CZ You Later

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Happy Tuesday, folks.

Let it be known that I hereby give permission to put up the December holiday decor.

If you put a wreath up or set up the menorah or mishumaa saba or any other December holiday-related nonsense BEFORE Thursday, jail.

For the rest of you, have fun.

Get festive.

Already had a cup or egg nog and reminded myself why we only let ourselves have it once per year.

CZ You Later

Just one honest crypto founder. That’s all I’m asking for.

The latest computer nerd to break my heart is Binance founder Changpeng "CZ" Zhao, who along with his company were slapped across the face by a whopping $4.3 billion fine after being found guilty of money laundering and violating sanctions in facilitating financing of terrorist organizations like Al Qaeda and ISIS following an investigation from the DOJ.

CZ pleaded guilty and stepped down as CEO, leaving the seat warm for Richard Teng, an exec with a compliance-heavy background. Just throwing this out there, but are we confident that he is the right choice given he was in the company and had the same expertise as all of the rule-breaking was going down??? 🤔 

Where does the crypto industry go from here?

It’s a million-dollar question (or in this case, the $4.3 billion question). This latest hurdle interrupts what has been an encouraging Fall SZN for the sector, driven by resurged interest in tokens following the momentum suggesting there will soon be mass inflow of capital when institutional investors are given the proverbial green light to invest through an ETF.

The US being a bit skeptical of the crypto industry is not exactly news (gasp, the government is against a system which stands for decentralization and thus undermines their control?). Even looking just at Binance, various regulatory bodies have been getting dirt under their nails as they dig for anything which might indict the world’s largest crypto exchange, the most successful of which was an SEC accusation that the company was selling unregistered securities, though to be fair this was not a Binance-specific accusation.

And in this already hostile climate, the fact that Uncle Sam can bring a company the size of Binance to its knees means that absolutely nobody is safe.

In fact, the only exchange which has been bending over backwards to work with the government to ensure compliance (though the effort has been unreciprocated…) has been Coinbase, and if there was a winner from the fall of Binance and FTX in the US, it is CEO Brian Armstrong.

He has been criticized for his cautious approach while running Coinbase, but he now stands firmly in the driver’s seat in the exchange wars:

The low hanging fruit of a takeaway for startups is that founders need to think compliance first, innovation second. Unfortunately, so long as the current regulators are in place, it’s not quite so simple.

Coinbase has been as active in discussions with the SEC and other regulatory bodies and has the resources to hire the world’s best lawyers, and not even they have any idea what the rules are.

While Coinbase’s situation is a bit unique because of its treasure troves of resources, I’m not sure that Armstrong’s stance on building in the US is a viable path for any other company. No startup can expect to have the resources to navigate the maze that is Gary Gensler’s thought process, and the risks of having their business shut down literally overnight because of a rule change (or even just arbitrary clarification) makes the US a very unattractive place to build a web3 company. London is the new Silicon Valley Miami for web3 builders.

Another interesting angle highlighted in this latest incident is that in its attempt to “protect consumers,” the regulators are making the space 10x more dangerous for the everyday person.

Crypto purists hate anything relating to centralization, but the fact of the matter is that at least for exchanges, they make more sense for 90% of people. Centralized exchanges (CEX), such as Coinbase, Binance, and FTX, make buying and selling crypto as simple as trading stocks on Robinhood. To accomplish this, traders on these platforms do not actually “hold” their cryptocurrency, instead entrusting the exchange to hold it.

While this sounds bad (and can be; see FTX using customer funds to YOLO on bad market bets and Bahamian mansions), it also means that the user does not have to worry about keeping track of complex seed phrases and the other technicalities that come with holding your own keys, which are the lauded pros of a decentralized exchanges (DEX) like Uniswap which allow the user to actually have full ownership and control over their digital assets, but that comes with all of the hassle of managing this.

Don’t mean to burst your bubble, but we don’t live in an ideal world.

It would be great if everyone had the time and technical know-how to carry around a ledger and have 12 oddly-ordered terms memorized, but again, 90% of people simply don’t. Should they be barred from accessing the asset class that is cryptocurrency?

No, hence why it’s essential that we have safe options for these users to enter the space and push the mission of widespread adoption forward. Enter the irony that is US regulators pulling out the microscope for centralized exchanges, making operating in the US a living hell for companies trying to make crypto simple for consumers, either preventing them from accessing it entirely (which is the goal of regulators tbh) or forcing them to scour the dark web for custodial wallet providers.

Admittedly, this is a bit of a controversial take in the degen world, and I’m fully prepared for my self-imposed ostracization.

CEXs are inherently incompatible with the entire ethos of web3.

But it’s also possibly the only way to reach mass adoption, so I for one will be rallying behind leaders like Armstrong who can leverage their positions to make crypto more accessible for all.

The Binance saga is a wake-up call. It's another reminder for crypto startups that operating in the US is equivalent to freediving with bull sharks, where at any second, they might decide that your existence should be terminated immediately. Tread carefully, and maybe tread down Downing Street.

As for the few leaders in the space with actual influence, please stop being dumb.

Your actions shape the perceptions of 99% people, and when you engage in the very illicit behavior that politicians continue to associate crypto with (despite this making up an absolutely miniscule percentage of crypto activity), you do nothing but make the road to adoption that much more bumpy.

See ya, CZ. Cleaning up your mess won't be easy, but hey, no one said revolutionizing the financial world would be a walk in the park.

Are you looking to be the annoying friend that constantly fact drops and tries to hide your insecurity behind a repertoire of useless stats and stories?

Boy do I have the newsletter for you!

Never lose a trivia night again:

Cheers to another day,

Trey