Section 5. Market Infrastructure - Transcripts

January 11, 2022

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Key Trends, people, companies, and projects to watch across the crypto landscape with predictions for 2022


Section five, Market Infrastructure Section 5.1. The Bitcoin futures E. T. F. Are state sponsored pieces of ship.

The Bitcoin futures et. S. That were approved in mid october are terrible for non Wall Street investors, despite nominal fees of just 65 to 85 basis

Points, it's likely these toxic assets will cost investors closer 5-10% per year in hidden costs due to their structures. Bitcoin's ongoing volatility and the markets long term bullish trend Bloomberg even went so far as to note that Kryptos money printing machine has turned back on since funds like pro shares, B I T O N. X X B T. F. And valkyries B. T. F. Are required to roll the underlying

Bitcoin futures whose long dated contracts have consistently traded at

higher prices than short dated contracts that contango bleed accrues to Wall Street market makers at the

direct expense of E. T. F. Holders. Arthur Hayes has a great post on how these work in plain english. This future structure is arguably necessary for E. T. S. That track physical commodities like oil, where

it's difficult or impossible to take physical delivery of the underlying assets. Remember last year's havoc when oil futures went

negative due to supply chain issues and storage costs. But a similar structure is insane

for an asset like

Bitcoin, which has both a healthy spot market and a simple mechanism through which investors can custody of physical settled futures. Bitcoin wallets, we know from day one that the new Bitcoin E. T. S. Are losers. We need only look at similarly structured commodity E. T. F. To see how extreme the underperformance to spot is likely to get The oil futures et Fuso was down 38% in the past five years compared to a 62% spike in the underlying asset. Raul, paul put it best saying issuing the Bitcoin futures E. T. F.

Is a good step, but it's basically handing hedge funds a massive arbitrage opportunity as the futures will trade at a large premium in bull phases and they will get to capture those returns. This is the old financial market trick. You now have to add multiple new intermediaries who will all make profits. The ETF provider, clearinghouse futures, broker administrator, auditor, law firm CMI and hedge fund Arbs, Wall Street gets richer, retail investors lose again, if there's any silver lining here, it is ironically that Raul is right. Wall Street likes products that they can profit from and a spotty TF superior as it is, doesn't get those same juices flowing like piggies to a trough. Could be toe at. I'll finally get banks in on the crypto action the basis trade presents free money they can pursue within their tight regulatory confines. I suppose this could be a long term positive in the meantime, if anyone, aside from the brokers win, it will be retail users at coin base not be Toby T. F. X. B. T.

F. Losers. Ben Thompson also pointed out that at least we now know the net cost of regulation hundreds of millions of dollars worth of contango slash backwardation costs for products that make no sense. Other than that they are regulatory possible. The lower cost alternative to this madness. The spotty TSR once Gary Gensler is unlikely to approve any time soon the last chapter which is a perfect coda to a decade of blundering sec crypto policy. Public market

Investors missed 1000

X. Of appreciation in the Bitcoin markets since the Winklevoss twins first filed there spotty TF application in mid 2013. Now they can also lose 10% a year to Wall Street with a much lower upside Investor protection baby. I predict that the headline cost to these products will all be sub 1% but

their cost net of contract role

Will be greater than 5% in 2020 to 75% confidence. Section 5.2 Goldman Gary and the Red M. Redemption. One final reason Gary Gensler is a liar and a fraud when it comes to having

any interest in protecting

retail investors in the crypto markets has to do with Grayscale Bitcoin Trust slash G. B. T. C. Product which continues to be the most misunderstood product in crypto. I will do my best to briefly explain how it works. But the explanation could easily be 15 pages.

The information about the trust are all public

but you need to be sophisticated to even know what you're looking at in the filings

first. You need to understand the org chart

one. G. B. T. C. Is the public share float of the spot based Grayscale Bitcoin trust To the trust holds $40 billion 2% annual fee. Three Gray scale is the sponsor of the trust and sponsors a family of similar trusts. Four Digital Currency Group is the parent company 100% owner of gray scale. Then you need to understand the difference between gray scales product and a normal E. T. F.

A normal spot based commodity. E. T. F.

Like golds. G. L. D. Has authorized participants or brokers that create and redeem baskets of shares by trading the underlying asset and the shares they represent until price per share

equals the underlying

net asset value or navy.

If there's more demand for the E. T. F. Than the

underlying intraday the share price greater than N. A. V. Dynamic attracts brokers to buy Bitcoin, create new shares by sending that Bitcoin to the trust vehicle, then sell the newly created shares on the open market. When share prices are less than N. A. V. The reverse happens and the broker will buy shares to redeem them with the trust and get their Bitcoin back these creations and redemptions take place daily to ensure the market price of the E. T. F reflects the underlying assets, less the sponsors management fees, the grayscale trusts aren't like that. The G. B.

T. C. Shares you see today have come to market through a loophole and securities laws that allow gray scales authorized participant yet another D. C. G. Affiliate genesis global trading to raise money for its trust from accredited investors who can then flip the newly created G B T. C. Shares on the public markets. Otc markets, not new york stock exchange after a six month seasoning period through something called Rule 1 44. I've called this quasi E. T. F.

Or side door E. T. F. Or Faustian bargain in the past, it looks like an E. T. F. But for the fact that one, the public float hits the OtC markets in slow motion after the six month lag and two, there's no

redemption mechanism to get your Bitcoin back by converting the underlying shares.

That last point is important as we'll see in a second. It's a one way funds flow. The rule 1 44 loophole paved the way for accredited investors to pile into gray scales trust early, then flip them to retail for mega premiums. After the lock up period

for a long time, demand for publicly

traded Bitcoin vehicles exceeded supply and G B. T. C shares were the only game in town while the sec dragged its feet on other E. T. F proposals. This persistent public market premium was a great


mechanism for gray scales trust

and early investors made a staggering amount of money off the spread billions

in total at the expense of retail. And with the implicit blessing of the sec, the G. B. T. C. Premium lasted a lot longer than most people expected. But as Bitcoin got much easier to access as an institutional investor, the overcrowded grayscale trade flipped negative. Newly created shares flooded the market in Q.

one and we now

have a persistent deep discount. Remember if this were an actual E. T. F. The premium wouldn't have existed and accredited investors wouldn't have been able to dump on the retail investors for years. Strike one sec. It would also mean that the trust massive and now likely permanent discount to Navy would close overnight. As investors would choose to redeem G. B. T. C. Shares for Bitcoin in the trust that are 15% more valuable in the spot market and would rationally do so until the N.

A. V. Gap closed commissioner's refusal to approve a spot TTF continues to punish investors who are stuck waiting for a return to N. A. V. That may never come and must now eat an annual fee of 2% from grayscale. Strike two sec. There is a third path and an escape path for grayscale investors though. While Grayscale can't run a continuous offering of new shares an offer redemption program concurrently, they were slapped for doing so in 2016 by the sec. They can pursue something called ragtime redemptions now that they have paused new share creations amidst the G. B. T.

C discount the issue. And you're correct if you've anticipated a wild swing and a miss strike three for the sec here is that gray scale can pursue this at any time but has no obligation to pursue Reagan redemptions especially for as long as they are also pursuing an E. T. F. Conversion which they did. The second two futures based DTs were approved in october. Grayscale is effectively saying a couple of things that are true but not the whole truth. We got in trouble for Reagan Redemption program in 2016 which is why we suspended it and

liquidity is available

for G. Btc investors in the public markets and we are trying to

close the a navy gap by converting

the trust to an E. T. F. Those are true and they're the party line. But the whole truth is that a redemption program is possible but they choose not to pursue it. Grayscale views their assets under management as operating leverage versus

the sec and it's E. F. T conversion plot.

But more importantly, they view it as a billion dollar guarantee gravy

train and permanent capital given the bits current hotel California structure. Grayscale as the bit sponsor is the ultimate decision maker when it comes to whether they one file for an ETF conversion which they did

to pursue a Reagan redemption program which they won't and three liquidates its trusts. Yeah. Right. In the meantime every D. C. G. Grayscale, G. B. T. C. Buyback isn't an indication of confidence per se.

So much as it is a money movement from one

pocket to the other to avoid shareholder ire they have no incentive whatsoever to allow redemptions.

Can you blame them? The sec is asleep at the wheel here and Gensler is complicit in allowing the 6-10

billion dollar gap between G. B. T. C. And the trust. N. A. V. To persist. Grayscale pursues an E. T. F.

They know won't come from this sec with 0% urgency. We won't do redemptions until the sec approves an E. T. F. Is a smart hostage negotiation when they are dealing with an optics oriented careerist like Gensler who will face zero critical

backlash from the press for a stonewalling.

This ship is too complicated to rile people up so investors lose while Gensler and Grayscale win. That brings us to the frequent news this year from D. C. G. And their announcements regarding G. B. T. C. Repurchase authorizations at writing. They approved $1 billion though they had only executed $400 million worth of transactions. This isn't heroism, it's a riskless option on writing investors think D. C.

G. Can close the N. A. V. Gap impossible given the size of the trust. But what's really happening is that either a, the E. T. F converts and the G. B. T. C. Comes back to par D.

C. G realizes G. B. T. C gains B. The assets under management sits there and D. C. G pays itself through gray scale, The 2% management fee on its G. B. T. C. Shares or see they do finally roll out a red gem redemption program or liquidate the bit and get their Bitcoin back at par.

After I wrote about this last month, one lawyer pointed out that these situations get into court all the

time, definitely possible, especially if grayscale continues

to collect fees while doing nothing about the discount. Remember they have a fiduciary duty to the trust? Okay, fine. But remember they can argue that they are taking steps to close the gap via backups and the E. T. F. Application. They may be untouchable in that regard. But I think it's fair for people to warn newer investors about the toxicity of gray scales, newer trusts which tend to perform even worse prediction. Barry Silbert is Gary Gensler's Daddy 100% confidence. Grayscale wins and continues to make a mockery of the sec investors loses. G Btc trades at an average 15% plus discount to N.

A. V 75% confidence with no Reagan program or E. T. F. 95% confidence. Further evidence that barry is a master at the secondary market and its information and legal asymmetries is D. C. G. S recent $10 billion valuation, which feels like a 60 to 70% discount for a company throwing off nearly $1 billion in annual E. B. I. T.

D. A. With billions on its balance sheet. Section 5.3 lender reserves. This hurts me to write. But stable coin and lending product regulations would be a good thing for the industry. We sort of lost our high ground once we started to see

some of the assets,

stable coin issuers and lenders were warehousing on balance sheet this year, including grayscale shares.

Tether may hold too much commercial paper.

See you later this chapter. But block fires

assets might be more eye opening. I'll pick on them

A. Because I have assets there so I think it's safe. They are in the regulatory crosshairs already so they are relevant. See they got caught with their pants down in a bad prop trade so you can see this isn't just theoretical

D. They are very well capitalized. So

insolvency suggestions are not


and e this is all

public information.

Here's what we know about blackface Q. One. The black reported in january that black fire was just shy of $100 million in revenue in 2020. With $30 million coming from G. B. T. C. Premiums in the gray scales trade and 55 from institutional lending. Block five was one of two firms alongside three arrows. Capital who slammed the grayscale trade hard enough to trigger 13 G. Disclosures with the sec By February 11. Block

Fi set at one

$7 billion of G. B. T. C. Shares and an unrealized 100 $50 million gain. Days later, GBTC prices began a two week 25% Nuke vs Navy.

Whatever exact amount Block five failed to unwind during that time period. Immediately flipped to 100 to $150 million unrealized loss. Ouch. The company announced a 350 million

dollars series D just weeks later, coincidence or a solvency booster I think the former but the announcement certainly seems to have been fast tracked was blocked by largely

responsible for finally breaking the grayscale trade. Well, here's a plausible

explanation for what happened in february as the G. B. T. C. Premium narrowed and an opportunity cost of rose. The

Black Fire risk team would have naturally wanted to cut down the position given black fives outside exposure.

Remember this liability would only grow with an appreciating Bitcoin price. Unwinding their steak could have caused a vicious selloff below the Nav Mendoza line until the Black

Fire risk team felt

comfortable warehousing the remaining underwater position and implementing a strategy to write off the

remainder of the bad investment. Indeed

by june 24th block fight had gotten out of 45% of its position, which means they may still own upwards of a billion dollars worth of underwater G. B. T. C. Which they hold at a 10% unrealized loss plus the 2% grayscale management fee plus black fives depositor interest rates, It's okay. Block five will live in their balance sheet can absorb the shock even if the position gets fully unwound at a loss. Perhaps block five is already out of the trade entirely by now. I doubt it and or it has more than made up for the bad bet with its other defi bets and institutional lending. The fact remains though that it took financial disclosures on third party filings to highlight that this was even a potential risk to what is now a $10 billion plus crypto lender with 500 K. Retail clients. It also highlights the challenge G. B.

T. C. Will face in rallying back to N. A. V. Wales will either

eat the 2% and pray for an E. T. F.

Approval or sell bounces above say 90% of the navy. Now that we know about the sausage factory, it might be somewhat charitable to say that today's crypto lending products resemble money market funds. Block fires at least are much riskier which doesn't make lending and stable coin regulations look so crazy after

all. Matt Levine had the best right up on the

issue with coin based lend and nailed the punchline saying,

look I get it from the perspective of coin base and its customers and frankly most of the normal people interested in crypto people would like to lend their bitcoins. It doesn't feel like a security. It's kind of annoying and archaic that a

1946 Supreme Court case says that it is. But also this isn't

a stock or bond or

note or investment contract or a personal iou or syndicated

loan. It's a fully collateralized bank account with 100

reserve ratio. Banks hold your money, use it to fund loans, pay you interest, pay back even if the loans default. The whole

thing is seamless to you etcetera. It's just a bank account. As I said in the last chapter, we have to hold the high ground.

It's a bit silly to warehouse a ton of risk on your balance sheet. That may cause major solvency issues. Never disclose the composition of your reserves or lending book and then expect no response from policymakers. We need proof of reserves for lenders and custodians. I think I covered this in the last section but I think the crypto lenders will face tough regulations this year. The B two B desks essentially securities lenders will be just fine

but the retail lending

players might not be welcome in the U. S. By year. End 5.4 psi phi

versus trade fi.

I still don't think people really get it. Banks. Legacy trading desks, major asset managers, they can all enter crypto and probably will sooner rather than later with a variety of offerings. But the game is basically over short of indiscriminate crackdowns, record setting m and a deals or something similar. Crypto C. Five firms have one and will not see their leads back to Wall Street. The same regulatory risks that loom over the industry. Keep trade by organizations on the sideline, handicapping them from developing the institutional knowledge and human capital base to compete

long term and regulated

crypto financial services. Sure there will be more crypto innovation groups, crypto executive officers and press releases. God wait until you see the press releases. Crypto companies are simply bigger, faster, more aggressive and unshackled by the distractions of maintaining 50 year old parallel trade by infrastructure. Talent pool only moves in one direction to into crypto where we're still early in the multi decade migration of financial, technical and creative talent to crypto Investors are not going to goldman for Otc borrow before they go genesis which has originated $100 billion 2.5 years. They aren't opting for CMI over finance or F. T. X. Futures. They aren't even looking at Fidelity before they look at coin based institutional which now counts 10

of the top 100 hedge

funds as customers. And Fidelity is arguably the best in class among legacy players when it comes to crypto innovation. The F. D. I. C. Will use Anchorage to manage orderly bank liquidations. It's over.

We're not stuck waiting

for the institutions to arrive. Were the barbarians at the gates, eating all of their lunch nom nom nom I write with satisfaction as I think of every slicked hair Blockchain, not Bitcoin 2015 vintage banker with each one of my victorious keystrokes. A message to trade fi insurgents. Don't let my ribbing discourage you. It's smart to help us bring crypto into your organization's, you'll be an internal hero. You'll get a big bonus. Then you'll get a promotion when you decide to leave and join a crypto company. Remember you're auditioning for your next role

in defi Section 5.5 Sex ed,

decentralized exchange growth has been nuts. These protocols

often offer a

better user experience, asset coverage accessibility than their centralized counterparts and they've done a good job in sopping up liquidity from global exchange also rans jane analysis says 200 sex shuttered year over year down to 6 50.

The decks momentum will persist for long tail assets and new synthetic instruments alike is decentralized markets that build

off open source code will

be broader and more dynamic than their centralized counterparts. By definition we have a whole chapter dedicated to

defy and we'll chat

more about DEX is in chapter

seven for now we'll stick to kryptos mammoth centralized exchanges Today there are basically three tiers.

The top three God tier

exchanges are coin based finance and FDX where primacy will likely come down to new products and regulatory winds.

Then there's Kraken

Ub Q.

Coin gemini.

Okay. X. And bit finex in the behind the volumes camp but could still dominate if any of the top three fall or stall.

There will likely be a healthy dynamic among this

group where market share ebbs and flows. There will also be regional winners

a bit in Korea bit flyer in

Japan bit so in latam coin switch, cuba and India Luneau

and africa,

etcetera. I'm only going to cover the top three exchanges here. If that's disappointing, then you can write your own end of your book. Coinbase has analyst coverage. Now, if you want to learn more about them in particular, I touched on some of their advantages in the Emily Choice Section two staggering growth. First mover advantage free marketing from their status as the first crypto I. P. O. Liquid

equity capital

with which they can splash the pot on additional accretive acquisitions. They've proven to be highly lucrative given their installed user base steadiest regulatory positioning out of the top exchanges today. But it's their Web three initiatives that may be most interesting. I'm keeping an eye on their coin based wallet and Dow

plants, not to mention their upcoming N. F. T. Marketplace

Finances. The most interesting player, not to mention the largest out of the Big three. It's arguably too big to fail, but they certainly have their work cut out to clean up the regulatory image. They've been getting chased around the world for the past year or so and sounds like a guy who's finally ready to settle down after a good run as jurisdictional bachelor.

My bet is that finance probably needs to take on a government

as an investor at this point


maybe they are so large that regulatory remediation is may need to happen via treaty versus private negotiations. The regulatory

hassles have kept the

company's performance somewhat

under the radar, if that's possible,

everyone has been talking about coin based in FT. X this year. While the BNB token, a

Shadow steak and just 20% of the exchanges profits crossed $100 billion dollars in market cap for the first time this fall.

Don't actually me. I know if you want to

know where the puck is heading though, I'll highlight F. T. X. A lot of ink has been spilt

Writing about Sam Blankman free this year, chaotic, good, wealthiest person. Under 30

effective altruist size chad impersonator. To be honest,

it's well deserved FDX moves at an otherworldly speed and has built a $25 billion dollar business in less than three years. With under 100 employees. They're the fastest growing company of all time out of coin base stripe and even finance. And they did it in the ruthlessly competitive crypto exchange market.

Here's how they did it

In just 10 easy steps.

Number one leverage capital and street cred from being one of the top traders on bit max. Number two make the markets during F. T. X. Startup period with your sister prop desk number three. Build product

for traders by traders. Things like leveraged tokens and tokenized stocks. Number four, use a token to incentivize

early customer

acquisitions since

switching costs are high,

Number five by the

largest mobile onboarding platform available in black folio.

Number six become the second largest donor in the world to the future. President's campaign.

Number seven spend a staggering $500 million dollars on sports marketing to build

brand awareness.

No eight, pick the right layer one Blockchain to help

scale a defi ecosystem around Selena No nine. Use that to become a

god for early Bitcoin is to

rally around outside of ethereum Number 10 rays, eye popping

amounts of money in memorable increments. If web three makes everyone an investor then FT X at all wants to own the internet scale exchange at least one of them

Will realize that vision by 2030

we'll see a trillion dollar crypto exchange.

Section 5.6 Crypto securities and I. L. O. S. Still waiting for that rat counselor to get his team to approve any of the crypto exchanges in house 80 S. Is rather than continuing to slander its applicants. In the meantime, there's only one digital securities platform worth noting Republic crypto Fresh off $150 million dollars series B.

Republic looks interested in building a secondary

trading platform for digital securities, something that might become more widely interesting as private company valuation soared to record heights and the accredited only secondary trading process gets standardized. They're also worth watching as they may be a primary Beneficiary in doomsday scenarios where most crypto projects are deemed securities ceo Kendrick Quinn hasn't shied away from that reality saying everything that republic does everything we touch, we treat them as securities by and large and fit them under the existing framework of US securities law. Still, it's another new republic product that I'm more interested in initial litigation offerings. If the threat to crypto comes primarily from F. S. O. C. Regulators, then creating a fund to relentlessly counterattack via lawsuits. Maybe a more productive use of capital than campaign financing.

Section 5.7 bag holders and stay acres custody is where the rubber meets the road between crypto and trade fi, taking custody of customer funds, opens the door for staking lending market, making governance participation and more. It's the one obvious area that crypto companies should be and are regulated. Most of the M and A activity will see among trade fire entrance to crypto in the coming years will be in

custody and

most of the investors and network participants will see enter the crypto economy will choose hosted custody over self custody for safety and security, dedicated

custodians like Anchorage bit

go fire blocks and ledger have all recently hit unicorn status as traditional fund interest has exploded, corn based cloud the bison trails infrastructure

shows how insanely lucrative the hosted node in staking services market is for these groups, it

raked in $80 million in Q three staking revenue alone and other infrastructures like block Damon figment and alchemy have raised massive

sums to follow suit.

The risks of concentrated custody are lower than they may appear at first glance, coin base holds 10% of all outstanding Bitcoin. But half of that is due to its role as grayscale. Bitcoin trust custodian By comparison ledger is estimated to hold 15% of all crypto. So the assets under self custody via one company's hardware wallets eclipses the largest centralized exchanges assets under

custody by a fair margin

at scale. I guess we'll probably see a 50 50 split where savers keep large investments in custodial or semi custodial multi sig accounts and retain ownership over their more dynamic liquid holdings in something resembling a checking account Section 5.8 coin list a global token issuance platform except in the U. S. And north Korea. I know you're thinking stop, stop.

He's already dead when it comes to gary guns learned as sec but I'm going to

continue my assault until he and his minions stop attacking innovators in crypto and tell the truth about the underlying market. They've crossed a line from being naive to intentionally misleading and someone needs to call out the lies up next I. C. O. S. And their historical performance. Commissioner Caroline. Crenshaw actively campaigned against the pierce safe

Harbor recently. She claimed that the 2017. I see. Oh Euphoria would have been even

worse if a safe harbor had been in effect. I. C. O. S. And other digital asset offerings raised billions from investors but most never delivered on their promises. She warned

without evidence,

Let's give her the benefit of the doubt though.

It's a sensible thesis as

most startups also fail.

How did the markets

do as a whole? Well, token sales have actually performed better as a class

of investment than the S. And P. By more than an order of magnitude,

Token sales have raised about $20 billion dollars all time

Finance or BNB alone has delivered a 5X on that entire

Initial investment. Here's the actual math for the seven token selling projects in the top 15 by market cap. BNB comes in with a valuation of $109 billion dollars Soul at $72 billion dollars 88 68 billion polka dot at 46 billion luna at 23 vax at 21 billion. And link

at 15 billion.

That's 300 and

$50 billion dollars of value creation

On just 500 million of invested capital. More than enough to offset all the losers. Nearly 20

X over by themselves and

That excludes ethereum is $550 billion 18 million

In crowd sale proceeds in 2014 for the token sales that underperformed and or didn't deliver at all and or work complete

scams. A good safe harbor would have turned

These 10uous, unregistered security cases into slam dunk fraud cases.

It's nonsense to claim that tokens as a class have been bad for investors. If anything, they serve as an indictment of the sec investors want and need alternatives to today's stock market participation. In the token economy with just about any level of diversification has historically

minted winners take mason's recent analysis of coin list sales

which also makes a mockery of crenshaw's claims while the US is listed next to north Korea

in the list of excluded

countries for participation in most of coin list sales, Here's how $100 invested across each of their 1st 20 sales would have actually performed Solano would have gained 1,218%. Return Flow would have gained 541%. Return File coin would have gained 1,195%. Return Near would have gained 658%. Return. Miner would have gained 43%. Return. Internet computer would have gained 377% return Block stack. 517% return Cello. return Origin 377% return Ocean 2463% return Casper 90% return Infinity 7% return Centrifuge. The only negative percentage at negative 427% return Covalin, return Cadena 1115% return Vanga swarm and human all at 7% return Nervous at 1461% return Al Durant at 948% return And props at 517% return.

The only question

in this analysis was whether coin lys investments outperformed as an investment, not whether it delivered a positive return in the period evaluated. Only

two tokens were trading under the coin list selling price. One of them props was effectively destroyed as their decision to comply with sec reporting and securities restrictions under reggae A made their network unusable.

The other

came with an embedded

put option for coin less buyers. If you had invested blindly with $100 across each coin list sale,

You'd have deployed 2000

dollars and returned $150,000 with a 100% hit rate. Aside from the sec sanctioned project. It's disgusting

and current sec leadership deserves your wrath to add

insult to injury

coin list which was spun

out of angel list. A company that helped author the jobs act in

an attempt to loosen existing securities laws

Recently raised $100 million $1.5 billion dollar valuation despite being unable to sell to us investors.

The infrastructure is there to facilitate compliant user friendly fair,

long term oriented network,

decentralizing token sales

on american platforms. The sec is just grossly negligent. Section 5.9 Rag Tech. If you want to

enter the crypto Frey as an investor or contributor but also want to feel like you're a sheriff in the wild west working to bring order to the frontier then KryptoS read tech plays are a good place to start.

Kryptos Read tech leaders are the front lines of our defense and they are very often a bridge to the more reasonable good faith regulators on the other side of the aisle.

Remember A 16 Z's Katie Haun was a federal prosecutor before she joined Coin Baseboard.

Public block chains are open to inspection by their nature. So it's a good thing

that these companies help authorities with probable cause.

Nab money launderers, tax evaders and terrorists. Strong compliance tools helped bring credibility to our claim that public block chains make

cryptocurrencies, terrible

vehicles for crime. They are fud busters. It was indeed a banner year for AML solutions like chain analysis. $100 million from co two benchmark Excel at a $4 billion valuation elliptic, $60 million from evolution and softbank and cipher trace $27 million from third point same with tax solutions as tax bit leapt into the unicorn club 130 million from paradigm insight and tiger global crypto data and governance platform SCC killer and superhero Factory Massari also had a good year raised 21 million from 210.72 ventures and all of the

major US crypto exchanges, you

don't need to be a complete renegade to have some fun building in crypto

by the way we're hiring for dozens of open

roles. If you're a developer that likes data infrastructure and DAO governance tools and you want to stick it to the sec to check out our careers page. We also made CB insights Fintech to 51 of the only non unicorns to make it on the list.

You know what that means?

Section 5.10 payments innovation Once again, this section in and of itself could be a full report. I'm going to leave a lot out or kick it down a level to the stable coin section for further color where appropriate to me, the most exciting trends in crypto payments are probably obvious. Stable coins have exploded settlement volumes on both Bitcoin and ethereum are up by multiple orders of magnitude in the past couple of years and every time I send a U. S. D. C. Payment to fund an investment, I weep tears

of joy that I don't have to initiate a wire

on a banking interface that looks like it was designed by someone

who still plays

frogger in their spare time. These are obvious. I'd rather talk about all the unique

upgrades we've seen so far this year in payroll integrations. Superfluid

streaming payments, quadratic payouts and integrations with new customers like charities etcetera. I'm going to show my angel bags here because none of these companies have tokens and they're all killer payments infrastructure businesses that have seen volumes go vertical this year payroll Juno. I have been banging the drum about the need for crypto payroll solutions for years, tools that streamline the integrations with big payroll providers and make it seamless for employees to receive crypto salary while also satisfying tax compliance needs. We're using Juno for a crypto payroll and I even recommended it to the Miami mayor. How's that for

investor value, add

streaming payments. Superfluid, I love streaming payments

Back in 2015. We were the first investors in stream iem

a Bitcoin streaming payments company that works sort of like lightning before lightning network streaming um, pivoted and became open Zeppelin on Bitcoin today. A similar solution exists

with strike

most interested in streaming payment options on ethereum Superfluid can handle subscriptions, salaries, rewards or any other stream of value with continuous real time settlement, multi coin calls, it networked cash flow

quadratic payments.

Get coin okay, get coin has a token and I was unfortunately not an early angel investor but they are the first major project to incorporate quadratic payments, which is a killer. Crypto primitive Bitcoin powers public goods funding programs that are scalable community, vote on proposals versus committees open for debate and democratic without being plutocratic. This is how doubt. Treasuries will ultimately get unlocked effectively at scale charitable giving the giving block before crypto, I started a charitable payments company When I first entered the space, I thought about pivoting the concept to apply to crypto assets. It was too early but my thesis remained intact. Donating appreciated crypto assets offered givers a double benefit. You avoid capital gains taxes on the donated property and you get to write off the full liquid value of the gift. The giving block has crushed it this year by bringing this idea mainstream. They'll process $100 million dollars plus in donations and are just getting started emerging markets value. We still take stable currencies for granted in most of the developed world. That may be slowly changing with inflation at 6%. But it's been a fact of life for those in emerging markets like Venezuela who have experienced catastrophic currency crises and political upheaval.

I'd like to continue betting on the top Remittance platforms that bring payment stability to crisis areas regardless of their physical location. Using

stable coins.

Again, I'm not doing justice to everything that has happened this year in crypto payments,

it's just too big

coin base. Announced a partnership with Visa and rolled out its

coin based card

block. Fi announced a Bitcoin rewards. Credit card stripe is hiring a crypto team and added paradigm co founder matt wang to its board Mastercard partnered with backed Visa leaned into the punk rock it ethos by buying a punk ramp raised at $300 million. Moon pay raised at $3.4 billion plus it's all too bullish. I can't take it. Don't miss your chance to own one of Mazzari's first N. F. T. S from the Massari 2022 thesis collection. Each unique piece of crypto art tells the story of the year behind us and the year ahead. Check out the full collection designed by pop surrealist artist GN on Open C. Section 5.11.

The National Security case for Crypto dollars. One of the things that got me into Bitcoin in 2013 was a big short thesis on us government competence. I thought our national leadership largely due to the accelerating degradation of our two party

system and media

would lack the capacity to address structural challenges in any meaningful way

and that even if they did they would do so with the efficiency of

drunks. That thesis has been proven largely correct. Political polarization has gotten much worse deficits are at World

War Two levels because no

one can agree on a responsible budget and with interest rates near zero we've opted to monetize our deaths at massive scale. Some 40% of U. S. D. That has ever entered circulation was printed since the beginning of 2020. All that has led to the 500 x. Plus returns on my initial short

thesis via a

Bitcoin long. So it may surprise you to know that I'm actually very long. The U. S. Dollar for national

security reasons.

And because I happen to like this country even if I resent many of its leaders namely I believe one of the only ways out of our current mess is to leverage the remaining time we have wielding the globe's dominant reserve currency and begin to export crypto dollars, a digital cash instrument that has the full faith and credit of the US Treasury but can trade pseudonymously

would be amazing

and attract global counter parties. A close Federal reserve maintained central bank, digital currency

dystopian overreach would likely fail as

no nation state in its right mind would invite that sort of granular foreign oversight into its banking system. Why should policymakers embrace responsibly regulated stable coins? A

16 Z put it best saying the existing



of private usd, denominated stable coins can help the US act quickly to win the emerging geopolitical arms race in financial innovation. The United States should condemn the surveillance authoritarianism embodied in china's digital renminbi project, not attempt to imitate it. American policymakers should be cautious about building massive centralized payments infrastructure. Doing so would impose unprecedented demands on the government's limited capacity to stand up. Critical technology platforms, present significant privacy risks and create an immensely attractive target for Attackers regulated stable

coins. Can coexist with more limited C. B. D. C. S and add resilience to our

future financial system by removing a single point of failure. I agree and I believe that the only path to keeping the USD is the world's preferred reserve currency

is for the US to

embrace crypto

as Bitcoin's liquidity

increases in financial institutions and foreign governments hedge against US credit worthiness. We could see Bitcoin and other forms of crypto replace the reserves versus treasuries or we'll see central bank digital currencies with strong monetary policy guarantees more easily chip away at the U. S.

D. Lead the game theory here

is for the U. S. To ban its alternative or buy in as a life raft. The former won't work for long. The latter must section 5.12 Dc Ep. To be perfectly honest with you, I have spent approximately 15 minutes reading up on central bank digital currencies this year. I read and heard what I needed to several years ago when the concept was first introduced and ever since. Every headline I've seen essentially boils down to wow this is great. We can fully surveil citizens financial transactions and bring

rates negative when needed. No me gusta

china's Dc Ep

offers a special

sort of hell scape social credit scores

for the win and you'll notice this is one of the

only times I'm referencing them in this report because otherwise I don't feel anything crypto related in china as interesting. I would also like to not be imprisoned if I ever traveled to Hong kong again. So better to stay relatively mum on chinese geopolitics china is going to roll out its Dc Ep

in time for the winter olympics in a few months and my fear is that the major Western governments will view

this rollout as an incredible success and attempt to emulate the new

product as quickly as they can project off. They will fail of course

because those with the technical acumen to pull a project like this

off facebook's

scratch that metas libra, scratch that Novy are reviled by our government leaders versus aligned and partnered with them. Dc EP as with all CCP crypto policy is ultimately designed to eliminate leaks in the country's capital controls. One analyst says DC EP will reduce capital flight to Macau by $600 billion. My biggest fear is that this is just step one in a long term move to

displace the dollar

as an exportable reserve currency. If china is able to

create a two tiered DC EP payment system,

one that facilitates pseudonymous circulation abroad and fully surveil herbal transaction monitoring at home, it would function similarly to something like cash only rather than a shielded pool of Z addresses and a transparent pool of T addresses. You could have to transplant pools of RMB, a foreign pool with surveillance at the point of interaction with the chinese state and a fully unshielded pool of domestic RMB

where CCP authorities hold the second keys.

In other words, DC EP could soon be the leading digital euro dollar candidate china is now the primary trading partner for

most countries including the

EU if they offer even a small degree of privacy and a foreign circulating digital yuan. It could be a real threat to U. S. D. S. Reserve paradigm, Section 5.13 Fed coins and western

C. F. D. C.

S. It's natural that the West is feeling the pressure to act. The Federal reserve will soon release a report examining the costs and benefits of

owning its own C. B. D.

C. Fortunately this is a race that we're going to lose and frankly we should lose trajectory. We are on in the US and europe includes state run digital currency payment rails that would allow for ubiquitous transaction surveillance, censorship and negative interest rates that steel deposits as a mechanism to enforce wealth taxes or punish savers and periods of sluggish spending. We're trying to build a shittier version of china's Dc EP, but without the requisite authoritarian values to pull it off. In the West, we have no competitive advantages. They would move faster with better coordination and enforceability of adoption and start with a larger trade network. Our only interesting advantages, respect for privacy, openness, a commitment to rule of law etcetera would be more or less absent from a C. B. D. C design. While a C B D. C would further deputize our payments companies to surveil customers even as it threatens to dis intermediate them.

Snowden calls them CF DCs. The F is for fascist and I like that framing modern governments have not been good stewards of the public's trust. It would be insane not to fight their efforts to install themselves into 50% of all transactions, especially when the government subject to court checks and balances and already act as an effective two of three. Multi sig signer in modern bank accounts and even more, especially when better alternatives are already present during testimony before the senate banking committee fed chairman Jerome Powell seems to agree. He told the committee he remained legitimately undecided as to whether the benefits of a C. B. D. C. Would outweigh its potential risks and offered that a better solution might simply involve the cleaner regulation of stable coins. 5.14 U. S. D.

C. And brother jeremy. When I started writing this report

I didn't have jeremy Allaire. Maybe the world's savior in my

outline. But hear

me out actually

go watch jeremy wrap first then

hear me out.

The jeremy is crypto dollar jesus thesis

in four parts

number one we should rally around liquid well regulated stable coins that are integrated across the crypto ecosystem and circles us Dc and pack So those are the only serious contenders today. Number two

USC is

the only stable coin interoperable already between finance coin base and Kraken annual hobie and Okay. Ax and it is a stronger defy bridge versus packs owes to absorb market share from tether. The winning, stable coin must be ubiquitous and U. S. D. C. Is an order of magnitude larger than Paxil dose three are alternatives as a country are to watch Dc Ep replace the dollar as global reserve will compete china with our own full surveillance currency. I don't predict a kind public response or rally around fully reserved, well regulated, stable coins number four.

If the dollar loses its reserve currency status,

it will be very bad for global geopolitics. I'm not sure such an epic transition of power would be peaceful. Doesn't sound so crazy anymore. There's a lot to like about us dc. It's already multi chain accessible on ethereum and it's layer two's Selena calderon and more. It's the most liquid stable coin. And defy circle releases monthly audited reports

of U. S. D. C. Reserves

from top five auditor grant thornton, US DCs creators circle and coin base have street cred having worked feverishly on building compliant crypto payments infrastructure since 2012 Circle may also benefit from the public company halo effect once it lists via S. P. A. C. And adds nearly $500 million in additional cash to its balance sheet. Financial inclusion and humanitarian aid is at all a priority for this. Administration circle has also done some legwork there already with the U. S. Government.

U. S. D.

C. Is one of the most promising currencies that balances broad affordable payment access to underserved communities and legal and regulatory compliance. 5.15 when Paxton's met Novy Paksas has emerged as the backbone for institutional entrance into the stable coin market. If regulators Think circle is playing too fast and loose and defy there's always an alternative this year, Paxson's deepened its partnership with Paypal by integrating with Venmo. they teamed up with Mastercard, they began powering crypto trading on interactive brokers. And then there was the real prize the Guatemalan pilot launch with facebook's Novy wallet.

Even if no v plans to

eventually move

over to its diem currency, the process may take years and is by no means guaranteed

Paksas Usdp could explode in size and volumes in the meantime as Novy marches against an ambitious roadmap one that could have an immediate disruptive impact on less scrupulous financial services providers. As I wrote last year, the US will have a proliferation of non bank financial crypto dollars. Years before we see an iota of progress on a similar scale. Central bank digital currency

we will win if

we continue to lean into that lead especially since stable coins are in many ways the perfect reflection of our inability to innovate within the regulated financial system. The byproduct of our original sin excluding

crypto companies from banking

services. If you still doubt that regulated stable coins are our future, then you have a homework assignment, send one wire and one stable coin transaction this week