We Are So Back!

Whoa boy, it's been a spicy month. And the long weekend gives me enough time to sum it up for you because this has been one for the history books.

🟢 Revenge of the Nerds

It has been a big month for crypto. Things had been going reasonably well in 2024. Bitcoin ETFs started in January and have brought in $13 billion dollars of inflows, making it one of the biggest launches of all time. Prices have rebounded strongly, the degens have been speculating on memecoins and there have been some notable product launches. But then things went ballistic this month:

1) May 9: Trump comes out pro-crypto. While Trump has previously said that he was “not a fan” of crypto and that Bitcoin is a “scam against the dollar”, apparently his pollsters figured out that there may exist a clump of pro-crypto single issue voters up for grabs. In early May, he started testing the crypto waters saying, “I’m fine with it [crypto]. I want to make sure it’s good and solid, but I’m good with it.” Most likely Trump finally found time to throughly study the Bitcoin whitepaper or perhaps he tried my hands-on Solana demo, but since then he’s gone full-on pro crypto.

2) May 16: The SEC gets smacked down in Congress. In March 2022, the SEC issued a “staff accounting bulletin” (SAB 121), which effectively banned banks from custodying crypto. It was highly unusual: the bulletin didn’t go through normal public review, it was inconsistent with all other assets that banks might custody and, oh by the way, the SEC doesn’t really regulate banks. But in its efforts to shut down crypto and “protecting consumers,” the SEC banned this function from the banking system and handed Coinbase a virtually monopoly on the crypto custody business.

But much like Blackrock and Fidelity before them, the banks were like, “Yo! Gary! We want in on this business too.” In a highly unusual move, Congress took up this arcane accounting issue. It was, in fact, the first time that Congress had a straight crypto vote (the only other times were small add-ons to other bills). Despite a veto threat from Biden, the House voted 216 - 192 in favor of repealing SAB 121, with 21 Democrats voting “yes.”

But what was even more surprising was what happened in the Senate, where the repeal passed 60-38. Ten Democrats voted in favor, including the Senate Majority Leader Chuck Schumer. It was a strong message to the Biden administration, which has yet to follow through on its veto threat (it expires tomorrow), but at least the SEC added some diversity by taking an “L” from the legislative branch instead of just always the judicial branch.

3) May 20: A seismic shift on Ether ETFs. After the Bitcoin ETFs were approved, many people assumed Ether ETFs would be difficult to deny. But with a decision deadline only four days way, the SEC had still failed to engage with issuers on the outstanding applications, a process that took months prior to the Bitcoin ETF approval. “It’s just not happening guys. Sorry,” was the verdict the previous Friday. But by Monday, the political winds had shifted. No one knows exactly what happened, but the assumption is that a new edict came from on high. All of the sudden, the SEC was requesting application updates on an “accelerated basis” and hours before the Thursday deadline, 8 ether ETFs, headlined by Blackrock and Fidelity, were approved. Given the rushed nature, it will takes weeks to months to finish the final paperwork for them to start trading, but it was a massive shift.

4) May 22: FIT 21 approved by the House. In the midst of the ETF approval, a second crypto bill came to the House. This one got approved by a larger margin: 279-136, this time with 71 Democrats voting in favor including some notables like such as Nancy Pelosi and half of the California block. And in a change, prior to the vote, the White House said they would not veto the legislation. FIT 21 is a comprehensive, wide ranging digital asset market structure bill that is unlikely to become law, but the fact that the House took it up and it passed with such bipartisan support is significant.

5) Bonus Item, May 20: FDIC Chair resigns. Martin Gruenberg, head of the FDIC, had been a key player in an unofficial, but evident effort to cut crypto firms off from the banking system. He also, according to official reports, oversaw “pervasive sexual harassment, discrimination and bullying.” Elizabeth Warren gave him the job and supported him throughout, calling the outcry a “purely political exercise,” but when the full reports came out the pressure was too much for him to keep his job.

🟦 What Comes Next

Listen to me now and believe me later: the anti-crypto army may not be going away, but they have lost the war. These events are emblematic of a big change in approach. And every day that crypto isn’t killed, it gets a little bit stronger.

The Biden administration has supported a wide range of anti-crypto efforts, but they now find themselves trailing in a close election where there aren’t a lot of swing voters left. I actually suspect that most Americans think crypto is idiotic, but very few of them are single issue voters. However, if you think Bitcoin is the key to a fairer society or even if you’ve just riden the Jeo Boden memecoin to a $190 million market cap, you might just swing your vote on that issue. Heck, there aren’t a lot of voters in swing states that support the carried interest loophole, but if a handful of obscenely wealthy fund managers have a vested interest then things tend to happen.

Pro-crypto Super PACs have raised more than $102 million, “the third-most of all super PACs engaged in the 2024 election,” only behind DeSantis (oops) and the Democratic Senate campaigns.

Even without political cover, U.S. financial institutions have looked for growth from crypto as their existing markets have reached maturity. Virtually every financial institution, even those led by nominally anti-crypto heads, are branching out into all sorts of crypto businesses:

As it becomes clear that the political firmament will no longer resist crypto, expect this trend to increase.

I actually don’t expect the Ether ETFs to be a huge success, at least not in the near term. Bitcoin has been around longer, is much better known and has a much clearer value proposition. People, myself included, struggle to explain to explain the value of Ethereum without taking 15 minutes of people’s time. Calling it “digital oil” or “the Internet’s app store” neither full captures its potential nor stirs the soul.

Nor do I expect new ETFs to get approved any time soon. The list of broadly investable crypto assets ends at 2.5 items. Solana would be the next candidate, but both Bitcoin and ETH had long histories of regulated futures markets prior to an ETF approval, something Solana currently lacks.

But this month is definitely indicative of a sea change in the legislative and regulatory environment. Buckle up, bit@*es!

◆ Don’t Get It Twisted, SBF is Still Scum

The other unexpected trend this month was a burbling vibe that maybe Sam Bankman-Fried wasn’t quite so bad after all. Earlier in May, it was announced that FTX customers would “recover all of the money they lost when the firm collapsed.” I was naively surprised at how many publications ran with this narrative, either explicitly or implicitly implying that Bankman-Fried was perhaps not, in fact, the greatest con man of his generation.

First off, even if Bankman-Fried took $16 billion of investor deposits, gave it to Mother Teresa who then invented a cure for cancer and gave back $18.9 billion, that would still be fraud on a massive scale. Can we agree on that? FTX customers seemed to think that the 10 Bitcoin in their account was actually backed by 10 Bitcoin and not, in fact, a $12 million beach house for his parents.

As for the settlement, the only reason investors are getting 118% of their “money” back, is because that definition of money is based on a quirk of bankruptcy law that froze their claims in U.S. dollar value at the time of bankruptcy. For example, if you held 1,000 Solana at FTX when they went bankrupt, you’re not getting back your Solana. Instead, that claim got converted to dollars at the price at the time of filing: approximately $12. Solana is now trading at $170 and you missed out on a $158,000 gain on a $12,000 investment. No wonder there is a bunch of money to pay people out as well as to pay $700 million in fees to the bankruptcy lawyers.

Really, it’s more like if Charles Schwab personally stole everyone’s NVIDIA stock in 2022, spent it on hookers and blow and claimed everything was cool because he gave you back $120 per share. C’mon man.

This Week’s Burning Hot Take

“Council has discussed crypto regulations and legislations at length…”

https://twitter.com/TommyWorldPower/status/1764830154780717335