For our Thursday episode focused on major news topics this week, the crew broke down the latest blockchain happenings and volatility including SEC Chairman Gary Gensler’s open letter to the crypto industry which has web3 insiders fuming. We also covered: A new report into the financials behind crypto exchange FTX, detailing how the rising giant stacks up to top competitors while offering insight into why investors are giving it a private valuation that’s twice the size of Coinbase’s public market cap. We had a lot to unpack! The chaotic court proceedings around Celsius’s bankruptcy woes and how the crypto lender is lashing out at previous partners through legal action as the company looks to shift blame for the way things went down.
Welcome to Chain Reaction, where we unpack and explain the latest in crypto news, drama and trends, breaking things down block by block for the crypto curious.
For our Thursday episode focused on major news topics this week, the crew broke down the latest blockchain happenings and volatility including SEC Chairman Gary Gensler’s open letter to the crypto industry which has web3 insiders fuming.
We also covered:
Tune in on Tuesday for an interview with the CEO of fast-rising NFT marketplace Magic Eden, which is doing its best to tackle OpenSea's domination of JPEG trading.
Chain Reaction comes out every Tuesday and Thursday at 12:00 p.m. PT, so be sure to subscribe to us on Apple Podcasts, Spotify or your favorite pod platform to keep up with the action.
Lucas Matney 0:00
Hey everyone, it's Lucas and Anita and Jackie Welcome to chain reaction where we unpack and explain the latest in crypto news drama and trends breaking things down block by block for the crypto curious. So I'm back Yeah, Lucas
Anita Ramaswamy 0:18
it's been a while uh, where were you? What were you up to? It didn't see you on Twitter. You know,
Lucas Matney 0:22
I was off on a on a little time off and I completely disconnected from crypto Twitter and all things crypto. It didn't we're worried about you didn't read a single we were gonna call for storage. I made it back. Yeah. deleted. Twitter deleted slack. I just tried to unplug. But yeah, so the past day, I've been trying to keep up on some news so that we can have have a nice conversation today.
Jacquelyn Melinek 0:42
Tell us where you were the people want to know, or is it a secret?
Lucas Matney 0:46
I was I was hanging in Spain, which was very fun. Very nice weather. And yeah, pretty much did nothing except eat and drink, which was pretty relaxing in my book.
Anita Ramaswamy 0:56
Yeah, that sounds great. So nothing happened when you were back. Very good, though.
Lucas Matney 1:00
seemed like it was actually pretty lucky week. I was I was looking through stuff and I'm in like, nothing blew up. I feel like I'm not gonna lie. I actually did check coin market cap a couple times during vacation because you know, I have problems. But I saw there was one day where stuff was down like 10% across the board, but like it's fairly evening out. It seems.
Jacquelyn Melinek 1:17
Yeah. Just a few mishaps here and there, but nothing insane, like we've seen in the previous months. Yeah, seems
Lucas Matney 1:23
like we had some movement on the regulatory front. Maybe, Jackie, you want to talk about that?
Jacquelyn Melinek 1:28
Yeah. Yeah, sure. So let's get into the news. enough fun over Lucas's vacation in Spain, we gotta get back to reality. But last Friday, the US SEC chair Gary Gensler put out an op ed to reiterate that security laws should apply to new technologies like digital assets, he said, there's no reason to treat the crypto market differently from the rest of capital markets just because it uses a different technology. And he owns in on crypto lending platforms that have frozen investors accounts and gone bankrupt, which I'm sure all of us can name a few like Celsius, and we're going to be talking about that later. Exactly. And then ganzer also goes into the recent settlement from February where the crypto lending platform block phi agreed to pay $100 million in penalties. And I think what was significant in this is that he said, fortunately, there's a path forward for these crypto lending platforms. He said, I encourage platforms offering crypto lending to come in and talk to SEC staff getting these platforms into compliance with the security laws will benefit investors and the crypto market with all of this
Anita Ramaswamy 2:31
reminds me of like when you're failing a class and you've got to go to office hours. But yeah,
Jacquelyn Melinek 2:35
yeah, like your idea, you're in trouble before you even know it. But some people I spoke to were not very happy with this op ed. Instead, it was like a quote, bland repackaging of the same cop on the beat mantra. And of course, like non compliance will be met with law enforcement the same way that bad grades will be met with EPS. We've seen that time and time again. And in reference to the block fi situation, too. I think there's a stronger need for regulation to be put in place for these crypto companies opposed to like the old school rules writing in the wind, so to speak. And when Gensler says he encourages platforms, offering crypto lending to come in and talk to the SEC, he makes it kind of sound like an easy thing to do, which Listen, I've never tried to sit down with the SEC, thankfully. But I imagine it would take weeks if not months of planning a few lawyers, a bunch of cash, among other things, which is not something every lending platform has the resources or time to do. So I don't know, how do you guys feel about this?
Anita Ramaswamy 3:33
We'll throw it out there that we would love to have Gary gentler on the podcast. So if he wants to come sit down with us, you know, our doors always open. But yeah,
Lucas Matney 3:39
there's an interesting thing about this, where I feel like in genzler is ideal world, all of these platforms, just like act like they have a security and they just follow the existing guidelines. But it doesn't really work. Because all these companies know that there's like a way for them to not do that. So why would they go for the path with the most resistance? Like if they're treating Aetherium and Bitcoin like commodities, not securities, there's going to have to be more guidance and acting like all these companies are just going to like act in a way that is just going to be easy for them regulatory wise, but not necessarily maximize profits is just obviously not realistic. Yeah, I
Anita Ramaswamy 4:15
think in theory, I agree with what he says that it should be treated like the capital markets, that doesn't really matter about the underlying tech. But the fact of the matter is that the SEC just hasn't codified that into law, necessarily. I mean, we still don't know even with, you know, that recent Coinbase action we talked about a couple weeks ago, like we don't know what counts is a security and what doesn't like we know the tests, but none of us are lawyers, we're all putting on our like amateur attorney hats and being like, Well, I think it's a security, it's a security. And at the end of the day, I
Lucas Matney 4:41
have a test x right. I
Anita Ramaswamy 4:43
know. We all are
Jacquelyn Melinek 4:44
like calling amateurs and Anita. Lawyer.
Anita Ramaswamy 4:49
Right? But it's like you said look, it's like these companies are rational actors, and they're going to take advantage of any little gap that they can in the regulation to find an opportunity for profit. So I think it's frustrating for the companies but at the same time, like, I don't know, there are some loopholes that they're able to exploit and are doing. So right now, it also feels
Lucas Matney 5:07
like the companies that the SEC has gone after have like kind of been pushing their luck a little bit Coinbase, you know, listed so many assets before the SEC came knocking on their door. It was only when they started listing ones that like even people in the crypto community were like, these are shit coins that they were like that SEC went after them. So I think it's like, in a way, it hasn't seemed like the DOJ has gone after like any people who were like maybe acting in their in their best interest in a way that like wasn't recklessly flouting the rules yet, but I'm sure they will. It's a weird time right now. I think
Anita Ramaswamy 5:38
I will say the one thing that I agree with that the crypto community has criticized a lot is that a lot of the regulation has come in the form of enforcement versus like rulemaking and guidance, it might be too late for that process to really play out. But I don't know whose fault that is. Like, I think that might be on the SEC for kind of sitting on this for so long. Yeah. And
Jacquelyn Melinek 5:55
I feel like if it's such a pressing issue to the SEC, perhaps not putting out just another op ed, reiterating your stance on digital assets is the best use of your time. There is a lot of effort that goes into creating new regulations and guidelines. I understand that. But given everything that's been kind of exploding in the past few months with crypto, I feel like there would be more pressure to create frameworks for this technology instead of just applying the old practices to new tricks in a sense, as always, the
Lucas Matney 6:25
issue is the SEC probably has as many employees as like a mid sized NFT. Startup. Okay, yeah, it creates problems. Yeah. To defend my great friends at the SEC. Yeah,
Jacquelyn Melinek 6:36
Lucas, you're not paid by them? You know, right.
Lucas Matney 6:39
Yeah, yeah, exactly. No, I mean, I'm sympathetic to the SEC. I mean, I think my ultimate blind prediction map is that none of this stuff is going to shake out very well at the CFTC. taking ownership of crypto, like I think it's all going to eventually go to the SEC. So it's just how many enemies can they make in the early stages of like, not providing people guidance, and having like, big powerhouses that are like substantial public companies get screwed because they were just trying to like, go blindly into this market? Yeah, sec isn't doing a great job here. But I also think that like a lot of crypto startups are living in fantasy land.
Anita Ramaswamy 7:15
Yeah, they're taking advantage of the short term benefit, and you know, doing that, well. It's the same exact thing that happened before 2008. When, you know, banks could do prop trading. Like I'm sure that was a fun time. I wasn't around for it, but seemed like quite a party. But um, but yeah, let's talk about a bigger company. Yeah, like,
Lucas Matney 7:31
yeah, on the on the crypto startup fantasy land, one of the fantasies is going pretty well, it seems. So this week, CNBC had a report on some of ft X's internal numbers for their growth. But CNBC reported that they did over a billion in revenue last year, which was 10x from the previous year. So it was a big explosive growth here, not a huge surprise. 2021 was huge for a lot of crypto companies. It was huge for Coinbase, also, which did $7.4 billion last year, up from 1.1 billion the year before. So really an explosive year across exchanges. FTX, growing a little bit quicker, they had a lot of money, they ended the year with $2.5 billion in cash, they did 15 acquisitions, they've obviously been super active this year in bailing out some of the Sci Fi lenders, and you know, trying to like resurrect some zombies and ensure that there aren't a lot of these big organizations going under that are hurting retail and kind of preventing future growth. So big stuff happening there. I think it's interesting when you compare the $7.4 billion in revenue that Coinbase did last year, versus FTX is 1.1 billion to look at how investors are actually feeling about these companies. So right now Coinbase, we rag on them every week, I don't really, I don't know if you continue the tradition while I was gone, but we had fun. They've been getting hammered for the past year. They did big numbers last year, but investors, so they did $7.4 billion last year, their market cap is only around 16 billion right now. So to x price earnings ratio is pretty much saying we have zero faith in this company in terms of like maintaining that level of growth going forward. Meanwhile, FTX so Bloomberg reported last month actually that FTX the like overall unit was trying to raise at a $32 billion valuation, which they already raised that but they obviously raised at that in better times. And then their US arm was going to raise at an $8 billion valuation. So 40 billion for that kind of cluster two and a half times what coin base is worth on public markets when Coinbase did 7x more on the revenue side? Yeah,
Anita Ramaswamy 9:35
I mean, while this is the thing about being a private company, right, I think like yeah, you can sort of it really raises the question for me of like, who leaked these financials? Okay, I'm not I'm not giving you a theory. I'm not giving you like a hypothesis. I'm just sayin had action going on the question, because these are really, really attractive numbers. Coinbase has to report when things are going poorly they have to report you know, the numbers that aren't looking as good for them. Right but FTX doesn't have Have to they can just paint a really optimistic picture. And perhaps that's part of the reason why people are giving them more credit for their promises than we give Coinbase. Because Coinbase doesn't have anywhere to hide. I also
Jacquelyn Melinek 10:09
feel like this is significant, because like this is numbers from 2021, when we were in a bull market, and things were going great, and a lot of crypto exchanges were also doing well at the time. But in current markets, some that are public are having lower trading volumes and less revenue, which because of transaction fees, people are trading less. And that makes up a huge chunk of revenue. We've seen that with Coinbase, and Gemini, and so on. But it's also important to note that like FTX, has dove into other sectors like the derivatives market and has acquired some traditional financial products and services among those like 15 companies that we discussed earlier, which could increase their revenue stream. But I think it'll be interesting to see if like the m&a action surrounding them will pay off in 2022. If those numbers are, quote, unquote, leaked, as well, at some point, and how that will be used in the future.
Anita Ramaswamy 10:56
Least by Sam, no, I'm kidding.
Lucas Matney 10:59
I'm happy that it was at least a real number. Like it was like revenue. So at least it wasn't like when Netflix says like, oh, this movie had 40 million watch hours or something. And you're just like, how am I supposed to glean user behaviors from this one factoid? Or at least its revenue? Yeah. Right.
Anita Ramaswamy 11:15
I mean, they also released the operating income and their profit margin, which was around 27%. I mean, that seems pretty high. I didn't have a chance to check out what Coinbase is doing on that front. But I do think Jackie, the point you made about FTX diversifying into different revenue streams is a fair one, because I know that when Coinbase reported its earnings pretty recently, they were talking about how things like staking and basically, like non trading activities have much higher profit margin. So that's probably part of the bigger picture to like, if FTX is able to convert more of that revenue into profits, even if it's significantly lower, it might not really matter.
Lucas Matney 11:47
Yeah, this is gonna be like a very, very lengthy we'll be talking about FTX V. Coinbase. for probably another year, just because of the way this is shaking out. I mean, like it is truly wild to see the differences in the price to valuation, revenue devaluation here. Yeah,
Anita Ramaswamy 12:03
one last quick point that I wanted to bring up was just a number that stood out to me, which is that FTX, US comprised only around 5% of revenue total for FTX. Whereas with coin base, they are pretty concentrated in the US, you know, they have expanded globally a little bit, but a lot of FTX is 50, and acquisitions that Jackie mentioned, were in a push to expand across the globe. So there are a lot more lucrative markets in the US. And like, you know, we were talking about regulation earlier, I feel like the US is one of the most like unfavorable markets when it comes to crypto and that front. Yeah, that's
Jacquelyn Melinek 12:31
interesting that only about 5% of FTX is us revenue came from the US, because I feel like Sam Big Ben freed spend so much time on the Hill pushing for regulation and guidelines in the crypto industry when they're not even profiting that much in the US. So it kind of raises some questions as to like, what's the end goal there? And if they do plan on expanding further in the US to make it more profitable or something, and it's
Lucas Matney 12:56
weird, because if it's 5% there, but they're also raising privately for their US arm at 25% of what their global arm is worth, like, obviously, investors have higher expectations of the US growth versus the global market, which makes sense.
Anita Ramaswamy 13:11
Yeah, the US customers are pretty valuable. But that's going to be a long and bloody battle, I guess and depends a lot on whether genzler decides to, you know, stop reading the op eds and start writing some some rules, but
Jacquelyn Melinek 13:21
crypto loves long and bloody battles, right. And you know, what are we going to talk about next? Give us give us
Anita Ramaswamy 13:27
the deets So Celsius, I hope you all are not sick of hearing about it because it's still very much ongoing. Just to recap really quick, there is some news but quick recap. It's the crypto lender Celsius. They halted withdrawals in the middle of June after the fall of the terrorists Stable coin and there was a liquidity crunch. And a month later Celsius ended up filing for bankruptcy protection. And this is basically a complete shit show like I don't know how else to put it. There's a trustee who was overseeing the bankruptcy proceedings here. And the trustees representative basically said and I'm paraphrasing here the quote, there's no real understanding of the nature or value of Celsius holdings or where it keeps them. So now the trustee wants to appoint like a third party examiner to look into the company's business model and see like, where are they keeping their cash? How do we even go about liquidating this company, when we don't even know where their assets are in the first place? The problem is they even know where they're at. Like, I don't know. See, the problem is that like appointing an examiner is super costly. It can take like a year or longer there was one appointed in the Enron case it took like a year for this person to finish their work. So it's not even clear whether the creditors here are going to agree to appointing an examiner. But the news this week was that there were two big lawsuits that Celsius filed and the first one was against ki phi, which is their money manager and Ky phi is pretty small. And just to you know, rewind a little bit what happened with ki phi is that ki fi sued Celsius saying that Celsius committed fraud a couple of days before Celsius finally filed for bankruptcy and keyfile at that time basically accused Celsius of not hedging their risk properly using Customer funds to manipulate their token price. And that was all coming from Jason Stone, who is the founder of key phi behind the lawsuit, he literally called Celsius a Ponzi scheme. And now Celsius is hitting back they countersued on Tuesday, and they claim that stone stole and or lost millions of dollars worth of crypto on their behalf. Because essentially what keyfiles role was here was that they had been acquired by Celsius, and they were responsible for managing Celsius investments. And when crypto prices fell, that's a lot of the reason behind what caused this whole liquidity squeeze in the first place. So at first keep, I wanted to get ahead of this. So that's why they filed the lawsuit right when Celsius was starting to you know, starting its downfall. And now Celsius is saying well, actually it wasn't us it was the fact that you guys didn't manage the money properly. And here's the hilarious part is that in the lawsuit Celsius claim that stone overstated his crypto investing expertise, and that he ended up losing crypto through gross mismanagement. So basically, you know, saying that he is incompetent. And they also accused him of using tornado cash, which we talked about earlier to launder some stolen funds. So they're like, not only is this guy stupid, he's also stealing from us. That was basically the TLDR of the lawsuit.
Jacquelyn Melinek 16:08
It's like when you put on your resume that you're proficient in Excel, and you're not Yeah, but in this case, it's billions of dollars managing crypto.
Lucas Matney 16:18
There are no heroes in any of these lawsuits ever is the thing but it's also just like you gotta see Celsius as lawyers going after some company for gross negligence and and I also I adore the phrase stole and or lost, like, you either you either screwed us over aggressively, or you just did it by accident, but I'm gonna say both.
Anita Ramaswamy 16:37
Yeah, I think the legal language implied that both happened to Celsius is pretty mad. They they filed another lawsuit to this was like a smaller one. But they also sued their custodian prime trust, saying that prime trust when they ended their relationship with Celsius back in 2021. Before all of this went to shit, that they didn't return enough of the funds back to Celsius. So Prime trust, gave them a bunch of money back but still withheld the $17 million worth of assets allegedly. So I think what's happening here, Celsius is kind of scrounging for cash, like they need to pay their creditors, they need to be able to give something to these people in the bankruptcy proceeding. And they just don't have a lot of assets right now. So they're going back to prime for us. And they're like, Hey, guys, like can you please give us that 17 mil? We need it.
Jacquelyn Melinek 17:17
After the 100 and 19 million wasn't enough? I think it's interesting because like, they should be focusing on these bankruptcy proceedings, and maybe they are but like you said scrounging for money is interesting tactic as well.
Lucas Matney 17:30
It's funny how fast companies grow and how slow they die sometimes, or, you know, obviously, Celsius is already feels kind of dead in some capacity. I mean, they're obviously still doing some stuff. But all the legal fees that go into a slow, prolonged death are
Anita Ramaswamy 17:45
Yeah, it's gonna be messy. And no one really knows what's actually going on here. I think the weirdest part of watching all of this unfold is just seeing everyone point fingers at each other. And there's no one we as the public don't really know who to hold accountable. The trustee running the bankruptcy proceeding doesn't know who to hold accountable. You know, no one really knows exactly how and what happened. And I think we're gonna be unpacking it for a really long time.
Jacquelyn Melinek 18:10
Before we get out of here, we wanted to highlight a few stories we're working on this week, or have already published and throw a shout out to next week's guest. I personally interviewed the former CFTC commissioner on how important regulation is right now, which is pretty timely, given the conversation we've had and how the responsibility for crypto regulation should be on the government and not new entrants, she said, which I guess we'll see.
Anita Ramaswamy 18:32
Yeah, lots of interesting stuff there. I did a Twitter spaces this past Monday with two investors at Han ventures on the path ahead for crypto startups. So that's going to be coming out in our podcast feed on Friday, just to play back of that conversation. And also this week, keep an eye out for a new fund launch I'm going to be reporting on that's focused in the emerging markets.
Lucas Matney 18:49
After returning from vacation yesterday, I have been focusing on getting our programming together with the rest of the crypto team for the crypto sessions event that we have in Miami in November, it's going to be super awesome. We've got a lot of top investors and founders in the Web3 space, really some of the most influential people, we've got tickets that are available already for this, you can check them out on techcrunch.com. And we've teased out a few of our first early guests. So there's gonna be some really exciting stuff going down in November and we'll all be there so you can see us in real life
Jacquelyn Melinek 19:20
talking TechCrunch I want to also shout out a promo code for our TechCrunch Plus subscription service, which I write for and you can save 25% off the annual pass for its code chain reaction.
Anita Ramaswamy 19:31
Yeah, last thing make sure to tune in on Tuesday next week, where we're gonna be interviewing Jack Lew, the CEO and co founder of the NFT startup magic Eden.
Lucas Matney 19:41
We'll be back every week with interviews with the experts in the web three space catch Anita, Jackie and myself every Thursday for the latest in crypto news. You can keep up with us on Spotify, Apple Music or your favorite pod platform and subscribe to our companion newsletter also called chain reaction. Links to the newsletter and more from our guests can be found in our show notes and be sure Follow us on Twitter at chain underscore reaction.
Anita Ramaswamy 20:03
Chain Reaction is hosted by myself Anita Ramaswamy along with my co hosts Lucas Matney and Jackie melanic. We are produced by Yashad Kulkarni on our associate producer is Maggie Stamets with editing by Cal Keller Bryce Durbin is our Illustrator Alyssa stringer at leats audience development and Henry pika that manages TechCrunch his audio products. Thanks for listening and see you next week.