June 5, 2022 | Issue 18
IS CRYPTO ENTERING ITS "DOT COM CRASH" PHASE?
In November 2021, bitcoin approached its record high price of $70,000. Business publications and newspapers extensively covered the story. Agents curious about crypto reached out to me with a sense of panic. They wanted to learn about crypto, but didn't know where to begin. They were overwhelmed by crypto's complexities. The urgency to learn was fueled by crypto dominating the news, sports, and entertainment. Sports stadiums sold naming rights to crypto companies and celebrities bragged about owning Bored Ape Yacht Club NFTs. That was crypto in a bull market. Now we're in a bear market and the urgency to learn has dissipated. However, the agents who read articles and not just headlines understand that crypto is not going to fade away. Crypto is simply entering a new phase. The internet experienced the same growing pains. If you are older than 40, you remember the Dot Com Bubble. In 1999 there were 457 IPOs and many were grossly overvalued because of the internet frenzy. In March 2000, the Nasdaq hit a high of 5,048 and a month later it dropped by 34%.
Internet startups focused on marketing and hoped to build a successful business model before running out of cash. Most failed and this led to the Dot Com crash.
The classic example of a failed business model during this time was Pets.com. They sold pet products online, but lost $147 million in the in first nine months of 2000 and they shut down later that year.
A key reason Pets.com failed was because they were too early.
In 2000, when Pets.com was being built, there were no plug-and-play solutions for eCommerce, warehouse management, and customer service. Cloud computing didn't exist yet and only 250 million consumers were on the internet.
Seventeen years later, after these business tools were available, Petco purchased Chewy.com and today Chewy is valued at $12 billion.
Is crypto in the Pets.com phase?
How long will it take for NFTs, decentralized finance (DeFi), blockchain, decentralized autonomous organizations (DAOs), cryptocurrencies, and web3.0 to find its footing?
When will the real estate brokerage, title, and mortgage industry embrace these crypto tools?
Who knows? But one thing is crystal clear – a lot of money has been invested in building the crypto industry and it is very influential in Washington.
Bloomberg reported that political donations from the crypto sector in 2021 and the first quarter of 2022 has exceeded contributions by internet companies, pharma, and the defense industry. (Follow the money, right?)
Don't write off crypto. It's powerful, it's global, and it's here to stay.
Join your colleagues who are learning about crypto and its potential impact on real estate.
Kudos to the CØMPASS sales managers and agents who have asked me to talk about crypto fundamentals to their agents. If you work at CØMPASS, participate in our crypto Workplace group and ask your sales manager to invite me to speak to your office.
If you don't work at CØMPASS, I'm happy to speak with you and your colleagues. Hope you had a great weekend. Have a productive week and stay crypto curious! Rich Hopen firstname.lastname@example.org | 908.917.7926 PS. You can find all CNR newsletters here.
▸ NY State Legislature Passed Bill Banning Cryptocurrency Mining
The bill sitting on NY Gov. Kathy Hochul's desk would enact a two-year moratorium on crypto mining that operates at reactivated fossil-fuel power plants.
Crypto currency miners set up large banks of computers to solve complex mathematical problems that allow them to earn crypto. Their work supports the security and immutability of the blockchain.
Crypto miners are attracted to off-the-grid power plants because the electricity is cheaper than plugging into the grid.
Some environmentalists oppose this type of mining.
According to a WSJ article by Jimmy Vielkind, the Blockchain Association's executive director, Kristin Smith, said that if the governor signs the bill, it would "send a clear signal that the crypto industry is unwelcome" in New York.
▸ Gemini Exchange Had Tough Week – Layoffs & Sued By CFTC
Gemini Exchange announced on Thursday that it was laying off 10% of its workforce.
Company founders Cameron and Tyler Winklevoss wrote in a memo, "This is where we are now, the contraction phase that is settling into a period of – what our industry refers to as 'crypto winter.' This has all been further compounded by the current macroeconomic and geopolitical turmoil. We are not alone."
Shortly after the layoffs were announced, the Commodity Futures Trading Commission (CFTC) sued Gemini for making "false and misleading statements" in how it would prevent bitcoin prices from being manipulated when it sought approval for a bitcoin futures product. The suit focuses on how traders would fund their bets.
▸ Insider Trading Charged Against Former NFT Marketplace Employee Nathaniel Chastain, a former product manager at NFT marketplace OpenSea was arrested by the FBI for trading on inside information. As part of his job, Chastain selected NFTs that were featured on OpenSea's homepage. He secretly purchased
NFTs before they were on the homepage and then sold them for two to fives more than he paid. US Attorney for the Southern District of New York said, "NFTs might be new, but this type of criminal scheme is not. Nathaniel Chastain betrayed OpenSea by using its confidential business information to make money for himself." We think of insider trading as applying to stocks, but the Department of Justice says it is not limited to securities. Also, "insider trading" is not a legal cause of action. The criminal indictment against Chastain was for wire fraud and money laundering. Legal commentators explained that misappropriating an employer's confidential information is fraud. Moving proceeds from that action through the monetary system triggers money laundering. Former US Securities Exchange Commission lawyer Alma Angotti said the case could provide an avenue for the government to argue that NFTs are securities.
CRYPTO CLASS – REGULATIONS
One of the biggest unknowns for the future of crypto is how it will be regulated. If the regulations are too onerous, crypto advocates will claim that the crypto industry will simply leave the US.
If regulations are minimal, crypto naysayers will argue that consumers will not be protected from crypto's vicissitudes.
However, articles in both the mainstream and crypto publications gloss over the regulatory process. Anyone interested in understanding regulations should understand the process by which regulations are created.
I have experience in Washington, DC as an attorney with a regulatory agency and on Capitol Hill with a congressional committee.
Here is how it works.
Departments and agencies in the executive branch, such the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), have legal authority to write regulations if they received regulatory ("rulemaking") authority through legislation enacted by Congress.
President Biden issued an executive order on March 9, 2022 requiring a multitude of the executive branch agencies to study crypto issues and report back to the President with their findings. Essentially, he asked them to recommend what explicit authority they need to regulate the industry.
It is likely that many departments will ask for additional authority and more funding.
After the administration resolves the turf battles, lawyers in the White House and departments will work closely with select members of the House and Senate to draft legislation (bills) that will work its way through the legislative process.
There will be hearings in subcommittees and full committees in the House and Senate. This could culminate with the passage of legislation that will be sent to the President for signing.
After the president signs the bill, it becomes law. There will be provisions in the law granting rulemaking authority to the departments and agencies. They will go through the regulatory process of issuing a proposed rule and inviting comments from the public. The "public" will include interest groups representing crypto exchanges, crypto miners, stablecoins, NFT creators and exchanges, banking, finance, environmental groups, consumer protection, and others. The agencies will review the comments, group them into categories, and publish their response. The agency may then jump to issuing a final rule or an interim final rule. When the final rules are published, they have the power of law which can be enforced, civilly or criminally. Trade associations unhappy with the the final rule will likely file lawsuits claiming that the agency exceeded its authority and that the rules are not enforceable. Once the regulations are in place, agencies will often write policies and guidances which will address issues that were inadequately explained or not anticipated in the regulations. The entire process from Biden's mandated crypto reports to legislation and then final agency rulemaking will take at least two to three years.
However, this does not mean the agencies must sit on the sidelines. They will attempt to use their existing authority to issue rules. Likewise, President Biden may issue executive orders to regulate some aspects of the industry.
INFLUENCERS - People to follow
Marc Andreessen – @pmarca
Marc Andreessen is a cofounder and general partner of one of Silicon Valley's most influential venture capital firms – Andreessen Horowitz. He created one of the first internet web browsers and sits on multiple boards, including Facebook.
RESOURCES – Books, websites, podcasts, articles
a16zcrypto is the homepage for Andreessen Horowitz's crypto arm. There are links to their podcasts, reports that are macro and niche, and resources on all aspects of crypto.
CRYPTO WORDS – LAYER 2
Layer 2 refers to a secondary software framework on top of an existing blockchain system. They solve the transaction speed and scaling difficulties that are common to major cryptocurrency networks.
OH, ONE MORE THING –
Thanks for reading! See you next week.
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