let's assume that just one of these things is, in fact, a security. You have to register in the United States as an exchange.

Starting point is 00:37:55 And that falls within our jurisdiction as the SEC, and you never did that. Never properly registered as an exchange. Right. It's like a, it's a massive complaint. When we, I think it was on the Bitcoin layer talking with Dr. Jeff Ross about this. And you could have filed a complaint like you're suggesting where it's very narrow. It's just just going after the staking or just going after a few tokens or, you know, just going after certain, you know, a small amount of their business. This is the whole gamut. Right. They filed a complaint literally questioning their right to exist as an exchange. Yeah. Could not get more broad than this. The only way I think you could tailor a more broad complaint is if you added in a every. token on the platform that could even potentially be a security. And just to clarify, it seems to me that it's not necessarily an attack on proof of stake, but it's an attack on delegated proof of stake. And also, I think, Preston, when you go back to the initial ICO for Ethereum, it's my belief,

Starting point is 00:38:48 Joe, you can correct me if I'm wrong here, but that it falls outside the statute of limitations. Right. It is. I mean, yeah, the SEC will probably not be going after them, right, for the original ICA launch of Ethereum. But I do think, ETH too, is there something? there, could they go after them for the transition to proof of stay? That's an interesting. Yeah, I mean, that's the question. I mean, so one of the emails that we got, it was kind of

Starting point is 00:39:12 fascinating. I tweeted it out. It talked about how, you know, their current understanding of how Ethereum is presently constituted back in 2018, they didn't think it was a security, right? Based on our current understanding of how this thing is constructed. They're commenting in all those emails and Director Hidman is opining on proof of work Ethereum, right? It's changed radically. And then the question becomes, well, why did it change? Who is leading the change? Just someone control the change? And that's where you have potentially securities laws get involved.

Starting point is 00:39:40 And if the folks that were leading the change and were, you know, cultivating that, that upgrade. And they were, they still to this day maintain that and it doesn't work without the man behind the curtain making it work. That raises issues. And I think that's why they've tried to leave the door somewhat open. You've noted, like in public statements, Gary Gansler has been far more reluctant than some of his predecessors to speak. on the legal status of Ethereum today as presently constituted. That is, in my opinion, intentional. Yeah.

Starting point is 00:40:07 I do think Ethereum has potentially the most political cover of any one of the cryptocurrencies or the all coins, right? But it still is not, you know, it's not bulletproof, essentially. Like, there are a lot of people that think that, you know, what Hinman said back in 2018 is like, case closed, that's gospel. Like, to Joe's point, it is not. Can we go back to what you said a moment ago, Hoddle about the delegated proof of stake, right? And I think it's a fair point that you have to distinguish between proof of stake and an attack on proof of stake versus delegated proof of stake.

Starting point is 00:40:37 But, okay, just to steal them on the other side, do you believe, I mean, what do you think as a market participant, the natural way this goes? I view it more as delegated proof of state being dominant as long as it's allowed to be, right? Why do I have to mess with all this? I'm going to put it all onto Coinbase and they'll do it for me. And I can just, you know, take a dividend, just like Preston says and use the familiarity with the equity market in the same way. with Ethereum. So to me, attacking delegated proof of stake is an indirect attack on proof of stake. No, I absolutely agree. I think that running an Ethereum archival node or doing something like proof of stake is just, it's well beyond the technical capability of the average market

Starting point is 00:41:19 participant, even possibly the above average market participant. I mean, I don't even think Vitalik Buteran runs a full archival Ethereum node, right? So that's pretty telling when the creator of the coin doesn't even, you know, run a node that's validating the entire chain state. Mark Cuban and his son run one, evidently, is what he told me. It's a very expensive proposition to run one. I mean, in order to be an Ethereum validator, do you believe that? Do you believe that? Oh, yeah, totally, totally.

Starting point is 00:41:46 In order to be an Ethereum validator, it's, you need about a $20,000 computer and, you know, $54,000 worth of Ethereum. So you're looking at $75,000 before you get in the door. So I hope you have enough money for a nice Mercedes. is otherwise you're not going to be a full participant on the Ethereum network or ecosystem. Let's transition and talk to the points made on Binance. So there's a temporary restraining order. Joe, get into this, explain why this makes the Binance situation very different than the

Starting point is 00:42:17 Coinbase situation and just get into some of the nuances of that. Yeah, so this is the blockbuster of the week, right? If there's one story in the legal crypto world and the market world as a whole, we need to get to maybe some of the market effect with the CZ having to defend the B&V token. We'll talk about that in a moment. So the one story is this issue with finance. When you normally file a lawsuit, guys, you file the complaint, you walk up, or actually you don't walk up to the courthouse anymore, you just file it online.

Starting point is 00:42:46 You get the stamp, and then you go work and serve the defendant. And the whole process at the get-go is very slow-moving. It can take months before you even get service on the defendant. and then after you get service, it can take months before the defendant even appears, and they may file a motion to dismiss, and that might get briefed. I mean, I've had cases where my clients have been sued, and the case doesn't even get moving for a year after the suit is filed. Literally one year after its file, we finally start getting into discovery and moving.

Starting point is 00:43:16 This is the exact opposite. This is rocket docket. This is, they filed the complaint, and within days, they had a TRO on file, which is an order. It's seeking immediate relief from the court, basically saying you need to act right now because Americans' deposits in Binance are at risk. We are nervous that the control of Binance U.S. is really under the control of a foreign national in CZ, who has openly flouted U.S. jurisdiction, who has used it as his piggy bank, move funds in and out of the United States, who has basically retained control over all of

Starting point is 00:43:50 the assets. There's allegations in this thousand-page submission that was put forward with tons of citations and documents that show, you know, CZ had most of the shards or access to most of the shards for all the crypto assets held by Binance U.S. He was a signatory on tons of accounts belonging to Binance U.S. and even though openly he's saying, no, we don't have any control. It's an independent exchange that has no association with the broader Binance.com.

Starting point is 00:44:14 They put forward compelling evidence, which the judge even cited, saying there's a lot of evidence here that they put forward showing that there was substantial control by the international of the domestic. In particular, one thing I'll just highlight is that they actually showed almost a billion dollars flowing out of the United States from certain accounts that were supposedly belonging to Binance U.S. in March and April. What happened in March and April, obviously there was that banking issues. And there's allegations about signature in here and some other U.S. banking institutions. So a lot of stuff there that needs to be figured out. So the SEC files this emergency relief. They say we need to be heard immediately in court. We need to safeguard U.S. deposits. We need a full accounting. We need to freeze all of Binance's assets. We need to have a receiver in there to look at things to know if the data were being given about what assets are held and the balances, certain accounts, is in fact true. And we need to do it now. So they filed this. It was presented yesterday before the judge. Binance did the smart thing. They conceded a lot saying, like,

Starting point is 00:45:16 we'll agree to make sure this is all in the hands of U.S. persons. We'll agree that we're going to have an accounting at some point of all the U.S. based entities. But they followed. on what they needed to fight on. So what do you think they needed to fight on? They don't want any of Sizi's personal assets froze and they don't want the international frozen. Those are the key issues that they fought on vigorously and it was smart. So it all resolved yesterday with the judge saying, well, look, you guys agree on a lot.

Starting point is 00:45:41 There's some issues that need to be carved out and resolved. I'm going to refer you to a magistrate judge, which is also a federal court judge, but someone is not appointed in the same stature as the district court judge. and they can go handle this discovery dispute and try to come back and come up with some agreed order rather than the judge throwing down in order to freeze all these things and to handle this. Let's just see if you can agree through a mediation to some consent decree, some consent order to safeguard assets. That's where it stands. How much time did they give them for that?

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Starting point is 00:49:37 Wow. Okay. So this is going to hear. Yeah. Okay. Wow. So it seems like they're going to play nice so that they can. protect those two major interests that they have on the international front and CZ's personal

Starting point is 00:49:49 interests. Where does it go after that, Joe? Does this get really messy? I think it's getting extraordinarily messy. And let me just say, there are a couple things that I think, and we talk about this quite frequently huddled, that really sort of, when I saw the notation on the docket, my eyebrows perked up because I'm like, okay, something's going on here. They're a little nervous. there was an appearance filed by a notable criminal defense attorney in this case, which the SEC case is civil. But what happens frequently in a lot of civil litigation is that you have a criminal attorney in the background. Most of the time, you don't even want them to file an appearance. But they're looking over what records are produced.

Starting point is 00:50:30 They're advising the client to say, listen, if you turn over these records, you could face criminal liability. And sort of they're in the shadows saying, my one job is to make sure this an indictment does not come. And that stems from, I think, in earlier report a couple months ago that the DOJ, the Department of Justice, was split on whether to indict CZ and indict finance. So my guess is, and I'll just qualify this with some supposition, but I think the DOJ has looked at this rather closely. I think the DOJ, which typically would move before a civil organization, a civil complaint, they would file the DOJ indictment and the civil was sort of taking a back seat to the DOJ. I think that they smell something here. They think there's something we need to look at, but I don't think they have all the records. And my guess is they greenlit the civil enforcement actions to put pressure on Biden and

Starting point is 00:51:20 to get as much records as possible. And then the SEC is they can normally, they can do a criminal referral. So I would not at all take off the table the potential of a criminal indictment at some point in the future. I can't say it's guaranteed. I think you need to get records. But to your point, how does it all play out? It plays out where the SEC will push as hard as they can.

Starting point is 00:51:40 can to do a full accounting of all records. And at some point, because there's been co-mingling of assets, and that's, we didn't mention that clearly, but there's this overarching allegation that the finance.com entity has co-mingled assets with the U.S. entity. If I'm a federal judge and I hear that and I see substantial evidence of that, Hoddle and Preston, I open the door to everything. If you're mixing and matching across accounts, across entities, the other side gets to see it all. and my guess is it will come to a head when at some point they will show the trail from the binoced us to the international and say we need to see behind the curtain over there what's going on with the international and that's kind of a black box right that what is behind

Starting point is 00:52:22 the curtain at binance dot com. But I would think to me, oh go ahead, no go ahead. I was just going to say to me when I saw the the Reuters article about the Department of Justice being split, my immediate first thought was this thing is a sci-op to get this guy on U.S. soil so that they can arrest him. Like, that was what I immediately thought. Maybe that's too, that's overtly conspiratorial. But I think there is a there there and there's definitely criminality at finance.

Starting point is 00:52:49 I mean, that, that seems obvious everybody has been paying attention. Well, you can say things I can't, but I'll just tell you, uh, you know, my personal opinion, Joe, just my personal opinion, not a legal opinion. Yeah. I'll just tell you, like, you know, if you're in these financial, uh, cases, right, in particular financial crimes, it's really important. get a full accounting of the records. And I think, Preston, I know you were really frustrated. Like,

Starting point is 00:53:11 how is this guy SBF not in handcuffs? Like, immediately after the whole thing blew up and it was obvious, everybody knows what was going on. How is he not indicted in doing a perp walk? Okay. And the answer is because they want to have all the records. They don't move off half cock. They want to have every single piece of paper so that when somebody's in handcuffs, they know I got my standard of proof beyond a reasonable doubt. There's no way we lose this case. How about the BAM trading and BAM management part of this, Joe?

Starting point is 00:53:40 Yeah, well, that's the U.S. entity. I mean, that's the whole basis of the suit. I mean, the U.S. entity is in the documents that have been released. It's basically a front for the international. Well, I guess where I'm going is more in the them trading against customer funds. Oh, the wash trading. Yeah, sorry, yeah. Yeah, no, no.

Starting point is 00:53:59 So that's the entity, right? The BAM trading is the entity we're really talking about, finance US effectively and the shocking allegations and the best part of it guys is this it's not just the allegations it's not just to get a complaint and well let's see what evidence they have they put forward hundreds of pages of chat logs of records internally saying you know we're running an effing unregulated exchange here in the united states a chat records from the the senior leadership of finance US saying there's wash trading going on in our platform. There aren't safeguards in place to prevent this.

Starting point is 00:54:35 Can we do something about this? Can we address it? And it's not years ago. Like some of these allegations and documents are from May and April of 2023. And it's shocking to me that, you know, they've known this for years. They've known this was a problem. Cizzi himself, if you follow him on Twitter, he goes out and says, our customers want to know there's not wash trading on the platform.

Starting point is 00:54:54 And now we know there's some internal records that there is. And they didn't have safeguards in place. They didn't have surveillance agreement. And by the way, this plays perfectly into the SEC's hands for the denial of the Bitcoin spot ETF. Let me explain why. Because their core, I think I alluded to this earlier, their core argument is you got one of these changes that has massive amount of spot buying of Bitcoin and spot selling and it's black box. They're not even making sure the trades are real and legitimate. So this will be Exhibit A in that action. Now, I'm glad you brought that up because

Starting point is 00:55:26 I wanted to touch on that as well. We're a long way off from a Bitcoin spot. ATF. And what it's going to take is essentially a well-regulated U.S. entity that is Bitcoin only that has significant volumes. And until we get something like, hopefully several of them, but until we get something like that, you're not going to see a spot ETF anytime soon. Because like Joe alluded to, and as we all know as market participants here, this stuff is the Wild West, right? And if you're operating at a, you know, a foreign exchange, not only are you in the wild West, you're in the Wild West Saloon. And it's passed. That's midnight and everybody's got their six shooters out and you're about to be killed because

Starting point is 00:56:03 there's no rules on these exchanges, none at all. Can we talk about that for a second? And I love your take pressed on this. And this is the one question I had for you tonight. Okay. We as Bitcoiners and we're passionate about the asset, we understand the importance of Bitcoin. It's frustrating to me for so long that we're so deep into this thing and you don't have a real solid Bitcoin exchange in the United States.

Starting point is 00:56:28 And I know there are exceptions and people don't bite my head up because I know you can think of two or three that are Bitcoin only, right? But we've heard allegations tonight about the prime trust, right? You've heard other issues in the past recently develop out the prime trust. We can get into those. But why do you guys think that we've had so much difficulty having, you know, we talked about this, a G-Dax type real API back-end exchange for Bitcoin in the United States after all these years? Yeah, I mean, everybody that I know, you know, who's, worked at Cracken says that Jesse Powell is a pretty hardcore Bitcoin maximalist. He's one of our guys. But the lure of all of the money coming in from these illiquid Ponzi scheme tokens is just too great.

Starting point is 00:57:12 And if everybody else was going to do it, then you might as well do it too. And you might as well make hay while the sun shines. And that's been sort of the modus operandi for this entire space. And, you know, it was good business for the people who could get it while it was going on. But, you know, ultimately, we were kneecapping ourselves as an industry. And the people like Brian Armstrong who were running Coinbase started off very strong Bitcoin only. And over time, these lures of adding new coins and suckering in retail investors. I mean, the earn program was basically a brainwashing tool where they would pay you to read propaganda about illegal illiquid securities. I mean, when you spell it out like that, it's pretty damning, right?

Starting point is 00:57:53 And that was, that game was going on for a long time. And like I said for, it was basically a game of three card Monty with the general public. And those days are over now. So it is time for everybody to take a good, hard look in the mirror. I mean, this is, to me, this reminds me of the moment post.com bubble collapse when the real, you know, next gen companies are going to be built, when the Googles and the Facebooks are going to come out of this thing. And that's exciting to me as a Bitcoiner. But the people that succeed in this industry, and I'm using that in air quotes, if you're listening to the podcast,

Starting point is 00:58:23 the people that succeed in this industry are going to be people with the people that. that focus on Bitcoin, not people that focus on illegal securities. Very similar to message to what Sailor's been saying for probably the last six months to a year is people are way overestimating crypto and way underestimating Bitcoin. I think it's on full display to echo your point, Hoddle. Joe, I think when I look at that, you know, you have fidelity, which is a major legacy financial organization. that is now allowed buying Bitcoin, you can't withdraw it, they're going to self-custody it, now available to the general public that have Fidelity accounts, they are the odd man out on Wall Street compared to everybody else. I think everybody else on Wall Street is still looking at this,

Starting point is 00:59:14 like, what a bunch of degenerates trading imaginary money, acting like it's going to compete with the dollar, we have total control over the financial world. And if these kids think that they're going to like program some fake magic internet money and compete with the dollar, like we're going to snuff them out with style and enjoy every second of it. I actually think that they find it entertaining to think that a Bitcoiner could even remotely think that they could compete with Legacy Wall Street finance. I think that's the mindset. I think you're absolutely right.

Starting point is 00:59:57 And I think to people that hold that view, I would say that, you know, if I was in your position, I would feel the same way, probably. But the world is changing. I mean, you know, Secretary Yellen came out the other day and said that we're planning on the dollar essentially losing its reserve currency status. That's a pretty crazy statement by Treasury. I mean, that's nuts. That's nuts.

Starting point is 01:00:17 I can't believe I heard something like that come out of her mouth. But obviously, she's right. right. And she's being a realist about what's coming, right? And I think as we look, you know, towards the Russia-Ukraine conflict and obviously China is rising, they're ascending while we're descending, there's going to be a conflict between the superpowers at some point. And when you look at these conflicts, you know, in the modern day, they're not going to look like World War II. They're not going to be like the 20th century conflicts. These are going to be hybrid wars. And hybrid wars are cyber. They're biological. And guess what? They're economic. And our traditional

Starting point is 01:00:47 financial system is a joke. It's full of holes. I mean, from us, cybersecurity perspective, you can just come in there and do whatever you want, basically. So we need an upgrade to make this trad-fi system more robust. And I think the thing that is non-intuitive at this point and still very contrarian, that's the thing I love, by the way, Preston, we still have our edge. It's all these years later, we're still the contrarians in the room. We're still the guys saying, no, it's just Bitcoin. You can just focus on Bitcoin and the underlying Bitcoin technologies. I think in the coming decade, we're going to be able to use these underlying Bitcoin technologies to not only strengthen Bitcoin in the world, but also strengthen the traditional

Starting point is 01:01:24 financial system, create a robust financial system that's able to withstand attacks. And these attacks are coming from adversaries outside of America. So if you're the type of person thinking, hey, it's never going to come from me. I'm at the center of Rome and this is the Roman Empire. The winds of change shift mightily. They come for you fast, much faster than you're expecting. So it's time to go to that point, Joe, to Hoddle's point, when we look at the lake, legacy financial, the J.P. Morgans, the Bank of America's, all of them, right? For the last 40 years, anybody who actually has real buying power that's secured that buying power, either in equities or bonds, the value has performed. They haven't seen it get eroded for 40 years until COVID.

Starting point is 01:02:11 From COVID till now, they've actually started to see, and I've called it deflection in the bedrock of finance. Actually, Sailor is the one that initially started saying this, and then I'd just been chirping it since. But they finally started this to see the deflection, and it hasn't been enough for them to be shaken out of their chair to act, like the holders of all this buying power, the people that are truly controlling a large portion of the buying power, they haven't gone to your traditional Wall Street banks and said, something is seriously wrong. We need a solution to this, right, at all. And so there's no reason for Legacy Wall Street to take anything serious. I think we're on the precipice of that changing in the coming three to five years. Like,

Starting point is 01:02:59 I think it's about to get disgustingly volatile, especially in the bond market. And I think what's going to make it really hard for people was I think you're going to have a total meltup in equities in the coming five years. Like, you're going to see prices and equities that you can't even imagine. especially from like a PE standpoint. Like if you're using traditional PE ratios, like you might as well just throw those things in the trash can because they're going to, they're going to be in multiples that you like make your eyes bleed because that's how these things play out from a currency standpoint, which is only going to add more confusion for a lot of legacy folks as to like where they need to position themselves for the changeover in currency. But in the bond market, it's going to be extremely evident that something is melting down. And I love your chart that you've been posting where you basically take the equity market. And instead of putting dollars on the bottom, you put long duration bonds on the bottom because I think it's a really interesting and neat chart to look at.

Starting point is 01:03:58 Have you looked at it recently? I haven't looked at it recently. Oh, my gosh. It's absurd. It's just exploding, right? Yeah. No, I wish I could share it. But let me ask you a question.

Starting point is 01:04:06 Okay, for both of you. The consensus view, I think, right now, and I don't know if this is your dear two views, but the consensus view is that you're sort of in the, the, the, late stages of the bear market here. You're building a base in Bitcoin and we're going to be heading much higher over probably the next year beyond that after the halving, if you believe cycle theory, that sort of thing. I don't. But let's put it aside. Let's just assume we're nearing the end of a bear market or longer consolidation. And I don't think these cases are going to resolve at any point in the near future. I think it will carry over into 2024, potentially into 2025 and thereafter. Do you think this changes the dynamics of the all-coin,

Starting point is 01:04:44 Bitcoin market? Are we going to get another Bitcoin bull market where you have the alts popping off again and you track capital and done money into the alts? I know that we have a friend, obviously, Brad Mills, who talks about very, very vocal. He's been saying for like the better part of two years that he thinks there will never be another all coin bubble that it's dead. I've heard you Haudel say things that you think there's going to be an AI altcoin bubble or identity altcoin bubble. Identity. Yeah. Identity. That's right. What do you think? Do you think that this is meaningful all this legal BS or where do you see it? Well, I thought about this quite a bit, actually, when these actions started coming down. And I think that, unfortunately, my take on this is that

Starting point is 01:05:22 there will be an old season. It will exist largely outside of America, largely outside of developed markets. Right. So I mean, Andreessen Horowitz announced that they're moving some operations to London. You know, London is another financial hub in the world that's, you know, part of the developed world. But I think, unfortunately, a lot of the people are going to be getting fleeced in this next cycle are in the global south. And that makes me really sad because I'm already starting to see American investors operate out of these Caribbean entities so that they can take part in these kinds of things, basically unencumbered. So, yeah, I think, unfortunately, you're going to end up in this situation where, like, much of the world is still hooked on these decentralized Ponzi schemes. And there's not a whole hell of a lot that we can do about it. So I do believe that you're going to see these things pump yet again.

Starting point is 01:06:09 Now, there's going to be some energy where inside of America at least, some of the people that are smart, sober, and rational will wise up, and they will either leave the space or they will double down and refocus efforts on being Bitcoin only. And you're already seeing a lot of the people that, you know, I consider to be more fly-by-night moving from crypto into the new trendy stuff like AI, right? you can take a GPU farm that you were using the mine cryptocurrency and you can use it to do AI stuff. So it's a real easy phase shift for these guys. I think that we're going to get rid a lot of the bad elements, but I think unfortunately the bad elements are going to go overseas

Starting point is 01:06:46 and they're going to prey on the underbanked in emerging markets. And that's going to be like a moral tragedy. And I will continue to speak up against it every time I see it because I don't think it's right. And if you're an investor, I think that that's something that, you know, should weigh on your conscience. And you should actually give heavy consideration. to. I agree with everything Hoddle just said. And I would say that the primary marketing for this is going to be Bitcoin is X price, which is way too expensive for you to ever make any kind of money in it. But this token that I just made is five cents and it could go to 25 cents or a dollar like in two months. Like that marketing pitch, how many times I talk to people

Starting point is 01:07:32 said that basically same thing. Like, oh, I wish I would have got in the Bitcoin seven years ago or eight years ago. It's just too expensive. I can't afford one of those. Like how many times I personally heard that? And I just like, oh, my God, my head hurts. It's a lottery. It's a lottery pitch, right?

Starting point is 01:07:52 And I mean, I like to play the lottery too. I love when the lottery gets to like a billion dollars and I buy a ticket. And for five bucks or whatever, I walk around for two days having this dream of like, how great will it be. Oh, when I'm a billionaire, I'll buy a sports team. I'll do this, I'll do that. I walk around for two days thinking this, right? That's fine.

Starting point is 01:08:09 That's a cheap dream. Everybody likes to do it. The problem with these alt-coin things is that you buy that dream and they suck you in. And then you end up spending way more than five bucks. You spend tens of thousands of dollars. You get your friends and family hooked up into it like it's an MLM. And then all of a sudden your entire reputation and identity and your community are all wrapped up in these things. and if you're part of like the ex-r-P army or something,

Starting point is 01:08:32 you're going to fight to defend this because this is you at this point. It feels like you're fighting to defend yourself, not like you're fighting to defend a scam, which is what they're doing in actuality. Wow. Would you both give the same answer? There are rumblings of enforcement actions against VCs that are coming down the pipeline.

Starting point is 01:08:50 Would you give the same answer if the SEC does end up going forward in filing enforcement actions in the realm of crypto against notable VCs? We'll leave it at that. Yeah, I think that some of the mid-level VCs are easy pickings. I don't think these guys are very smart or sophisticated. There's a lot of guys who, you know, went from being a bartender to a crypto VC. I mean, let's face face it. That's how it was.

Starting point is 01:09:14 It was pretty ridiculous. And some of these guys ended up having, you know, their funds entire AUM on FTX because obviously they've never heard of counterparty risk. These are not serious people, right? But I think the Andreson Horowitz's and the Sequoias are going to be harder to go after because these guys know how to keep things at arm's reach. It was never suggested, like, you know, what they would do basically is, and I'd heard this from friends who were startup founders, you would go in with a great idea for a startup, and you

Starting point is 01:09:40 would have it back channeled to you that, you know, it really, yeah, we're not, we're not really thinking about it at this time, but, you know, honestly, if there was a token on your roadmap, it would be a lot more interesting, right? And so it's sort of the simplistic understanding that you need to add a token, and a lot of the impetus was put on the founders in that case. So I think it's going to be hard to tie it back to the A16 Zs of the world. They're very sophisticated. So crazy to me.

Starting point is 01:10:05 Joe, what's the chances of an asset freeze on finance for customers? So if somebody's listening to this and they have funds on finance, like you need to get those off of finance, right? But what are you doing? Don't stop listening to the podcast. Yeah, stop. Hit pause. Go now.

Starting point is 01:10:26 Go now. Exactly. What's the probability of something like that through everything you've seen from a legal sense? Is that highly probable coming next? We have heard from Binance that they are on the cusp of losing some of their banking partners and their ability to withdraw, this Binance U.S., to be clear, their ability to withdraw dollars in the United States off the Binance U.S. platform. So they're actively encouraging people, get your dollars off.

Starting point is 01:10:55 we're going to be probably crypto only moving forward. So that's one part of it. So if you're talking about the assets on Binance U.S. that are crypto assets, my understanding is if the consent order goes through, it will allow them to withdraw, customers to withdraw crypto assets on the Binance.us. platform, and I think the SEC has agreed to that. Now, if you're thinking a more comprehensive freeze,

Starting point is 01:11:21 which I still think is on the table, I see that coming down from Binance under two scenarios. Scenario one, which is probably the most probable, is if there is an accounting or records, as I mentioned, because of the commingling issue, that identify U.S.-based accounts that are somehow held off the U.S. platform in the custody of Binance.com, the international. I think a judge would look at that and say, wait a second, this is outside of the United States. We need to get back this money immediately. I'm going to issue an order because they've consented to the court that this needs to be frozen

Starting point is 01:11:51 immediately. That will be subject to additional records. And I still think the SEC is not confident that they have all the records. You know, during the lead up, even as late as June 2nd of, you know, this month, they were getting contradictory information from Binance's lawyers and their auditors about how much assets were actually held by the Binance. That U.S. platform. Never a good thing when you're contradicting your own auditors about how many assets you hold on the platform. And that's put forward with some compelling evidence by the SEC. So the The scenario number one is, just to recap, is if there are new records that show commingling between international and U.S.

Starting point is 01:12:28 In my opinion, though, the bigger issue and the more likely scenario where you see a total freeze of the assets is if there are some documents or evidence that is uncovered through this process that is referred to the DOJ and the DOJ hacks on a criminal basis, that I would rate it. If they move forward with an indictment, a very high probability that those assets are totally frozen. you know, if you're using these platforms, right, and you understand there's an active investigation, and there's a federal judge compelling violence on a daily basis to turnover records,

Starting point is 01:12:58 you can't sleep good at night having any money on that exchange. And I'm not trying to be, you know, a fearmonger here or promote a bank run. That's not what I'm doing. I'm just saying, practically speaking, it's in an uncertain situation where it can develop very quickly. I mean, look at FTX, right? We heard rumors online about FTX and as Hottle alluded to this back and forth with CZ and within what? A week, two weeks. It was insolvent effectively, Haddle?

Starting point is 01:13:23 It was like three days. It was like three days. It seemed like a week. Overnight and people were flying down to the Bahamas doing sketchy stuff to try and get their money out. I mean, people were trapped. You know what I mean? You don't want to let that be you. And the cost of self-sovereignty here in this space is like about $100, $150 for a good hardware wallet.

Starting point is 01:13:42 That's well worth it if you got, you know, tens of thousands of dollars on one of these exchanges. Get yourself a hardware wallet. But look up some great tutorials online. Our buddy Ben, BTC sessions on YouTube, does a phenomenal job. Stefan Lavera does a phenomenal job. They'll walk you through it. Go to the Cold Card website, Coin Kite, Cold Card, buy one. Look up a tutorial on YouTube.

Starting point is 01:14:04 Boom, yourself, sovereign. Easy. Guys, I think we're going to wrap it up there, unless you have any other highlights or things that you think we need to cover on this particular topic for right now. Give people a handoff. If you guys are good, give yourself a handoff. where people can learn more about you or follow your Twitter account. Both are just awesome places for people to learn more. Oh, I know. I'm sorry, before we do that, one last thing that I wanted to cover.

Starting point is 01:14:29 Bitcoin, in all of these documents, which there's been a lot of documents and a lot of pages to plow through. Joe, I know you've pretty much plowed through all of them. Bitcoin is addressed very differently than anything else that is addressed as far as all these tokens. So real fast, if you can just kind of cover for people that are listening to this, we only cover Bitcoin on this show for the most part. What would you say to a Bitcoiner that's seeing all this and saying, well, my God, this sounds really scary? The first thing I would say is that just look at how Bitcoin came into being.

Starting point is 01:15:02 And that's the big distinction between what the SEC has said versus all these other tokens. They lay out very carefully in the Coinbase suit and in the Binance suit about how all these things are brought to market with promises of expected return. It brought to market in a very centralized way, a very top-down, controlled way. That is the complete antithesis of how Bitcoin came to market and how Satoshi developed this. And they developed it in a open-source decentralized way where everybody had a right. There was no pre-mine.

Starting point is 01:15:31 Everybody could have came and mined on the chain. So really, you see very different origins and very different incentive-based structures. So the SEC in statements that are now public, in versions of the speech that Director Hinman gave that we alluded to, earlier, he speaks in a very praiseworthy way about Bitcoin and how Bitcoin is very different from all these other things and how it came to the marketplace is really key. And that's at the core of what the SEC is about, right? They're trying to say, we want to make sure that there's no incentive structure here where people can just put this in the market, pump something, make a quick buck and take

Starting point is 01:16:05 advantage of customers. Bitcoin is not that. It's not brought to market to take advantage of people. I think the way I think about it is, you know, there's been a lot of posturing, especially on Twitter about the crypto guys being like, oh, look at you, you Bitcoiners, we thought you were libertarians, we thought you were free market guys, we thought you were laissez-faire capitalist, and look at you, you're cheering enforcement, okay? Are you against the free market?

Starting point is 01:16:28 And one of the framings I always say is, listen, free speech is part of a free market. And I don't like your behavior particularly. And so, you know, if you're selling snake oil in the western town, I'm going to stand next you and be like, hey, this is gasoline. This is formaldehyde. You shouldn't drink this. drink it. This guy is scamming you, right? And I think that, you know, it's easy for them to say that they're coming for Bitcoin next. And, you know, there are going to be some battles. There are

Starting point is 01:16:53 many battles left with the U.S. government over the fate of Bitcoin. I think one of the battles is, you know, the curtailment of mining emissions, potential different tax rates for mining electrical use. I think there are potential different tax rates coming for you as an individual on Cap Canes. I think that there's a strong desire to docks all of the coins and all of their whereabouts and that you may have to self-report that in the future, both for national security interest and for the interest of taxation from the IRS. There are many battles that Bitcoiners are going to fight with many different regulatory agencies. Some of them were going to lose.

Starting point is 01:17:28 Some of them were going to win. But eventually, Bitcoin is going to win the war. And Bitcoin is here to stay. Bitcoin is a major part of this century. and not just for America, but for the world, because this is a global phenomenon. One thing real quick, Preston, this is the quote. I'll just read for the audience here. This is from that speech I referred to director of him in speech years ago, right?

Starting point is 01:17:50 And this is the SEC talking about Bitcoin. He says, and so when we look at Bitcoin, we do not see a third party whose efforts are a key determining factor in the enterprise. The value of Bitcoin turns on the efforts of decentralized miners and individuals. Independent market participants of an open source payment mechanism. Applying the disclosure provisions of securities laws in this situation would seem to add little value. So he's basically saying that they get it, right? They understand how Bitcoin's different from all the rest of this stuff.

Starting point is 01:18:22 We know Gary gets it. I mean, he's literally taught the class at MIT and people can watch the class at MIT of everything that's ever been said about it. And his thoughts on Ethereum and some of the others and how they don't pass the how he test. And this was Sailor's interview with Raoul Powell was just incredible to look back and think that that was two years ago and just how on point he was with respect to how this was going to shake out eventually. You're both just too optimistic about what's coming in store. I'll just say this. I come down far more. I think this is going to be really impactful, guys. This litigation is going to

Starting point is 01:18:59 have far-reaching consequences. And I think everybody's looking at this saying it's Fudd in the crypto universe. and they're saying it's not going to be a big deal. It is a big deal. It will have their U.S. is not the only game in town, right? But they're the 900-pound gorilla in financial markets. And many economies, many regulators globally will follow the U.S.'s lead. So the folks in the cryptoverse that have incentives to say this doesn't matter, I'll take the other side of that bet.

Starting point is 01:19:24 Yeah, I'd agree with you, Joe. All right, guys, give a handoff to Twitter or any other things that you guys want to highlight. You can find me on Twitter, American Hottle 8, or I'm on, I'm on Noster a lot these days. Noster is a really cool new emerging decentralized social network that you should definitely check out if you haven't checked out so far. So you can find me on there too and give it to Joe. Yeah, I'm also on Twitter all the time at Joe Carlisari. You can contact me on there if you have sort of fun macro or legal issues.

Starting point is 01:19:56 I would prefer you contact my firm, right? I am a litigator practicing the space. If you have a litigated dispute, you can Google my name, find my firm's website. I'm happy to help anyone. I represent a ton of Bitcoin miners, people building on Bitcoin, people involved in litigated disputes involving Bitcoin. So I have about half my practice now adjacent to Bitcoin. So I always want to help Bitcoiners and I accept Bitcoin.

Starting point is 01:20:18 I love that. I love that. Yeah. We'll have a link to that in the show notes and we'll have a link to Hoddle social connections on the show notes as well. Gentlemen, we need to do this more often. I really enjoyed this chat. And thanks for your time tonight.

Starting point is 01:20:32 Thanks, Preston. Thanks, Preston. If you guys enjoyed this conversation, be sure to follow the show on whatever podcast application you use. Just search for We Study Billionaires. The Bitcoin-specific shows come out every Wednesday, and I'd love to have you as a regular listener. If you enjoyed the show or you learned something new or you found it valuable, if you can leave a review, we would really appreciate that. and it's something that helps others find the interview in the search algorithm. So anything you can do

Starting point is 01:21:01 to help out with a review, we would just greatly appreciate. And with that, thanks for listening, and I'll catch you again next week. Thank you for listening to TIP. To access our show notes, courses, or forums, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decisions, consult a professional. This show is copyrighted by the Investors Podcast Network. Written permissions must be granted before syndication or rebroadcasting.

We Study Billionaires - The Investor’s Podcast Network - BTC135: Binance & Coinbase Vs the SEC w/ Joe Carlasare & Hodl (Bitcoin Podcast)

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