April 11, 2024 | Read Online

Byron Gilliam

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"Never underestimate the power of a well-constructed argument."

- Johnnie Cochran

✉️ Thursday Mailbag of the Century

Q: Should I close my Wells Fargo account?

Nothing you read here is investment advice, but if you're considering closing your Wells Fargo account because you're angry about the Uniswap news, please know that Wells notices are not issued by Wells Fargo.

It's the SEC that issues Wells notices, so that's who we should be angry with, as everyone on Crypto Twitter already is even though we don't know what exactly there is to be angry about.

Wells notices don't generally say what crime is being alleged, but the best guess seems to be that the SEC will accuse Uniswap Labs of operating as an unregistered broker-dealer.

That would be good news, if so, because Uniswap holds no customer funds, takes no risk and makes no recommendations — so I don't think it would take an OJ-style dream-team of defenders to persuade a jury that Uniswap is not a broker-dealer.

But statements in response to the notice from Uniswap's founder ("The products we offer are legal"), general counsel ("The Uniswap Protocol is mainly used for lawful purposes") and official blog ("The UNI token is not a security") suggest that the team expects the case against them to be far broader than that.

That would be good news, too, I think, because if the SEC chooses to make this a crypto "trial of the century," it looks far more winnable for the defense than the 1995 one starring Johnnie Cochran.

Q: Is code law in crypto?

We've been reminded this week by the opening arguments in the trial of Mango Markets exploiter Avi Eisenberg that, even in crypto, code is not law.

But maybe we should act as if it is?

To me, it feels a little intellectually inconsistent to tell US regulators to stuff it one day (as we are with Uniswap) and then go running to US law enforcement when some tokens get "stolen" (as are with Mango Markets).

Perhaps a judge will agree that Uniswap and the rest of DeFi is compliant with US law and that the courts should only intervene in decentralized markets when we ask them to.

But that, I think, is an argument of Johnnie Cochran-level nuance and making it might risk muddying the waters of public opinion.

If any part of that argument doesn't hold up (or if the law changes unfavorably) we will look as if we want to have our legal standing both ways — like painting your house purple in defiance of HOA rules and then complaining to the HOA that your neighbor painted their house pink.

Critics might ask us to make up our minds — do we want the US government to referee crypto or not?

If yes, then we have to play by the US rulebook — which is whatever the government says it is.

If no — and we want to play by our own rulebook — we probably shouldn't ask the government to enforce it.

I assume it's the latter we want. DeFi wasn't designed with US law in mind, it was designed with "we can do whatever we want to" in mind, which is the only way it could have been — how can a borderless financial system be designed to conform with every set of financial laws in the world, all of which are subject to change?

To be both universal and resistant to change, crypto might do best to adopt a stance of disinterested aloofness, engaging with legal systems only when it's absolutely unavoidable.

It is of course important that we assert and defend the right for crypto developers and projects to work in the US — Uniswap and Coinbase are fighting the good fight on behalf of the entire industry.

But I think we should be wary of asking law enforcement to adjudicate crypto-native disputes like Mango Markets.

In crypto, ownership is defined by control — the saying "not your keys, not your crypto" has always been at the core of what makes crypto different.

When we start asking the legal system to adjudicate who owns what cryptos, it makes crypto distinctly less different.

Q: Is Tether a better business than Goldman Sachs?

That was the consensus view on Crypto Twitter after Tether reported a quarterly profit of $2.85 billion, which compares favorably to the $2 billion that Goldman Sachs earned in the same period.

But only $1 billion of Tether's profit was "operational" — the rest was marked-to-market paper profits earned on the horde of bitcoin and gold Tether has amassed by issuing digital dollars.

So as long as the price of bitcoin is rising, the DOJ chooses to tolerate Tether's existence, the SEC chooses not to tolerate bank-issued stablecoins, retail users continue to inexplicably prefer USDT over USDC, and Tether faces little competition from yield-bearing stablecoins…then, yes, maybe Tether really is a better business than Goldman Sachs.

But, given the choice, I'd rather own Goldman.

Despite its mysterious offshore existence, Tether operates at the pleasure of the US government and it's kind of surprising to me that it's still the government's pleasure to let them operate.

(Most of Tether's $100 billion of assets are held in the US banking system where it would take but a phone call to freeze them.)

My only real explanation for why that may be is that US law enforcement finds Tether more useful than other branches of government find them annoying.

Recently, there have been signs that this balance could be changing and, if it does, I suspect Tether could soon find itself in a pickle that even Johnnie Cochran couldn't get it out of.

Q: What is crypto's Destiny?

You've capitalized "Destiny" so I think you must be referring to the latest TradFi phenomenon, Destiny Tech100, a newly listed, closed-end investment fund that traded as much as 2,200% above fair value this week (now about 1,100% above).

The fund's mission is to democratize early-stage investing by offering "everyday investors" access to "top venture-backed" companies "for the first time" — in part by entering into forward contracts to buy shares of privately owned companies from employees at those companies.

It's not a terrible idea — accredited investor rules are annoyingly paternalistic and who wouldn't want to get in early on the next Amazon, Google or SpaceX?

What is a terrible idea, however, is paying a 1,100% premium for the opportunity.

That shouldn't need much explaining. The Destiny website says early-stage investments can have 10-50x upside, which sounds exciting — but if you pay a 10x premium, you'll need their entire portfolio to realize that upside just to break even on your investment.

To me, that makes the mania for Destiny shares at least as dumb as anything happening in crypto.

"Less dumb" is not much of a reason to invest in crypto markets, of course…but it is a reason to think that crypto markets will continue to attract investors.

The giant premium commanded by Destiny shares demonstrates that the demand for early-stage investments is universal — it's not just accredited investors and crypto degens that are attracted to low-probability, high-upside bets.

Destiny will struggle to meet that demand because buying forward contracts from employees at unlisted tech companies is hardly a scalable business model, even if they start wildly overpaying for them.

(Dear Destiny buyer: Can I interest you in some unlisted shares of Blockworks?)

Where could they find more such investments then? Crypto!

Like crypto, Destiny is a regulatory arbitrage — because the SEC limits access to unlisted investments with its accredited-investor rules, Destiny is able to package them up and sell them at a giant premium.

This makes the premiums that many crypto tokens trade at look much more reasonable.

No, that does not make me want to rush out and buy DePIN tokens trading on 100x revenue.

But it does help me understand why DePIN tokens are trading on 100x revenue.

Crypto's destiny (lower case) may simply be to meet investors' insatiable demand for wildly risky investments.

― Byron Gilliam

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This week Lyn Alden & Luke Gromen join the show to discuss the rise of fiscal dominance, the path forward for inflation & the end game for U.S debt.

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