Welcome back. This week, Jacquelyn and Anita ran the show while Lucas was off on vacation. We got up to speed on the U.S. government’s crackdown on cryptocurrency mixer Tornado Cash because of its role in facilitating money laundering. While it’s true that hackers have long used Tornado to fuel illicit activity, we tried to answer some bigger questions: what is a mixer in the first place, and what exactly would someone use one for if not crime? This week’s episode comes just after Coinbase announced its long-awaited, ultimately disappointing second-quarter results, so we ran through the numbers and what they mean for the industry. We also talked about Binance and Indian exchange WazirX, which might never, ever, ever be getting back together. Subscribe to the Chain Reaction newsletter to dive deeper: https://techcrunch.com/newsletters
Welcome back. This week, Jacquelyn and Anita ran the show while Lucas was off on vacation. We got up to speed on the U.S. government’s crackdown on cryptocurrency mixer Tornado Cash because of its role in facilitating money laundering. While it’s true that hackers have long used Tornado to fuel illicit activity, we tried to answer some bigger questions: what is a mixer in the first place, and what exactly would someone use one for if not crime?
This week’s episode comes just after Coinbase announced its long-awaited, ultimately disappointing second-quarter results, so we ran through the numbers and what they mean for the industry. We also talked about Binance and Indian exchange WazirX, which might never, ever, ever be getting back together.
Subscribe to the Chain Reaction newsletter to dive deeper: https://techcrunch.com/newsletters
Helpful links:
https://techcrunch.com/2022/08/08/ethereum-co-founder-sees-role-diminishing-as-blockchain-becomes-increasingly-decentralized/
https://techcrunch.com/2022/08/08/treasury-tornado-cash-laundering-stolen-crypto/
https://techcrunch.com/2022/08/09/coinbases-earnings-fall-short-of-expectations-as-crypto-winter-rages/
https://techcrunch.com/2022/08/06/binance-says-it-doesnt-own-indian-exchange-wazirx-years-after-acquisition-announcement/
https://techcrunch.com/2022/08/08/binance-tells-estranged-partner-wazirx-customers-to-move-funds-to-discontinue-off-chain-transfer/
Anita Ramaswamy 0:04
Hey everyone, it's Anita and Jacqueline. 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 know Jackie had some exciting news this week. I saw late on Friday night, Jackie, that you were on a call with someone really important in crypto Vitalik. How was that? Yeah.
Jacquelyn Melinek 0:27
Yeah, it was actually funny because I went out to dinner. And then I came back, and it was like, 1055. And I was like, Oh, right. I have a call at 11pm on a Friday night. So I think
Anita Ramaswamy 0:37
I was like out and I saw it on Twitter. They were chatting.
Jacquelyn Melinek 0:40
Yeah, crypto is 24/7. I mean, you know that. So I had this press call with batalik. He invited us a TechCrunch, which was great. And basically, prior to it, we send in questions, and he picks like 10 of them or his people did. And one of the responses was about where he sees the crypto industry going within the next 10 years. And it was super interesting to hear his thoughts. He said it's hard to predict. But he thinks within the next 10 years, crypto has a power to transform into something that's not based on promises of being useful, but is actually useful. And I think that's really interesting coming from the co founder of Aetherium. Obviously, today, there are a handful of like crypto projects and protocols that are useful, but he's saying like he expects scaling to be the trigger for that. Because a lot of applications today are promising in theory, but they're not viable because of scaling issues. But once those are solved, they're going to get to the point where it's the final trial, that pivotal moment where applications have to make it or they think he thinks within the next 10 years. That's going to be the biggest part. And we'll see like what blockchain application to actually have the power and ability to pass through that. So I thought that was super interesting. Yeah. And he was super nice. Yeah. And it was like noon and Korea. That's where he was based. Oh, wow. So I'll give him credit that it was like a fair time for him. But for me, it was a little late.
Anita Ramaswamy 1:58
Yeah, totally. I mean, interesting, too, because I was reading your piece on this. And I know that another thing he talks about was that he was going to be sort of taking a little bit of a step back or like letting the Ethereum network sort of run without him. And I know that one big part of discussion has been how tied Vitalik is to Aetherium and how they're so linked, like a lot of I think like Bitcoin Maxxis always point to that and say like, oh, Ethereum isn't truly decentralized, because Vitalik has such a big say. So it seems like he's really trying to push back against that perception and show that like, hey, the network has taken a life of its own. It's not really about him anymore.
Jacquelyn Melinek 2:30
Yeah, yeah, he was saying that, like he thinks today, Ethereum can survive without him. And I think that's honestly kind of humbling for someone who created such a big network and blockchain to say that and be like, hey, like, it's good without me, you know, and like, he still will be involved. But he said, he's taking like steps back every six months. It's like less and less. So it'll be interesting to see what happens there.
Anita Ramaswamy 2:50
Yeah, very cool that you got to chat with him. Yeah. But yeah, there was a ton of news this week. And the first thing I wanted to talk about was this whole tornado cash situation. So tornado cash is a crypto mixer, which I'll explain what that means in a second. But basically, the US Office of foreign asset control the OFAC imposed sanctions against tornado cash, and they have prohibited all US citizens and businesses from using this service. And so I co wrote an article on this with Carly, who is on our team at TechCrunch uncover cybersecurity. And basically what a cryptocurrency mixer is, is it allows people who are sending crypto to conceal the source and the destination of their assets. So it'll blend a bunch of transactions together, and you can't really see where the funds are coming from or where they're going to and tornadoes specifically operates for the Ethereum network. So for anyone who's trying to transact in Ethereum, and the US government basically came in and they were like, ya know, anyone in the West can't use tornado anymore. The quote was actually from their announcement, despite public assurances otherwise, tornado cash has repeatedly failed to impose effective controls designed to stop it from laundering funds for malicious cyber actors on a regular basis. And without basic measures to address its risks. That's from Treasury, Undersecretary Brian Nelson. So they were essentially saying like, there's a ton of money that's transferred through tornado and a lot of it they attributed to money laundering,
Jacquelyn Melinek 4:10
right? And what about the other money going through tornado cash? Like, is there a good side to this?
Anita Ramaswamy 4:16
Yeah, so that was the funny thing, actually, is that in the announcement from the treasury, they said that $7 billion worth of money had been laundered through the platform, right. And they attributed a lot of that to North Korea. There's this group, the Lazarus group, and we've heard of them a couple of times and chatted about them on the podcast, because they're North Korean state backed hackers. And they were behind the XE infinity hack and a bunch of other high profile hacks and crypto. And so a bunch of the money that had been transferred through the platform of tornado was stolen funds from Lazarus group. And the tornado platform was also apparently used in last week's Nomad hack that we talked about. So there definitely is a good amount of illegal activity going on. And it's definitely helpful to criminals who are trying to steal money to use a platform that would conceal this source and destination of their funds. But with that said, the Treasury said it was $7 billion in their announcement that had been laundered. But elliptic, which is blockchain analysis firm that I was talking to, they actually came out with a different estimate and said only about $1.5 billion was linked to crime. So specifically, like ransomware, hack stolen funds, that's a pretty big discrepancy, right?
Jacquelyn Melinek 5:19
That's a big difference. If I had 7 billion and I found out it was only 1.5 billion, I would be a little upset. And laundering is no different. That's a big discrepancy for sure. Yeah. And
Anita Ramaswamy 5:30
elliptic is a pretty trustworthy source. So you know, I mean, they look at on chain data. And I thought that was really surprising. And I think the reason behind the US government saying it was $7 billion of, you know, basically criminal activity. I don't think that's quite exactly true. Because there are a lot of legitimate use cases for something like tornado, I was reading about Vitalik. Back to him, he actually came out and said that he had used for NATO cash before to make donations to Ukraine. And so there are a lot of situations where I think people want financial privacy, like when they're making a donation, or you know, the thing is in crypto, right, like if someone knows your name, and they know what your wallet addresses, they can link the two and they can literally see every single thing you've done on any public blockchain. So like if I bought an NFT, and I like didn't want people to necessarily know every single NFT that I own, but they already know that I'm linked to a certain address, they'd be able to see that. So I do think a lot of that like 6 billion or so five or 6 billion or so dollars, that wasn't actually verified to be criminal activity was probably people just using tornado cash for things like that. Yeah, too. But you know, they don't want everyone to see every transaction that they've ever done, right?
Jacquelyn Melinek 6:33
Yeah. For those of you who can't see me in a neat era laughing a bit, and I'm laughing because she brought up the idea of buying NF T's you might not want people to see and I'm thinking of a crypto dick, but NFT is maybe there's some founders out there who don't want people knowing that they own those, but they wanted to partake in it.
Anita Ramaswamy 6:50
I think that's valid, you know, to each other. Oh, really?
Jacquelyn Melinek 6:53
Yeah, you know, maybe I want to hide some NF T's to just kidding. But I'm going back to tornado. This isn't the first cryptocurrency mixer to face hot waters with regulators for illegal activity or alleged illegal activity. In the past, we've seen sanctions against blender.io, another mixer that was also used by the Lazarus group, the North Korean one, and then also some in conjunction with helix, which is another crypto mixer. But what do you think this means for like the future of them? Is it just a matter of time before the US goes for all of them? Or is there a chance that crypto mixers can exist?
Anita Ramaswamy 7:26
Yeah, I would say that on a personal level, I guess I hope not. Because I can definitely see the valid use cases being a thing. But I think that things are not looking great. You know, if the US government is really going to crack down on a tornado like this and say like all of the money going through the platform is criminal activity. It's money laundering. I don't think that bodes too well, for anyone operating a mixer going forward. I know there are other groups out there that are working on solutions, where they're trying to take sort of a middle ground approach where maybe they'll report to the government what your transactions are, and make sure that they're compliant, but they're not going to mix your funds with like North Korean hacker groups or anything like that. The thing with tornado though, is their founder was pretty insistent that this platform should run on its own and shouldn't have any rules or regulations. And I know, that's a big point of discussion and debate in crypto, you know, like to what extent should those principles be preserved? I think there are a lot of people who want privacy, but they don't want to hide from the government necessarily, like they just might want to hide their embarrassing NF TS from their friends. So it is unfortunate. And I think that that's going to be a huge challenge for people who were actually using crypto because they like, you know, if you compare it to like a traditional financial system, in some ways, there's even more privacy using Trad fi than there is using a public blockchain because it's not like a one to one thing where everyone can see what you've done. And in some ways that transparency is really good. But at the same time, I can definitely see why there are totally like legal valid, legitimate use cases where you don't want people to see every single transaction you've you've done. So yeah, things are things are not looking too great. For anyone who's running a crypto mixer right now. I don't think the US government is going to be too friendly towards them.
Jacquelyn Melinek 8:55
Yeah, no, I definitely agree with that. So I guess we'll see where this heads long term. But earlier this week, we also saw speaking of public things, publicly traded company Coinbase reported its second quarter earnings for 2022, which as I'm sure some of our listeners know, already, it fell short of expectations. I do not want to bore everyone with a bunch of numbers. So I'll try and keep it to a handful of numbers. Yeah,
Anita Ramaswamy 9:18
what are the key metrics here?
Jacquelyn Melinek 9:20
The key metrics Coinbase is net revenue declined from about $2 billion in q1 to $800 million, roughly in q2, which is about a 60% decline, according to our math. But that said,
Anita Ramaswamy 9:35
I might have used a percentage change calculator yesterday when we were covering this. So
Jacquelyn Melinek 9:39
yeah, I didn't major in math, but I can do math online. But basically, a lot of this happened because crypto trading activity has slowed. And that's a major impact given that that is coin basis main revenue stream and they also had a large gain and costs compared to the year ago thanks to share based compensation costs, r&d, and like a few other things. So combined Egnyte with the decline in revenue really put Coinbase in the red zone. And going back to the crypto trading activity, we've seen that slow across all exchanges just because of like what's going on in the market right now people are either holding, they're not selling, or they're just kind of doing neither, you know, like anything. Yeah, we saw that the total trading volume for Coinbase also fell about 30%. And a lot of this blame, according to the shareholder letter, is due to the down market trend that we're seeing right now. And it also could be that its core retail customers are trading less and looking toward non investing activities and holding on to their assets instead of selling, which, of course, is a little bit less lucrative for Coinbase, as people are exploring new opportunities. Yeah, so
Anita Ramaswamy 10:43
a non investing activity like let's let's dive into that for a second. Actually, Jackie, and I were like, covering this yesterday. And a frenzy. I feel like this happens so fast. And this is one line that really stood out to me in the shareholder letter, when I got it was about non investing activities. So basically Coinbase makes most of their revenue on trading fees. But there are other things that people can do with their crypto. And one major example of a non investing activity is staking and ahead of the Aetherium merge that's supposed to happen, staking is going to become even more important. So that's where you deposit your coins into the network in order to validate transactions. So Ethereum is sort of shifting, like they've said, they are going to be doing for a really long time from their proof of work validation system to a proof of stake validation system. So that's going to be a really competitive market. I think for a lot of exchanges. We're trying to get customers to use their staking products. I know like by Nance us announced a sticking product a couple of months ago, like Coinbase has been pretty aggressive in this space. And they have been so far, like, relatively successful, but the problem for them is that staking just doesn't bring in as much revenue per user as trading does. So they still want to see that recovery in trading activity, especially from US retail investors. You know, in reading the shareholder letter, there was a lot of discussion about activity, you know, from institutions and how they're trying to build out Coinbase prime, which is sort of their premium offering, right. But at the end of the day, like US retail investors are in a lot of ways the bread and butter of Coinbase is business specifically. So unless we see a recovery in that particular segment, it's gonna be pretty tough for them like they are diversifying, but in my opinion, it might be a little, like too little too late for them. Yeah, but it's not it's not all negative news, right?
Jacquelyn Melinek 12:16
No, no, outside of the q2 earnings, things have been like somewhat hot and cold for Coinbase. Last week, Coinbase partnered with Blackrock aka the world's largest asset manager with over $10 trillion in assets. How can someone have that much in assets? I don't know as Blackrock as like zillions and zillions of dollars. Yeah, don't quote us on that. But Coinbase is gonna be providing Blackrock institutional clients access to crypto, which is pretty huge news. And at the time, Coinbase is stock jumped on that. And this is apparently been a long time in the making, according to Coinbase CEO, Brian Armstrong. So that
Anita Ramaswamy 12:51
was like before earnings, right? Their stock price dropped because of that. Yeah, because of that.
Jacquelyn Melinek 12:55
Yeah. And then it also partnered with meta formerly known as Facebook, as we all know, to integrate its crypto wallet into Instagram. So people can showcase their NF T's and stuff, which is kind of cool. But speaking of NF T's Coinbase hasn't always been so hot. In recent months, they created an NFT marketplace, which I feel like no one has talked about anymore, because it didn't really do too well, when it launched in it, it still isn't producing the same amount of like volumes or users and transactions that we see on like open sea or magic Eden, they're nowhere
Anita Ramaswamy 13:25
even close, which is kind of crazy during what a huge namecoin basis and like trading and like other activities, but NF T's they just haven't been able to make that push. So I guess the meta thing is pretty good for them. In that case.
Jacquelyn Melinek 13:35
Yeah, definitely. Hopefully, the metal thing helps them out there. And it also laid off about 18% of its staff in June and recanted offers from others. So really Coinbase is at this like point where they can either push ahead and figure out new ways to produce revenue or allow their users to expand beyond the traditional methods they've already explored. Or it can also just be stuck in kind of like this limbo mode, where a lot of crypto feels like it is right now the foreseeable future seems a little bit dark, given the general decline we've seen and a lot of that is correlated to users using crypto products. And if they're not, that affects the success of not just Coinbase. But all these crypto companies.
Anita Ramaswamy 14:17
Yeah, one thing I wanted to point out was just like over the past couple of years, I mean, starting with the pandemic and sort of the crypto Bull Run, we saw people really aggressively trading and being super interested in that. And I do think it marks a broader shift in interest in trading and you know, just like the rise of the retail investor that everyone talks about, but people overestimated that. And Armstrong himself said when he was announcing the earnings, I think that we probably could have grown slower over the last couple of years. And so you know, I think everyone kind of got excited to see this wave of retail investors like really double down on that. And Coinbase in particular is maybe just like a little too dependent on that trend. And so a lot of the layoffs and all of that it's happening not necessarily because I think like crypto is so screwed and it's like gonna be doing so poorly but more so that they overestimated their expectations so much that now that there's a little bit of struggle, things are really bad.
Jacquelyn Melinek 15:07
Yeah, I guess long term plans are kind of just yet to be told. And I'm sure we will be discussing their q3 earnings in a couple months on the podcast as well. So things may get better to stay tuned or they may get worse. It's all up in the air. And speaking of things up in the air, last week on Friday, it was kind of interesting. I was Xerox, India's biggest crypto exchange had a little kerfuffle with finance and Anita Do you want to kick this off here?
Anita Ramaswamy 15:33
Yeah, this is absolutely wild. I saw this headline because money Shoe Covers India TechCrunch like wrote about this and it just blew my mind like so basically what happened is was your ex I've heard of them a bunch like they're they're huge in India and by Nance allegedly acquired them two and a half years ago. So like both by Nance and was your ex announced this acquisition on their blogs, like two and a half years ago, like this is like a should be resolved should be a done deal. Like everyone had moved on. Everyone was fully under the impression that this is a company owned by by Nance, right?
Jacquelyn Melinek 16:04
So is it alleged? Yeah,
Anita Ramaswamy 16:06
so I'm saying allegedly, because via CZ, he's the founder and CEO of finance tweeted this week that the company had been trying to conclude the deal for the past few years. But the transaction wasn't actually complete, because of quote unquote, a few issues. He didn't elaborate on what those issues were, but I have like unofficial theory as to maybe why he suddenly even talked about was your exit. All right, like two and a half years have passed? No one has really mentioned anything, you know, if the acquisition fell through, you would think we would have known earlier, but actually what happened this past week is the NDS enforcement directorate, which is a government agency froze a bunch of was your ex assets worth over a million dollars, not a huge amount, but they were saying that was your ex potentially violated a foreign exchange rule and the country so I think what happened was, you know, CZ sort of saw that was your ex was in hot water and wanted to either clarify or whatever it is, like distance by Nance away from that association with with your ex, but okay, so she got really weird after he tweeted that, because Michelle Shetty, who was the co founder of was your ex basically said, No, you guys do own us. And this, like all happened over Twitter. And so there was a lot of back and forth. And like CZ, came back and said actually no, like we wanted to acquire with your ex, but they didn't transfer their source code, they didn't transfer their IP over to buy Nance. So the acquisition never actually worked out. And so these two have just been going back and forth. I mean, Shetty came back and said that xao is like using deception. I think that was the the exact quote, and all of this has just been a lot of drama on Twitter back and forth. And it's been super confusing. Like, at the end of the day, I still don't think it's resolved. Right, Jackie? Like, have you seen anything in terms of like, definitively who actually owes this company?
Jacquelyn Melinek 17:47
No, I haven't seen any further tweets. It's funny that you bring that up, because like, I feel like only encrypted, do you really get two major exchanges, CEOs, or founders fighting together on Twitter for everyone to see. And I think that that really speaks to the whole personality of being on chain. But no, I have not seen a resolution. And I don't know if we will really get one. And my interpretation based off what they said back in 2019. Both companies is that the acquisition happened. And maybe CZ is like backing out of that. But it'll be interesting to see how this plays out.
Anita Ramaswamy 18:19
Yeah, there's one potential threat of maybe a resolution down the line, which is that by Nance did make this move to basically say that they are going to distance themselves further from with your ex, because they used to have this feature that would allow customers of either platform to just seamlessly move their funds without having to pay transaction fees. And now by Nance said two days ago that they're actually going to be removing that capability for off chain fund transfer. So it's sort of like this escalation of tensions. I took some international relations classes back in the day. And it kind of reminds me of that where like, countries just do things like this to signal to each other certain messages. And I think that the message right now from by Nance is like you guys are kind of canceled. We don't own you know, we don't know if it's true or not, but it's definitely an escalation of tensions. And so it's going to be tough. Like, I think for users who are going to be pretty confused about what's actually going on, you know, comes up by Nance basically said, like, despite our best efforts to try and claw back ownership of what we thought was going to be a wholesome partnership and acquisition, that's what their comms team said was their expectation that it didn't work out and that they don't own was your ex, so who the hell knows?
Jacquelyn Melinek 19:24
And maybe they'll break up even though apparently they never got together. Yeah,
Anita Ramaswamy 19:27
this is. Wow, it's reminding me of the Taylor Swift song. Like we're never ever, ever, ever got
Jacquelyn Melinek 19:35
our act together. Okay. Yeah, I guess we can end it on that one. Before we get out of here, I wanted to highlight a few stories we're working on this week or have published and also throw in the name of our next week's guest. For me personally, I'm working on a story about crypto partnerships with sports teams, and how that's been going. I feel like last year so many crypto companies partnered with sports teams. And so I think it's time for an update. So yeah, and you know, what are you working
Anita Ramaswamy 20:04
on? Yeah, some big moves in sports. But I've been following web three gaming, I think it's really fascinating space. I'm not personally a gamer haven't grown up with that background or anything. But it's a huge, huge part of what we see in web three and crypto. So I was diving into that a little bit more. And I had a chance last week to interview Justin Kahn, the Twitch co founder on where he thinks that sector is going, you know, what he thinks about play to earn and if that's going to be sustainable, and he gave me a lot of spicy thoughts and takes on that, so be sure to check it out. And as for our guests next week, make sure that you all tune in on Tuesday, we'd love to have you We interviewed web three investor Legion from variant fund. So should be an exciting conversation dropping on Tuesday. Check it out.
Jacquelyn Melinek 20:41
Awesome. We'll be back every week with the top news on the crypto ecosystem. Catch us on Tuesdays for interviews, as Anita mentioned with experts in the web three space. You could 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 the stories we talked about can be found in our show notes. And be sure to follow us at chain underscore reaction on Twitter
Anita Ramaswamy 21:05
chain reaction is hosted by myself Anita Ramaswamy along with my co host, Lucas Matney and Jackie melanic. We are produced by Yashad Kulkarni and our associate producer is Maggie Stemettes with editing by Cal color. Bryce Durbin is our Illustrator Alyssa stringer at leats audience development and Henry pick about manages TechCrunch his audio products. Thanks for listening and see you next week.