WBD666 Audio Transcription
Defending Bitcoin: Operation Chokepoint 2.0 with Nic Carter
Release date: Friday 2nd June
Note: the following is a transcription of my interview with Nic Carter. I have reviewed the transcription but if you find any mistakes, please feel free to email me. You can listen to the original recording here.
Nic Carter is a Partner at Castle Island Ventures and co-founder and Chairman of Coin Metrics. In this interview, we discuss Real Bedford, ordinals, the Bitcoin fee market, Bitcoin culture wars, layer 2 innovations, Chokepoint 2.0 and the 2022 banking crisis, and how people can stand up for Bitcoin against the current US administration.
“In the US, we know it’s coordinated. We absolutely know that. It’s certain officials in the Biden administration that are working together with specific regulators, in particular the bank regulators, to marginalise the Bitcoin and crypto industry.”
— Nic Carter
Interview Transcription
Peter McCormack: All right, Nic.
Nic Carter: I need to put in my Zyn real quick. Don't judge me, I have an addiction.
Danny Knowles: This is episode 14.
Nic Carter: I fucking love Zyn.
Peter McCormack: What is that?
Nic Carter: 14? That's insane.
Peter McCormack: What is Zyn?
Nic Carter: Zen is a nicotine pouch?
Peter McCormack: That's the thing you keep trying.
Nic Carter: It raises your IQ by 10 points. I fucking need it, bro, I don't have much left up there.
Peter McCormack: Each one? If I had 4, would I go up 40 points?
Nic Carter: I don't think it's linear like that.
Peter McCormack: That's a shame. I need my nicotine, I'm a nicotine addict.
Nic Carter: I just can't inhale anything, I can't inhale a vape, my lungs reject it.
Peter McCormack: Maybe that's what I need to go to.
Nic Carter: I recommend Zyn.
Peter McCormack: Yeah.
Danny Knowles: They mess you up though.
Peter McCormack: Yeah, how?
Nic Carter: They're pretty strong.
Danny Knowles: Genuinely, it makes you feel like you're going to fall over.
Nic Carter: Yeah, I'm used to it now.
Peter McCormack: You build a tolerance.
Nic Carter: Yeah, for sure!
Peter McCormack: All right, okay, I might leave that one in, our nicotine conversation. Anyway, it's been a while, how've you been?
Nic Carter: Good, man. When was the last time I saw you; a year ago, right?
Peter McCormack: Was it conference last year?
Nic Carter: This conference, or maybe --
Danny Knowles: I think it was after that.
Peter McCormack: No, we've been since, haven't we?
Nic Carter: You guys have a better place this time. Thank you for getting a better spot.
Peter McCormack: Fuck, that was a problem. So, we booked a spot.
Nic Carter: Why does this always happen?
Peter McCormack: Well actually, when you think about it, that's Miami; Miami is a scam.
Nic Carter: Everyone here is super sketchy and a broker.
Peter McCormack: Yeah, whatever we do, whether it's buying a coffee and a sandwich, or renting an Airbnb, everyone is scamming you. And so we booked this Airbnb, the photos looked great, we got there, we were like, "We can't stay here!" And it was like $12,000 for two weeks, which is what our normal budget is. So we spoke to the guy and he said, "Well, I've got a few other places". This was another $16,000. So it was $28,000 for two weeks, and we're like, fuck. But then when you think it through…
Nic Carter: I have a second bedroom, you guys could have used my place.
Peter McCormack: There's five people that were staying here. And if you think the cost of a hotel, we basically paid $400 a night per person.
Nic Carter: That's actually reasonable.
Peter McCormack: Yeah. So if you try and go through hotels and then book a studio, it would cost more and a lot more travelling. The cost of doing the job right. Where were we last time?
Danny Knowles: We got scammed that time as well. That's when we turned up to the place and as we turned up, this carload of people came and were like, "Are you coming for the party tonight?" And they were having a party at the Airbnb that we were meant to be renting.
Peter McCormack: No, that was the second one, because we went to the place beforehand and we were in the ghetto.
Danny Knowles: Oh, yeah, that's right.
Nic Carter: You were in the Gables, but not the good part of the Gables.
Danny Knowles: No, well the first place actually in Little Haiti, and then we ended up in Coral Gables.
Peter McCormack: Hold up, but Nic didn't come to that place, did he?
Danny Knowles: He did, yeah.
Peter McCormack: But that was a nice place.
Danny Knowles: Yeah, the place we were at was nice, it was just far away from Nic.
Nic Carter: Yeah, thank you for doing the design district, it's closer.
Peter McCormack: All right
Nic Carter: Yeah, I've been in for reliably informed this is my 14th episode of this show; is that right?
Peter McCormack: Out of how many?
Danny Knowles: 662.
Peter McCormack: Who else is ahead; Lyn?
Danny Knowles: I don't think anyone's ahead now.
Peter McCormack: Oh really?
Danny Knowles: No, maybe Lyn is actually.
Peter McCormack: But Lyn was a regular.
Danny Knowles: Oh yeah, Lyn had 26.
Peter McCormack: Yeah, that doesn't count.
Nic Carter: Doesn't count.
Danny Knowles: But apart from that.
Nic Carter: What percentage of the show am I? What's 14 over 600?
Danny Knowles: I'm not going to try and do the maths!
Peter McCormack: I mean, what's that?
Nic Carter: You have a laptop.
Peter McCormack: So about, well…
Nic Carter: I'm not even going to attempt that kind of maths right now.
Peter McCormack: About 1.8%, 1.9%?
Danny Knowles: 2.1%.
Peter McCormack: 2.1%, not far off.
Nic Carter: That's great.
Peter McCormack: Yeah.
Nic Carter: Wow.
Peter McCormack: I've got this -- so I always do sums in my head.
Nic Carter: Really?
Peter McCormack: When I hear a sum, I try and do it in my head. I work out these little patterns to do it. So that one was like 14, and then we've done 660. So I'm like, okay, 14 and 140, okay, 140, 280, 560, okay, so that's 2.5%-ish, if we did 580 shows. All right, what's my quick guesstimate for the difference? I'm always trying to do sums in my head.
Nic Carter: I can't any more, I have too much brain damage from arguing on the internet.
Peter McCormack: All right, man, anyway, you've been good?
Nic Carter: Yeah, man, yeah. I didn't go to the conference, but I was physically in Miami.
Peter McCormack: It was a good conference. I preferred it from last year. I said to you before we started, it was smaller, which is better. And look, if I could get 25,000 people to a conference, I would get 25,000 people to a conference, but they still got 12,000-ish there. I thought the quality of speakers was higher than last year, and I thought all the side events were a little bit cooler, a little bit more dive-bar-y, not so flashy.
Nic Carter: I threw a pickleball event.
Peter McCormack: Where the fuck was my invite?
Nic Carter: I didn't know you're a player. Do you play?
Peter McCormack: No, I don't.
Nic Carter: Well then.
Peter McCormack: I don't even know what pickleball is.
Nic Carter: It's like tennis for less athletic people.
Peter McCormack: That's that fastest growing sport thing.
Nic Carter: Yeah, we jumped on board.
Peter McCormack: Who won?
Nic Carter: We didn't do a tournament, we just played.
Peter McCormack: Participation trophies!
Nic Carter: Yeah, exactly, like that one right there.
Peter McCormack: That's not a fucking participation trophy, dude! We won the double.
Nic Carter: Oh, there was a cup as well?
Peter McCormack: Yeah, we won the league and the cup.
Nic Carter: Do you guys compete in the FA Cup; can you get into it from down there?
Peter McCormack: So, we've applied now. For the division we're in, we can get into it. So we've applied. You have to be accepted, but we think we'll be in it this year.
Nic Carter: Because non-league teams can.
Peter McCormack: Yeah.
Nic Carter: You could in theory win the FA Cup.
Peter McCormack: We can in theory win the FA Cup next season. It's a non-zero chance. There's a lot of zeros after the decimal for that non-zero chance! What you always want to do is, if you're a non-league team, your goal is to get to the first round. What happens is, the non-league teams all play each other first for like five or six rounds. I mean there's lots of tiers. So, say step one's the first non-league division and then you get step two, three, four, five, six. Six, five, four, three I think play a couple of rounds and then they bring in two and one, and if you get to the first round proper then it's the teams from the League One and Two and Championship.
Danny Knowles: Yeah, and maybe Conference.
Peter McCormack: I think it's Championship as well, and then the third round they bring in the Premier League. So, the big goal for any non-league team is, can we get to the third round, because you might get Man United.
Nic Carter: And you get TV money, right? You might play at Old Trafford, then you, what, split the gate?
Peter McCormack: You get half the gate, doesn't matter how many you bring. And so, a lot of the teams, when they do it, they always will take Old Trafford and split. And also, it's a chance for the players, a one-off game at Old Trafford. But sometimes teams are like, "No, screw this, come to our place". So, you'll see this tiny, little place that holds 3,000 people and Man United are turning up! But just to be in the FA Cup itself is brilliant.
Nic Carter: That's sic.
Peter McCormack: Yeah, we'd have an FA Cup game. And I would expect the team we're going to put together, I'd expect us to possibly win our first couple of rounds. Our goal is to try and get a team in step two or step three.
Nic Carter: So what's it going to cost you, do you think, to get into League Two, to get into the football league?
Peter McCormack: That's a good question.
Nic Carter: Because it's been done before. People have incubated non-league teams and got them all the way up.
Peter McCormack: Salford did it, the reborn Wimbledon did it, Dorking have one below it, I think. So, if I had to estimate, if you said, "Give me a number now, I'll sort you out", I think it would be about £10 million, but it could be less. So for example, this year, over the summer, we've got to spend about £230,000 on our ground. We're going to put in new two new stands, new perimeter fence, and we've got to do all these things because every league level is graded and so, if you don't hit the grading, they won't allow you go up. The following year, we need a new clubhouse because our dressing rooms aren't big enough. That's going to be another £250,000. Then we might be all right for a year.
Nic Carter: But as you keep moving up, the infrastructure costs go up?
Peter McCormack: The infrastructure costs go up, and then you won't be able to play league football on our ground. So, we're spending all this money while at the same time looking for another site and looking to build on that.
Nic Carter: Because what, your drainage isn't up to spec or something?
Peter McCormack: You can't have a 3,000, 4,000 ground there. And, if we're a team that get into the Football League, into League Two, we're going to be ones that think we can get to One and perhaps Championship, genuinely think that, so you need somewhere that could be a 10,000 capacity at some point. And so what you really need is a site that you can build upon. But I think Wrexham's wage bill this year was probably around £2.5 million.
Nic Carter: Wrexham was the one where some American actors bought it, right, as a reality show around that?
Peter McCormack: Yeah, they're like the cool version of us!
Nic Carter: Are they cringe; are they considered cringe or cool?
Peter McCormack: It's a mixture, so I've got mixed feelings. Firstly, I think it's great for Wrexham, the town of Wrexham, and the team, they've been really treated badly by previous owners. And you know, as part of Wales, it's a bit deprived, and for them to have all this excitement, it's amazing. When you watch the TV series, I think Rob McElhenney's okay.
Nic Carter: Oh, he's from It's Always Sunny, right?
Peter McCormack: Yeah, he's all right. I like him. But Ryan Reynolds, he's trying to be Deadpool. Like, you're there in a serious conversation, and he's just, it's not funny.
Nic Carter: He's staying in Deadpool character.
Peter McCormack: Yeah. They go to three or four games, the big ones; whereas, I mean Connor helps; what's it like? We're pulling the pints and working the gate, we're literally all volunteering to make it work. So, it's a similar story but completely different. But it's great for them, it's great for Wrexham, ultimately I'm happy for them. But we're trying to do it without their funds. But maybe next bull run, I'll find a Bitcoin billionaire and say, "Come on".
Nic Carter: Have you worked out how many podcast episodes you need to record to get into League Two?
Peter McCormack: That is a good question. How long have we been doing this; six years?
Danny Knowles: 150 a year.
Peter McCormack: 150 a year. If we did it in ten years, that would be 1,500 podcast episodes.
Nic Carter: That's a lot.
Peter McCormack: That's a lot of podcast episodes.
Nic Carter: You're going to have to expand. It can't be Bitcoin anymore.
Peter McCormack: Well, I think the thing that's on our side is we've not raised any money yet, and we don't want to do that for the first three years. I think we can do the first three promotions without raising money, and then I think if I go out to the Bitcoin community and say, "Well, look, I've got us this far, now we need to raise money. We need £10 million, £20 million", whatever that number is, "this can be our team, we can all get involved", I think a lot of people will be interested.
Nic Carter: I'm committing a charge to that race; I'm in.
Peter McCormack: All right. We've had a few people like that.
Nic Carter: Yeah?
Peter McCormack: Yeah, but you know, offer some big lumps as well.
Nic Carter: Mine's a small lump.
Peter McCormack: But it's probably still a big lump, relatively.
Nic Carter: Depends on the price of Bitcoin.
Peter McCormack: Yeah, well, it depends on the price of Bitcoin. So if there was a Bitcoin run, that's the time to raise money. But I I'm not doing this to make money, I just want the team to be successful. So the equity doesn't really matter to me. I'd probably want to do what Zuckerberg did and make sure I have controlling decisions. But at the same time, I mean, I'm not here thinking, "I'm going to sell this club one day and make some money". Look, if Bitcoin continues to grow, I will be financially fine and our team will...
One thing is, every four years, we get this advantage over other teams that they don't have, in that all the bitcoiners will be interested, or some will. But I think when I first announced it, people didn't really get it; some did. I think if the momentum keeps growing, people are like, "Oh, okay, I get this".
Nic Carter: Do the bitcoiners come to the games?
Peter McCormack: They do, they do. So, we have a meet-up once a month, we usually get 50 to 100 there, and then I would estimate at least 30 people have got on flights to come to games, just for the game.
Nic Carter: I'm still due.
Peter McCormack: You're going to come?
Nic Carter: Next time I'm in the UK.
Peter McCormack: All right, we're going to make that happen. People listening will be like, "Stop fucking talking about football"!
Nic Carter: No, this is great.
Peter McCormack: I know, it's a Bitcoin story.
Nic Carter: Yeah, this is more interesting than my stuff, for sure.
Peter McCormack: Subjective. It's funny, some people hate the football stuff. They literally hate it and they're like, "This is a Bitcoin show, I don't want to listen to this shit". And also, ever since I started doing the football club, my Twitter engagement has dropped massively.
Nic Carter: But that's just because the algorithm is very fickle, right?
Peter McCormack: But I've got two distinct crowds, it's like Bitcoin and football, and it's not like Bitcoin and macro, or Bitcoin and, I don't know, cyber security. They're like, the Venn diagram doesn't cross very well.
Nic Carter: Whenever I try and talk about music or cultural stuff, no engagement. They don't want to hear it. They want me to play the hits. I'm like Radiohead and they want me to play Creep, and they hate playing Creep.
Peter McCormack: Yeah, it's a tricky one, but this is such an important project. And to do it first year, say what we're going to do and do it, get the trophies, was great. Do it again and again relentlessly, it's a challenge, funding is a challenge. We've got good sponsors, but we have to get more, and continue it. Anyone listening want a sponsor, let me know.
Nic Carter: How much is it to get a logo on the sleeve?
Peter McCormack: That's gone.
Nic Carter: That's taken?
Peter McCormack: Yeah. I'll tell you offline, but both sleeves are taken. We do well on sponsorship. In terms of sponsorship, we do as well as a mid-table National League side. And if somebody heard that, they'd be like, "Well that's bullshit, why would a step five team do as well as a step one team?" I think you get more awareness with us. We're the only team that streams all their games.
Nic Carter: Well, you guys are televised, yeah.
Peter McCormack: Yeah, we're televised, so we stream all our games, and we do all our interviews with the backdrops. I've got a big platform, and so you can go and pick a mid-table National League side, but the only people who are going to be aware of you are home fans who come to the ground and some away fans who come to the ground, whereas we've got this big platform. So we do very well. That's why I think getting from where we are up into the National League is fairly doable because we have that.
But the other big challenge we've got, we've got to grow the crowd. You've got to try and double it every year. We started with 40 when we first took over those last few months, we had like 40, 50 a game. Last season it ranged but we finished at average about 180 and we had one game of 327. But next year we need to be doing 350 a game average and a couple of big 500s, 600s, and that's hard finding that many people.
Nic Carter: In Bedford.
Peter McCormack: I mean the people exist.
Nic Carter: How many people are there in Bedford?
Peter McCormack: Oh, 174,000, the people there.
Nic Carter: Well, so what's going on?
Peter McCormack: It's getting them there. Well, so we're not the biggest team in Bedford.
Nic Carter: Oh, really?
Peter McCormack: So there's a team next door, Bedford Town, who have the long history. And last season, we started in step six and they're step three; they're three divisions above us.
Nic Carter: So you're the MK Don's to the Wimbledon here.
Peter McCormack: No, more like we're the Notts County to the Notts Forest. They thought we were a joke, dismissed us, laughed at us. We won the league last year and they came bottom of theirs. So, we're now a division apart.
Nic Carter: Oh, my gosh, wow, there's going to be some good derbies.
Peter McCormack: Well, so there's three competitions, I think three cup competitions, we can draw them in, definitely two. If that happens, it will be crazy.
Nic Carter: That will be great.
Peter McCormack: If we get promoted and they don't, we'll have two confirmed league games. They will be sellouts. You will get 1,500 to 2,000 at them. People will get sent off, it will be fucking wild.
Nic Carter: It will be like the, what is it, the Old Firm? That's what I want to see.
Peter McCormack: The Old Firm classic.
Nic Carter: The Bedford classic.
Peter McCormack: We'll get the Bedford ultras out. Connor and his mate.
Nic Carter: With the flares.
Peter McCormack: Yeah. But also, it's great for the town. And look, I think the people at Bedford Town are a little bit sad. They see us as a threat and I think they're a bit sad that we're a reality and we're a threat. But it's good for the town. I mean the town has this attention on it now.
Nic Carter: People will defect.
Peter McCormack: They will definitely defect. I mean we do things right and I think people are seeing that. When's this coming out?
Danny Knowles: This will probably be out on about 1 June or 2 June.
Peter McCormack: So I can say this now. So, there's a ladies' team in Bedford, Bedford Girls and Ladies, senior ladies' team, they've got a reserve team and then they've got 18 youth teams, girls aged 7 to 16, who twice a week turn up, 200 girls, train and then play games on a Saturday or Sunday. It's a big unit of players. About a year ago, we approached them and said, "Look, we'll support you, we'll get you new kits for the ladies, the seniors, and you can play our ground", and then we paid expenses to the ladies. I think we're the only team who paid the ladies in our division. I can't confirm that, but it was a real support for them and it was great, and then over the summer we've agreed they're going to become Real Bedford Ladies.
So we're now going to have, across the senior and the kids, over 250 girls now playing in our jerseys with the Real Bedford logo, with the skull and crossbones. And so that, you've suddenly got a base there of kids, mums and dads who play for Real Bedford, who may come to our games, who get behind what we're doing. Also, the whole town is like, "Oh my God, they're supporting the ladies' side of football, which is great", and so that gives us a real density around what we're doing. We have a similar partnership with a youth set up, called Bedford Park Rangers. We hope at some point they do the same and we support them. So, we give them money for their coaches to do their development. We also have a hardship fund, because there are kids who can't play football because their mom and dad just don't have the money, and so they can use the hardship fund to get boots or pay their subs.
So, the end goal is to end up having these, probably you're talking about 600, 700 kids playing under the Real Bedford brand, and that is what builds your crowd and that's what makes you sustainable. But that also -- sorry, it's becoming a Real Bedford show, but this presents the next challenge. So, I need to build a new ground, I need four training pitches, I need a gym, a rehab centre, what's the other thing I need? Anyway, just say I need those. Oh, an academy. Well, an academy is fine, but if I build all that, we have the home ground, the pitches themselves generate £200,000 a year each because they get rented out, these 3G pitches. You can build an academy where you can take kids who, rather than go to university or sixth form, they come here and they get taught in this place part of the week. With the academy, how much time is education, how much time is playing football?
Okay I don't know if that would have picked up, but basically Connor was saying it's three days a week you train, and then you're doing your regular school stuff. But these kids are therefore training all day, every day, doing what they like. You get paid for running the academy, and then if you have the gym that makes money. But that's a £10 million project. I think it pays back, not well, but I think it pays back over five, six, seven years; I mean it will pay for itself, but I've got to find that money to do that. By the way, where am I going to get £10 million, Nic?
Nic Carter: Bitcoiners, Twitter, LPs.
Peter McCormack: How do I get someone to invest in that? Do we know anyone rich who will lend me £10 million?
Nic Carter: You have to create a pitch deck and then send it to me.
Peter McCormack: We'll get on it. But what I hope for this is, I think this is a really great Bitcoin story in that we've created this football centre where hundreds of kids go and play football and they're keeping fit, they're getting outside, we're supporting deprived families, we're supporting talented players, and a whole town -- because this will become the most important thing in the town when it happens, the whole town could become focused on this, and there's a Bitcoin logo on there. And it's like, that's cool, it's not us, I'm not arguing about Ordinals, we're not arguing about whatever bullshit people are arguing about, it is, "Here is a community project that a bunch of bitcoiners made happen, and look what it's done".
Nic Carter: Yeah, I like it, it's very unique. Although we are going to argue about Ordinals today!
Peter McCormack: We will. But just my last closing thought is, anyone listening thinking, "Why are you talking about football?" the same people who might not be into football probably heard about the Bitcoin Commons in Austin and Bitcoin Park in Nashville and these meatspaces that are growing up, Pubkey in New York, and people are starting their own ones. I think the idea really is, you can start a basketball team or a minor baseball team or a local rugby team. A guy's come to me and wants to set up a rugby league team in Bedford, or you can sponsor a snowboarder, or it can be a gymnast who wants…
I think I just, well I did, I just gave some money to a young girl who's a swimmer. She wants to go to the Youth Olympics in Brazil. She can't afford it. It was, whatever the amount was, it was £3,000, I think she was £1,000 short on her funding. We supported her. We can support all these people. I think the lesson here is we've all financially benefited from a currency which is not inflationary. So, we've all bought some and it's become worth more and we can share that out and help other people do things, and I think that's a good thing.
Nic Carter: Yeah, that's what Balaji calls a network state. You start in the digital world and then you go analogue; you build an analogue presence.
Peter McCormack: Yeah, anyway should we talk about Ordinals, unless you've got any other questions about the football team?
Nic Carter: No, no, it's fascinating. I didn't know any of that stuff.
Peter McCormack: I will get the pitch -- actually, to be honest, it's half done.
Nic Carter: I'll give you some feedback.
Peter McCormack: Yeah. You got any billionaire friends?
Nic Carter: Yes.
Peter McCormack: Which, by the way, just my last pitch for this; if anyone is a billionaire who's listening, if you're a billionaire you can go and buy Chelsea, who are like 4th in the league and screw it up and end up 12th in the league, or you could even buy a Championship team. But the most you're going to do with a Championship team is hopefully get in the Premier League and if you do, you're never going to win it. So, you can basically get up a league and finish mid-table if you buy Chelsea. All right, you can win things, but you've got to spend a lot of money. You could half buy a team in the ninth tier of English football, you've got eight promotions to enjoy and once you're involved you, won't give a fuck that we're not a Premier League team, you'll be on for the ride, so give me a call!
Nic Carter: I'm a Chelsea fan, so I object to that.
Peter McCormack: I'm sorry, I'm really sorry.
Nic Carter: It's been rough.
Peter McCormack: Yeah, but your chairman I think naively thought, as I did when I first bought Bedford because I did the small version of that, that you can buy success.
Nic Carter: Well, we did historically buy success with Roman.
Peter McCormack: Yes, but you historically bought success in a staged and controlled way. He just went out and was literally spraying money everywhere, buying everyone. I mean, how many players are on the books now, and he just threw them all together. I actually felt bad for Potter because I think he's a good manager.
Nic Carter: Difficult situation.
Peter McCormack: Yeah. Let's talk Ordinals. We should do Real Bedford Ordinals!
Danny Knowles: You've done one.
Peter McCormack: Oh, yeah, where is it?
Danny Knowles: I'll tell you another time!
Peter McCormack: Have you got it?
Danny Knowles: No, I've not got it.
Peter McCormack: Tell me now.
Danny Knowles: Jeremy's got it!
Peter McCormack: Yeah, whatever. Okay, Ordinals. I don't care about Ordinals.
Nic Carter: Really? You should.
Peter McCormack: I mean, I don't care, as in I don't care if people do it, and I don't care if people hate it. I've got a very simple view; block space is there to be bought or sold, and if you're not breaking consensus, you have done nothing wrong. If you've got an issue with Ordinals, you're not going to stop it by shouting at people. It's a bit like, I can't think of a good analogy, but if you don't like it, propose a BIP, see if it gets through. I don't think it will, so accept this new reality.
Nic Carter: Well, that's a very common-sense view, I wish more people had that view.
Peter McCormack: But I'm not too keen on the whole trolling people with it. I think it's a really interesting point where it says, "I like Bitcoin so I'm trying to break it", and this, how it's exposed problems with Lightning I think is super-important, I think we've benefited from it. Better to find out now than later down the line. I think dressing up as a wizard and dancing on stage, it feels very Ethereum.
Nic Carter: And to be clear, their dances, they just didn't execute the dance very well, they weren't even in time. They weren't in time, Udi didn't know the flossing dance.
Peter McCormack: I can't do it, I've tried.
Nic Carter: I can't do it either, but I didn't attempt it on stage.
Peter McCormack: Can you do it?
Danny Knowles: I've never tried it. I'm very proud to say I've never tried it.
Nic Carter: It's actually pretty hard.
Peter McCormack: Yeah.
Nic Carter: They picked a hard dance, they should have picked an easier one.
Peter McCormack: He's doing it; do you want to see it?
Nic Carter: That's actually really good.
Peter McCormack: We haven't got a camera on him. Connor, you need to come to the camera and do it! Yeah, so I don't mind, I don't think Giacomo shouting at Udi online and calling him a scammer is going to make any difference. If anything, it's going to egg him on, he's going to enjoy it.
Nic Carter: Well, that's what he wants.
Peter McCormack: Yeah, totally. So I accept this new reality. I haven't bought them, I don't have any need for them. I think ultimately people will lose money.
Nic Carter: It does affect you as a bitcoiner, though, because it changes the nature of Bitcoin. So, it creates a new regime for fees, for better or for worse. I'm on the side of fees being good. So, a structurally new regime, it can just block space and now it costs more. For a long time, Bitcoin is 1 sat per byte. My opinion, that's too low, right? So, it's good for the long-term security, my opinion; it creates a new pressure to take transactions off the mainchain and use L2s, whether it's Lightning or something else; and it injects new developers into Bitcoin and new start-ups, so it adds a vibrancy to the ecosystem. So, even if you don't care about jpegs one way or the other, it actually does change the nature of Bitcoin.
Peter McCormack: It does. And so the reality is, if you really don't like it, you have to propose a BIP and have to get it changed.
Nic Carter: It's very difficult. Yeah. So Andrew Poelstra, who's not on Twitter, he was one of the architects of Taproot, he had, I don't know where he actually made this point, some non-Twitter domain, I don't know where; he said, "There's no easy way to bar the insertion of arbitrary data into Bitcoin". And if you do it, if you reverse Taproot and you make it harder to inject data into Bitcoin, people have the bug for it now, they want to do it, they'll find a way to do it that'll be less efficient. Maybe you can insert data in public keys, for instance, a kind of garbled public keys. Historically, people inserted data in OP_RETURN, right, so there's no easy way to just selectively eliminate inscriptions from Bitcoin; people will find another way to do it. So, there'll always be this congestion issue from now on.
Peter McCormack: Right, and you probably understand this better than me, but my expectation is, there's been a long debate over the fee market and as the block reward drops, will there be enough to provide enough security? And I know there's, "How much is enough security?" but bear with me. And, you know, one of the things that people have theorised is that, look, a couple of decades down the line, so many people will be using Bitcoin, it will be the settlement layer, it will be expensive to use, let's not worry about it. So if that does happen, and if fees are very high for selling on Bitcoin, it will be very, very expensive to put Ordinals within the block. So eventually, Ordinals might get priced out of Layer 1 anyway.
Nic Carter: That's correct. So, high prices are the cure for high prices, right? So, if you think about other commodities; oil. If oil gets really expensive, new oil wells come online, and that creates new supply, and that brings back down the price of oil. Bitcoin's not exactly like that, but if Bitcoin blocks basically get very expensive, people that are inserting jpegs, which is a very inefficient way to insert image data into Bitcoin, they'll find ways to compress the data, right? So, there's ways to do it with code. So, instead of putting pixel data into Bitcoin, you could compress an image into a few lines of code, right? So that's the idea of a generative NFT.
Where we are now is in a transition phase where people are still really inefficiently bundling as much image data into Bitcoin as possible. Once fees rise, people will want to increase the semantic density of block space and just be far more efficient in terms of how they're embedding data into the blockchain. So, it's not something I worry about at all, and it's the same with monetary transactions. If fees rise, maybe it doesn't make sense to do a $5 transaction in Bitcoin, but then you will use a deferred settlement mechanism, like Lightning, where of course many transactions are associated with one on-chain settlement. So I don't worry about fees at all.
I have seen a lot of discourse like, "Oh, fees are too high". Too high is a normative, you're imposing a normative lens on what is a market system. If you believe that Bitcoin should be an open and permissionless system, there's no such thing as too high. You could say it's too high for the global South, but that's just unfortunately the nature of the system. We can't impose a mandate, we can't impose a designated pricing on the commodity. It's like saying the price of oil is too high and the working class, they can't afford their rides to work, or whatever. That's unfortunate if the price of oil goes too high, but there's nobody that can set the price. And it's the same with Bitcoin block space. Nobody can set the price, we just have to accept the market price and tune our usage of the protocol accordingly. So if it is too high, then we use Lightning, we use other alt-2s.
Peter McCormack: And I don't think this is like the Blocksize Wars. Some people have compared it to another civil war, but the Blocksize Wars was very different in that we were heading towards a chain split. This is a very serious question about, was this the right thing for Bitcoin? And there were two very distinct camps. Whereas, there is no outcome here where something's split and it is just a use case. So I've been comparing it almost to, it's like a Bitcoin culture war we're going through now.
Nic Carter: Totally.
Peter McCormack: And I'm okay with the fact that we class it as that, but with it being a Bitcoin culture war, it's almost like those fighting aren't changing anything by fighting, and some of it's a net negative.
Nic Carter: Yeah, always.
Peter McCormack: There's no winners, I don't think there's any winners in culture wars. We can see that right now, the culture war we're in.
Nic Carter: Well, it was a necessary conflict that was going to happen. I think it has actually been going on for much longer than people think.
Peter McCormack: Of course.
Nic Carter: So, there have been debates around whether it's okay to insert arbitrary data in Bitcoin, sort of non-economic data, from the beginning, right? So back in the day, there was this protocol called Counterparty, which was mediating asset issuance. And back then, there's always been this view among a certain faction of bitcoiners, "Well, it's risky to have things that aren't Bitcoin being circulated on Bitcoin. Bitcoin should be trading just units of Bitcoin". And Counterparty was proposing an asset transmission protocol, and there was a way to do a multisig for Counterparty, and it was rendered non-standard, actually.
So there's probably some controversy around this, but I believe it was actually Luke Dashjr that rendered multisig transactions for counterparty assets non-standard. That doesn't mean they were barred by the protocol, it just means that if you send the transaction into the network, it won't propagate, so you'd have to go to a miner directly to mine it. So, that was back in 2013, I believe, and that actually did help kill off Counterparty usage on Bitcoin.
Peter McCormack: They can't do the same now?
Nic Carter: Well, I mean I think it'd be difficult for any developer to get a change like that through today. But that's just an example showing there has been this conflict between developers and users historically over whether it's acceptable to transmit non-Bitcoin-related data on Bitcoin, and this is just a continuation of that. And in fact, Luke Dashjr has been vocal on the Ordinals debate this time. Again, he's actually been fairly consistent on that. So for as long as Bitcoin has existed, practically there's been a debate over how much data should be in OP_RETURN; should it be 40 bytes or 80 bytes? Is it too much to have 80 bytes in OP_RETURN? This is just the same debate, but on a much bigger scale because now potentially we have blocks that are all arbitrary data and that's perceived as excluding regular transactions.
Peter McCormack: So, it causes another change as well, in that when people say to me, "What is Bitcoin?" I'm always quite simple about it, "Bitcoin's just money". But the protocol actually now is more than just money, it's a market for data, it's a protocol for data. I don't want to explain to people it is that, but essentially it is.
Nic Carter: The thing is that we can't control what people do with it. So, Satoshi put some non-financial information in the first block. Early users of Bitcoin put, if you remember there's an ASCII Bernanke. I think that was inserted in 2011 into Bitcoin; I think that was through arbitrary data insertion in addresses. And people have been using OP_RETURN to put data into Bitcoin for the whole history of Bitcoin. So, as an open protocol without rules on who can use it or for what, and as a database that's highly available and has very strong assurances that that data is always going to be there, of course people are going to use it for non-money type transactions, that's just the nature of the system.
Peter McCormack: But a lot more so now.
Nic Carter: Certainly now more, but we're still operating within the protocol rules. We're still bound by this 4 MB limit. I mean, obviously the rule changed in 2017 with SegWit, but we're still bound by that limit. So, we are still operating within the actual protocol rule set; it's just that there's a new economic motive to put arbitrary data into Bitcoin, so it has changed in magnitude.
Peter McCormack: I do think there is a potential future block-size argument if these Ordinals continue to be used and successful, but as we said earlier, more people using Bitcoin for the transfer of money and settlement, then it becomes expensive. People who are big proponents of Ordinals being priced out might be like, "Well, I think we maybe want to look at a block-size increase to make this more affordable". I think that potential argument comes again down the line.
Nic Carter: I think the Ordinals people would be smart to understand that we need to start compressing the data. There is one valid point, which I would say is that Ordinals or inscriptions are kind of subsidised in a way by the protocol, because the witness, you pay less in fees than the transaction data. And this is in the witness part of the block.
Peter McCormack: I think you should explain that whole thing.
Nic Carter: I believe this change came into effect around the time of segregated witness in 2017 and if I'm not getting it wrong, the idea was to encourage people to make SegWit transactions and to make it cheaper from a fee perspective to have this witness data. And so, because inscriptions are going in the witness, it's kind of cheaper in Bitcoin terms to insert that data. You could say maybe that was a mistake back then, because now it's somewhat cheaper to put arbitrary data into Bitcoin than it is to put transaction data into Bitcoin. So, that's probably the one valid point that I would say the anti-inscriptions people have.
Peter McCormack: So the people anti-inscriptions, are they -- like I say, I'm on the, "I just don't care", but actually I think there's more arguments to make me care that I've heard, then I don't care. My fear stuff is more about, I spent all this time, the last six years, talking to people about Bitcoin as money, as the best form of money. And then there's this curveball that's come in, so I have to deal with that, and I just want to focus on the money bit. But at the same time, like you've just done now, you've given me a very good argument for why Ordinals are good.
Nic Carter: Well, I think it makes Bitcoin better at being money, right? So it increases long-term fee revenue, which increases the long-term security of the protocol, which we totally need. I don't know what the correct amount of security spend is. Maybe there's no correct amount, but I think it ought to be higher. If the system is mediating a lot of value transfer, we need miners to be incentivised to do their job. So, kind of on a second-order basis, I think inscriptions make Bitcoin more secure from a monetary perspective, and they also create this pressure to do layered scaling, right, because if fees get really expensive, your motive is to increase the economic density of transactions. So, Lightning does that.
But people need a reason to create an L2, like a roll-up on Bitcoin or to use Lightning. The reason now is fees. So, I don't really worry about it because all Ordinals does is create this motive for developers to increase the efficiency of the Bitcoin system in terms of the value to the bytes ratio, and we should always be increasing that ratio. I believed in that a long time, and in the last two years or so, there hasn't been a good reason to try and be efficient with your transactions, because the block space was cheap. Now it's expensive, there's a good reason it'd be like that. And I think all bitcoiners today believe in layered scaling, right?
So Ordinals being a thing increases fees, increases the need for layered scaling, so I do think it makes Bitcoin better at being money. It does dilute the narrative a little bit, for sure, so I think that's a valid complaint that people have, like Bitcoin should just be about financial transactions. But the benefits seem really material to me.
Peter McCormack: It's diluted some of the core ideology as well, because there is certainly a split amongst people who consider themselves Bitcoin maximalists. We were out in, I can't remember that bar, the Pubkey event the other night, and that's a Bitcoin crowd; that is a Bitcoin crowd was probably, I would guess, 95% to 99%, maybe even 100% would have been small blockers, would you say?
Danny Knowles: Yeah.
Peter McCormack: But I think it's a much wider split of those who are pro-Ordinals and those who are against it. I'd be guessing 50/50.
Danny Knowles: I would take the other side of that. I think the vast majority of people I speak to just are pretty on the fence, or they don't really care.
Peter McCormack: Well, they don't care, but the pros and the against, they're like... I've seen a fairly even split, but it's diluted that ideology, and sometimes I'm like, "That's a good thing, because we don't want ideologues here". But at the same time, I don't know where there comes a time where we do need the ideologues, where we've got the people who firmly -- I always think of John Carvalho during the Blocksize Wars. I thought he did a very good job at defending on the Bitcoin mailing list, with others just letting this pass. I don't know if there comes a time when we need it, but it certainly split the crowd and perhaps this is just going to keep happening. So just, there is no core thesis and perhaps that's the best thing for this.
Nic Carter: Well, I think one obvious thing, it brings more people into Bitcoin, and it brings a different breed of person, and I'm always on the side of universalising in as big tent as possible. So, I think it makes Bitcoin more palatable, actually, to newcomers to see that there's heterogeneity in the community, ideologically. The other interesting thing is, it actually might help ossify Bitcoin in some sense, because the developers now realise there's unintended consequences of the changes they insert into Bitcoin; no Bitcoin core developer really realised that SegWit plus Taproot would equal inscriptions. So I think there's actually going to be some hesitancy in the Core dev community to do another change, for better or for worse, and that means that Bitcoin is more likely to be ossified.
I don't know if we actually need the same foot soldiers that we had in the scaling wars, because I don't see any imminent changes on the horizon. In fact, I think it's actually quite possible that Taproot is maybe the last major change we get in Bitcoin, precisely because of the Ordinals and inscription things, it makes the devs realise, "Wow, we tweaked this one small thing and had this huge, colossal effect, so let's not change anything ever again".
Peter McCormack: So, from my understanding, the only big change that people have been discussing and want is the covenants that's been discussed. I mean, I don't know how important it is, but that's the only one I've heard, and that might be five, ten years down the line.
Nic Carter: The other one that I think I would personally want to see in Bitcoin would be an opcode allowing for the verification of zero-knowledge proofs so that we could create ZK-rollups on Bitcoin, which would be an alternative L2, which has seen a lot of success on Ethereum and I think is a very valid way to compress transactional data, have lots of off- or near-chain transactions, and a very small amount of data on the blockchain, so it'd be a big efficiency win.
Peter McCormack: So let's compare that to Lightning, because one of the things that has been exposed with this is that high fees have exposed some bugs and issues with the Lightning. One thing we've been trying to get our head around is people say, "Well, the solution to high fees is the Lightning network". But I still can't get my head around the idea of somebody who has money on the Lightning network, but they don't own a channel on the basechain. And so in doing so, are they always trusting someone else's channel, and then are they really sovereign?
Nic Carter: Yeah, I mean, it's a very fair point. If the settlement fee becomes very high, then the ability to move in and out of channels, or settle channels to the basechain, becomes more difficult, it becomes more costly. So Lightning's not immune to high fees by any means. The security model of Lightning supposes that you can always settle on the mainchain. So, I don't know if it's a flaw in Lightning, that's just the nature of the system.
Peter McCormack: Yeah, so explain how ZK-rollups work.
Nic Carter: Oh, man, I wish you didn't ask me that!
Peter McCormack: By the name, I'm guessing a bunch of stuff gets rolled up and checked and then gets signed that that's fine; it's a way of trusting a bunch of data?
Nic Carter: Yeah, so, man, that's probably literally the one question that I would hate to be asked on a podcast. So, as far as I understand, you have a bunch of transactions that are proposed, they're batched together, and then there's an entity, a sequencer, which creates a digest of those transactions and registers it periodically to the blockchain. And the ZK element is a way of proving that they've been honest in terms of summarising this transaction data and inserting the state and creating a faithful representation that gets registered to the Bitcoin state.
There's another kind of rollup, which is an optimistic rollup, which relies more on fraud proofs, so the ability to challenge a sequencer as to the validity of the data that they're registering to the base layer. I'm not as much a fan of those ones. I'd say ZK-rollups have found product market fit on Ethereum, they seem to work, the security model seems to work. So, I think it's a totally valid approach for Bitcoin to take, but it does require a soft fork.
Peter McCormack: Do we know how much capacity they can add to it?
Nic Carter: I would say almost an arbitrary amount, a really significant amount of capacity.
Peter McCormack: Okay, interesting. We should try and cover that at some point.
Nic Carter: Yeah, John Light has been really good on them, he wrote a whole paper on it. So, yeah, there's a few people trying to do it right now, actually, on Bitcoin.
Peter McCormack: Do you know anything about this Ark thing that I've seen popping up on Twitter recently? I've not looked at it at all.
Nic Carter: I haven't spent a lot of time on it, yeah.
Peter McCormack: What about Fedi?
Nic Carter: I mean, have you done a show with Obi?
Peter McCormack: We've made two with Obi, and then we did a show with Calle on eCash.
Nic Carter: Yeah, I mean I think the idea of having multiple competing scaling approaches is absolutely correct. Whether it's Federated Chaumian Banks, whether it's a rollup, whether it's Lightning; I think if there was a mistake bitcoiners made, it was to hitch their horse just to Lightning five years ago. Lightning to me is suitable for a certain genre of transaction, basically a high-frequency, small-granularity, fast-settling, continuous stream of small payments. That's only a very narrow set of transactions that satisfy those criteria. So, I kind of lament that there haven't been more attempts at scaling, and it's because Lightning's very good.
If you remember Ethereum, like five years ago, they had a similar thing to Lightning. I think it was called Raiden, it didn't work. And then they went ahead and proposed dozens of different other scaling methodologies. I kind of wish that that had been the case on Bitcoin too. But the good news is that we now have a very good reason to pursue new scaling mechanisms. So, we're kind of having that renaissance now on Bitcoin.
Peter McCormack: Yeah, we're noticing there's a bit of momentum behind other L2 options.
Nic Carter: Yeah, I mean Lightning has reached some maturity from the protocol perspective, but it still hasn't become totally widespread, which I think is signalling to people, "Okay, well, let's explore other mechanisms too".
Peter McCormack: Well, we actually wanted to talk to you about Operation Choke Point, and we've got some time, we can cover a bit of that. So, you might correct me if I'm wrong here, but you're the first person I remember talking about this in Bitcoin. I don't know if somebody raised it to you first, or you saw some discussion, but you're taking credit for it.
Nic Carter: I probably coined the term Choke Point 2.0. I'm probably not the first person that ever pointed out that Bitcoin companies have a hard time getting banked, I think everybody knows that. But there was a really specific set of events that happened around the turn of this year that turned it from a low-level continuous thing to a kind of acute crisis.
Peter McCormack: And do you believe this is a concerted, coordinated campaign to choke crypto out for more sinister reasons, or do you think you can point to things like FTX and say, "I think if you're a policymaker, you don't really understand Bitcoin and crypto, and you think your job is to protect people". You see things such as FTX, and maybe add GBTC in there, or BlockFi, or any number of faders and go, "Well, this is all fucking crazy, and this is terrible for consumers and yes, we should protect them".
Nic Carter: Yeah, you don't need a sinister explanation; that's the explanation. So in the US, we know it's coordinated, we absolutely know that. It's certain officials in the Biden Administration that are working together with specific regulators, in particular the bank regulators, to marginalise the Bitcoin and crypto industry in the US -- I'll limit to my comments to the US for now -- as a reaction to FTX in particular, and also because of the midterms, because Congress became split between the Democrats and the Republicans, and the regulators, the Executive Branch, realised Congress is not going to do anything about crypto, because the Republicans are more favourable towards it, they won't pass any anti-crypto legislation.
So, the Executive Branch realised, "Okay, we've got to take it upon ourselves and do something about this", and their preferred means of doing that, it's a high leverage tactic, is to deputise the banks, to get the banks to do their dirty business for them. And they basically signalled to them very clearly, "Don't deal with crypto companies, don't bank them".
Peter McCormack: But do you think this is a consumer protection policy, or do you think it's, "Oh, now we've got the opportunity to do what we've always wanted to do, is get rid of this because of the likes of FTX"?
Nic Carter: There's an overt hostility in the Biden Admin towards the Bitcoin and crypto space just latently. They got the political go ahead to do it post FTX, because FTX really did actually change sentiment towards the crypto industry in this country, absolutely, so it gave them political licence to do that. But I think it was opportunistic. It was, "Well, crypto is out of control and we need to do something about it".
The other thing is, there was a view that the crypto space could actually destabilise the established financial system, and so they wanted to insulate the traditional banks from the volatility of the crypto industry. We know that that's not the cause of the banking crisis. The cause of the banking crisis is interest rates being raised very quickly, and depositors becoming very concerned about the banks and withdrawing their funds really quickly. So, those two things are the main causes. Crypto, Bitcoin, the industry going up and down, that's not really the cause. Although it's unfortunate for us that the first three banks that collapsed, they all had some portion of their business that was crypto related. So initially, there was an attempt to blame it on the crypto space.
However, as more banks started to fall and collapse, they were just regular banks, they stopped being able to do that.
Peter McCormack: Yeah. Can we just do a quick TL;DR on each one, because Silvergate, I was a big fan of theirs. I really liked Alan Lane, met him a few times, think he's a good guy. It feels like they at least tried to wind down the business professionally and ensure everyone was protected. But also, at the same time, they very quickly went from a position of appearing to be a very strong bank, traditional bank, that had decided to take the move and support crypto and Bitcoin companies, but very quickly found themselves unwinding. What was the background to this?
Nic Carter: So yeah, so Silvergate, they are actually choosing to voluntarily liquidate, which is something that people miss. That's very rare for a bank. So, they're actually winding down all their operations. All their depositors are made whole without the federal government having to step in, right? So, they're not like the other banks where they collapsed and there was a loss that the government had to insure. Silvergate chose to wind down. The question is why would they do that?
Well, on the one hand, they did service almost exclusively the crypto and the Bitcoin space, and so as 2022 went on, their depository base drew down because a lot of their clients were going bankrupt, or something like that, right? They also did service FTX Alameda, and so there were investigations launched into them. Some senators questioned their solvency. In fact, Elizabeth Warren and some of her colleagues, they overtly questioned the solvency of Silvergate, which of course, if powerful senators are questioning your integrity, you as a depositor, you're going to leave, right? So that helped fragilise the bank.
The other thing that happened was the FDIC, the Federal Depository Insurance Corporation, they started to totally ratchet up the scrutiny against Silvergate basically saying, "Send us a list of your clients, send us all this data", like tons of bureaucratic tasks, which made their life a lot more difficult. And the Federal Reserve went to Silvergate and said, "You need to eliminate your concentration risks. So you can't have more than, let's say, 15% of your deposits pertain to the crypto industry". Now, Silvergate was pretty much a crypto-facing bank, right? They serve crypto companies. So this 15% threshold means it's another way of saying, "You can't run your business any more".
So, the combination of higher compliance costs to serve the crypto space, plus this kind of artificial 15% threshold meant that their business model didn't work anymore. So, certainly they suffered a bit of a run on deposits, but what actually happened was they realised they didn't have a business any more, because the government basically told them, "You can't run your operation the way you used to, you can't be a boutique crypto-facing bank". So, that's actually the reason they chose to liquidate in the end.
Peter McCormack: It reminds me of that conversation we had a couple of days ago with Peter St Onge, where I was becoming very sympathetic to libertarians, whatever my opinions are politically, but very sympathetic in that the amount of work the government does to make it hard to run a business and the amount of money they take from us through various taxation that stops us reinvesting, it's become really clear to me recently; the reason being is, I had a little bit of extra cash recently because of the podcast, and I was able to buy another business and invest and grow. I think about how much money I would have if I didn't pay such high tax and the amount of other businesses I could start or invest in and do things. I know I'm a better investor and a better operator than any bureaucrat in government.
So, I've become very sympathetic recently and that's just the same point. That is a successful business that employs hundreds of people, services lots of other companies.
Nic Carter: They provided an essential service. They were one of the few banks that was explicitly, validly pro-crypto and allowed these crypto firms to do business in the United States.
Peter McCormack: But here comes the government with new regulations, which makes it hard for them to do business, which means a bunch of people have lost their jobs and a bunch of other companies are struggling to find banking services. So, they are just squeezing good businesses for no apparent reason.
Nic Carter: Well, to be clear, they're not doing this through the accepted democratic process, right? So, what Congress could do would be to pass a law to say, "Well, under constitutional grounds, banks can't service the crypto industry". If they really wanted to do that, that would be the way to do it. What they shouldn't do, or they shouldn't be allowed to do, is to have bank regulators go to the banks and say, "You can't do business with this legal industry". That's unconstitutional, right? That's a due process violation. That happened with Choke Point 1.0, and it just was unconstitutional.
It ended when Trump came into office, but they would have also lost the legal case. They tried it against other types of businesses, weed businesses, adult entertainment businesses, payday lenders gun manufacturers. So, these are politically disfavoured businesses that the government sought to choke off through the banks. This time, the target was crypto. It's still unconstitutional. Federal regulators can't just persuade banks to not do business with the legal industry, that's not the way it works in this country.
So, my real objection is it's not just that the crypto space has been victimised, it's that they're doing it in an unacceptable way that's not part of the social contract in America.
Peter McCormack: So how is it different with Signature and Silicon Valley? So, Signature is maybe even a more sinister case, because they were actually sent into receivership by the New York Department of Financial Services in mid-March after the collapse of Silvergate and Silicon Valley Bank, and so they were nationalised, basically. So, all the creditors were wiped out, the shareholders were wiped out, right? Apparently, this is what their chairman, Barney Frank, said, "They were solvent at the time that occurred". So, they were not actually in such a beleaguered state that they couldn't do business on Monday. They probably could have but regardless, they were nationalised. So, that's basically the government seizing a solvent banking institution. That's very, very unusual, deeply unusual. In fact, I don't think it's ever happened before. Typically when banks are sent into receivership, that's because they've failed or they're in the process of failing. So, that was a very odd thing to occur.
What happened after that was their crypto business -- so they had this thing called Signet, which allowed their clients to settle up fiat between themselves on a real-time basis. Silvergate had one as well, called SEN. SEN was gone, Signet was the only one left, so I think that was why they had a target on them, and Signet was not sold, even though there were bidders for it, right? So, in the sale process that the FDIC managed, the crypto deposits were not sold, and Signet was not sold. The crypto depositors in Signature were told, "Withdraw your funds, leave, find another bank".
So, the government seizes this institution, they run a sale process, they sell the bank to another bank, but in that process, the crypto business is stripped out and destroyed. So, that to me is intensely suspicious, right? Maybe it wasn't a crypto, anti-crypto animus that was the reason they were nationalised, but the consequence was Signature, another explicitly pro-crypto institution, was taken out behind the woodshed and shot, and their entire crypto business was eliminated.
With SVB, another interesting titbit, SVB was not really a crypto-facing institution. They had Circle as a client, but that was about it. During their sale process, the OCC said to the bidders, "You can't sell, you can't transfer or acquire assets pertaining to three things with SVB, the three Cs: no crypto; no Cayman, and no China".
Peter McCormack: Why Cayman?
Nic Carter: I'm not sure, honestly, but they were basically the politically disfavoured portions of their business. So, you can't acquire any crypto depositors, you can't acquire any Cayman depositors, and no Chinese start-ups that had accounts with SVB can be sold. So in each case here, we see a sale process managed by the government, but we see the crypto elements stripped off and not included in the sale.
Peter McCormack: And so, the point of Choke Point 2.0 is to choke out crypto and Bitcoin and such, because the idea of just outright banning this would take too long?
Nic Carter: It wouldn't be possible. You wouldn't be able to persuade Congress to ban crypto. It's not like China where one person can decide; you have to persuade the representatives of the people to do it if you wanted to ban the industry. That would never happen. So, the idea was to do it in this roundabout, sly way, and use the Executive Branch's power over the banking space to really hamstring the industry. And it worked, frankly. Today, there are very few banks that will accept a crypto business's money.
Peter McCormack: What can be done about that; is there anything that can be done; can you separate the banking sector; can you insulate it from government interference?
Nic Carter: No, because banks are public-private partnerships, they exist at the behest of the government, they're highly regulated, and they are insured by the government. That's what FDIC is, it's depository insurance that comes from the government. So, banks are always going to be beholden to what the government wants. However, if you're violating the Constitution, you can of course sue. So, certain injured parties are definitely contemplating, and I believe will, bring a case against certain banking regulators protesting the fact that the banks were deputised against crypto space. So, that's one solution.
Another solution is congressional oversight. So, the Executive Branch went around Congress, even though authorities should have invested with Congress. So, certain members of Congress are now pushing back subpoenas, potentially trying to figure out, "Hey, hang on, why did the Biden Administration go around us and exercise undue authority that they maybe don't even legally have?" That's another solution. However, what's actually happening, the way people are dealing with it is entrepreneurs are going offshore. They're starting businesses in the UK, in EU, which has comprehensive crypto legislation and MiCA. They're going to Hong Kong, right, they're going to China. So, we have businesses that would exist here that are going elsewhere. They're going to Bermuda, Switzerland, Singapore, and Hong Kong in particular, right? So people are just leaving. So, the American crypto industry has suffered this huge loss because the government did this.
Peter McCormack: How do you think this plays out, because we do have an election in two years. Maybe I'm wrong, but I have a feeling the Republicans might win. It feels like we have a little bit more favour with some Republicans, not all. Do you think, whether it's DeSantis or whether it's Trump, do you think we're in a more favoured position, protected if that happens, or do you think they'll do the same?
Nic Carter: Yeah, I mean DeSantis is, I think, explicitly pro-crypto, so that would obviously be better.
Peter McCormack: Explicitly anti-CBDC.
Nic Carter: Certainly, yeah. Trump, I honestly don't know, but under Trump, Choke Point 1.0 was ended, so I would presume that he wouldn't inherit 2.0 and think it's a good thing. So, certainly a lot turns on the outcome of that election, A lot of people are looking forward to it and thinking, "Well, if Biden wins the second term, it's actually curtains for the domestic crypto industry". So, the other thing that could happen is there could be a successful lawsuit brought by the industry to restrain the banking regulators from doing this. The problem is, normally what would happen is, okay, there's an industry that really needs banking; why don't entrepreneurs create new banks to serve this industry that's underserved? Well, they tried, that's what Caitlin Long's custodial was.
Peter McCormack: They wouldn't allow her to do it.
Nic Carter: That was what the OCC-chartered banks, crypto banks, were trying to do; Anchorage, Pratego, Paxos, right? Those banks were run out of town. The OCC denied all of their applications. So, the normal market process of creating new banking institutions to serve this underserved industry wasn't allowed to occur because banking charters are being denied. I do see the states potentially getting involved here because the states do have the right to charter banks; that's been one of their key rights historically. The government's trampling on top of that. So it could be the case that there is pushback from the states saying, "Hey, actually we do reserve the right to charter these new institutions, so you should let us do it".
Peter McCormack: Hopefully Cynthia Lummis will do something in Wyoming and something will happen in Texas.
Nic Carter: Yeah, I hope we see more defence of things like the SPDI in Wyoming. Wyoming tried to join Custodia's lawsuit against the Fed. I think they actually weren't able to, but I wouldn't be surprised if more states push back and try and seize some authority and try and charter new crypto-focused banking institutions.
Peter McCormack: It's so utterly frustrating to watch this being played out, and this choke against something that, we may disagree whether it's Bitcoin or crypto, but at the same time this kind of choke out of these free market ideas.
Nic Carter: Well, I mean you had a great episode with Luke Gromen recently, where he I think he described it like, "Closing the theatre doors before setting it on fire", and I think he's right. So, I believe this is an attempt to impose soft capital controls on the American people, because what they don't want is capital fleeing the system to an alternative. They want capital to stay in government bonds where the government has to run inflation really hot and keep yields relatively low so that they can reset their debt position, which is very high. So they kind of want people to stay in the formal regulated banking system because the banks hold a lot of these government bonds. That's what they want. They don't want people fleeing for the exits.
So, to me, this does look like an attempt to impose capital controls, which the US hasn't had since World War II, since Bretton Woods. But I think that's kind of where we're going now.
Peter McCormack: It's kind of an admission that they're fucked!
Nic Carter: I don't think they can succeed in that because we live in this digital world. The rails to move between fiat and Bitcoin, they exist still, right? They weren't successful in killing off the crypto industry. All they've been able to do is delay the transition, but it's still going to happen.
Peter McCormack: Yeah, and if they go after exchanges...
Nic Carter: They have been, right? They've been harassing Kraken, they're harassing Coinbase, so they're using all the tools in their toolkit, but still we live in a democracy, we have property rights in this country, the government can't really just kill off legal corporations that they don't like. So ultimately, we are still protected, these institutions still exist, so they can't have a complete victory here and that's why they're going to lose in the long run.
Peter McCormack: Is there anything we can do or people listening can do?
Nic Carter: You can talk to your elected representative, honestly. So, by making a lot of noise around Choke Point 2.0, a lot of things happened. Bobby Kennedy talked about it. So I mean, I love it, he shouted me out, right? So, that's incredible. Certain members of the house --
Peter McCormack: Can we just take a moment there just to recognise JFK's nephew is shouting you out!
Nic Carter: I know, it's a surreal moment!
Peter McCormack: How surreal does the world get sometimes?!
Nic Carter: Yeah, I did expect any of this would happen. Frankly, I didn't actually know who he was before that happened, but I thought his speech at the conference was incredible. Yeah, he won a lot of support in doing that. Members of Congress held hearings trying to dig into the Choke Point stuff. The problem is, we need discovery and a legal case to actually get the documents so that we can find out what the FDIC was doing, what they were thinking, what the Biden Admin was thinking. So, we do need a legal process to play out there.
There are potential reprisals that may occur. It's going to take time, and certain banks may come in and choose to serve the crypto industry too, so that might be another way this happens. But yeah, I mean we've been under the cosh here for the first half of this year. I do see some light at the end of the tunnel, but yeah, it's been immensely challenging.
Peter McCormack: But it's just the latest fight.
Nic Carter: Yeah, and they're going to keep fighting us. I mean, that's just going to be the status quo from now on.
Peter McCormack: Alright listen, I know you're going to head off shortly. Is there anything we've not talked about that you wanted to talk about today?
Nic Carter: I mean, that's the most important thing, honestly. I think we should continue to make noise about it, I don't think we should accept this lying down. I think the Biden Admin has overreached, frankly, I think it's a few activists in that. I don't think Biden himself cares about crypto one way or the other.
Peter McCormack: I think Elizabeth Warren does.
Nic Carter: She certainly does, and she has kind of a shadow cabinet, people that she got into power. The key architect of Choke Point in my view is Bharat Ramamurti, who works for Biden in the White House, who is a protege of Warren's. So, she kind of inserted some of her people in these key positions. But yeah, there's a lot we can do, actually. In particular, there's legal processes that we can employ. And if you've been harmed by this stuff, I think you should basically sign on to one of these lawsuits because they will be brought to bear soon.
Peter McCormack: So are there actual lawsuits, active lawsuits or potential active lawsuits?
Nic Carter: They're being crafted. So, the lobbying and policy organisations, like Blockchain Association, Chamber of Digital Commerce, Coin Center, they're contemplating this. But what they need is good plaintiffs. So they need firms that have been harmed because they illegally lost banking access, right? So they need the right kind of plaintiffs to come forward to join these cases so that we can get discovery and we can find out behind the scenes, we can get the emails, we can find out what these bureaucrats were thinking and saying, because I know that if we get in there, that is going to throw a lot of sunlight on the system. And I think frankly, it was a violation of the Constitution; I think we'll win the lawsuits.
Peter McCormack: Signature is a good plaintiff.
Nic Carter: Yeah, you would expect them because they've obviously been harmed. So yeah, I haven't heard anything from them. I think other banks are a little bit shy right now because they're going through their own processes of liquidation and there's other investigations. So the banks themselves certainly have been harmed, but they may not be the plaintiffs with the most standing here.
Peter McCormack: All right, well listen, we'll keep an eye on that. Nic always good to see you. 15th appearance or is it 14th?
Danny Knowles: 14th, 14th appearance.
Peter McCormack: I thought we'd done 14.
Nic Carter: This is 14.
Peter McCormack: 14th appearance, I'm sure we'll see you soon. We'll do the next one in Bedford.
Nic Carter: Okay.
Peter McCormack: We'll get you in.
Nic Carter: I'll come and see you.
Peter McCormack: All right, man, take care.
Nic Carter: Thank you.
