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- [00:00]
Aseeb
So the first thing is, like, looking at it as an investor, it's pretty clear that there were some real big diligence failures here by everybody who underwrote this. And just, you know, you don't touch. You don't mess with sanctions. Sanctions are really, really serious. And your exposure under US Law, sanctions are strict liability. It's not enough to say, like, oh, I didn't. Oh, ha ha, whoopsie daisy. Doesn't matter. Strict liability means that you violated sanctions. Punishments. Come on. You, regardless of what your intent was, not a dividend.
- [00:28]
Tarun
It's a tale of two Kwan.
- [00:29]
Aseeb
Now your losses are on someone else's balance.
- [00:32]
Tom
Generally speaking, airdrops are kind of pointless anyways.
- [00:35]
Aseeb
Unnamed trading firms who are very involved.
- [00:37]
Robert
Alec Eth is the ultimate defi protocols are the antidote to this problem.
- [00:43]
Aseeb
Hello, everybody. Welcome to the chopping block. Every couple weeks, the four of us get together and give the industry insider's perspective on the crypto topics of the day. So quick, controllers, first you got Tom the defi maven and master of memes.
- [00:54]
Tom
Hello, everyone.
- [00:56]
Aseeb
You got Robert the crypto connoisseur and czar of Superstate.
- [00:59]
Robert
Good morning.
- [01:00]
Aseeb
So you get to run the giga brain and grand poobah at Gauntlet, Yo. And I am Aseeb, the head hype man at Dragonfly. We are early stage investors in crypto. But I want to caveat that nothing we say here is investment advice, legal advice, or even life advice. Please see chopping block XYZ for more disclosures. So it's a very joyous time in America because a new colony just dropped. Apparently, we are now taking over Venezuela. So surprise, it's morning in America and unfortunately, Venezuela has been a little bit of a complicated situation. So for those of you who are living under a rock, the president of Venezuela was basically picked up very kindly by American military and brought to New York, where he's now facing charges. And as part of this invasion of Venezuela, turns out crypto actually had a lot of intersections with what happened in the takeover of Venezuela. So first, there was a rumor turned out to be unfounded that Venezuela had an enormous portion of their holdings in Bitcoin. This. It looks like this has been invalidated. It seems to be not true, that. But however, it is proven that they were using tether very extensively in their purchases of oil to get around. Obviously they were sanctioned and so it was difficult for them to transact in dollars. And so as a workaround, apparently they were using quite a bit of tether to get access to this now there's a bunch of companies on the ground in Venezuela that were growing quite rapidly before the invasion of Venezuela took place or whatever. Not invasion, whatever you want to call it, the capture of Maduro took place. And one of these companies is a, called Contigo. So Contigo was founded relatively recently. It was a YC company by Y Combinator which is a big startup incubator in Silicon Valley. And so Contigo, interestingly they got hacked just a couple of days before the capture of Maduro. So this was perceived to be a little strange. Just the timing of this of like, okay, wait, the money is gone. Seemingly right before Maduro is either seized or potentially some people speculate that he may have been given up by some people who are inside the administration who collaborated perhaps and wanted to see some turnover in the power structure in Venezuela. And then just on January 11, FinTech Business Weekly dropped a gigantic expose on this company, Contigo. So a little bit of background. Contigo, Contigo was supposedly one of the fastest growing companies that have come out of yc. They were doing basically reminiscence Apple for Venezuelans. They were on the ground in Venezuela and they allowed you to get, you know, like many of these fintech apps that use stablecoins underneath the hood. They allowed you to get dollar banking in Venezuela. But interestingly they were using two Rails in particular. So one, they were using these JP Morgan smart accounts. So these kind of just in time accounts that you can get without actually being yourself a J.P. morgan customer. So they can have these accounts on behalf of individual users. And as well they were using a bank that is a Venezuelan state bank and they had one of the only two crypto licenses in the country by the crypto regulator in Venezuela. And so this expose revealed that Contigo in some way seemed to have been enabled to transact with sanctioned entities despite the fact that they were using US Banking Rails, they were using JP Morgan Stripe Lead Bank. And supposedly there's speculation, I didn't see any proof of this, but there's speculation that there were ties to Maduro's son who was somehow connected to the startup or invested in the startup or something that allowed them to get access to the license as well as these, these, these Rails. So how are they making all this money? You know, supposedly they were on, actually I don't remember the number but you know, tens of millions of run rate. They were on a very, very growing at a very, very rapid clip and supposedly the reason why they were making so much money is basically that they were getting access to US Rails but they were allowed to essentially play both sides of the black market on what's the currency? Boulevards. Yeah, exactly. So basically they were able to transact in the black market for Bolivars, but also get the reference rate, the sort of fake rate that the government is giving you that's not the actual market rate. And basically they were able to arbitrage between these two, which of course if you can arbitrage capital controls with a license, that's an amazing business. And effectively that's the accusation is that that's effectively what they were doing in violation of sanctions. So now the company has denied all of these allegations. The CEO is now on Twitter saying that he's going to sue people for repeating these allegations. So typically these are allegations. No idea whether or not these are true. But a very curious situation because in many ways this story strikes at the heart of what stablecoins are about. We have advocated for a long time that a big part of the banking of the unbanked, a big part of the value of stablecoins is that they extend the reach of the dollar into many of these countries that otherwise would be dollarizing.
- [05:44]
Tarun
Right.
- [05:44]
Aseeb
But for capital controls or for restrictions that people place on individuals. And one of the reasons why stablecoins are so attractive is because they allow individuals to route around these controls. Now at the same time the companies that enable that something like Contigo is doing so potentially in violation of sanctions. So it's a little bit of a, you know, it's a very sticky moral quandary because companies like Contigo, they are the core of what stablecoins do. A lot of the adoption of stablecoins is in emerging markets and it's doing so in contravention of what the government wants. But what individuals want, of course, like the people of Venezuela are being horribly repressed by their government. The Bolivars had insane inflation, one of the highest inflation currencies in the world. They're basically hyperinflating. And so people there informally are using dollars to get around it. But we've also sanctioned the government and sanctioned the banks and make it very difficult for banks to transact with Venezuelan individuals despite the fact that Venezuelan individuals aren't necessarily sanctioned. So all of that is backdrop. Wanted to get your guys reactions. What did you think about this Contigo story and how does it reflect about how you think about stablecoin sanctions and how all this stuff, how all the, all this stuff comes together?
- [06:53]
Robert
Well, before we go into Contigo let's go for the even deeper Venezuelan stablecoin backstory, which is I remember when Venezuela launched its own stablecoin specifically to evade US Sanctions, called the petro. Right.
- [07:07]
Tarun
This was supposed to be stable.
- [07:10]
Aseeb
It was tied to oil.
- [07:11]
Tarun
Yeah. I'm not even sure if it was supposed to be stable. I thought it was just like tied to oil.
- [07:16]
Tom
A barrel of oil.
- [07:17]
Robert
It was a barrel.
- [07:19]
Aseeb
Barrel of crude. It was a barrel of crude.
- [07:20]
Robert
Yeah, it was a barrel coin. But they launched a barrel coin specifically to evade sanctions, knowing that the inherent properties of a stablecoin was that it would be censorship resistant enough such that the US Government could not censor the transactions in the currency it failed to take off. It failed to get any traction whatsoever. But there's been very demonstrably long standing interest from the Venezuelan Maduro regime specifically to use stablecoins in a censorship resistant way. So I don't know the details of Contigo. I would not be surprised if there was cooperation or, you know, a closed eye or two or something more deliberate. The roots of them being familiar with crypto and attempting to exploit it goes back a long way. Right. This is not something that like the average American is like using stablecoins for sanctions evasion. It is regimes that are bad guys. Right. But this is a clear example.
- [08:24]
Tom
Yeah.
- [08:24]
Aseeb
What's your take on the moral side of this question of this story though?
- [08:27]
Tom
Yeah.
- [08:28]
Robert
I mean, the moral side of this is like you actually don't even need a stable coin, frankly, if there's any other censorship resistant assets. Right. There's Bitcoin, there's other crypto assets. Theoretically the stablecoin element to this only adds a dollar peg that otherwise wouldn't exist. I think there's a long tail and a growing list of permissionless assets. Right.
- [08:55]
Tarun
And.
- [08:57]
Robert
I think any regime that's under sanctions is going to find ways around it. Right. You know, you talk to experts about this stuff. Like every one of these regimes that's under sanctions finds an infinite long tail ways of evading it, whether it's through like physical barter of like oil and weapons and boats and things with other nations, you know, but like they're very hard to enforce outside of the US Banking rails.
- [09:21]
Tarun
Right.
- [09:21]
Robert
Almost everything else economically and financially that like countries engage in trade with is outside of like direct US control. And so, you know, if you're Maduro, if you're Khmer in Iran, if you're any of these regimes under sanctions, your goal is to continue trade in whatever format it comes across. It's frankly A little bit embarrassing when it comes into U.S. bank. Rails through multiple hops were complicit in this because somehow you know, a company was able to get licenses on both sides and nobody knew any better. But you know, I wouldn't be surprised if people unravel deeper things not just about Contigo, but about other fintechs that are somehow in the middle of this.
- [10:05]
Tom
Yeah, I think, I mean a lot of this also feels specific to like Contigo's business model like you said of kind of taking this big spread between the official rate and kind of the black market rate. I mean stablecoins and Tether, you know, huge. In Venezuela there's plenty of peer to peer markets. People can use any sort of wallet. I mean the same way in Argentina you would go to a cueva and exchange pesos for dollars. Similar kind of phenomenon. People have been doing that for a long time but then obviously you offer it through this app that then is connected into traditional banking Rails and that seems like where you run into issues with what they were offering.
- [10:36]
Aseeb
Yeah, it's surprising that this doesn't seem hard to have figured out. There were only two licenses given by the Venezuelan crypto regulator and Contigo is one of the two recipients and they were working with like. So I think Venezuela has like two state banks. They were working with one of the two state banks, both of which are sanctioned by the US government. So it's sort of like I mean did they. I mean I don't know but I can't imagine they did any diligence whatsoever. Or maybe they got the licenses after they were able to get the US banking relationships. That seems plausible to me that maybe they just didn't update the whatever when they were onboarding onto these virtual bank accounts that they had at these US banks that they just didn't circle back once they'd gotten these Venezuela licenses. But obviously I have no idea. Tarun, what's your take?
- [11:22]
Tarun
I'm more of the camp that any euro dollar like product eventually has this type of thing where there's somewhere in the world where the majority of their business model is arbing the fact that either there's some yield that's not accessible or a license accessible or sanctions. They're all kind of like there's a slippery slope and I think if your goal is maximum distribution then you're inevitably going to have this. And I think this more shows a failure of how KYC works and a lot of banking regulation in that it's a point estimate at one point in time. Right. It's like I KYC'd you. I never check again. Right. And to your point about like, oh, maybe they got the license after and then no one bothered checking. That is sort of why the whole KYC system seems kind of broken anyway in a lot of ways. Like there's no live measurement of anything, despite the fact that we have the Internet. Like, it feels like looking at a fax machine sometimes when you listen to like these procedures.
- [12:30]
Robert
Well, it's evolved from the Analog era, right? Like the rules were designed pre crypto. The rules were designed mostly pre Internet. The rules were, you know, it's evolved over time, but it started from a very low tech perspective of dating back to the day where people walked into banks and you got to know the person who was standing in front of your face and they said, you have to know who that is. How could you possibly do business with someone if you don't know them?
- [12:54]
Aseeb
Yeah, I mean, so I'll speak to. Because it's funny because I, I, I met this guy. Jesus, I think is the name of the founder. He was going through, he was going through YC and then he also went through what's the, what's the, what's the one in SF that's like, it's like 12 cohorts in Alamo Square.
- [13:11]
Tarun
HF0.
- [13:12]
Aseeb
HF0. Yeah, it also went through HF0. So I think we spoke to them. Then we ended up passing on the deal. Seemed like a smart guy. I didn't know that obviously. I don't know a ton about Venezuela. You know, I know as much as any crypto person knows, which is that it exists. It's, you know, it's a country that's going to go hyperinflation. It felt too early for us to really consider it, so we didn't go that deeply and I guess. So I'd say, I'd say a couple of things about this whole situation. So the first thing is looking at it as an investor. It's pretty clear that there were some real big diligence failures here by everybody who underwrote this and just, you don't touch it. You don't mess with sanctions. Sanctions are really, really serious. And your exposure under US Law, sanctions are strict liability. It's not enough to say like, oh, I didn't, oh, ha ha, whoopsie daisy, doesn't matter. Strict liability means that you violated sanctions. Punishments, come on, you, regardless of what your intent was. So sanctioned violations are very, very serious. Now, all that being said, so there's the legal question, which is like, and the investment question of what you should be doing as an investor, which is stay as far away from this kind of stuff as you can because it's very, very dangerous. And then there's the moral question. And the moral question kind of disentangles from the legal question. Right on the moral question. I think it's pretty clear that both from the perspective of morality and from the perspective of American interests, we want Venezuelans to use stablecoins like as America. The whole idea of stablecoin policy and internationalizing the dollar is that places like Venezuela dollarize and that's good for America. So in some sense, like this is what we wanted with the genius act. It's why we made it so that when we legalize stablecoins you do not need to kyc as a user of a stablecoin. Right. We don't care if you're Venezuelan, even if you are some bad guy or you're part of the Venezuelan government. If you're using dollars, great. We actually want the whole world using dollars. So in that sense, the expansion of dollars even into quote, unquote bad guys is actually good. That's part of the explicit goal of the geopolitical strategy behind stablecoins. And at the same time the other side of that of course is the crypto side, which is that the advancement of banking, the unbanked, giving people more human freedom and giving people more financial access. Companies like Tigo explicitly do that. That is what they do. I mean they do all this other stuff too of like our being the obviously this is how they make money. But the core product is just you got Bolivars, we're going to get you out of there, we're going to get you dollars. And to me that seems pretty obviously good for Venezuelans and one of the strongest arguments for why crypto is increasing human freedom and doing good for people. Now that being said, sanctions are messy. Sanctions are complicated because they're a tool that causes a lot of harm for this game theoretic purpose of basically bargaining with nation states. And you take the harm because you think that it gives you the bargaining power or it gives you some other advantage. I do tend to think that as a country we overuse sanctions. I think that we overestimate what they can do. I think actually they have a pretty weak record. But there are times when sanctions have been tremendously powerful, although it tends to mostly be the threat of sanctions rather than actual sanctions.
- [16:20]
Robert
I mean, I don't, I don't know if they are ineffective. Like, frankly, if you look at countries like Iran today that have. Their currency has completely collapsed, it's due to sanctions, right. If you look at Venezuela, their economy has also completely collapsed. Like, we, we do use sanctions as. As a nation, right. A tool of national security and national interest that I believe.
- [16:45]
Aseeb
Sanctions. The problem with sanctions is that they're very indiscriminate, right? Like we hurt the Venezuelans much more than we hurt the Venezuelan government. The Venezuelan government just started hyperinflating, extracting more, doing more and more damage to the people of Venezuela. So it's a targeted tool to attack a government sanction. Like, I mean, just look at Iran, right? Iran. It's so many decades that we've been sanctioning them and mostly the people have been hurt is not the Khamenei or however you pronounce his name. It's been the people of Iran who've been mostly hurt. So that's what I mean when I say it's a very blunt instrument and it doesn't have a great record relative to other ways of trying to depose regimes. Yeah, that's completely. I agree with that.
- [17:30]
Robert
It is a very blunt instrument, but it's also a very gnarly and effective one.
- [17:35]
Aseeb
It's very gnarly. It's a good way to put it. It's very gnarly. There's one more story about. Anyone want to comment anymore about that? But there's one more story about Venezuela I want to get to. So the other story. The other story about Venezuela comes from our good friends at polymarket. So there was a lot of hubbub right after the capture of Maduro that there was some trader on polymarket who apparently traded. The likelihood that Maduro would end up. I think it was that Maduro would no longer be the leader of Venezuela or something like that. Some market related to Venezuela's just Maduro. And they made, I think in the day before, or maybe even the hours before, $400,000 from what is perceived at this point to be some kind of insider trading on the capture of Maduro. And so this caused hubbub, front page news on Wall Street Journal. A lot of people were talking about it. What does this mean? It led to the proposal of a potential bill that would outlaw insider trading by government officials in prediction markets. It doesn't expand to everybody, but specifically government officials trading on information they learn through their work, as in the government. And a bunch of. About. Who could this have been? Was it somebody in the US Government? Was it maybe somebody in the military, people seem to discount the possibility that it was somebody in Venezuela. Like I sort of alluded that perhaps it might have been somebody in the opposition in Venezuela who sort of sold out. Maduro, knew that this was happening, was collaborating with the Americans in order to help take down the air defenses that we did, or to give up where Maduro was or what he was going to be doing. So there's a lot of potential stories about who could have been this traitor. It could have also been, to be clear, somebody who just saw something like, oh, I see some helicopter or I see like some other signature of military action that is uniquely. That I can uniquely see no insider information. I just saw it and I traded on it. The same way the guy who, you know, commissioned all these polls to figure out that, oh, Donald Trump was more likely to get elected than most people thought that guy had alpha that nobody else did. So curious to get you guys thoughts on the story because it's very polarizing for people.
- [19:36]
Tarun
I think we should get Richie Torres as a guest, given his. He's the one who's the most interested in pushing this.
- [19:42]
Robert
I agree.
- [19:44]
Tarun
Right.
- [19:44]
Robert
Come on the show, Richie. Let's actually talk about this.
- [19:47]
Tarun
I feel like I'm kind of curious. I would love to get his, his interview. That, that, that's, that's my only real thought.
- [19:53]
Aseeb
Okay, what's your, what's your point of view? What's your point of view?
- [19:55]
Tarun
Turn. I, I kind of take this like Matt Levine type of stance towards insider trading, which is like the definition is always this moving target and you can never perfectly get it correct or have it uniquely identifiable. I think if you've read the 10 years of his columns, probably his best writing, in my opinion, is when he writes about insider trading because of how annoyingly complicated it is to prove that someone got a benefit. Sometimes the person who gets the information and tells someone else who makes money off of it, sometimes only they are liable and sometimes only the person who traded and made money was liable. And those scenarios are all kind of complicated depending on the asset type, depending on microstructure. And I don't really think that Kalshi solution is a full solution, to be honest, because it's like, hey, we have a committee and we have your kyc. That's kind of it. And I don't know if that's enough to be honest, especially for some of the parlay type bets where it's like, well, what if I had information on A and B but not C? So that increased my probability of Winning the parlay, like maybe that's insider trading. I'm not sure. I actually don't know what the stance on that is. So I don't think any of these people have a solution.
- [21:13]
Aseeb
I'm pretty sure there's case law that for example, if you like, one way to trade on a merger, like a very obvious way to trade on a merger would be to buy one of the two companies that are going to merge or whatever. Another way to trade on it is to like short a competitor or to do something that you are pretty sure is correlated. Those have also been prosecuted as case of insider trading.
- [21:31]
Tarun
So parlays are a little. Because correlated is different than the ones that are like A and B or C happen. Right.
- [21:39]
Aseeb
Like there's actually a much weirder went up a lot.
- [21:42]
Robert
So we're talking, we're talking about equities, okay. Where information belongs to the company and you're basically in one sense or another stealing from a company.
- [21:52]
Aseeb
Okay.
- [21:53]
Robert
There's not insider trading in commodities because, like, how can you insider trade, right?
- [21:57]
Aseeb
Well, there, there is, there is actually, I think two cases ever of insider trading commodities that have been successful prosecutions. So it was that under just general fraud.
- [22:06]
Robert
What was the sort of.
- [22:07]
Aseeb
Because I'm not, I don't remember. I don't remember. But like there is that wrinkle that every lawyer will have to. Mostly there's no insider trading in commodities, but technically there can be. Right.
- [22:16]
Robert
But like the question is, is an event, right, more like a company or more like a commodity? Right. And they happen to be regulated by the commodities regulators. Right. So that's the first thing where it's more similar.
- [22:31]
Aseeb
Right.
- [22:32]
Robert
And it's not like it's. If you had to base it just based on that, I would say it's more commodity, like. Right. But it is in some ways more company like, in that it's information that belongs very really to somebody that they don't want to get out. Okay. So if it's about us capturing Maduro, that is for sure information that Delta Force doesn't want to get out. Right. And so in that sense, I think the information does have a rightful owner that you're stealing it from. That could compromise national security interests or all sorts of things.
- [23:08]
Tarun
Right.
- [23:08]
Robert
If Maduro saw the probability of him getting captured go, you know, on a given Tuesday or given Saturday, go From, you know, 2% to 98%, he's going to get out of Dodge. Right. And you know, I, I do think that that information has, you know, consequences to the owner if it leaks, right. Very clearly. Like, there is this futarchy argument where you're like, it's better if everything's public and it's priced in, in real time. And like, if there's going to be an event, like, wouldn't the world be better off knowing two hours beforehand? But using the Maduro example, the world would not be better off, right, If.
- [23:46]
Aseeb
All right, so let me give you a counter argument to that, because there's a symmetry here, right? One version is like, well, you know, it's bad for the US Government if Venezuela learns that the Maduro market is spiking, right?
- [23:56]
Robert
But it's good for us, but it's.
- [23:57]
Aseeb
Also symmetrically true for us. Well, it's good for Venezuela, but it's also true for us if there's a spiking market that Iran is about to fire off nukes and somebody in Iran is insider trading. That we also learn two hours earlier that, oh, shit, you know, get the, get the F16 up there. So it's not obvious. It's not obvious. Like, it's ultimately a question of externalities. Is that for this market, for the securities, let's say for, for stocks, right? What is the point? What is the positive externality of allowing somebody to trade on. I know this merger is going to happen? Not really obvious. There is anything. Not really obvious. There's any benefit that's happening and there's some value being taken from the company that they might otherwise do something with. In the case of a commodity, there is value to you hedging your own oil exposure, even though, you know, we just drilled a bunch of oil, we know a bunch of oil is coming, we haven't told anyone, but we want to hedge all of the oil that we are going to. We don't want to hedge oil prices because we want to lock in the oil that we basically just found. And the value to that business of doing that is actually significant, right? So we're thinking about the externalities in deciding how to set up the regime of insider trading, I think. And the externalities for prediction markets are really not obvious. It's really not clear ex ante if it's better or worse for there to be advance notice of certain things in violation of the government knowing. Like, if we learn, like let's say, for example, there's a market on will, I'm going to try to pronounce it Khamenei, I think, is how you pronounce the name. Whether he's going to step down by January, by the end of January, end of May, end of the year or something like this. There's like, there's like three different markets and you can see that progressively the numbers get higher as it goes into the end of the year. Okay, if that number spikes for January, let's say US intelligence has no idea what's going on and all of a sudden they see the poly market goes up to 70% for January. Somebody's trading it like crazy. Maybe it's time to shoot airstrikes. Maybe it's time to go in there and like just start, just start, just start taking advantage of the situation that you know that some shit's about to go down. The US government might say like actually maybe we're okay with there being a little bit of. Actually it depends on how many of these markets are about us versus how many of these markets are about other people.
- [26:05]
Tom
Yeah, I don't think there's any sort of theory of investor protections for capital markets and there's certainly many other laws that would prevent someone or discourage someone from leaking state secrets. Independent if that's getting expressed through prediction market or not. And I think also as you said, there's many other ways this information can get out that isn't directly related to people who have direct knowledge of the matter. I mean we even know that the US government was trying to flip Maduro's pilot for a while and apparently he was game and then he backed out. So okay, if there's one thing or I remember during the bin Laden raid there was a tweet, someone was like a lot of helicopters giant over Abbottabad and that was like, yeah, yeah, it's like now it's famous. But yeah, I kind of tend to agree. It feels like everything we've done so far in investment protection is to preserve capital markets structure to encourage good capital formation. And I don't really get the same sort of impression from prediction markets.
- [27:03]
Tarun
I mean I think the real problem is A the value of the information is valuable to one party, but B it's like whose benefit is like who receives the benefit and how do they receive the benefit. Seems to be a really big part of securities law that I don't think there's any analog for. For the latter part. This is why I think these kind of like insider trading committees and attribution things are like, they probably work for these sports markets. I actually think the sports markets, I can 100% believe they make sense. But I think these types of politics, rare events markets, I think you're going to find that you run into tons of weird contradictions with case law if you want to try to emulate that system perfectly. And that's where I would mark the line. I really think the sports stuff, I think it's pretty fair game, especially given all the incidents you've seen that you could find a way to make a system that works. Because the other thing about sports is, you know, when the market ends, Right. Like, everything is like a fixed endpoint, so it's like much easier to determine things. But, yeah, I think political ones.
- [28:17]
Aseeb
Yeah, I think there's one. Okay. The one edge case that's very obviously bad is the person the market is about betting on the market. Right. That's the one case where definitely that breaks prediction markets. You should never allow that. And that's potentially hard to police because you can use whatever third parties or something, but that very clearly. There's no theory of prediction markets under which that's useful to anyone. No positive externalities from that. But there's always more people. So any market is going to be about someone and information about them. They don't want information about them to necessarily be elicited. So if it's about Iran, if it's about Ukraine, if it's about whatever, everybody else in the world benefits from that information except that party. So when you're the US Government, you see a market that potentially is about you, such as, when am I going to go in and get the guy? You really don't want that market to be disseminated, or you don't want that information to be disseminated. But I think to your point, Tom, there's already laws around that which are basically protecting state secrets and so on. Now you can redouble that law by saying, okay, government officials are not allowed to. I think that's reasonable. I don't think that's a big loss for anyone to say that. But my other sense is that this argument we're having now is not the argument that people will actually have, because the reality is that people's moral intuitions about that, about all of this prediction markets are extremely morally unintuitive to people. They do not jive with how people think things ought to work. They think certain things should not be bet on. They think that putting money at stake into something like human life or a war or even an election is morally wrong or just gross or dirty. And they think that making money from knowing that something is going to happen is illegitimate, and that's why insider trading is illegal. They feel very strongly this fairness intuition about insider trading but of course that's not what insider trading jurisprudence is based on. It's not based on fairness. It's based on a duty to your employer or to the person from whom you got that information. And prediction markets potentially break that completely. But I suspect that legally, in terms of the arguments, the laws, the public debate that we're going to have around this, because now prediction markets are so everywhere in your face and they're so political, they're about big stories. These moral intuitions are probably going to dominate the public conversation, not the debates that we're having right now, which are I think a lot more technocratic than where things are going to go. So my prediction is that we're going to see more things like this. If we see somebody who's like, I learned that Taylor Swift's going to get married because I baked the cake for the wedding or whatever, people are going to be in a fucking uproar when they learn that that person made money off that market. And obviously that's a flippant example, but I think there are going to be other examples like that where people get really upset. It's like no matter who it was who traded on the Maduro thing, unless it's somebody looking out their window seeing helicopters, like the Abbottabad guy, people will be really mad. Doesn't matter who it is. Could be the flipped helicopter pilot, could be something else, could be almost any. It could be a hedge fund, anything else, people get mad.
- [31:18]
Tarun
Yeah, I mean it's hard to disagree with that.
- [31:21]
Aseeb
Okay, so let's switch gears.
- [31:23]
Tarun
Well, well actually one, one, one one final thing is like I do think there are prediction markets that do border on these securities law things which are like the, like what is the earnings of X company and X quarter markets. And so there, I think there is going to be this part where the technocratic thing gets totally used, right?
- [31:46]
Robert
Yeah, you could totally take an equity thing and move it into a prediction market, future based structure.
- [31:53]
Tarun
I think those are going to be where we find the weird edge case laws where everyone tries to apply like the known laws.
- [32:01]
Robert
Yeah, I mean that's even an easy application though because it looks like the normal thing. You just use a different tool. I feel like it's still the same classic insider trading. If you work at a company, you know what the earnings are and you go bet with a bookie. Right. Just because the form factor is not the usual form factor. The mechanics are still the obvious one.
- [32:18]
Tarun
But because that one's obvious, that might be the one you get a law for first and then all future law has to cite that as precedent and then refute that. Right. So there might be some thing where it's like the genesis block that biases what happens.
- [32:33]
Aseeb
I mean, that would be good, all things equal. Because like this sort of duty of care type, you know, jurisprudence allows for the way that we like our moral intuitions about prediction markets, which is that. Yeah, as long as you're not trading on yourself or you're not violating some other obligation that you have, it's fine. If it's like the pilot, the Maduro pilot, trades on it, it's cool, no worries. So, yeah, I think if that's where we land, then that prediction markets is kind of.
- [32:59]
Tarun
I could just see that as one potential path. You know, like, there's the path you're talking about, which is like the sort of moral kind of arguments win out, but there's also this weird path of like, oh, there are all these markets that can be regulated and probably are the easiest.
- [33:16]
Aseeb
I think those markets just get negated. Right. More likely, those markets, they're not like, treated differently, they're just like shut down, basically.
- [33:23]
Tarun
Yeah. Maybe because you need to be an.
- [33:25]
Aseeb
SEC registered exchange to have a swap on a security.
- [33:28]
Tarun
Right, yeah, yeah, that's true. That's true. That's true.
- [33:32]
Aseeb
Yeah. And like, none of these, none of these prediction markets are going to. You're going to do that. So. Yeah, that'd be my guess. Okay, so let's switch gears. Another big story this week has been some drama brewing in zcash land. So zcash, of course, the. The ascended privacy Coin. A bit of a brouhaha this week where to give a little bit of backstory. So zcash has a foundation. It also has a. The foundation is called Bootstrap. It also has a company called the Electric Coin Company. And the Electric Coin Company does all the development on zcash as well as manages Zushi, which is the big wallet that has been increasingly responsible for the onboarding of many more users into zcash in the last couple of years. So the. All the members of the Electric Coin company ecc, recently quit. All at once. Everybody quit. And the claim was that the quote, unquote, majority of the Bootstrap board members moved into clear misalignment with the mission of zcash. They announced that they are starting a new company building unstoppable private money. It will be called Cash Z, a new zcash wallet to replace Zushi. Presumably, they're going to be building on the Zushi code Base, which is open source, and they want to scale zcash even more than they already did. It's a his. Their claim is that the reason why they did this, the reason why they did this was because originally they were planning to, quote, unquote, take Zushi private. I don't totally understand what the way the Zushi was structured, maybe it was some kind of nonprofit, it was owned by a nonprofit or something. But they were planning to basically take external investment into Zushi. And apparently the board had some kind of 501c3 nonprofit constraints which made it difficult for that kind of path to be followed. Josh Schweihart, the CEO of the Electric Coin Company, claimed that the terms of their employment were changed, which made it impossible for them to perform their duties effectively and with integrity. The board came out and said, look, we and ECC are nonprofits and those constraints are very real. I wasn't clear that ECC was a nonprofit, but apparently it is, or they're claiming it is, or they're tied to a nonprofit in some way, maybe through some kind of obligation. They have to bootstrap. They claim that urgency does not excuse a fault process. If we were to do this the way they were describing, any of our donors could sue. The transaction could be unwound. The board has no discretions on these matters. Assets must serve the public mission. And Zuko, who is formerly the CEO and is the co founder of zcash, claimed that he felt that the board was a composed of people with very high integrity. He didn't have a clear view either way. But we now have this big flashpoint. Twitter is up in arms. Zcash ended up lagging down on this announcement, but then has recovered somewhat on the announcement of Cash Z, the new iteration of the wallet.
- [36:19]
Tarun
So I want to point out one financial thing. Monero is at all time highs hit its all time high in the last day.
- [36:28]
Aseeb
Yeah, Monero pumping for.
- [36:31]
Tarun
Honestly, I have some friends who are only Boomer coin traders because they only trade on like these platforms that only have Ripple and BCH and stuff. And anytime those guys message me, that's how I find out about this. They're like, oh my God, I'm back in crypto. Monero and BCH are ripping. I'm like, okay, thank you for the news.
- [36:51]
Aseeb
Are they on gdax? What are they trading on that they only have Boomer assets?
- [36:54]
Tarun
No, they're trading on like PayPal. Yeah, it's like stuff like that.
- [36:58]
Aseeb
You're trading on PayPal square.
- [37:00]
Tarun
By trading, I mean they're Buy. They buy. They bought bch.
- [37:04]
Aseeb
That's right.
- [37:04]
Tarun
You know, they forgot about it and then they got a notification. They're like, I'm back in crypto, baby.
- [37:09]
Aseeb
Got it. Got it. Exciting. But, but here's the question. Governance.
- [37:15]
Tarun
Like correlated?
- [37:16]
Aseeb
I doubt it. That doesn't make.
- [37:18]
Tom
No way.
- [37:18]
Aseeb
There's no way. No way.
- [37:20]
Robert
I don't think the boomer platforms your friends are using support Monero, if I have to guess.
- [37:24]
Aseeb
Yeah, yeah. Robert, what's your reaction? Governance drama. As the governance defi veteran, tell us your view on this whole thing. Yeah.
- [37:32]
Robert
You know, the reaction when this first occurred was on the timeline and in the markets. It was chaos. People just saw the headline, which was zcash Core developers resign. I think as everybody has learned more about the situation and has basically seen this as like potentially a structure in which zcash is going to have a better foundation, a better set of oversight, a better cleaner set of rules for the core developers. I think it's a positive. Right. I think there's never an easy way to shake things up when they have to change.
- [38:09]
Aseeb
Right.
- [38:09]
Robert
Like in every situation, whether it's zcash, whether it's the stuff we're talking about AAVE like a week or two ago, like any of these highly contentious and important governance decisions, there's no simple, easy off ramp that everyone's happy about for the most part. Like eggs have to get broken.
- [38:29]
Tarun
Right.
- [38:29]
Robert
And I think there's a case where it's going to be a productive and good outcome where there's a couple eggs getting broken along the way and a couple people are going to scream about it, but the end state is going to be positive for Zcash.
- [38:42]
Aseeb
Is this our OpenAI moment? Is that what this is?
- [38:45]
Tarun
Well, that's what Zaki. That's what Zaki claimed. I don't know if you read Zaki's post. He's on one of the bootstrap board members is he compared it to OpenAI. I think people in crypto who've been in crypto for a long time maybe have too fast of a reflex to go to complicated foundation nonprofit models. And in the current world, it seems like asking for forgiveness probably works better. So especially for a wallet that wants to earn swap fees and stuff, like not. Not some exotic thing that's launching a new token. And so I kind of think the company makes sense if I look at successful wallets in crypto, they're not foundations, they're not run by nonprofits. Right. They are. They have by and large been Successful in a for profit manner where they are forced to figure out how to upsell their users on products. And I think like worrying about the OpenAI risk before you have a billion dollars of revenue seems a little bit, I don't know.
- [39:54]
Aseeb
Yeah, why can't you just spin it out and the nonprofit owns the asset. Right. It's part owner.
- [39:59]
Tom
Is it some artifact of being a PBC is like a certain mandate and that's out of mandate. And I don't know, I kind of assume that the board was operating in good, good faith or it seems like everyone just basically just stuck. But the thing that's also strange with this too is it is reminiscent of these kind of AI Aqui hires where it's like, okay, you can keep the entity, but everyone's just going to leave and start a new company that's going to do the exact same thing. And there's not really a case to be made against. It's kind of like Windsurf or whatever. And so I feel like it's actually weirdly parallel to the AI industry in a couple different ways. And I've been just an OpenAI. So even in that world, you know, what would you do if they didn't want to like, you know what, they want to raise money, but they want to go do something similar or they want to do in a different structure? It's like, I think there's like multiple reasons why maybe this wasn't a tenable situation.
- [40:51]
Tarun
I think one thing about wallets versus foundations, which has been a thing that has, I think I've seen multiple times in crypto now over the last eight years, is like when foundations start owning front ends, they don't monetize them or feel the need to improve them. Also, there's two sides of the same coin. There's one side which is like, hey, we want to make revenue from the front end and the other side is, well, we also don't really want to invest in more than the bare minimum. And I do think people who are making a wallet that is starting to get some success, traction, usage, whatever, tend to want to migrate away from that benefit the token only structure. I'm not saying this is them for the record. This is my own impression from watching the history of wallets that have been successful and the trail of tears of the hundreds that have not been successful. And there is a sense in which the foundation structure, which is all dedicated to the token in the sense Tom just described, may not really work for your user acquisition strategy or getting your product to Be better. And I think that tension does always kind of seem to be latent, especially when you look at wallets from that were incubated by foundations. They often spin out and just like end up not being as successful sometimes as like the wallet that started as a company. I mean, I guess Phantom is like the best example of this, but there are tons of other smaller versions.
- [42:26]
Aseeb
Yeah, I think that that's confounded by just like quality of team. Right. Where somebody who starts owns all the equity and is like doing their own thing is obviously going to be, you know, if you're really good, you're not going to join a company of like a sub product owned by a foundation. If you're really good, you'll be like, I'm going to start my own thing and I'm going to go at it. Hire the best growth people, hire the best engineers. Like in principle it should be true that if you're owned by the foundation and the foundation doesn't have a profit motive, it's just caring about the token that there should be some alignment of like look, let's just, let's just grow this thing, get more and more, get Zushi into more and more hands and make it into a great product and on some level like it kind of it. The proof is in the pudding. Like Zushi was made by a nonprofit apparently and it was a really good product. It is a really good product and it was able to onboard a lot of people into zcash. Now that's not the norm. Most wallets that are built by foundations are pretty fucking terrible. But the, the interesting thing is like, okay, the other, the opposite incentive. If you are a private company, you're creating your own wallet. The potential risk is that you're over monetizing, right? If you are a private company, let's say, let's say Cash Z. Now Cash Z. I'm assuming all the investors are going to be very aligned for Cash Z. But one can imagine, let's say you get Sequoia or let's go even far, let's say Tiger, you get Tiger Global as an LP for Cash Z or not lp an investor for Cash Z and you raise a bunch of money. Okay, why would Tiger Global not say, hey, you know, this is great that we've got these privacy users and all, but why don't we also add Monero just in case like some other people want to use Monero and they don't like the zcash model. And why don't we also add Bitcoin? Because people Love Bitcoin. You know, like Bitcoin's part of the whole past. We can make more money if we. Loyalty is not defi trading. Exactly, exactly. Right. So like, there is some drift in just that you can only be so big if you only are one asset wallet. And if you truly are purely incentivized by the profit motive, why would you not eventually become phantom? Right? Like you start with zcash and then you eventually become phantom. So that is the counter argument, Right? And obviously we haven't seen that. I'm not arguing that they would, but that is the counterargument for why it makes sense for a wallet incubated by a foundation to say, don't worry about monetizing, don't make any swap fees. I don't care if you never make swap fees, I will subsidize you forever. Just grow and build a great product. Now, in practice, that doesn't work that way. In practice, the great growth people don't want to work for a company like that. So no matter how much you subsidize them, you're just never going to be that good compared to a phantom. So there's a tension. I don't know how to resolve that.
- [44:56]
Robert
Yeah, every blockchain needs a killer wallet for it to succeed, Right. I remember the early days of Bitcoin. All the wallets sucked, right? But there was at least a couple options available and none of the options were great. That's sort of why we got Coinbase, frankly. But a blockchain needs a great wallet, right? Can you imagine Ethereum without Metamask? Right? Metamask is a privately owned for profit thing, but it was so wedded to the interests of Ethereum because Joe Lubin and Consensus were like Ethereum, maximalist and massive bags and all of these reasons. They had this incredible alignment. But without MetaMask, Ethereum honestly was horrible. Do you remember before Metamask? Remember using mistake, Right. Like it was unusable. Right. Frankly. And so I think for a blockchain to scale, you need at least one minimum of one killer wallet. Right. Or killer user experience that, like normies.
- [45:54]
Aseeb
Are like, I get it.
- [45:55]
Robert
Like, this is great. Like, let me use a thing without one, it's hard to get the traction you need. And so I think a foundation has to ensure at least one fantastic wallet exists. Can more exist? Yes, absolutely. I would love to see a blockchain experiment with this. I mean, what if there was a blockchain that was using the equivalent of like builder codes or whatever it is at Like a chain root level to incentivize wallet and transaction hyper liquid does do that. Yeah.
- [46:25]
Aseeb
So okay, does it on the general.
- [46:27]
Robert
Transaction stuff or just on.
- [46:31]
Tarun
Oh, not on the hype evm but like.
- [46:33]
Robert
Yeah, yeah, yeah.
- [46:34]
Aseeb
But take it one step further.
- [46:35]
Robert
Imagine if like Ethereum or hypvm or Solana or whatever gave like the wallet that submits a transaction to the mempool a portion of the transaction process.
- [46:45]
Tarun
I think I would argue USDH is kind of trying to do that because like they're passing back the yield based on usage and holding or like the goal is to, to do that. So it's not exactly this, but it's in the spirit of this totally.
- [47:01]
Robert
But like you have to have one wallet come hell or high water. Right. And so I think in the ZCASH example here, like I do agree more with the non profit approach to this because you have to get to n equals 1 without overcharging users, without like mission creep, without losing focus. Like if they had four wildly successful like consumer wallets, I'd be like, yeah, like why do you need a foundation support? Why not make just pure corporate competition across all four? But they don't. So it's like I think there's more alignment with the nonprofit model.
- [47:38]
Aseeb
I mean it's classic theory of the firm stuff, which is that, you know, when does it make sense to internalize something versus to contract it out? The problem is always talent.
- [47:45]
Robert
Right?
- [47:46]
Aseeb
The problem with all these arguments is talent is that the best talent want to own their own fates. Many people have claimed that the zcash drama is the end of the foundation era. And we've talked about that. We've actually had multiple people proclaiming the end of the foundation era for different reasons. Tarun, you've been very down on foundations. What do you make of this argument?
- [48:05]
Tarun
I mean, I think the empirical evidence shows people don't want to do it right and people want to get around that structure because it has so many annoying requirements. Sometimes you have to get technical decisions approved by a board. You know, like there's like a lot of little stuff like that that I think just grates on people. And the benefits of the foundation models seem to be just disappearing, at least in the US like what's the point, right? Like look at lighter. They launched their token as a US company and so I think a lot of people just don't see the benefit beyond like lawyers and the BVI and Caymans. Obviously they're probably unhappy, but you know, I just kind of think it adds a lot of extra constraints and especially when you have a product that's moving fast and like starting to get traction and users, it might just make sense to move back to the conventional model. And I think that your talent point is basically that. Right? It's just like there's a lot of extra restrictions. I think OpenAI is more like this exception that happened to you were forced to have to solve it because it was just printing money. I mean obviously spending money too, but on a top line basis. And I just think it's like in crypto people prematurely jump to like pretending they're at that scale. They're not. The foundation model I do feel like holds you back unless you're at like that type of scale.
- [49:34]
Aseeb
Okay, very fair. All right, well, we're up on time, so we got a wrap here, but we'll be back next week with more news. Thanks everyone. See you next time.