NICO BRUGGE: Hello, and welcome back. Here's why you should watch today's Real Vision Crypto Daily Briefing. The SEC and Ripple called for immediate ruling on the long running crypto dispute. We'll explain why the battle over XRP could have a Ripple effect over the wider market. Plus, we'll do a deep dive into how asset managers see the digital space. Lorin Gu and Omakase from Recharge Capital explain their thematic investment strategy. And as always, we'll break it down into the key takeaways at the end. Stay tuned. I'm Nico Brugge. And with me as always is Ash Bennington. How are you doing today, Ash?
ASH BENNINGTON: I'm doing great man. It's great to be back with you as always.
NICO BRUGGE: Always a pleasure and we got lots to get to, so we might as well dive into some price action. But before we do, don't forget to subscribe and like and click that bell on YouTube, or join us at realvision.com/crypto. Alright, on to the price action. Bitcoin is up slightly over a 24 hour basis after falling to its lowest since June. A challenging macro environment is definitely wreaking havoc, including fears over another significant rate hike later this year. It has been a major drag on all risk assets. Ash, what's it looking like for Ethereum?
ASH BENNINGTON: Well, it's not any better on the Ethereum side, Nico. Unfortunately, despite the merge being widely regarded as a success, Ethereum is down some 20% trailing seven day basis. That's worse than Bitcoin in percentage terms. However, Ethereum did not test any new lows, as we saw lots of volatility and big swings prior to the merge, Nico.
NICO BRUGGE: Thank you for that, Ash. One other token we're looking at today is XRP. Indeed, it's one of the best performers of the day up some 10%. And that brings us to our top story. We have more news on the ongoing battle that's gripped many in the crypto space. And indeed, it could determine the regulatory landscape for hundreds of coins. The SEC and Ripple, the company that created the XRP token have been locked in a dispute over the nature of XRP since December 2020.
Questions include, did Ripple violate the federal securities law? Is XRP an unregistered security or not? Both parties have nailed filed motions for summary judgment and want the judge overseeing the case to make a ruling now without a trial. Indeed, just so everybody's aware, XRP is the number seven cryptocurrency by market cap, but it's not quite a household name yet. Ash, can you give us a brief overview of XRP itself?
ASH BENNINGTON: Yeah, absolutely, Nico. XRP was created in 2012, as the native token of the Ripple payment protocol. The single most important use case for XRP, at least as I understand it, is cross border payment. Indeed, that's the first use case that we see listed on the Ripple website. Why does all this matter? Well, cross-border payments is a highly regulated use case rely on, in my view, at least by adoption of international money center banks.
Just a couple of years ago, I went and read through XRP's whitepapers on the Ripple website, and they were definitely focusing on being compliant. And now you have the SEC alleging that Ripple essentially conducted an unregistered security stale. This is obviously something that is not something that would be regarded as a tailwind to Ripple. Indeed, in fact, some may see it as an existential threat. Obviously, opinions on this matter differ.
But the specific thing that happened now why we're talking about this today, is that both sides have filed motions for summary judgment in the Southern District of New York. Essentially, in non-technical terms, what they're saying to the court is, hey, you guys have the information. You need to make the decision right now. We don't need a full trial. We'll have to see obviously, this is a story we're going to be following very closely, Nico.
NICO BRUGGE: And Ash, just before we move on, do you think there's any wider implications for the crypto market as a whole considering this lawsuit?
ASH BENNINGTON: Well it's interesting. We're going to talk about this more in our next story. But obviously, this entire legal regulatory compliance framework is something that I think is incredibly important. I've even alluded to this potential coming civil war in the crypto space over regulation. Those who believe in the libertarian ideals of cryptocurrency and those who want cryptocurrencies to be regulated in many ways, like securities, or within the broader purview of the US, indeed, the international regulatory framework.
So it's an important story for that reason. How much beyond Ripple this case applies? That still remains to be seen. And of course, we're going to be watching the outcome of this case very carefully to give you further analysis, Nico.
NICO BRUGGE: Absolutely. And indeed, the SEC is not only turning its attention on XRP. It is now also turning his attention on Ethereum-- A bold claim found in one of the mill SEC lawsuits regarding Ian Balina claims he didn't register his ICO, his initial coin offering, in 2018. Now, this just broke yesterday. And we've seen many similar cases by the SEC in the past.
But what's unusual in this case is that in the letter to investors who were sending ETH to Balina, it was noted that it was validated by a network of nodes on the Ethereum blockchain, which are clustered more densely in the United States than in any other country. Thus, the SEC concludes, as a result, those transactions took place in the United States. Obviously, there's lots to unpack here, Ash. Just what is the SEC claiming?
ASH BENNINGTON: Well, first Nico, you did a great job explaining this very complicated and convoluted sounding filing. By the way, we should say this filing came to light yesterday. It was filed yesterday and publicly notice for availability yesterday. So, this is the quote that is so important.
I just want to read this to people so they can hear exactly in the language that SEC used, "The US based investors in Balina's pool irrevocably committed to the transaction when, from within the United States, they sent their Ethereum contribution to Balina's pool. At that point, there Ethereum contributions were validated by a network of nodes on the Ethereum blockchain, which are clustered more densely in the United States than in any other country." And here's the killer. As a result, those transactions took place in the United States.
So there are some who are reading this, essentially, as an assertion by SEC, that all Ethereum transactions are subject to their jurisdiction. Now, that's obviously a very wide interpretation for what is in fact, a very narrow case. You have this case, as you said, Nico, where there's an allegation that there was an unregistered securities offering in the form of an ICO in 2018. But the significance here, many are reading into this is potentially much broader.
So I would say, look, this is a single filing, a single paragraph really, in a single filing by a single regulator against one person who allegedly engaged in unregistered securities offering. It takes a lot to extrapolate more broadly, that essentially all Ethereum transactions are under the purview of SEC, but that's exactly what's being questioned here. And I think it's fair and reasonable to point out that that is still very much an open question.
More broadly, I just want to give a little bit of context here for what this space is and how we think about regulation. So the real challenge here is that ultimately, you have Congress in the United States that enacts legislation, then gets signed by the President. The president vetoes it. It goes back to Congress for a supermajority override on the veto. These are effectively organizations that are least in the view of the unitary executive theory, which is a thesis about the way that regulators are ultimately responsible to the President of the United States.
You have representatives from the President of the United States in the form of these regulatory agencies, making these filings here. And this is what they do, they file civil suit, when they believe that US law has been violated. So this is a really big, obviously, complicated broader story about how we get to the legal regulatory and compliance clarity that we need in the United States. To me, it's just still extremely early.
Congress has yet to weigh in and pass law on this. There is not the case law in the space. There's not really even the precedents that are well established at the regulatory agency level. So there's a lot to happen here. And I think people really need to understand this, when they read the stories that sound potentially as though they're going to resolve these challenges. There's still a lot more to come.
And by the way, we should also had Jay Powell, chairman of the Fed, commentary about CBDCs, potentially eliminating some of these challenges. It is extremely early on the technology side, which is one of the reasons why it's so hard to get legislation out of Congress about this. These things seem to change month-to-month, sometimes week-to-week. Lots of challenges here, Nico. This is part of a much broader story that we're going to be following here, intensely on Real Vision because of its impact on this space, Nico.
NICO BRUGGE: Absolutely. And it isn't just the SEC that is focusing its attention on crypto regulation. It's also the White House now. On Friday, the Biden administration put out its first ever crypto framework for regulation. Key takeaways as per CNBC, they want to focus on eliminating illegal activity in the industry. They want to introduce strict regulations for stablecoins. And they want to point out potential significant benefits of a CBDC, i.e., digital dollar. Ash, lots to unpack here. Why do you think it's noteworthy, and what's the overall message coming from the White House?
ASH BENNINGTON: Well, it's always noteworthy whenever the White House weighs in on anything. I mentioned this unitary executive thesis. This idea that ultimately, the President is responsible for regulatory agencies in the form of providing guidance to their heads. This is important because essentially, the White House is weighing in and telling Congress the way that they should act to enact regulation that presumably this White House would sign.
But again, this is part of a very long process here. Effectively, this is just guidance for those regulators and for Congress to harmonized with the vision that the President has. But again, this is part of a much broader conversation. It is still extremely, extremely early on when the White House issues, this type of guidance. In my view, at least, people should not take this to mean that somehow, we're going to get regulated clarity on this two weeks from Tuesday.
Obviously, important to point out on this question and the previous question, I am not a lawyer. This is not legal advice. It's not financial advice. But we're just struggling here, Nico, to get our heads around these momentous sounding stories that keep popping up, sometimes multiple stories per day around these very much, very much open questions about how these things are going to be handled from a legal regulatory compliance and indeed, legislative perspective, Nico.
NICO BRUGGE: Speaking of which, let's hop across the pond where the UK regulator, the Financial Conduct Authority is speaking out against FTX saying, it's not authorized to offer financial services or products in the UK. Per Bloomberg, though, FTX is pushing back, saying telephone numbers listed in the announcement aren't theirs, and that it is most likely scammers impersonating FTX. This is a really interesting one, Ash. What do you make of it all?
ASH BENNINGTON: You got it. It's a funny story. I don't recall ever seeing a story where essentially a regulator said, hey, you guys are conducting business in our state, in our regulatory purview that you shouldn't be. You guys need to pull it. And then the entity comes back and says, hey, no, that's not us. That's actually scammers attempting to defraud people using fake phone numbers. It's an interesting one. And I'm sure we're going to follow this story. And we'll find out what happened here in the relatively near term.
But big picture, the more important takeaway I think from this is if you are in a particular jurisdiction, do your own research, understand who is regulated to do business there and who is not. That's an important point that people need to make, particularly as we talked about on this show, how very early it is in this regulatory regime for digital assets. Really important for people to do their own research. Make their own decisions about what's legal and not legal in their own jurisdictions, Nico.
NICO BRUGGE: Absolutely. Let's take a quick look at the never ending story involving LUNA and Terra and their founder Do Kwon. The Financial Times is reporting that South Korean authorities have asked Interpol to issue a red notice against Do Kwon. Authorities are alleging he is not cooperating with the investigation over the $40 billion implosion of terrorists, USD and LUNA, while South Korean authorities are claiming Do Kwon is on the run. Do Kwon denies this via a tweet which we'll throw up right here.
Now on to our main segments, as regular as regulators try to catch up with the quickly involving space, asset managers are trying to figure out how to best invest in it. Recharge Capital describes itself as a multistrategy investment firm with thematic first investing at its core. Indeed, one of those themes is the digital space. Ash spoke with founding partner of Recharge Lorin Gu, and its digital asset managing partner John Lo. John Lo, excuse me, better known as Omakase. Let's begin with Lorin describing their philosophy when it comes to the digital space. Let's take a listen.
LORIN GU: We are at thematic base just because we do believe that picking the right theme is going to be producing long term alpha compared to being generalist, especially in a halftime like this, where the fundamental values of the business that we believe in and the sectors we believe in will really drive the demand. And those are heart demands that will continue to push forward innovation as well as the business revenue generation.
When it comes to crypto, we really see crypto as a different form of FinTech, but also in emerging market. If you really think about crypto, we really see it as different new nations. Similar to a Brazil or Mexico as made of government and population. We believe that cryptos are the same, just on a different dimension was to centralize participants or citizens of digital countries. And we do believe the first and foremost thing that a country needs is FinTech or financial infrastructure. And that's why we believe that for crypto, what we're trying to focus on is really digital finance infrastructure side.
ASH BENNINGTON: [?] crypto is still an enormous theme if you look at it from that framework. How do you think about your individual investments in the space? What separates the good from the bad?
LORIN GU: I think, so much of the crypto over the last two years, Frenzy has been focused on the application side, the future promises that crypto could really fulfill. But without the initial infrastructure, a lot of those are just dreams rather than realities. So for us, again, we stick to a framework of access upsell, and regulation. And we do believe that crypto is still in the phase one approach when it comes to the development of [?] digital nations.
NICO BRUGGE: It's an absolutely fascinating click, but let's pick up with what he mentioned about crypto, just being a different form of FinTech. It seems that they are interested in the financial infrastructure when it comes to investing and not necessarily the coins themselves. Ash, what does this reveal about the opportunities that are being presented in the space? And what are your general reactions to this clip?
ASH BENNINGTON: Well, Lorin is basically making the case, as you said, that crypto is a FinTech. And they're basically investing, as you say, in the FinTech infrastructure beneath cryptocurrency. He goes on to compare them to sovereign states. Now, I suspect regulators within sovereign states might feel a little bit differently about this. But it's an interesting metaphor, and it's an interesting way to think about it. He also compares defi to emerging markets.
One of the really interesting things about crypto in general is that it's truly global. So it's a good metaphor in that sense. This is in fact, a global technology. With EMs, that's emerging markets. There's another way that the metaphor seems fitting, which is that there's high potential for growth, but also high risk. And it's also in EMs, as well as in defi and crypto more generally, very early in the development cycle. In fact, I think we actually touched upon this in the very next clip.
JOHN OMAKASE LO: When you take a system, and you rebuild it from first principles, and that system is ultimately more efficient, transparent, and some could say also more robust. So I would say in general, since the defi protocols are quite frankly simple, this simplicity has actually allowed for these protocols to become incredibly robust, and incredibly autonomous. So this type of infrastructure, we have conviction, [?] will stand the test of time.
So if we're talking about institutions that last for even 30 to 50 to 100 years, most Fortune 500 companies probably don't last for more than 30 to 50 years. We'll probably see defi and elements along this, like lineage that has been started in 2018, and lasts for above 100 years, as long as decentralized networks continue propagating. And all the incentives and game theory effects around decentralized networks allow it to propagate so aggressively, and also stay resilient to a certain degree.
NICO BRUGGE: So ash, what do you make of John's remarks when he says, "When you take a system and you rebuild it to make it more efficient, transparent and more robust, it will stand the test of time." Do you think that the current state of defi can attest to that?
ASH BENNINGTON: Oh, really good questions. I think I asked the guy. I'm not sure if you saw it in this clip. But I asked them essentially, what is defi's unique contribution? And what problems does defi solve that TradFi does not? And as you say, Omakase started by talking about this idea of first principles. The idea that if you start building something from scratch, you can redesign the effectively the core values. And he lists among those core values, efficiency, transparency, and robustness.
I want to just talk about each one of those in turn, because I think it's important. So transparency has certainly been one metric by which the traditional finance system has failed. I'm thinking specifically here back in 2008, interbank lending froze up because banks were essentially afraid to lend to each other because they didn't know what was inside some of the securities, especially the mortgage backed securities, collateralized loan obligations, CDOs, CDO-squared, all these synthetics.
So this was a challenge whereby I think the traditional finance system failed to meet the goals that had been everyone expected of it. We didn't think we'd wind up in this situation with an absence of transparency. Omakase is arguing that defi can help solve that. I think that's an important first principle. Switching