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Commissioner Hester M. Peirce

Feb. 9, 2023

Today, the SEC shut down Kraken’s staking program and counted it as a win for investors. I disagree and therefore dissent.

Kraken operated a service through which its customers could offer their tokens up for staking. The customers earned returns, and the company earned a fee. The Commission argues that this staking program should have been registered with the SEC as a securities offering. Whether one agrees with that analysis or not, the more fundamental question is whether SEC registration would have been possible. In the current climate, crypto-related offerings are not making it through the SEC’s registration pipeline. An offering like the staking service at issue here raises a host of complicated questions, including whether the staking program as a whole would be registered or whether each token’s staking program would be separately registered, what the important disclosures would be, and what the accounting implications would be for Kraken.

We have known about crypto staking programs for a long time. Although it may not have made a difference, I should have called for us to put out guidance on staking long before now. Instead of taking the path of thinking through staking programs and issuing guidance, we again chose to speak through an enforcement action, purporting to “make clear to the marketplace that staking-as-a-service providers must register and provide full, fair, and truthful disclosure and investor protection.”[1] Using enforcement actions to tell people what the law is in an emerging industry is not an efficient or fair way of regulating.[2] Moreover, staking services are not uniform, so one-off enforcement actions and cookie-cutter analysis does not cut it.[3]

Most concerning, though, is that our solution to a registration violation is to shut down entirely a program that has served people well. The program will no longer be available in the United States, and Kraken is enjoined from ever offering a staking service in the United States, registered or not. A paternalistic and lazy regulator settles on a solution like the one in this settlement: do not initiate a public process to develop a workable registration process that provides valuable information to investors, just shut it down.

More transparency around crypto-staking programs like Kraken’s might well be a good thing. However, whether we need a uniform regulatory solution and if that regulatory solution is best provided by a regulator that is hostile to crypto, in the form of an enforcement action, is less clear.[4]

[1] Press Release Announcing Action, https://www.sec.gov/news/press-release/2023-25

[2] For a longer discussion of this issue, see Hester Peirce, Outdated: Remarks before the Digital Assets at Duke Conference (Jan. 20, 2023), available at: https://www.sec.gov/news/speech/peirce-remarks-duke-conference-012023.

[3] For a discussion of this point, see Jessica S. Hart, Note: Policing Proof-of-Stake Networks: Regulatory Challenges Preserved by Staking-as-a-Service Providers and the Need for a Tailored Regime, 23 Col. Science & Tech. Rev. 192, 206-7 (2021) (discussing in variations in staking service provider business practices). See also Nicholas E. Gonzalez, Does Cryptocurrency Staking Fall Under SEC Jurisdiction?, 27 Ford. J. Corp. & Fin’l Law 557-58 (2022).

[4] Solutions need not come from a regulator. See, e.g., Proof of Stake Alliance, POSA Advances Staking as a Service Industry Driven Solutions (May 14, 2020) https://medium.com/proof-of-stake-alliance-posa/posa-advances-staking-as-a-service-industry-driven-solutions-60180943773b.

https://www.sec.gov/news/statement/peirce-statement-kraken-020923

h/t:  https://www.kitco.com/news/2023-02-10/SEC-staking-decision-provokes-strong-pushback-from-crypto-firms-and-scathing-criticism-from-within.html

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22 hours ago, Neonmoon said:

I don’t know if anti-regulation is a smart position after this past year 

I'm not sure how the SEC shutting down essentially a high risk, interest bearing program protects investors. No one staking Cardano or some shit on Kraken is blind to the risks.

Also, nothing the SEC could do would've stopped FTX. Gensler met with Sam B-Cups personally so he wasn't that concerned.

But, more scrutiny is coming either by legislation or regulatory fiat. The most centralized coins will be rekt worst. Their development and use will be pushed to other jurisdictions if they survive.

 

 

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On 2/10/2023 at 7:24 AM, bernorange said:

I have had coins staked on Kraken for well over a year now.  There was nothing shady about their service/system. 

So, how do you folks stake coins without an exchange?  Do you use a soft wallet like Metamask?  How do you calculate the tax burden for your staked coins?  There are a bunch of tax services that can interface with the major exchanges to calculate tax reports.  Does the same exist for reporting activity in wallets like Metamask?

Only losers pay taxes.

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On 2/12/2023 at 12:07 PM, Mullet Free said:

I'm not sure how the SEC shutting down essentially a high risk, interest bearing program protects investors. No one staking Cardano or some shit on Kraken is blind to the risks.

Ah, that explains why nobody complained when FTX went tits up, wiping out billions in the process. Everyone was cool with it, and just accepted it as the risks of investing in unregulated scams.

Edited by Blotto
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On 2/11/2023 at 11:59 AM, Neonmoon said:

I don’t know if anti-regulation is a smart position after this past year 

What are you considering to be an anti-regulation position?  SEC commissioner was explaining how the industry got zero guidance from the SEC.  Compliance with regulation is kinda difficult when the regulation isn't well defined.

https://twitter.com/brian_armstrong/status/1624829368915890176

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14 minutes ago, bernorange said:

What are you considering to be an anti-regulation position?  SEC commissioner was explaining how the industry got zero guidance from the SEC.  Compliance with regulation is kinda difficult when the regulation isn't well defined.

https://twitter.com/brian_armstrong/status/1624829368915890176

I am considering the dissent of Hester Pierce, the SEC commissioner, as a position of anti-regulation. She has a history of anti-regulation postions. She even even wrote a book about how the Dodd-Frank Act was flawed, which is ironic, considering she worked for the SEC from 2000-2004, and their lack of regulation helped forment the 2008 financial crisis. Not shockingly, she is again dissenting against regulation. 

She is arguing there is zero guidance. Which is in fact, not true, there is oodles of guidance about securities regulation, but until now, the Crypto industry believed its yield products were not securities. They were wrong. 


 

 

 

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12 hours ago, bernorange said:

I guess we'll find out if Coinbase challenges the SEC in court.

That will be interesting. I think it's clear that the SEC went after someone like Kraken first because their resources are limited relative to a Coinbase that can take these things further. Good to book an initial, easy win.

 

I posted in the NFT thread, but the big new thing is ordinals/inscriptions on Bitcoin. 

https://medium.com/coinmonks/ordinals-an-overview-of-bitcoin-nfts-795c39447e23

People are mostly using the inscriptions for NFTs now, but you can theoretically put all kinds of data directly on the chain. It has clogged the mempool of unconfirmed transactions and caused fees to rise. This kind of use seems like it will eliminate any concerns about fees not supporting mining as the block rewards shrink.

The other interesting angle is the legal effect this will have as people place all kinds of data on the chain, some of which will be illegal. 

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47 minutes ago, Mullet Free said:

I posted in the NFT thread, but the big new thing is ordinals/inscriptions on Bitcoin. 

https://medium.com/coinmonks/ordinals-an-overview-of-bitcoin-nfts-795c39447e23

People are mostly using the inscriptions for NFTs now, but you can theoretically put all kinds of data directly on the chain. It has clogged the mempool of unconfirmed transactions and caused fees to rise. This kind of use seems like it will eliminate any concerns about fees not supporting mining as the block rewards shrink.

The other interesting angle is the legal effect this will have as people place all kinds of data on the chain, some of which will be illegal. 

It's not that hard to store data in a distributed manner such that it's widely accessible and hard to remove - encrypt it and/or segment it and distribute it on cloud and traditional storage. Bingo bango, and no ridiculous BTC TX fees to grapple with either!

IDK man, it's a solution in search of a problem. I just don't see any utility that is marginally better (or cheaper) than existing methods. 

 

...

 

Except for driving more interest in bitcoin and more TX volume, which is necessary for the crypto to continue bringing in new money to keep the music going

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If I'm understanding that, individual Satoshis are being tied to ordinal NFTs at which point, the Satoshi isn't really a coin to be bought/sold/traded as a "regular" Satoshi.  It (theoretically) becomes a collectable.  With respect to the prospects of bitcoin as a currency, the growth of collectable Satoshis would actually be deflationary (by shrinking the supply of non-minted Satoshis). 

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56 minutes ago, Captainant said:

It's not that hard to store data in a distributed manner such that it's widely accessible and hard to remove - encrypt it and/or segment it and distribute it on cloud and traditional storage. Bingo bango, and no ridiculous BTC TX fees to grapple with either!

IDK man, it's a solution in search of a problem. I just don't see any utility that is marginally better (or cheaper) than existing methods. 

 

...

 

Except for driving more interest in bitcoin and more TX volume, which is necessary for the crypto to continue bringing in new money to keep the music going

I guess there's something to be said for making something permanent on the bitcoin blockchain.

In the case of NFTs, evidently Eth code for NFTs just points you to a URL rather than having the image itself. A lot of this stuff is technically over my head, but thought I'd share as it's the new thing going on.

This was a pretty good interview with the creator here. I listened to try to get a better understanding of what's going on and what's possible.

https://www.podpage.com/citadeldispatch/cd91-ordinal-inscriptions-with-casey-rodarmor/

 

58 minutes ago, bernorange said:

If I'm understanding that, individual Satoshis are being tied to ordinal NFTs at which point, the Satoshi isn't really a coin to be bought/sold/traded as a "regular" Satoshi.  It (theoretically) becomes a collectable.  With respect to the prospects of bitcoin as a currency, the growth of collectable Satoshis would actually be deflationary (by shrinking the supply of non-minted Satoshis). 

Does ordinal theory affect fungibility? - Bitcoin Stack Exchange

 

 

 

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You misunderstood me.  My post above wasn't concerned with privacy or tracking the value of minted Satoshis that are traded around.  I also understand that minted Satoshis *could* be used the same as unminted Satoshis, but why the heck would they be?  My point is that when someone owns a minted Satoshi, presumably they will keep it separate from non-minted Satoshis for collecting and "numismatic" trading.  It won't circulate for trade as a non-minted Satoshi might.  As more Satoshis are minted (ie. tied to some NFT/collectable data), the number of non-minted Satoshis will shrink (because the pool of all possible Satoshis is finite).

Edited by bernorange
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5 hours ago, bernorange said:

My point is that when someone owns a minted Satoshi, presumably they will keep it separate from non-minted Satoshis for collecting and "numismatic" trading.  It won't circulate for trade as a non-minted Satoshi might.  As more Satoshis are minted (ie. tied to some NFT/collectable data), the number of non-minted Satoshis will shrink (because the pool of all possible Satoshis is finite).

Also there remains the issue that there is no intrinsic value or utility to a minted Satoshi, aside from the hope that someone else will buy it due to generated FOMO 

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19 hours ago, Captainant said:

Also there remains the issue that there is no intrinsic value or utility to a minted Satoshi, aside from the hope that someone else will buy it due to generated FOMO 

Value is subjective, so claiming something has no intrinsic value is pointless.  Many things have been used over time to facilitate trade or transfer value. Money evolves.

 

https://nakamotoinstitute.org/shelling-out/

 

 

 

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18 minutes ago, Captainant said:

Great, so what is the value and/or utility of a minted Satoshi?

I'm sorry I didn't realize you meant one of these inscriptions? no clue. I'm not really into them. Just learning some about them because they're affecting bitcoin.

 

 But the whole TherE's No iNtriNSic ValuE point is dumb.

 

BTW at a new high for the month. 24K. Feel reasonably confident saying we bottomed around EoY.

Edited by Mullet Free
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4 minutes ago, Mullet Free said:

I'm sorry I didn't realize you meant one of these inscriptions? no clue. I'm not really into them. Just learning some about them because they're affecting bitcoin.

 

 But the whole TherE's No iNtriNSic ValuE point is dumb.

 

BTW at a new high for the month. 24K. Feel reasonably confident saying we bottomed around EoY.

If you want to be cutesy and argue that the dollar has no intrinsic value, sure fine whatever. But you're ignoring the other basis of value: UTILITY. 

By your framing (I'm presuming) USD may not have intrinsic value, but it is undeniable that you can exchange USD's for goods and services easily. The same is not true for BTC. It's a bitch and a half and requires a huge depth of technical knowledge that your average Joe will not able to navigate as it currently stands.

Sure, I'm sure the 69th sock of GRUhorn will chime in with "muh LIGHTNING!" but that still doesn't actually solve anything - it's just another abstraction layer that does nothing to address the transaction cost and latency of BTC that is preventing wider adoption. 

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19 hours ago, Captainant said:

If you want to be cutesy and argue that the dollar has no intrinsic value, sure fine whatever. But you're ignoring the other basis of value: UTILITY. 

By your framing (I'm presuming) USD may not have intrinsic value, but it is undeniable that you can exchange USD's for goods and services easily. The same is not true for BTC. It's a bitch and a half and requires a huge depth of technical knowledge that your average Joe will not able to navigate as it currently stands.

Sure, I'm sure the 69th sock of GRUhorn will chime in with "muh LIGHTNING!" but that still doesn't actually solve anything - it's just another abstraction layer that does nothing to address the transaction cost and latency of BTC that is preventing wider adoption. 

Setting up a lightning wallet like Muun is quicker than opening a checking account. Not difficult. Sending funds is incredibly easy. QR codes.

Lightning network itself is being adopted. Public channel capacity up 5x in 2 years. 

 

 

 

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One other cool thing that's happening is nostr. It's a decentralized social network. No token involved. The only currency involved is some people are using Bitcoin/LIghtning to build out features around it. I could see it expanding. I just thought I'd share since it's a unique approach to social media and the problems that come with centralized control of information. It also utilizes public/private key cryptography to verify accounts. Currently it's almost universally populated by bitcoiners. That isn't surprising since they're concerned with decentralization in general and many have been concerned with Elon's twitter direction. I use damus on IOS. Iris is a popular android app. Details below.

 

https://nostr.how/

https://damus.io

https://iris.to

 

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  • 2 weeks later...
On 2/10/2023 at 7:24 AM, bernorange said:

I have had coins staked on Kraken for well over a year now.  There was nothing shady about their service/system. 

So, how do you folks stake coins without an exchange?  Do you use a soft wallet like Metamask?  How do you calculate the tax burden for your staked coins?  There are a bunch of tax services that can interface with the major exchanges to calculate tax reports.  Does the same exist for reporting activity in wallets like Metamask?

i have done it just transferring from mm wallet then transferring the resulting coin back to the wallet using sushiswap.  sushi can pair coins for a liquidity pool and break them up when needed. As far as taxes i just calculated as i sold things.  The pool(s) that i was staking in generated a few different types of coins over time.  I would generally collect each week and sell.  I used a zero cost basis for the sale counting it all as taxable.  

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I staked some ETH to LIDO on Ledger as I pulled my modest BTC/ETH holdings to a Ledger cold wallet.

The complication and convolution is definitely a point for @Captainant … at this point I treat BTC/ETH like a slightly more readily spendable precious metals.

I don’t know anything, but I think this BTC jump is simply other crypto holders fleeing to safety. I suspect we’re back in the $16k range within a year or so, especially as recession becomes obvious and disposable income dries up. 

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Thank @gyroprotagonist.  In the time since my last post, I discovered that the Ledger Nano cold storage wallet can integrate with apps that let you stake crypto.  Also, some of the crypto tax calculator services that work with exchanges also work with the Ledger Live software and can calculate taxes there as well.

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52 minutes ago, B00M said:

I staked some ETH to LIDO on Ledger as I pulled my modest BTC/ETH holdings to a Ledger cold wallet.

The complication and convolution is definitely a point for @Captainant … at this point I treat BTC/ETH like a slightly more readily spendable precious metals.

I don’t know anything, but I think this BTC jump is simply other crypto holders fleeing to safety. I suspect we’re back in the $16k range within a year or so, especially as recession becomes obvious and disposable income dries up. 

IF the 4 year cycles continue then 2023 would be analogous to 2019.

BTC performance in 2019 +95%, actually was much higher mid year

BTC performance so far in 2023 +40%

I still think 30K is quite possible by EoY.

 

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Crypto markets likely facing some significant headwinds thanks to unraveling fraud and/or government regulators choking out business.

Quote

Silvergate Capital (SI) was downgraded to “Underweight” from “Neutral” by JPMorgan (JPM)  after the crypto bank said that it was evaluating its ability to continue as a going concern and delayed the filing of its annual report on Wednesday.

The crypto-friendly bank said it needed to delay the filing of its annual 10-K for the 2022 fiscal year, and would take an additional two weeks to complete it.

The Wall Street giant also withdrew its price target for the stock, which was $14 a share previously. Silvergate shares fell 47% to $7.18 in premarket trading.

Silvergate’s rating was also downgraded to “Hold” from “Buy” by Canaccord Genuity. The broker also cut its price target on the stock to $9 from $25.

JPMorgan notes that in the recent quarter Silvergate realized a $886 million loss from selling underwater securities, resulting in tangible book value (TBV) being cut more than half to $12.93.

“With the company having sold additional securities (beyond what was guided) as a loss in January/February, this reflects that the company is facing continued liquidity challenges,” JPMorgan analysts led by Steven Alexopoulos wrote.
...

https://www.coindesk.com/business/2023/03/02/silvergate-downgraded-by-jpm-canaccord-amid-doubts-of-banks-solvency/

Quote

Cryptocurrency exchange Coinbase Global Inc (COIN.O) said on Thursday it was no longer accepting or initiating payments to or from Silvergate Capital Corp (SI.N) after the lender warned it was evaluating its ability to operate as a going concern.
...

https://www.reuters.com/markets/currencies/crypto-exchange-coinbase-stops-initiating-payments-or-silvergate-2023-03-02/

Quote

A bipartisan grouping of three US Senators has written to Binance asking for details on its money laundering controls, accusing the crypto exchange of being a "hotbed of illegal financial activity," according to the Wall Street Journal.
...
The exchange is reportedly bracing itself for significant fines for past conduct. A Binance spokesperson did not immediately respond to CoinDesk's request for comment.

https://www.coindesk.com/policy/2023/03/02/binance-a-hotbed-of-illegal-financial-activity-senators-claim-wsj/

Quote

...
Robinhood has just disclosed in a regulatory filing on Feb. 27 that it had been subpoenaed by the regulator regarding its crypto activities.

"In December 2022, shortly after FTX filed for bankruptcy on November 11, 2022, and following the bankruptcies of several other major cryptocurrency trading venues and lending platforms earlier in 2022, including Three Arrows Capital, Ltd., Voyager Digital Holdings, Inc., and Celsius Network LLC (“Celsius”) (collectively, the “2022 Crypto Bankruptcies”), we received an investigative subpoena from the SEC regarding, among other topics, RHC’s cryptocurrency listings, custody of cryptocurrencies, and platform operations," the company said.

Robinhood Might Stop Offering Crypto Services

As a result, the brokerage firm warned that if the SEC or a court concludes that cryptocurrencies or certain cryptocurrencies are "securities," the platform would simply "ceasing support for such cryptocurrencies on our platform."
...

https://www.msn.com/en-us/money/markets/robinhood-targeted-in-regulator-crypto-crackdown/ar-AA182VRl

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Major digital assets plunged as the business day began in Hong Kong on Friday.

Bitcoin (BTC) and ether (ETH) both dropped more than 5% as customers fled crypto bank Silvergate, whose stock tumbled 58% during U.S. trading Thursday. Most of the other 10 largest cryptocurrencies by market cap saw declines similar to BTC and ETH's.
...

https://www.coindesk.com/markets/2023/03/03/bitcoin-ether-drop-over-5-in-massive-sell-off-as-market-continues-to-digest-silvergate/

Look out below!

 

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1 hour ago, bernorange said:

Silvergate is a big deal. Bank a ton of the crypto sphere. Your link wasn't working for me. Here's another with some more background.

https://www.bloomberg.com/news/articles/2023-03-02/silvergate-sinks-to-record-low-on-review-of-going-concern-status?leadSource=uverify wall

 

I'm surprised things haven't dumped more. It kind of supports the idea that forced selling this cycle is really done. We'll see.

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On 3/2/2023 at 6:48 AM, bernorange said:

 

On 3/3/2023 at 7:18 AM, Mullet Free said:

Silvergate is a big deal. Bank a ton of the crypto sphere. Your link wasn't working for me. Here's another with some more background.

https://www.bloomberg.com/news/articles/2023-03-02/silvergate-sinks-to-record-low-on-review-of-going-concern-status?leadSource=uverify wall

 

 

It's a shame. I have friends there.  It was a well-run, profitable bank before they fucked around with this crypto horseshit.

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Austin based guys.  OOF

 

 

On 3/5/2023 at 2:50 PM, Gil Bang said:

 

It's a shame. I have friends there.  It was a well-run, profitable bank before they fucked around with this crypto horseshit.

FTX really screwed everyone. Got the ball rolling on the crackdown. Why? Embarrassed regulators and legislators.

Edited by Mullet Free
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13 minutes ago, Mullet Free said:

FTX really screwed everyone. Got the ball rolling on the crackdown. Why? Embarrassed regulators and legislators.

Well that and stealing at least $9,000,000,000 of customer deposits. But yeah sure the legal action is just because their feelings got hurt lmao

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18 minutes ago, bernorange said:

@Captainant - you misunderstood @Mullet Free's comment.  He was saying that regulators are cracking down on the crypto space now because of embarrassment over what happened with FTX.

Regulation was always coming, but a full on blitz is happening. I'm sure the speed of it has nothing to do with the Chairman of the SEC meeting with Sam multiple times. Or his testifying as a kind of expert on Capitol Hill and Maxine blowing him kisses.

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Crypto-focused bank Silvergate Capital said on Wednesday it planned to repay deposits and voluntarily liquidate following a massive loss.

The decision comes after the San Diego company flagged risks to its ability to continue operating as a going concern earlier this month, fanning liquidity concerns that sparked a rout in the crypto market.

“In light of recent industry and regulatory developments, Silvergate believes that an orderly wind down of bank operations and a voluntary liquidation of the bank is the best path forward,” the company said in a statement.

“The bank’s wind down and liquidation plan includes full repayment of all deposits,’ according to the statement.

Silvergate had been trying to ease investor concerns over its future after it reported a $1 billion loss for the fourth quarter following the collapse of Sam Bankman-Fried’s crypto exchange FTX in November.

But multiple partners of the bank, including high-profile firms like Coinbase Global and Galaxy Digital, severed ties last week.

Silvergate said it hired Centerview Partners as financial advisor, Cravath, Swaine & Moore as legal advisor, and Strategic Risk Associates to provide transition project management assistance.

 

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21 hours ago, Hefeweizen said:

Lol, that is going to fuck up some crypto miners in Texas.

Possibly, if it made it all the way to actual policy. Not sure how you’d know for sure what electricity is used for if you have a small operation. 
 

 

ruh roh. Looks like Circle/USDC could be wrapped up in SIVB mess.  
 

Holding Bitcoin in cold storage is a good place to be as the banking sector wavers and Fed about to be forced to pivot while still at elevated levels of inflation.  

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