Crypto Goes to Congress
As many of you have seen, the first Congressional hearing on digital assets occurred last week, inviting six of the largest stateside blockchain CEOs to testify and answer questions about their platforms and visions for the space. Many members of Congress came in having met with the CEOS and were enthusiastic about blockchain tech, but at least as many were hoping to learn more. Alexandria Ocasio-Cortez came in with a pointed line of questioning, but, by and large, it was a panel more about highlighting the important issues related to inflation, Web 3, consensus mechanism energy efficiency, and topics that have been batted around but never discussed in Congress with this degree of formality. The six crypto representatives were polished and are generally perceived to have done well at answering the questions of Congress well, even skillfully simplifying technical topics into digestible tidbits.
This panel was the culmination of blockchain companies finally connecting their government relations arms with the resources and attention they need to make a serious push for more meaningful policies in one of the least hospitable jurisdictions for crypto, from the regularity standpoint, in the world. It makes it far more palatable that several members of Congress have already firmly attaching their hitch to the blockchain movement. The trumpeting of these technologies by the mayors of New York City & Miami have added to the vocal support from Senators from Wyoming and Congressional representatives from California and spread out across the country. Most all of the pro-crypto members of Congress were in attendance both for the historical importance but also to ask questions that detractors have determined to have been softballs, but, ultimately, this panel was not a confirmation hearing, but rather an opportunity for the discussion to take place in the hall of Congress as to the feasibility of the growth of stateside crypto.
In this article, I thought it would be useful to get some context into the individuals and companies that presented on the Hill and their importance level in the ecosystem, stateside and abroad.
Jeremy Allaire - Circle
Alexandria Ocasio-Cortez: "This doesn't seem like a new financial system per se, but, really, an extension or perhaps expansion of our present one."
Allaire: "I would disagree with that. I believe we're seeing is a new open infrastructure layer on the internet, a missing infrastructure layer of the internet, that is designed around value exchange and economic coordination that is rooted in immutable data, the ability to interact with counterparties in a very safe way that hasn't existed before the internet."
Circle's USDC token provides 1:1, full collateralized with fiat in FDIC institutions for every dollar worth of value of USDC, which is tightly pegged to the dollar, deeply and readily liquidable. Their aim is to expand the use of the dollar online with their product and point to how the digital yuan/e-CNY and other digital competitors, like the sand dollar, which is a digital Bahamian dollar, a currently pegged to the USD 1:1, are encroaching on terratory that is threatening the dollar's status as global reserve currency.
With other competitors out there that act as a de facto dollar or have deep liquidity, Allaire's argument that it's in our national interest, and to ensure continued low borrowing rates, that the government would be best served to encourage the use of a digital dollar or see an erosion of the USD as the global reserve currency. Already you're seeing the Russians using the e-CNY as a preferred international trade fiat denomination so the argument founded in actual trade practices.
Circle has been praised as offering a prudent alternative to Tether, which is only partially collateralized and has been subject to a string of enormous fines for what regulators see as collateralization obfuscation. The Financial Times is reporting that of the $76 billion in USDT minted, only 2.9% is adequately collateralized to the standard that Circle has set, with another $3 billion minted just two weeks ago. Many large investors I know feel comfortable using USDC or GUSD, Gemini's USD stablecoin product.
Privacy advocates have put Circle in their crosshairs, however, due to the--albeit rare--practice of freezing USDC funds in wallets that law enforcement deem to be criminal. This is a product of having operating stateside and any company that wants to freely and openly transact in business with US citizens, with offices in the States, is under the thumb of law enforcement and are compelled to comply with explicit directives from regulatory bodies or risk losing their licenses.
Sam Bankman-Fried - FTX
"One of the really innovative properties of cryptocurrency markets are 24-7 risk monitoring and engines. We do not have overnight risk or weekend risk or holiday risk in the same way traditional assets do which allow risk monitoring and de-risking of positions in real time to help mitigate volatility. We've been operating for a number of years with billions of dollars of open interest and we've never had customer losses, clawbacks or anything like that even going through periods of large movements in both directions. We store collateral from our users in a way which is not always done in the traditional financial ecosystem to backstop positions."
For FTX, this period of not having passed exchange losses to users is a remarkable record in relation to the rest of the ecosystem, which regularly haircut account values across the users base, which, as you might expect, does not ingratiate a user base to a platform. If you’re a full-time trader and you’re doubled your portfolio over a year’s time and now are told that all of those gains are erased due to the exchange’s sub-standard cybersecurity practices, that’s deflating at best and infuriating at worst. Sometimes these decisions are more easily arrived at given that these exchanges have almost no face-to-face relationships with customers and, rather, it’s strangers on the internet, against whom—as we know from social media—pushing one’s weight around is far more palatable than someone you’ll see at conferences or at work.
"If you look at what precipitated some of the 2008 financial crisis, you saw a number of bilateral bespoke non-reported transactions happening between financial counterparties which then got repackaged and re-leveraged again and again and again such that no one knew how much risk was in that system until it all fell apart."
This is an important point when you consider that all of the assets that were being dealt in during the days that lead to the 2008 financial crisis--inspiring Bitcoin's development--were entirely legal, but there was a habit of obfuscation such that when these mortgage backed securities were divided into tranches and the proper data wasn’t readily available, even in the midst of being leveraged, then the implosion happened.
While obfuscation is commonplace in the world of exchanges, because of the centralized nature of many or anonymous nature of wallets being used to made trades on a decentralized exchange, FTX has a track record for delivering on the transparency that investors demand. The actual FTX exchange is just a robust orderbook that does a masterful job of connecting market makers and earns an absolute avalanche in fees for facilitating the pairing. The products are very transparent and clear-cut with simple contract specifications. The only difficulty, requiring a great deal of time and thoughtful strategy, is jurisdictional compliance.
The youngest billionaire under 30, Bankman-Fried has amassed a sizable following among tech-savvy, blockchain-facing enthusiasts. His casual demeanor and good-natured persona is well-received but balanced with an intellectual sharpness, depth of understanding on technical topics, and work ethnic that has been the winning recipe for his meteoric success.
Bankman-Fried does one of the best jobs on Twitter of keeping it light and fun, while also offering thoughtful takes on nuanced topics. Multifaceted problems are considered from several angles and a decisive decision is made in one particular direction, lacking the analysis paralysis which can leave many engineers turned managers frozen. We forget that these tech titans are actual people, largely because PR people are so careful about image control and vetting each tweet. The public appreciates when Elon Musk or Bankman-Fried drop a Tweet that feels organic and not vetted in the way that we might expect from the CEO of a large multinational, publicly-treaded company.
In my technical writing, anytime I had a question I would fire off a Tweet to Bankman-Fried and would be regularly shocked at how quickly I would get a reply. Many CEOs made it a practice of not responding to anyone on social media. Some students I have reported Bankman-Fried answering them via Twitter as well, speaking volumes to the willingness to engage as a public figure while still clock in superhuman hours to crank out platform upgrades and put out fires in real time.
I've been helping Western European family offices trade on FTX from the first month the platform was off the ground and the combination of deep order books, tight bid-ask spreads, novel tools, and the most liquid derivative markets has lead many to trade on this unique platform while Deribit closed their doors to many jurisdictions, BitMex was in regulatory hot water, and Binance was slower to offer anything more than vanilla trading tools. The robust suite of crypto spot, futures, calendar, options, quant bots, and well built out user interface pushed a broad swath of traders in FTX's direction by virtue of favorable discussions on Reddit and Discord groups. Couple that with the aggressive marketing to lean in on the mass adoption front to compete with Coinbase and Gemini has done a lot to capture the imagination of traders that had never before thought about crypto as a trading vehicle. The push of new entrants like Crypto.com to follow suit by grabbing the naming rights to the Staples Center and similarly going into highly visible sports marketing has done much to raise the profile of crypto, and exchanges, into the forefront.
The projects that have survived the shuffle of crypto booms and busts are pretty exclusively exchanges--FTX, Binance, Coinbase, et al--because they are productive blockchain assets who use the revenue from liquidations, opening trades, and the high-margin business of running an exchange to both grow during the good times but also handsomely weather the bad times. FTX has a burn rate of their FTT token that limits supply and creates scheduled demand. When the market takes a huge dip, as we've been seeing, these periods sometimes see the largest buybacks because of the fees generated from liquidated positions. FTT buys back its own token with about 33% of the exchange's weekly profits, similar to Binance's model. When blockchain companies are hurting, well run exchanges are doing just fine, there to dress the wounds of their blockchain brethren and, often, inject investments into interesting use cases when values are low, further strengthening their treasury portfolios.
Famously, Binance bought a substantial stake in FTX and Bankman-Fried ultimately bought those shares back in the midst of some of the largest funding raises seen in the ecosystem with a $900M round at a $25B valuation, only to be outdone by themselves with this more recent $1.5B round at a $32B valuation. Keep in mind, this is just for FTX.com and doesn't include FTX.us which separately is valued at $8B. These are lofty numbers but backed by almost a billion in annual profit. With these resources at your disposal, nurturing relationships and building partnerships comes more seamlessly and swiftly.
Brian Brooks - Bitfury
"The topic [blockchain] is an important one for anyone who cares about American competitiveness in the financial services sector a financial ecosystem that empowers users over bank CEOs and other powerful central decision makers and the next iteration of the internet in which individuals are able not only to read information and write content but also to own a piece of the networks themselves."
The feeling from Reddit, and in reading the comments for this panel, is that the egalitarianism and equal access to opportunities that defines the ideals of America is not present in what Redditors love to term "late stage capitalism,” but rather, they purport, is more clearly seen in the Web 3 push. Users appreciate that this Harvard lawyer is speaking eloquently on the importance of making sure that users enjoy hearty stakes in platforms, in an economy that concentrates resources for start-ups squarely at the C-suite. It may trickle down, but the very nature of Web 3 is that users can enjoy a sizable stake at every stage of the platform’s progression.
There’s a feeling that this allows individual investors to amass wealth in a way that their career may not, unless they have an accounting firm, insurance book of business, or other practice that can be sold and operate without their involvement. If you earn a salary of $50,000 per year and you get sick enough that you can’t work, absent work disruption insurance, you’ll soon be earning $0 per year. If you work on a promising tech project and your division is profiting $50,000 per year and you step away, there’s a high likelihood that you could find someone to occupy your role, even if it takes a dip in profitability, and you have an asset that, at a 50 price-to-earns multiple, is worth $2.5 million. This is basic principals taught by Robert Kiyosaki with his Rich Dad Poor Dad series and in every business school in the world, but getting token exposure to these platforms on Web 3 removes 90% of the fraction you would face with growing a business of your own. The decentralized autonomous organization is a swift tool for including people from all over the world to have a meaningful say and stake in a project virtually instantly so they can get about the business of developing compelling use cases and high-probability business strategies. This produces a more participatory economy, on the equity level, and positions many thousands of people well to accelerate their retirement timeline.
The big picture perspective that Brooks brought with many of his homespun analogies, including the early skepticism about email as a communication tool by the legal community, was appreciated by a great many as well as for his ability to unwind complicated topics so it would be impactful for a member of Congress and the viewing public to best digest.
Denelle Dixon - Stellar
"We need to focus on consumer-oriented products that .... brings the person through from a literacy standpoint so they understand. You look at user experience, you look at UX design, all of these things are really important and, as we saw in the early days of the web, it happened, it came together, we became better at educating the the audience about what's available"
Mass adoption of blockchain technologies is a critical component of the end game allowing these early companies to reach all of their milestones. Stellar is unique in their push for simplicity and speed. Transactions take a seconds, are cheap, and require less electricity, as she mentioned in one of her answers, than a Visa transaction.
Stellar takes pains with their community grants to inspire use and development, a best practices principal that not enough blockchain companies do. If the technical architecture of a blockchain is similar, or in the case for EVMs almost exactly the same, the value comes down to the community of adopters and developers who are facing their use and development efforts squarely on a particular blockchain. It’s for this reason that developer evangelists are so prized: they hold the key to swaying the best developers and thinkers towards active development on one blockchain and away from another. Getting paid is a huge consideration when a developer eyes a blockchain for development so a demonstrated willingness to invest in hackathons or issue generous grants has the dual effect of stirring up goodwill and building great blockchain-specific applications, which inspire further innovation and a vibrant community around its utility.
Alesia Haas - Coinbase
"Existing laws regulation and legal precedent make it clear that blockchain tokens are not securities so we believe that the law clearly shows that blockchain-based digital assets are one of two things: either a new form of digital property or a new way to record ownership."
The biggest hurtle that Coinbase has to overcome is divorcing the notion that cryptocurrencies are securities. The difficultly is that many of the checkboxes that securities tick, cryptocurrency would also tick. One of the sticking points is often the ability of it as an asset to, appreciate but, when you take a step back, a work of art is essentially buying equity in an artist. You’re buying it for its aesthetic appeal, but also with the hopes that your sharp eye for talent will make you an early patron of an artist that grows to levels that ultimately land their work at Sotheby’s and Christies. You’re making a bet on a person in a way that if you made a bet on a company would fall under the securities umbrella.
The only escape from this constraint is be granted accredited investor status. Whether the accreditation laws are befitting by making income and wealth the core determinate of financial literacy is up to interpretation, but, for Coinbase, with the largest use base in the ecosystem and a sky-high market valuation with an aggressive valuation multiple on their earnings, it’s imperative that crypto be positioned as far from the SEC as possible, and, in an ideal world, outside of the purview of any regularity agency that can act authoritatively to impede their access to the American general public.
Next Articles Topics: Inflation, Decentralized Social "DeSo", Ethereum Virtual Machine sidechains
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