The 3 Most Important Crypto Developments in August 2022

Didier Borel - 00:00:06:

Welcome to The Swiss Road to Crypto monthly review for the month of August 2022. I'm joined, as usual, by Alex Poltorak, co-founder of Hodling SA and by Mauro Cappiello, co-founder of Blockchain Chain Innovation group. Hodling SA offers a completely noncustodial multi signature wallet solution for storing large amounts of Bitcoin for institutional holders, family offices, and individuals. Blockchain Innovation Group enables companies to run their businesses faster and safer by using technologies like blockchain and distributed ledger technology. In this episode, we will review major headlines relating to the following subjects privacy and regulation and various other topics. So let's start off first with headlines relating to privacy and regulation as the two subjects are related. In this month's episode, let me read first to you some major headlines, and then you will see how the subjects are related. The first one is relating to Tornado Cash, which is a mixer for Ether. Only the last week, the Treasury Department's Office of Foreign Asset and Control sanctioned Tornado Cash, a token mixing service that allows for privacy preserving transactions on the Ethereum blockchain. OFAC noted that criminal organizations like North Korea's Lazarus Group have leveraged the service for money laundering purposes. As a result, it added Tornado Cash's website and 44 associated Ethereum addresses with specially designated nationals and blocked persons list Arcchain derived exchanges like dYdX blocked addresses that touch Tornado Cash, shocking users who had no idea that their Ether had anything to do with it. Meanwhile, Dutch authorities arrested Alexey Pertsez, Tornado's Cash developer, claiming the software contribution to his open source code facilitated money laundering. The regulation itself also represents a new milestone. For the first time, it wasn't a person or an organization that was sanctioned, but a smart contract made of code. So that was the first headline, gentlemen. Let me also add further that Tether says it's not freezing Tornado Cash addresses until the government tells it to. Tether is upholding its decision not to freeze sanctioned wallet addresses with ties to Tornado Cash because it has not received any requests from US. Law enforcement or regulators to do that. In the case that OFAC does put an explicit request, heather would comply, the company had it. So that's first of all an interesting headline, gentleman. So there we mix privacy and regulation. I have to say, my first observation is that as we know in the US. From various court cases, that writing code is considered speaking like the equivalent of free speech. So in the US. Theoretically, you can't censor code because it comes out to the same thing as censoring free speech. So here the US Government is doing something that is, in my opinion, blatantly illegal to fight against, theoretically, money laundering. So gentlemen, I don't know what thoughts those headlines inspire for you. Who wants to start?

Alex Poltorak - 00:03:25:

I'll start, if I may. So I have a feeling that it's a bit of fake news or overreaction a little bit at least. I don't have evidence for now that the code is targeted. For now. What I see is that 44 addresses linked to some entities that have probably done something illegal are targeted. The website operator of the mixing service is targeted, but I don't think that the code is really targeted. I haven't seen any evidence of that the code is really targeted. For now, I see 44 addresses. As I understand, they are addresses of some entities who interacted with the turn on the cash smart contract. The website allowing to access the service got also down and the code hosting went down. But all of these are kind of separate things and are unrelated to the legality of code itself.

Didier Borel - 00:04:48:

But why do you say that code hasn't been targeted?

Alex Poltorak - 00:04:51:

I don't have any evidence for now of code being targeted. Many journalists said this, but I don't see any court decision on this for now. So I can say this and honestly it would be quite stupid to try to attack from this angle because for now it always failed in the US. This kind of approach.

Mauro Cappiello - 00:05:14:

Remember the travel rule where they wanted to kind of target the developer, writing the smart contacts and all that to be liable and they failed. Exactly. So I understand what you're saying, Alex, right.

Didier Borel - 00:05:31:

But for now the guy is in jail. So they might fail legally in the wrong weeks, still put them in jail.

Alex Poltorak - 00:05:38:

Is he in jail with a proper court decision or is he in jail waiting for a court decision?

Didier Borel - 00:05:45:

He's waiting for a court decision, but they put him in jail and with no what appears to me is no legal basis to do that.

Mauro Cappiello - 00:05:54:

The question is if he's the coder, is he the coder, or does he also provide operate the whole service? Right. So if he has a legal entity and let's say they hold cash or whatever it is, regulatory, then obviously it's a little bit more complicated. If you would just write the smart contract, give it to somebody and then he runs it, then he should be not liable, right?

Alex Poltorak - 00:06:25:

Exactly. That's at least my interpretation for now.

Didier Borel - 00:06:31:

Mauro, what's your opinion on why governments become very touchy about Mixers.

Mauro Cappiello - 00:06:40:

Mixing? It just says the word, right? You lose transparency, you lose history. This is kind of like a purposely go through a process to eliminate the history. Correct, Alex.

Alex Poltorak - 00:06:56:

Traditionally financial intermediaries are here to do that for you. And he's liable to his auditors and to his jurisdiction, but it's not public data. So basically there are many fair uses of a Mixer and some protocols were using mixers also in their protocols. Some exchanges may very well or brokers may very well use another cash for legitimate reasons where they collect all data, inputs and outputs from the mixer. And they can prove the inputs and outputs and link them to a KYC user, but they provide anonymity to the outside world, to this user. So this is a perfectly legitimate legal use case of a mixer. So again, I don't think code is targetable. It would be really difficult to prove. But when you operate the code as a financial intermediary who does all the KYC and stuff, you are kind of on the good side. And when you allow use of this through your own server where you own the domain name well yeah, you are providing money laundering service.

Mauro Cappiello - 00:08:27:

Alex, what he said is if there's a legitimate reason to use a mixer right, and that's one thing. This is why the judgment is probably not on the quote, it's probably on the usage. Right? Yeah. So if the company does has legitimate not kind of intentions and provide service which is legitimate or not legitimate, that should be the different judgment, I guess. Right.

Alex Poltorak - 00:08:59:

Now on USDT, as I understand, they are not operating directly under US law. So they are kind of not forced to directly. Well, it depends on the local laws in their jurisdiction.

Mauro Cappiello - 00:09:17:

State laws. State laws.

Alex Poltorak - 00:09:19:

Is that what you may be just waiting for their regulator to tell them to act? Like for example in Switzerland if you are a Swiss bank you could proactively censor some transactions or do something like that and lose customers or you can wait until the Swiss regulator comes and tell you you have to respect this blacklist or whatever.

Mauro Cappiello - 00:09:45:

Yeah, I think that's usually procedure. Right. And I guess some companies take it more serious because of reputation risk, all the weight.

Alex Poltorak - 00:09:55:

Yeah, but you remember cases like WikiLeaks where even past finance closed the bank account of WikiLeaks.

Mauro Cappiello - 00:10:05:

Yeah. Before, right?

Alex Poltorak - 00:10:07:

I guess before any legal enforcement.

Mauro Cappiello - 00:10:11:

Yeah, exactly. Yes. I'm not surprised.

Didier Borel - 00:10:14:

Okay. Another headline on the same topic, gentlemen, the Coinbase CEO Brian Armstrong, when asked if he would shut down his Ethereum staking service if threatened by regulators, he answered he would. Instead of censor transactions if he was asked to do so by a regulator instead of sensor transactions, he would cut down his Etherean staking service. To which I have to say I have doubts. We'll see if that happens. The regulator would certainly see that as a cop out and I'm not convinced they would like it. So I have doubts if you would actually do that. But we'll see. And in fact also Mauro just pointed out to me that SDX, the biggest Swiss exchange, has said it's going to launch an Ether staking service for institutional clients. So what comments do those two pieces of news inspire you? Mauro, would you like to start?

Mauro Cappiello - 00:11:07:

Yeah, so first of all, Coinbase is now basically in the cage, right? Everybody is. So basically they're listed. All of that makes them just kind of like, I think less flexible and much more dependent on other powers to survive or not. So they're kind of like in the same space other companies are so they cannot just freely, I guess, make decisions by themselves and push forward for innovation or their ideologic. That was one comment. The other one is obviously on the other side. I'm used to hear that SDX is always providing now staking services as you said. I'm sure they will obviously immediately stop this. If anybody would say finn orgs or some US people will come and ask to kind of shut it down or question the service obviously interested. This is only for institutional clients. So they are doing it for their banks and for their institutional clients which are members of six as far as I know. So it is kind of like interesting that it has now caught attention at the banks, at the institutional service provider. That staking is an interesting thing and I can also tell you I'm part of the Swiss Blockchain Federation where we also investigate in different things, mainly interest from banks and other institutions. So definitely no security token is one, staging is one, DeFi is one. These are things which these banks and members want to know about because they want to obviously evaluate if they can offer that to their clients. Right now some of them, not many of them are now implementing crypto services. Right? We heard about cost finance and others but I think on the road map they're already working trying to find out the legal implications and all these kind of things and technical forestaking for defy, which is a good thing, right? So they're kind of embarking into this roadmap of making use of digital asset, providing that to clients. Everything is going to take much longer right, because of legal questions and orders. But it's a positive thing that they embark into reviewing it.

Didier Borel - 00:13:42:

Do you think for the time being SDX's incursion into security tokens and other digital services? Do you think it's making money or not yet?

Mauro Cappiello - 00:13:52:

So my guess is the reason why they expand or broaden their portfolio has talking to do because maybe the security token transformation is not as extreme as they would like to have because otherwise they probably will be very busy with that. But they also have done investments in companies which would allow them to provide these services too. So that's why I think they are trying to diversify their business in this space again to their members. Right. As far as I know it's not a retail person, right Alex?

Alex Poltorak - 00:14:34:

Yes, I think that it was a funny marketing move from Coinbase but I doubt they will go down this road because if they stop this service because of censorship, they will probably have to stop all their other wallet related or exchange related services for the same reasons. Basically. For example, what does it mean to censor or not to censor transactions when you are a stater? It means that if the transaction is on the fact that you have not to confirm it, it's kind of the same for financial intermediaries, for any exchange or withdrawal or deposit transactions. So they will have to apply the same to all of their other services. Now, as a company, when you choose between censoring and making users unhappy or stopping the service completely, or just not applying the regulations and kind of doing sort of rebellion against the regulator, you probably think what the others will do. And with the proof of stake in Ethereum, you know exactly world big stakers. You know exactly which jurisdiction they are in, and you expect them to do the exact same thing. So that's probably to me the biggest difference with some more decentralized networks like bitcoin, where you can more easily become an independent and fully anonymous minor.

Didier Borel - 00:16:23:

Okay, let me bring up another headline that caught my attention is the crypto investment firm digital currency group registers an executive as a lobbyist. The digital currency group, which counts more than 150 crypto companies in its portfolio, has registered its vice president of public policy, Julie Szel, to lobby on its behalf and the US. Federal government. So there are two sides. On the one hand, maybe crypto purists don't like Washington, don't like regulation, don't like regulators. And on the other hand, you sort of need wall street, in my opinion, because wall street has a lot of money involved, and they're going to pay to have lobbying groups that have gotten some results in the US. So far. So even though maybe some crypto purists might not like wall street getting involved in bitcoin, on the other hand, do we need them because they pay for lobbyists?

Alex Poltorak - 00:17:18:

Are they getting involved around bitcoin or about the security tokens and stable coins?

Mauro Cappiello - 00:17:26:

I guess both. I know digital currency since 2016, or probably they probably exist even before that. But they were kind of also driving all these consensus meetings we had in New York and so forth. They were bringing already then companies. They were bringing politicians, different people to these events. So they were really driving this lobbying for the industry in the US. And then obviously globally. So I don't think this is just about security tokens because they have invested in so many different companies with technology and non technology. I think it's really maybe also in response to educating politicians, continue to educate them, see the value. I'm not sure I would connect it only to wall street. For me, this is just kind of like how to get lobbying obviously on different level politically what's happening or maybe preventing.

Alex Poltorak - 00:18:36:

Even Antonopoulos was doing lobbying in US. In Canada for explaining some technical realities and how the society should potentially handle them. But for me, I differentiate between two things. Bitcoin, which is like third, money of the enemies that cannot be manipulated by anyone, so trusted by everyone, and securities, where you seek for legal protection of your government or some jurisdiction. So when you buy a house, let's say, or company share presented as a token, you still want some legal protection, you expect it. So I don't see any problems with this kind of lobbying and education.

Mauro Cappiello - 00:19:39:

I just looked at the LinkedIn profile. She's actually vice president of the center for Capital Markets competitiveness in US. Chamber of Commerce. Another reason is definitely that the US now understands if they don't do anything all their business, because in all the jurisdictions right. So this has really I think it's good for the US. That they have that right. They have enough money. Right. They have invested in 150 companies. These guys were in it from the start. So it's really pushing the industry and the development and the movement. So I think it's good.

Didier Borel - 00:20:24:

And you think your clients like that? Okay.

Mauro Cappiello - 00:20:29:

Absolutely. Yeah. Know, if they help kind of find solutions, educate people, find solutions, implement new ways where this can be used and they can do their transformation or they can build new business opportunities, I'm sure.

Didier Borel - 00:20:46:

Okay. Let me move on to another subject. Last month, Alex, you were saying that you didn't really think that maker Dow was all that decentralized anymore because you thought that their governance meetings resembled the meetings of the Central bank and a lot of people. Now to get the DAI stablecoin, put up USDC as collateral. So the maker Dial founder Christian Roon has stated that the DAI stablecoin could exit its US dollar peg by eliminating all of its USDC exposure. The DAI stablecoin is currently backed 60% by USDC. The Megardale co-founder said that the recent US. Treasury sanctions against crypto mixing service tornado cash was the reason for considering the pivot. Mauro and Alex wants to start.

Alex Poltorak - 00:21:41:

Well, to me it was totally expected and I think we already talked about this on the podcast, that decentralized collateral or centralized collateral are not the same things. And unfortunately, the exposure to centralized collateral may damage even the holdings of those who only use the decentralized collateral on maker die. It depends how they handle the scene.

Didier Borel - 00:22:15:

Yeah, they said 60% of the collateral and MakerDAO is USDC.

Mauro Cappiello - 00:22:22:

Make or die.

Didier Borel - 00:22:24:

Yeah. Just play on words. Make her die. Absolutely. Because now, as you say, Alex, maybe the people who only put up ether is collateral to get the DAI stablecoin could be hit by people who would put up USDC and now they would pull out. So that's an interesting point.

Alex Poltorak - 00:22:43:

I didn't think of that theoretically isolated. But, you know, like, one thing is to have it theoretically isolated, and then the other thing is waves of market reactions that are slightly rational sometimes, and then it can really destabilize even the price of it with these kind of amounts.

Didier Borel - 00:23:07:

Mauro, any comments?

Mauro Cappiello - 00:23:11:

I think still to be proven, what's the best model? Right? I'm not sure which one is the best model yet to get this confidence, as you said, somebody said, look, we only use stablecoins, which are audited by one of the big four. Does that help? It probably helps, I guess, for me, yes. It's still very open. And we probably need to have a few more experiences. What we can or cannot do before we find the right mix. Somebody wants to do gold, then you have to centralize it. Right. Asset back. So I think we have to just kind of like experience it. I still think it will be something which was going to be used. If the financial industry do not shut it down and the regulator because it's competing with their kind of initiatives, then I think it will survive. But what is going to be the best secure way or maybe another way of thinking of it, of somebody and discuss it with somebody? Is it a stablecoin for a payment or is it just an investment? Is it just an asset class? Those are two different ways of looking at it. What do you do with them? I think, Alex, you probably are more of using it as a safe heaven and you have them and you kind of make sure the volatility is not hitting you. But it seems that regulators have a problem with that. But they will probably not have less of a problem with stable coins which are more used as an investment.

Alex Poltorak - 00:25:00:

Yes. Okay, you take this from, let's say, regulatory point of view.

Mauro Cappiello - 00:25:06:

Yeah, that's my role here.

Alex Poltorak - 00:25:09:

Yeah, it's a good way to look at things. I look at them from the technical perspective and sometimes you cannot change technical reality like you cannot reinvent mathematics or change some results by law. So you have also to consider this and the reality will be somewhere in between. So over time I think we will see that. Okay. Asset back tokens or investment. Stable coins have probably to be regulated and have a good oversight and we will probably only trust regulations and not use some. I don't know. Central bank or Zimbabwe or whatever. But more trust like the Swiss banks or some good jurisdictions and we will better understand the properties of truly decentralized stable coins that are kind of way more difficult to regulate and to enforce.

Mauro Cappiello - 00:26:23:

Yes, and that's where I think what you said in that world, which is more within the crypto space, it's about technology, security and then the whole impact of it. And then the other world is where you say technology, it's relevant, but it always supersedes by regulations. So there's a certain.

Alex Poltorak - 00:26:47:

I don't want.

Mauro Cappiello - 00:26:48:

To call it security, but there's a.

Alex Poltorak - 00:26:49:

Certain but again, we are taking things from the Swiss perspective where our regulation is kind of cool and protected of the people and stuff. Many people in different countries don't really care about regulations because they do not feel protected, for example, they would rather use the technology way of protecting themselves.

Didier Borel - 00:27:17:

Interesting comment. Okay, let's move on, gentlemen. Thank you. I didn't mention the Ethereum merge which is slated to happen next month because I'm sure next month we'll only be speaking about the area merge that will have worked out well or not basically the migration from the proof of work chain to the proof of state chain. So then we'll see if we have a sort of fork and the proof of work chain continues or not because miners have spent a lot of money buying the mining equipment and might want to keep it going. And one of my recent guests on a podcast, Kevin Mona, and basically was saying that one chain always ends up winning out and dominating and then all the value goes on to that. So which chain would that be after? Proof of stake. And it's looking more and more like the proof of stake chain will be the dominant chain after the merge. And to give you some headlines confirming that Ether mine is to drop the proof of work Ethereum post merge, they said that crypto exchange Gemini announces new Staking Reward services. So Staking means proof of stake, so they're going to favor the proof of stake chain as well. So there we go. So we'll be speaking about certainly that next week, but for the time being, Circle has also said that they're not going to support the proof of work chain. So basically it seems like the proof of state chain will be the dominant chain after the merge happens.

Mauro Cappiello - 00:28:49:

I guess it's a good thing, right? Alex, do you agree?

Alex Poltorak - 00:28:53:

Honestly, I don't know. I don't care much about this, but what I know is that both sides are trying to create a lot of fun and a lot of drama to move the price either one way or the other before the merge because it will influence also on the liquidation on other smart contracts like maker Dow will influence the outcome of taking and a lot of other things. Okay, you need to be careful considering information about the merge and about the proof of work this year.

Didier Borel - 00:29:42:

Okay, so just a few odd lot headlines here that might inspire one or other of you. So the Nomad cross chain cryptocurrency bridge suffered $190,000,000 exploit, so bridges often suffer exploits. And I think I saw a headline somewhere of how many hacks there had been so far on bridges or DeFi protocols. It's even bigger than 2021, so we're still a lot of hacks in DeFi, especially on bridges. Another headline, unrelated, BlackRock, announced a partnership with Coinbase to allow investors the ability to manage their portfolio and conduct risk analysis on investment decisions. And I think the Coinbase is even going to start for BlackRock, a trust just for BlackRock, which allows them to invest directly into Bitcoin. There we go. And finally, also there seems to be a fight between Bitcoin. I think they're custodian us. And Galaxy Digital Galaxy. The Digital Galaxies decide to end the acquisition of Bitcoin and Bitcoin is not happy and they're going to sue them for $100 million. In fact, BitCo I don't know. Mauro, do you have any knowledge there of why Galaxy Digital which said that they were going to require them decide to end the acquisition. I mean, obviously they must have been doing their due diligence and saw something that they didn't like, is my first reaction. Do you have any information there?

Mauro Cappiello - 00:31:18:

I don't. I remember I started to work with Bitcoin, like, in 2018 or so. I never experienced major issues there, so I couldn't say.

Didier Borel - 00:31:31:

Okay, actually.

Mauro Cappiello - 00:31:35:

Just speculations. Maybe they have some clients or they hold custody for something which they shouldn't.

Didier Borel - 00:31:43:

Okay. All right. Any remarks Mauro on BlackRock and Coinbase.

Mauro Cappiello - 00:31:49:

No. Okay.

Didier Borel - 00:31:51:

All right. And finally, Alex last headline that might be more up your alley. Maybe you can give us some insight on this. A Monero hard fork, manero privacy. Coin has made adjustments to the security and privacy features of its network through hard fork on August 13. Among other things, the upgrades have improved the multi signature mechanisms of the blockchain, which should facilitate the exchange of information between wallets. The hard fork brought several fixes to the internal multi SIG mechanism to facilitate exchange of information such as key sets and data synchronization between wallets. In terms of security, the bulletproof algorithm was upgraded to bulletproof plus a zero knowledge proof algorithm implemented in 2018 to reinforce the network's privacy. Do you have any information or insights for us there, Alex?

Alex Poltorak - 00:32:47:

Yes. So the Monero network is one of the most active sandboxes with large community experimenting on privacy transactional privacy. So they regularly forked the network to bring some new functionality like this, usually twice per year. I think they forgot the network and bring some new stuff. So this is something that was, as you mentioned, worked out since 2018, and it takes really long time to understand, implement, audit things and make sure that the community is kind of comfortable with them. And hopefully if the experimentation is successful, partially this technology can be backported to Bitcoin and other networks.

Didier Borel - 00:33:47:

Okay. Alex, if I may ask you one question, I've heard the critique to Monero. Tell me if you agree with this or not, that in fact, not that many people use it. Therefore, the amount of transactions in a block is not that big. Meaning? In other words, the anonymity set is not that big. And I've heard some people criticize Monero saying, therefore it's not all that private because the anonymity said it's way too small. What's your reaction to that comment?

Alex Poltorak - 00:34:17:

So I can tell you a funny story. So the community is obviously very much aware of this, and some community members built what they call the church of Monero, and it's volunteers.

Didier Borel - 00:34:36:

We needed another religion. I see. Yeah. Okay.

Alex Poltorak - 00:34:40:

It's volunteers who are meeting on a regular basis and transact only, with the only goal of providing anonymity set. Okay, so they do transactions exclusively to provide anonymity set to other users.

Didier Borel - 00:34:58:

Okay, so maybe they do worry about it a bit, but do you think the anonymity set is now good enough to make you relatively anonymous. If you really want to do something that we don't need.

Alex Poltorak - 00:35:11:

Anonymity security is not black or white binary like one. So it's better than using plain bitcoin transactions. It's kind of similar to properly using coin chain transactions. Well, it provides some better anonymity already and if you use it wisely and you understand the limitations, you can also produce more transactions or batch them with transactions of your friends, family or partners, business partners. So there are ways to increase your privacy knowing these limitations.

Didier Borel - 00:35:59:

Okay, gentlemen, thank you very much.

Mauro Cappiello - 00:36:01:

Thanks. Bye. Bye guys.

Didier Borel - 00:36:03:

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