Coinbase vs. SEC, ETH's New Roadmap, & The End of an Era?


July 27, 2022 | Issue #229

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Coin Snacks


The End Of An Era?

In February of last year, Tesla (TSLA) shook the world of finance after announcing the purchase of $1.5 billion worth of bitcoin to add to its balance sheet.

This month, nearly a year and a half later, Tesla announced that it had converted 75% of its BTC holdings back to fiat, adding $936 million in cash to its balance sheet.

The Verdict?
Unveiled in its 10-Q filing with the SEC on Monday, Tesla's big bet on bitcoin seems to have fared pretty well so far. Although the company was faced with a $170 million impairment charge on the remainder of its holdings, Tesla still reported a $64 million gain in Q2 2022 from its decision to offload the majority of its BTC position. At the moment, these are the only numbers we can rely on as both the average entry and sale price of their BTC holdings have yet to be disclosed.

The End Of An Era?
One of the biggest narratives leading up to last bull run was the notion that both private and public companies were starting to add bitcoin to their balance sheets. While the first public company to do it was Michael Saylor's MicroStrategy (MSTR), Tesla's move to buy up BTC months later was the announcement that lit a fire under the bitcoin price. In a sense, it was the BTC purchase that was heard around the world. Tesla was the first massive, widely-followed public company to make such a move. If more public companies followed suit, say even 1% of the public market, BTC supply would be even more limited, creating another massive price catalyst for the years to come.

Musk's decision to sell, on the the other hand, likely brings this era of public companies buying up bitcoin's limited float to a temporary close. While there were a few big companies that did jump on the wagon, notably Block (SQ) and Coinbase (COIN), the entire narrative didn't pan out as well as investors had hoped.

As companies (and retail investors) switch to risk-off mode facing inflation, rising interest rates, and fears of a recession on the horizon, it now seems like it's going to take a while before this narrative picks back up.

That's not to say it's something we shouldn't ever look forward to again.

"This should not be taken as some verdict of bitcoin," Musk said during the earnings call, calling cryptocurrency "a sideshow to the sideshow." According to Musk, the company sold its bitcoin holdings largely due to its uncertainty on China and when they will lift its COVID-19 restrictions. Musk also said he's open to increasing Tesla's bitcoin holdings in future.

Voyager Rejection of FTX Buyout Leaves Investors Searching for Answers

Frequent readers of CoinSnacks know that centralized crypto lenders have been slaughtered during this bear market.

They also know that Sam Bankman-Fried (SBF) and FTX have emerged as a lender of last resort, with SBF committing hundreds of millions of dollars to BlockFi and Voyager in the past.

This was seen as a good thing for all parties... The distressed companies would not wholly collapse, customers would not lose all of their money, and SBF would be able to pick up previous Unicorns for pennies on the dollar.

BlockFi gladly took the money. However, Voyager has forcefully rejected the offer.

What's going on here?

A Quick Recap
We have written extensively over the past month about what went wrong for the centralized crypto lenders. However, if you are new here, here's a quick TLDR of how Voyager got into this situation:

  • 1991: Do Kwon, the founder of the stablecoin Terra, is born
  • Early 2000s: Su Zhu and Kyle Davies, founders of crypto hedge fund 3 Arrows Capital (3ac), become high-school friends
  • 2020: The Fed turns on the money printer to fight against Covid-19, sparking a crypto bull run
  • 2020 - Early 2022: The bull run nets Luna and 3ac billions of dollars
  • March 2022: The Fed begins raising rates to combat record inflation
  • May 2022: Terra, now worth ~$30 billion, collapses
  • June 2022: Under intense pressure from the market downturn and strapped for cash after the Terra collapse, 3ac folds
  • July 2022: Slumping asset prices and a lost $665 million loan to 3ac force Voyager to declare chapter-11 bankruptcy

It is at this point that SBF enters the fray.

The Offer to Voyager
SBF made his offer on July 22nd, and it appeared to be centered around protecting customer assets.

Under the plans of the offer, FTX would purchase Voyager's crypto assets and loans (except the 3ac one). Customers of Voyager would then have the option to start a new account on FTX funded by their portion of the bankruptcy claims. This would allow them to either withdraw immediately and recoup some liquidity or purchase new assets and get back into the game. Either way, it was an improvement over having their funds stuck in Voyager while the bankruptcy played out.

The offer also made a lot of sense for SBF, as he gets some cheap OTC crypto while his exchange FTX potentially acquires a bunch of new users.

Win-win, right? Not according to Voyager.

The Rejection
It took just two days for Voyager to reject the offer.

Voyager's primary issue with the offer was that it was essentially a liquidation. As we covered last week with Celsius, chapter-11 bankruptcy is a way for companies to restructure their finances, not liquidate them.

Voyager wants somebody to come to their rescue, not buy them out. Not only would SBF’s offer buy them out, but according to Voyager, it would do so for pennies on the dollar.

Voyager’s other issue with the offer is that it goes around the in-place bidding system. Voyager argues that accepting this offer before hearing other bids actually does a disservice to customers, as it is possible that a bigger offer comes in later.

Ultimately, to Voyager, this is nothing more than a "low-ball bid dressed up as a white knight rescue."

The Rebuttal
As he often does, SBF took to Twitter to respond to Voyager.

Two key ideas emerge in his Twitter thread: customers are the losers of a bankruptcy process and he believes it is selfish third parties that are opposed to his offer.

As SBF notes, bankruptcy proceedings take a long time and are very expensive. Not only do customers not have access to their funds during the process, but their funds are slowly drained from payments to bankruptcy consultants. By the time it's over, it's anybody's guess as to how much the customer will get back.

Third parties like consultants, however, love a lengthy bankruptcy process. The longer the process, the more fees they rack up. SBF believes these people pressured Voyager to reject the offer. A quick resolution like SBF's offer is not in their best interests.

Moving Forward
SBF believed his plan would have best served the customer. Voyager disagreed. So now we are at the same spot as before: looking at a lengthy bankruptcy process in which the customer is likely to lose out.

It's a shame that it got to this point. As we talked about last week, customers should not be the ones who lose out from upper-level mismanagement. Hopefully, Voyager will take every step necessary from here on out to protect its customers. It's the least they can do.


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Ethereum's New Roadmap

Last week on CoinSnacks, we covered The Ethereum Merge and all the beautiful things it will do for investors, users, and developers.

Well, if you thought that was the end of the story, boy, you are in for a treat.

Last Thursday, July 21st, Ethereum founder Vitalik unveiled the updated Ethereum roadmap during a talk at the Ethereum Community Conference (EthCC).

It turns out that The Merge is not the endgame for Ethereum but just the first of 5 catchy named phases that, when completed, should enable Ethereum to handle 100,000 transactions per second (TPS).

Let’s talk about what each phase entails and why they matter.

The Merge
The Merge, which we discussed last week, is the first phase, and it’s on everybody’s mind right now. During The Merge, the current proof-of-work execution layer merges with (hence, The Merge) the new proof-of-stake execution layer Beacon Chain.

This has a few significant benefits for Ethereum. We will cover the big ones quickly, but if you want an in-depth explanation, seriously, go check out last week’s article.

The main benefit of The Merge is that Ethereum issuance is significantly reduced. Combine this change with the EIP-1559 burn mechanism and ETH is likely becomes deflationary. A deflationary ETH is an ETH with significant price potential.

The other main benefit of The Merge is that the move to proof-of-stake cuts power usage by ~99%. This should satisfy those worried about crypto’s adverse effects on the environment.

The Merge is scheduled to happen on or around September 19th, 2022.

The Surge
Poor transaction speeds and high gas fees have proven to be a thorn in Ethereum’s effort to scale. The Surge, phase two of the plan, is the first step to remedying this issue.

In The Surge, we finally see the implementation of the frequently teased sharding mechanism.

Sharding splits a database horizontally to spread the load. Basically, it makes data smaller and easier to congest. Combined with Layer-2 rollups, sharding should help massively scale Ethereum, which has been a problem for Ethereum in the past.

The plan is for sharding to come out sometime in 2023.

The Verge
Decentralization and security have always been central to Ethereum. The Verge helps take it to the next level.

The Verge introduces what is known as “verkle trees” and “stateless clients” to Ethereum. There’s a lot of computer science mumbo jumbo needed to understand them, and it’s really not that relevant for the average Joe, so we aren’t going to waste your time explaining it right now.

All you need to know is that verkle trees and stateless clients make it much easier to run a validator node, and the more nodes a network has, the more decentralized and secure it is.

The Purge
Just like the movie, The Purge is all about destruction.

The goal of The Purge is to delete unnecessary old history from the network to simplify Ethereum further and reduce the hard drive space needed to run a node. The ultimate hope is that nodes will no longer need to store the history of the blockchain after The Purge, making it much easier to run a node.

The Splurge
The final stage of the plan is The Splurge.

The Splurge is the final cleanup phase. Described by Vitalik as “the rest of the fun stuff,” The Splurge is where Ethereum can upgrade as needed to support the previous four phases.

Looking Ahead
Although most of these phases are still a ways away, this story is worth following over the coming months and years.

Never before has a blockchain sought such an ambitious upgrade plan. If everything goes according to plan, Ethereum has a chance to be the first blockchain to solve the blockchain trilemma – successfully balancing decentralization, security, and scalability.

It’s an exciting time to be an Ethereum investor. 

Keep Aptos On Your Radar

What bear market?

Layer-1 blockchain Aptos just closed a $150 million series A funding round led by FTX Ventures and Jump Crypto that included big-name investors Andreessen Horowitz, Multicoin Capital, and Circle Ventures.

With this latest raise, Aptos's 2022 fundraising tally stands at $350 million.

Naturally, this leads people to think, "what is Aptos?", "why are VCs so interested?" and maybe most importantly, "Is this something I should be keeping an eye on?".

What Is Aptos?
Aptos's origins can be traced back to the failed Meta blockchain project, Diem. Created in 2019 under the name "Libra," the goal of Diem was to create a stablecoin that could serve as the currency for a new financial system.

A worthy goal for sure, but one that government regulators were not excited about. Ultimately the regulators had their way, and Diem was shut down in 2022.

But, just because Diem failed, it doesn't mean that its developers gave up their cryptocurrency dreams. Instead, they have used their experience with Diem to create Aptos, a Layer-1 blockchain meant to be "the safest and most production-ready blockchain in the world."

Why are VCs So Interested?
There is no shortage of layer-1 blockchains these days. Solana, Avalanche, Fantom, Tron…the list goes on and on. Where Aptos stands above the rest though is the huge amount of money raised in such a short amount of time. Something unique about it must appeal to VCs.

That unique trait is its use of the Move programming language initially created for Diem. The main advantage of Move is that it enables performance that the dominant blockchain programming language, Solidity, doesn't. One hundred thousand transactions per second, sub-second transaction finality, parallel execution of transactions, and speedy testing are all made possible with Move.

Scalability is a massive hurdle for blockchain adoption. VCs are betting big that Aptos and Move is the answer.

Should You Keep an Eye On It?
Short answer: yes. Anytime bigwigs throw hundreds of millions of dollars at a new project, you'd probably be wise to keep an eye on it. One has to look no further than Solana to see that following VC money into new scalable blockchains can pay off big-time.

Long answer: yes, but… It's still very early days for Aptos. It's still in development. Mainnet hasn't launched yet. There is no token. There is no release date. You couldn't invest in it right now even if you wanted to.

Furthermore, the conditions are different now than when Solana was coming up in 2020-2021. It's just not as easy for new blockchains to rocket up. We're in a bear market now. The macro is terrible. Ethereum is becoming more scalable soon. Layer-2 rollups are booming.

Alternative layer-1 "Eth Killers" are down a ton this year. VCs are betting that Aptos will buck that trend. We'll have to wait to see if they are correct, but in the meantime, keep cautiously following this story. 


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Coinbase vs. SEC

Coinbase is having one helluva week with our not-so-friendly regulators, stirring up a fair share of drama in the process.

The bad news all started with the SEC announcing insider trading charges against a former Coinbase product manager, Ishan Wahi, his brother and his friend last Thursday.

The SEC alleges that the group “perpetrated a scheme to trade ahead of multiple announcements regarding certain crypto assets that would be made available for trading on the Coinbase platform.”

The SEC asserts that Wahi, who worked in the company's asset listing team, tipped off his brother and friend about new coins that were to be listed on the exchange. By doing so, the group was able to trade on insider information and make more than $1.5 million in profits off of 25 different assets.

US Attorney Damian Williams described this as "the first ever insider trading case involving cryptocurrency markets."

Ok. Not a great look for Coinbase as they should have caught this before crypto Twitter did. But, based on the indictment, it looks like Coinbase did have mechanisms in place to try to stop insider trading from happening and as soon as they found out that it occurred, they cooperated with authorities. At the end of the day, it's worth mentioning that Coinbase wasn't charged with anything. Instead, only the people directly associated with the insider trades got penalized.

The story doesn't stop here though. As it turns out, what was buried within the contents of the SEC indictment is whole different beast. This is where things get pretty interesting...

Inside the complaint, the SEC alleges that the defendants ultimately committed securities fraud. But in order to commit securities fraud, the defendants would have needed to trade... well, securities.

Therefore, in what Matt Levine describes as “a weird way for the SEC to say that Coinbase is running an illegal securities exchange,” the SEC is in a round-about way claiming that Coinbase has listed and allowed the trading of securities.

The assets that the SEC classified as securities are: AMP, RLY, DDX, XYO, RGT, LCX, POWR, DFX, KROM.

Regulation by Enforcement
Since Coinbase's launch in 2012, we'd be hard pressed to find another crypto company that has so openly and willingly attempted to enter conversations with the SEC.

Remember, this is the company that attempted to productively engage with the SEC around a lending product (that dozens of companies already had on market). In response, the SEC issued a Wells notice (an official way to tell a company that the SEC is going to sue them).

Now, in the middle of an unrelated indictment, the SEC is accusing Coinbase of allowing trading in securities and is accusing nine other tokens of being securities.

This, as Jake Chervinsky puts it is "regulation by enforcement." (Go read Jake's thread if you want to learn more about why this situation is so nefarious)

Coinbase's Chief Legal Officer, Paul Grewal, immediately penned a response stating that:

"Seven of the nine assets included in the SEC’s charges are listed on Coinbase’s platform. None of these assets are securities. Coinbase has a rigorous process to analyze and review each digital asset before making it available on our exchange — a process that the SEC itself has reviewed."

But, the SEC didn't stop there.

Yesterday, Bloomberg reported that the SEC is officially investigating the exchange. The company’s shares dropped 21% on the news.

Our Take
It's not that the SEC doesn't have the jurisdiction to enforce regulations...

It's that that jurisdiction doesn't give the SEC the right to engage in unjust tactics to get their way.

It'd be one thing if the SEC actually cared about protecting retail investors. If they did, one of the clearest ways to protect investors would be putting together a regulatory framework that all companies could follow and adjust to accordingly. Perhaps the SEC would have saved investors from broken, now bankrupt companies like Celsius.

Instead, the SEC has spent the majority of its time enforcing unclear regulations, through a process where exchanges and token projects alike have no way to defend themselves.


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