Why Washington's Anthropic Ban Could Become a Playbook Against Crypto

Transcript

Hey everyone, welcome to Bits and Bips, where we explore how crypto and macro collide one basis point at a time. We're here to discuss the latest stories in the worlds of crypto and macro, and have an excellent guest today. But before we begin, a quick commercial break. >> Fidelity has been investing in blockchain since 2014. They're not wondering if digital assets will shape the future, they're hiring the talent to help ensure they do. Explore opportunities today at crypto.fidelitycareers.com. Fidelity is an equal opportunity employer.

This episode is brought to you by Cape, America's privacy-first mobile carrier. Same premium service you'd expect from any other carrier, but designed so your number, your location, and your data actually stay yours. Get 33% off 6 months at cape.co/unchained. Heads up everyone, we've now fully transitioned Bits and Bips to its new [music] dedicated channels. So if you're not yet subscribed to the new Bits and Bips channels on X, YouTube, [music] Spotify, Apple Podcasts, or wherever you get your podcasts, go there and subscribe now. [music] For the next few weeks, we'll place segments of the full interviews on Unchained as a reminder, but for now, you'll only hear those short segments of [music] Bits and Bips

on Unchained, no more full episodes. You can get links to all of the dedicated channels with the full episodes at unchainedcrypto.com/bitsandbips, [music] spelled b i p s. Thanks again. >> All right, welcome back, and as always, I'm your host Austin Campbell, high scholar of Zero Knowledge Group. Here with my co-hosts, Ram Ahluwalia, meister of wealth, leader of Lumida, Chris Perkins, the golden hand of 250 Digital, and Sam Enzer, the warden of Cahill next. Um, for those of you who don't know Sam, by the way, you should. He is one of the lawyers deep into the crypto world and

has thought about these things for a long time. Today though, we're going to start talking about the Fable five, Ben. So, what's going on? The US government issued an export control directive citing national security concerns suspending all access to Anthropic's Fable five and Mythos five for any foreign national. That includes Anthropic's own foreign national employees forcing Anthropic to abruptly disable both models worldwide for all customers. All other Anthropic models are currently unaffected, but Anthropic received the directive at 5:21 p.m. Eastern previously and the government's concern

was stated to be a jailbreaking of Fable five. Um so, let's talk about Anthropic first. They said the demonstrated technique for jailbreaking found, quote, a small number of previously known minor vulnerabilities. Other publicly available models are able to discover them as well without requiring a bypass and they named OpenAI's GPT-5.5. They also said, quote, we disagree that the finding of a narrow potential jailbreak should be cause for recalling a commercial model deployed to hundreds of millions of people. It would essentially halt all new model deployment for all frontier model providers.

Now, on the other hand, the administration's case, and this was David Sacks, said, quote, Fable is Mythos with guardrails, but if those guardrails fail, then you've exposed Mythos and its advanced cyber capabilities to people who shouldn't have them. The admin asked Dario to fix the jailbreak or de-deploy the model. Dario refused. Anthropic prioritized the continued offering of the consumer model over safety and the ball is in Anthropic's court. Now, acknowledging up front that we don't have a full story from either side, and we're still trying to figure out what's going on, I wanted to start, Sam in particular with you, cuz I know you've dealt with

crypto and seen administrative actions previously. How are you taking this whole thing apart? What do you think here? >> Uh sure, great question, Austin and Austin, uh Roman, Chris, thanks for having me on. So, this is an interesting we're in an administration that has been in many ways a huge friend to the digital asset sector and to the AI industry. Um looking and the president has made clear he wants to remove red tape and make America the the capital for crypto, for AI, for tech in the world. Um and and to create the kind of regulatory environment that will attract entrepreneurs to build here and disseminate their products, right? And we are in for AI, we're in a race against China in many respects. Uh and in the in the blockchain industry,

um there are many projects that integrate AI with crypto, integrate AI with um with DeFi, and it it regardless have some of the the basic tech infrastructure that could be regulated by export controls. So, how do I take it? On the one hand, I think because this administration has been so friendly to uh the tech industry, um and you you have the statement from David Sacks about why you you can imagine that, you know, just taking a step back here, we know that Mythos was extreme is extremely powerful and was in many ways marketed as something so, you know, too hot to touch, right? So dangerous.

Um Fable is supposed to have safeguards, and you could imagine, according to the reports, and I don't know if these are true, but what I've seen in the press is there's reporting that Amazon's CEO told the administration there was a jailbreak, in other words, a way around the safeguards. And 24 or 48 hours later, you've got this 5:21 p.m. Friday night directive not to export it. So, on the one hand, you can you can understand as a human who may be concerned about national security, why the administration would react this way.

On the other hand, as somebody who has lived through what I'll call the Howey or the Gensler wars, um watching you know, not necessarily this administration, but government officials take ambiguous regulations or ambiguous statutory authority and then use it to crush developers, innovators, and businesses, it is concerning when the government has the power to effectively ban the dissemination of software, of ideas. Uh there is well-established case law that source code, software, including encryption software, is literally speech. Uh is literally protected speech under the First Amendment.

Um here, we have not What Some of the things that are concerning about this, and that's not to say the government doesn't have a valid basis, but there's there's there's a question of what's the substantive basis, and then there's a question of the process. And here, we don't have, as the public, we don't have much process. The letter that was reportedly sent by the Commerce Department to Anthropic has not been publicly released. We have a description of it from Anthropic, but we don't know what it says. We don't know what the what the concerns were, what the national security concerns uh reportedly or allegedly were. We don't know what the statutory or regulatory authority for it was.

Um and this could have If this power is abused, it could have sweeping implications for the AI industry, but also for the crypto industry, right? I mean, just taking a step back, what happened here is the regulation in vogue, the export control, regulates the export of what? Here, we're talking about APIs. Okay. Does that mean if I have a US server with an API and someone in China accesses it that that's an export?

If so, does that mean the export power can be used against any US-based uh server, API, or technology? And you know, there are exemptions or exceptions for export regulations for things that are published, which has often been why permissionless DeFi protocols you you don't see them getting uh regulated through export directives. That said, what if I have an API? Uh or what if I run a front end? Or uh or a DeFi protocol that relies on an underlying AI model, um like Fable or something else, right? This opens kind of a Pandora's Box of government authority for an

industry I'll say >> For my part, having lived through the Operation Chokepoint side of the Biden administration as well, some of the arguments that I'm seeing here I worry even if the people currently in charge believe them are forming a playbook to misuse them in the future, right?

Because now we live in a world where you can point to any frontier development that might have cybersecurity or financial stability implications, say the words national security and then start imposing things like export controls. To me the question is where is the limiting principle? Like one of one of the beautiful things about crypto is you meet an incredible amount of interesting people working in the space and one of the ones I've met is Gene Hoffman and if anybody remembers the original encryption wars Gene was at PGP at the time that was happening and was the guy carrying around a physical book of printed code.

Right to get around export controls because the First Amendment allowed him to do that and I think it is a fascinating thing to see all of these principles that we've been fighting about now for 20 30 years coming back front and center with this discussion because what I will kind of raise here and Chris you've like lived through some of the national security side of things. Those concerns are not invalid. There are genuinely valid national security concerns if people could use these tools to damage the United States. But how do you contextualize those? Like where would you put a dividing line because you're also somebody who's operating >> National security will always Trump responsible innovation no matter what.

And if you look right now a lot of the vectors of attack you're seeing in Congress right now on the Clarity Act, you know, maybe banks aren't so happy about interest anymore and maybe there's a different way to kill this thing by going after national security. Right? So that is always the the Trump card no pun intended. Um as you look at this right now, I was at this event this morning and I spoke and afterwards Hillary Clinton came on. And the one thing that jumped out at me and and you look she was very articulate about her perspective around Iran and maybe we'll talk about that later. But at the end the moderator said, "Hey, what keeps you awake at night?"

And she said, "You know what really keeps keeps awake at night? AI." And so, if you think it's bad right now with the government intervening in Anthropic, and I think we can have a long debate about whether this was politically motivated or whether it was not, and then some people say, "Oh, they just hate Dario, so they're going after him." But, I think we're just getting warmed up, and I think AI has a pretty big problem right now that crypto got in front of, frankly. Um, you know, maybe our PR isn't the best, but we got we we had a very good game in DC. Um, but I think both these technologies have a PR problem, and one thing as we're going into elections, uh, uh, midterms, you know, I saw a lot of Democrats get on stage this morning and talk, and they

emphasize moderation, moderation, moderation. But, then Hillary came up and said, "AI keeps me awake at night." So, I think we're getting warmed up. I love the fact that you mentioned, um, the encryption wars, uh, because we we continue to like bump up against this every time there's a new technology, and over time, you know, we figure it out. The problem is like, what do we do? You have the Chinese that are coming up with very sophisticated models, very cheap models. Um, the more and more we get involved in in and put our hand in government and over-regulate it, a couple things are going to happen. Number one, consolidation, right? We see it over and over again. Regulation leads to consolidation. It boxes out entrepreneurs because it's very

expensive, and, you know, you listen to the All-In guys, they're like, "Hey, that's the That's the playbook here. Get big enough to create that regulatory regulatory moat." And and that's been the game. That's been the game for a very long time. Um, and so, that's the risk that we face. I don't think you can put this toothpaste back in the tube, and then it brings you back to this whole idea of decentralized AI. And we've been in this space, you know, for a very long time. Um, very, very hard, unproven, and there are parts of the stack that you can decentralize, but generally, you always have somebody centralized no matter what, like whether it's that front end or something else, they're going to be subject to regulation. So, so maybe the future is like the AI mullet. Uh where you have

the decentralized AI in the back end. I don't know. Um but but I think this is going to get much more complex. I I think it's only going to get worse because, you know, if if if the Trump administration is is already taking this much of an active viewpoint, um then then I think the Democrats going to Last thing is that we're this period right now of max concern because there's just these models are moving faster than our security. Eventually, I think we're going to reach the stasis where the models actually fix the security. And once your vulnerabilities are fixed, yeah, maybe you get some very sophisticated ones that pop up in the future. But what we should end up with a much stronger environment from a from a security perspective once we've had the time to

implement these models. So, hopefully that plays out uh in the future. >> Yeah, I'm nodding my head at at the comments. I mean, overall, like the limiting principle is the US Constitution, specifically the First Amendment to Sam's point. Uh this is an overreach of the federal government. Uh it's disappointing, right? Uh I know growing up I read Ray Bradbury's Fahrenheit 451, which was a a lesson on the concerns around burning books. We read about George Orwell's 1984. There was Kurt Vonnegut's short story Harrison Bergeron.

It's so surprising to see this come from this administration. And in the future, we're not going to have our kids read books. They're going to have access to intelligence on demand like a utility. It doesn't make sense for the role of government to restrict that. There's no due process. National security has been used and abused to contravene on natural rights, and it's being abused here. Uh I agree also AI is becoming a political issue. I had a chat this Sunday as my Verizon Fios went down, I called called in to get it repaired and I asked the service operator, "Oh, like where are you based?" Just making some chitchat. Uh while the IP's updating,

she said, "I'm in Virginia." Uh Virginia Beach. I said, "Oh, that sounds lovely." She said, "No, it's not. They're building a data center here." And I said, "Oh, well, it's just a one-time construction issue." She said, "No, no, no, no, it's already up and running. It's worrying, it's making some my utility bills going up, having environmental damage." Her words. So, this is a this will be a continued issue. You know, AI is important for unlocking the potential of humanity and you need political leaders at this time to step up and communicate that story. What's more likely to happen, though, is that AI will become a punching bag and used to uh create the next enemy or scapegoat.

Uh So, yeah, I I agree. You'll see more backlash and I think Anthropic is betting on a change in the midterms. They have a bunch of ex-Biden staffers, as my understanding. The that dynamic is in the background. >> How how much of this, though, Right, cuz like OpenAI clearly caught a stray in Anthropic's like commentary on this and yet nothing has been done with them. We haven't seen anything coming out about like Grok or any of these sorts of things. How much of this is related to what Sam brought up earlier, which was Anthropic's own marketing of its own models? Cuz if you run around saying my model is an existential threat to cybersecurity, whose fault is it if people take you at

face value? >> They have the best model. They have the best model on the block, but I think yeah, Chris is right. It's not the proper role of government here to set cybersecurity policy. It's company IP property and private enterprises very good at identifying issues and risks to their business and innovating new solutions to address it. Like Y2K should have been a bigger issue than this. You didn't have national security telling private companies to go address this Y2K bug.

Private companies identified the issue and they invested in technology and it became a non-issue and that should happen here. >> It's very >> Oh, sorry. >> No, you go Sam. Go. >> I was going to say that I think the the problem here, right, is if in fact this type of if you really are concerned about national security, you can't stop Chinese models, decentralized models, or anyone who is able to crib uh the Mythos or Fable Tech in the period it was out and deploy it, right? So, this isn't really if you're really truly trying to solve for national security, this is not an

effective solution, but you are disabling the market from getting up to speed on it to fix it. And if we believe in the free market, then we should let the free market toy around with this. >> What what makes me crazy? Peop- people get freaked out about tech. They're naturally scared of it and the immediate response is let's go after the tech. Let's regulate the tech. Let's attack the tech, right? But the point is is that it's not the tech that does anything, it's the users. It's the people, it's the institutions, and it's the governments that use it. Like maybe we should get rid of cell phones cuz you can do a lot of bad things on a cell phone.

And I tell this all the time, when I was in Iraq, I used to get we would get blown up by garage door openers. They trigger IDs on us. So, like garage door openers, let's get rid of them. They're dangerous technology, right? So, like I wish we would focus more on the the behaviors and hold people, the front ends accountable rather than just go after. Like if you use Mythos to hack somebody, well, let's go after those people and those institutions and hold them accountable. Like that I I feel like we always default to the tech and that's the wrong place to default.

>> I feel like it's also the lazy path in some ways because people and by the way, back to Sam's earlier parallel with crypto, people have this problem with the internet now where it's global and so you naturally want to expand your reach to regulate things, but some of those people might be outside of your specific national borders. I don't think anybody's really come up with a coherent, call it theory of regulation in the internet era where we can effectively address those things without also stepping all over extraterritoriality and I feel like as a result they reach for the lazy solution. Like Sam, you do a lot of legal work in this space. I guess I would ask you if you were advising the US policy makers thinking

about this right now of how to balance these concerns, like and I'm going to put you in the awful spot of thinking about having to make this decision yourself, how would you be approaching this right now as the US government? >> So I think the first thing is they have to communicate their reasoning. If it is in fact a valid national security concern, it is very important that there are mechanisms to regulate through notice and comment rule making, which is the the bare bones of democracy, right? The bare bones of due process.

This goes around that. That's extreme. Fine. But lay out what is the concern? What is it What is your statutory authority to do it? And that is at a bare minimum is very important so that all of us can understand what is the framework here. When um President Trump came in, he rescinded There had been an AI diffusion framework set up by the Biden administration for how the export regulations would apply to AI models and he scrapped it. Okay, but we still don't have a replacement, right? So, what is the framework here? What is the precedent being set here? If you want the AI

application makers like Anthropic, OpenAI to comply, to take safety seriously, to have those guardrails, you need to set the rules of the road. And that's not my own message, that's the Trump administration's message, right? The complaint against Biden and Gensler was regulation by enforcement, not guidance. Okay, well, that that approach needs to be taken here. >> I think that's actually quite fair in terms of say what you mean and write it down. In many ways, it echoes the complaints about like secret proceedings at FISA courts, right? And privacy violations there is you have all these undisclosed things that we never know about. You took a

bunch of actions that we have no way to know if they were completely valid and totally reasonable or complete nonsense and violating the rights of Americans. So, I guess step one is transparency and sunlight are going to be the ultimate disinfectant here. >> For sure. It's hard to go beyond that because we don't have the facts. We have Anthropic's version. I'm not saying they're wrong, I just don't know. Um, you've got the SEC statement which gives you a window, but that's not sufficient data for me to make an assessment of what exactly is the rule? How does this rule apply to the AI industry, to the DeFi sector, to blockchain?

All of these are unanswered questions. With something this dramatic, we shouldn't have those questions. >> Yeah, you you could see that, you know, based on this and and again, we haven't even had gone through midterms yet and if the sentiment continues to deteriorate, it does seem like now's the time to push for decentralization. Uh, that that seems to be one of the solutions. Um now that doesn't make it easy if you're a centralized provider trying to access the technology, but we're seeing that in crypto markets where that narrative is really starting to pick up right now. Um cuz that's always been that's always been first principle. Uh you just can't trust governments, whoever they are. Uh decentralization is the way. Um so I think there's more to follow on on that. I think like I said

earlier, governments are just getting warmed up on this technology and I think it's going to get worse from here. >> I said, I think it was back on Odd Lots in 2024 that people should be worried about the Bitcoin strategic reserve for this exact reason, which if if you go around marketing yourself as a tool of national security and strategically important, eventually the government might do something about it. One of the things I worry about with this is if we actually believe that, say I'm back to the concerns with crypto, did we not just create sort of the playbook for the US government trying to control, oh I don't know, Bitcoin mining here as a matter of national security? Like if we saw the Chinese accumulating a lot

of it, would we try to commandeer a bunch of hash rate and you know, essentially fork the chain or something? Like I don't love where this leads without a dividing principle. So I I'm inclined to agree with you. The number one thing we need to see here is why because you can easily argue why Anthropic would be motivated to lie and you can easily argue why the administration would be motivated to lie and without seeing what really happened, I don't know that we as outsiders have a great way to sort of referee this thing for lack of a better way to put it.

>> Right. Um I'm I'm I'm sure journalists or professors at NYU can do Freedom of Information Act requests. Um and if you want to talk about doing one, we should talk offline after after this, but obviously when there's an ongoing investigation, when there's a national security matter, those are some of the classic situations where the government won't release information. >> Yeah. >> Go ahead, sir. Don't throw shade on the Bitcoin reserve. I still want that. >> [laughter] >> I want I want I want an ETH one. I want I want every layer one that holds onto stable coins. It's a strategic commodity. Let's go. Come on.

>> Be careful what you wish for. This is going to be one of those monkey paw curls moments if you're not careful. >> I think it's going to be just fine. >> All right. Well, before we move on to our next topic, we have to do two things. The first of those is we've got to let Sam go. So, Sam, I want to say thank you very much for joining us today. We really appreciate your time and your thoughts. And for those of you in the world who aren't following a lot of K. Hill's writings on topics like crypto, you should. They're great. Second of all, >> Fidelity has been researching and investing in blockchain since 2014, long

before it was a headline. And they're hiring crypto and DeFi professionals to join their team and discover what's next in finance. Fidelity is looking for people with fresh perspectives from different backgrounds, whether it's tech, UX, or product design, whether you're crypto savvy or crypto curious. As long as you have the passion to make a real impact at a company striving to make finance accessible to all. Explore crypto careers at Fidelity today and make the decision that could change your future for the better. Visit crypto.fidelitycareers.com to learn more. That's crypto.fidelitycareers.com.

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no more full episodes. You can get links to all of the dedicated channels with the full episodes at unchainedcrypto.com/bitsandbips [music] spelled bips. Thanks again. >> Welcome back, everybody. And in other big news that's been happening, SpaceX had a over $2 trillion debut. So, SpaceX IPO'd on June 12th, ticker SPCX, do not accidentally buy Virgin. Uh priced at $135 at the offering, which was a $1.77 trillion valuation.

They raised $75 billion, and then closed on day one up 19% at 161.11, and have traded even higher than that today, briefly valuing it, you know, what, 2.25 trillion intraday. And a lot of people, as you can imagine, are very excited about this. So, the bull case has been that SpaceX owns the entry toll to a lot of markets, basically all markets involving space, as the one company with significant launch capacity. The call it flagship product there is currently Starlink, but there are many other things you can do with reor- like reusable boosters to bring people into orbit.

On the other hand, the bear case, so take Ed Dowd, ex-BlackRock, it's priced at an outrageous multiple, about 95 to 100 times revenues. That's just absurd. It's going to deflate over the next 6 to 12 months. Great companies and great stocks are two different things. And Log Weaver on X said, "15 billion in annual revenue, a 1.77 trillion valuation. That's not pricing a company, that is pricing a thesis. And that insiders hold 3.75 billion of shares with no lockups and more coming in a couple of months."

Also, as an aside, on chain, uh 300 million in USDC trading for SPSX on Hyperliquid, a global 24/7 market in parallel with the traditional exchange. And that the Friday snapshot was Nasdaq 172.86 and Hyperliquid 172.62. So, starting here, Ron, I'm going to start with you as an investor. As we look at SpaceX, one of the things that I've observed is that people have a hard time breaking apart the mission of SpaceX, the valuation of SpaceX, and their personal feelings about Elon Musk. So, looking at that hairball, how do you

feel about SpaceX the stock in particular? >> Yeah. So, Elon is one of the world's greatest entrepreneurs and one of the greatest marketers and storytellers of all time. SpaceX, I'll update you on some of the numbers here. It's price to sales is now 135 times. It's up about 30% since the IPO the last 2 days. Now, most IPOs, including blockbuster IPOs, including say Coinbase, including Circle, which we saw last year, including Meta, they tend to decline and it's a very clear and significant effect, especially as you start to get closer and closer to

these unlocks. Elon now is a over a trillion dollars net worth. There's a story there uh also, but this is a bad bad investment. It is not a great idea. You should recognize that sometime in the next couple of uh you know, weeks or months against the unlock comes online, you know, this thing is going to go down. Tesla, you know, when it IPO'd, certainly a much lower valuation before Elon had fully established his, you know, cult. Uh you know, if you bought immediately around the IPO, you had to wait until November to make your get your principal recovery.

Uh and it really wasn't until 2020 that Tesla really took off. So, people often remember history incorrectly. Uh this is not the next Amazon. Again, Amazon went public as a small cap at a $500 million valuation. This is a $2.5 trillion valuation company. It's in the broadband business, which doesn't trade at a high multiple and their competitors for Starlink, including Verizon, uh it's in the uh rocket launch business. It's got competition from Rocket Lab, uh which I believe was just included into the Nasdaq now. Just uh I think one of the major index committees accepted them into that. And they've got competition from Jeff Bezos coming online.

And we don't see the end demand that substantial from government enterprise and consumer behind it. Right? What's exciting about the AI theme is you've got these big Mac 7 businesses defense and sovereigns spending money on AI. That's real demand fueled by profits. We're not really seeing that in the space story yet. So, I think this is a This is a hard avoid. It is a sign of where we are in the cycle. I I was traveling this weekend and passing an airport.

And uh just the timing was really fortuitous that the guy next to me called his wife. He was a boomer, like late 60s, I imagine. And I think the second thing out of his wife's mouth after was how was the trip was, "Did you buy SpaceX stock?" I was like, "Oh. Oh, that's interesting." Every now and then you get to see the person on the other side of your trade. That was one of those moments. So, I don't I don't think it's a it's a it's a it's a good investment here at all. I think it's cut and dry, also. It's not even ambiguous. >> Chris, what do you think? >> Gosh. Uh Well, let's start on let I'll let Ram handle how he thinks about the valuation of the underlying asset. But, one thing that we saw really interesting for a

second time is that we had pre-IPO purpose in place uh for the first time. Like, you know, they're really starting to come on the scene. And you're going to see it again and again. And these instruments are now proving an important data point to see how these IPOs perform. And I think it I I I I think it could open up and it really help catalyze the IPO markets going forward because issuers can better time their IPOs or even facilitate direct listings, which is what Coinbase did to to you know to Ram's earlier point. Um maybe you don't need the banker necessarily. And every time we have an IPO and the pre-IPO markets, you know, provide insightful data points, I think it builds on that

narrative. And then eventually someone's going to say, "Well, wait a second. I'm going to start monitoring these things and help time um I go to market um maybe even through a direct listing." So, I think I thought that was a another genuine general success story out of this. Um look, Elon is the Thomas Edison of our era. Um one of the best entrepreneurs in the world. Ram, you know, yes marketing, he's also an incredible fundraiser. Like this again proves how good he is at fundraising. He can tell a story. He can tell a narrative. He can get the capital behind it. He thinks big. So, listen to every founder, like watch this guy. You know, he can he can sell a story.

Um he's operating in some really interesting um technologies, environment, space. He's in AI. He's going to put the data centers in space where he addresses the energy issue. Maybe he addresses the the cooling issue. And and I think he's able to capture this idea in people's minds and he surrounds himself with some of the best scientists. Um big question for me is, okay, we we've gone through this IPO. Not sure where the market goes from here. Um we have a couple more IPOs on the horizon, Anthropic.

Who knows after last week? We'll see what happens. And then you've got uh Open AI as well. Um you know, if we successfully navigate these IPOs with and people are really concerned about that sucking sound of all the capital coming out of capital markets, crypto markets are doing just fine right now. You know, we didn't see them drop precipitously post this IPO. Feels like they're starting to build again. I'm wondering, you know, are these some of the signals that we're going to see for capital to push back into crypto once people get tired of the AI trade, um is crypto is is is crypto going to going to come back in favor. That's what I'm looking out for.

>> So, as I've been watching this, I kind of view what's going on with SpaceX as call it the immovable object meeting the unstoppable force. And what I mean by that is on one hand, you would say never bet against Elon Musk. Right? I completely agree. He is one of the greatest entrepreneurs of our time. Some of the things he's built are truly incredible. And regardless of what your personal opinions on Elon as a human are, electric cars, reusable rockets, internet from space, like the guy just builds incredible stuff.

And by the way, as somebody who's got a lot of neurodivergent friends, I think people need to cut him a little bit more slack on that front as well on the personal front. On the other hand though, something all of us in crypto are highly familiar with is the classic like low float high FDV token. Right? Which is to say these things parabolically go up and then come back down and just bleed out over long periods of time. And if you look at the SpaceX IPO, it is a low float high FDV token because the current number is what? Slightly less than 5% ish of stock is publicly trading.

So, most of this is locked up and in the hands of insiders who are going to unlock over time, including over the next 6 months, and be able to start selling into the market. And we've seen what that chart looks like time and time again. Which is a squeeze at the start and then it starts to bleed out as these things happen. So, for me as I'm watching this, one, it's not an obvious short right now because this can definitely go up while we're in the low float area of this. But over time, I have a very hard like sort of situation if I believe that SpaceX is going materially up from here.

Because these sorts of dynamics for float tend to be downward trends over time. And two, all of the mega cap IPOs have had 50% ish drawdowns in the same year in which they were issued. So my central thesis right now is even if you like SpaceX as a company, I feel like you're going to be able to buy it on discount in the future compared to where it is right now. So Ram, do you think I'm missing anything there? >> I think you you nailed it. That's right. This is really easy. It's an avoid.

Uh it's a wait. You know, the VCs will have to crystallize the returns also. So after this lockup, they're going to say, "Okay, sell. I get to lock in this incentive fee." And there are a lot of VCs that are in this name, and they're going to recycle that back to their LPs to launch their next venture fund. So the incentives around this are just not good. You know, it's not a good deal. You know, what's the opportunity? It's the exact opposite. So what happened the last 2 weeks was that investors sold off securities to go buy SpaceX.

So if you look at the other names in the Mag 7 complex or just stocks in general, last week you saw people selling Microsoft, Meta, Nvidia, they hadn't gotten this cheap since the recent stress test from the SVB crisis. And in fact, in some cases they got as cheap as in that moment of time. So now that all that selling was done, they they had to sell stock to go fund the purchase of SpaceX. You want to do the opposite. Go buy the stuff that investors sold off. That is uh being offered at a discount. You have 24% year-over-year earnings growth. The S&P is going to break 8,000 plus easily.

Rick Reeder from BlackRock came out today saying that you could get uh quite a bullish setup in the market. Um I agree. Uh, so that's the move to make is is buy the anything but, you know, SpaceX. >> I mean, something does feel a little broken here, right? Like what Why are we waiting till companies have trillion-dollar valuations before they go public? Like Yeah, who missed out on all of that incredible growth? It was, you know, normal people. And so, I think this is probably in the back of Chairman Atkins' head. How How do I How do I make IPOs great again? How do I make companies go public earlier? You know, we've talked about this.

80% of companies with over $100 million in revenue are private. Like, you know, this is another thing. How do we How do we fix this? It seems broken, doesn't it? >> How How I I agree with that. Like, creating more access to fast-growing companies benefits the public, especially retail investors. So, wholeheartedly agree. Now, let me flip the other side of this. There's a more cynical view, which is that private markets you have non-mark-to-market, and you can keep raising money and set your valuation, right? OpenAI took their valuation up to $860 billion.

It was hard for them to close that round. Brad Gerstner didn't step in. SoftBank didn't step in. Microsoft, the partner that knows them best, did not step in and permitted them to work the Amazon, or at least they didn't sue them for that. They renegotiated a deal. So, the thing about private markets is you get to pick your number so long as you find at least one buyer at that price. You can just raise the price and market. And SpaceX needed a boatload of capital, so does OpenAI AI and Anthropic. Said another way, if they were listed on public markets, there's no way they would have achieved these valuations.

They had to stay private for longer to raise the capital. The other story out there is is Stripe. Stripe was a 2021 darling. They don't want the accountability of public markets. If they went public, they'd be hitting 52-week lows now. Like Fiserv, like Global Payments Network, like pick your payments company stock. So, said it Yeah, I think I think the management and the VCs get it. And they want to raise money from silly investors privately while they can and enjoy the benefits of artificial mark-to-market valuation.

>> There's a long-term problem with that though, which is that if the average American feels like they're not collecting the gains of the American economy through the stock market, you're going to over time see an increasing defection from the very ideas that make this system possible. And all of this does come down to structural incentives as you were kind of implying, Rom. Like for any politician listening, if you want to fix this, it's really simple. One, roll back parts of Sarbanes-Oxley that have made it incredibly painful to become a public company. And then two, significantly raise the taxes on disposal of shares where the valuation is higher than something like the lowest member of the

S&P 500. That is to say, incentivize going public earlier and disincentivize staying private. All of this is fundamentally a question of economics because if I can raise money at these valuations, take my time, not pay taxes, and then go public as late as possible, I'm going to do that as the business owner. And I will also tell you it's kind of hard to fault people for playing the game as it's been designed, right? This is like intentional fouling in basketball. If it's a valid tactic, people are going to do it. If you hate it, change the rules.

And so, Rob, let me throw the ball back to you and ask how much of this is actually the companies doing it and how much of this is just how the game is designed. >> It's mostly the companies doing it to take advantage of raising money with extremely cheap funding. This is almost like 2021 low-interest era type financing environment for companies in the AI theme. We talked a few weeks ago about how there 60 plus AI unicorn companies only two of which make even a penny of revenue.

So, it's just frothy and what these VCs are doing is they're going to dump on retail investors. I'm all in favor. Exactly what you said by the way. You got to fix incentives. You got to relax Sarbanes-Oxley. I think that's 100% on the mark. This dynamic wouldn't change, right? VC as an asset class has real issues. It's lagged every asset class. If you look at VC properly as an asset class as opposed to looking at only top quartile returns, which is what most investors do. In the In US equity, you don't say, "Oh, let me show you top quartile returns." You show the index.

Same thing for small cap. Same thing for the Russell. You look at the entire basket. If you looked at the entire basket of venture investing, the returns are really weak. They're terrible. They certainly lack QQQ and they don't compensate you for giving up liquidity. So, what what it really is is this. LPs are willing to write the check to be a part of the story. They can go to the country club and talk about it. They can say, "Oh, I'm a I'm a part of this investment." They're subsidizing the rest of us, which is phenomenal.

It's a wonderful thing. It's a wonderful thing that we have these angel investors and these VC funds making the world a better place. Uh but it's not really great asset class for investors. You know, the CEO of Sequoia uh he came out and said this in his last 1 month before he departed. He said VC is not actually an asset class and he walked through the returns and I think I was I was pleasantly surprised to hear that. Probably had to do with the fact that he was maybe ejected from Sequoia. Uh but that's the reality. It's an overrated asset class. You know, the the major indices have returned back-to-back-to-back years 20 20 20% plus returns. It's really the confidence in the IPO market that retail investors

will lose confidence in. They'll maintain confidence in US equities more generally. >> So Rob, now that you're done bashing VCs um unless you're an LP in an early stage investor in in in Anthropic, you know, SpaceX or any of these major plays, if you were in that early round, you've done just fine. I think what how many millionaires were created just now uh with with yeah, SpaceX IPO. So, yeah, it's it's easy to indict an asset class and in all asset classes, there's good, bad, and ugly. Uh but there's also some amazing success stories if you pick the right managers.

>> Of course. Of course. Though, I will say one thing that I think people have not given Elon credit for in the SpaceX thing is how much equity they did give to employees at those companies and how broadly that was distributed. Right, one of the things that back to Sarbanes-Oxley we've seen is after the implosion of Enron where people were putting their 401ks into the company stock, don't do that. Right, there was kind of this pullback from giving equity in general. I do think there's something meaningful if you have not IPO'd yet to liberally giving equity to employees so that on the way up you bring them along with you. And I think that also goes a long way to fixing some of these issues

versus VC. >> Well, this wonderful story of capitalism and success. And I think this is something that as a public to talk more about. We celebrate the hero, we celebrate the entrepreneur, we celebrate Steve Jobs, Elon Musk, Jeff Bezos. And we talk about the innovation, disruption, and the benefits to humanity from all this technology innovation. But then when we talk about capitalism, people bristle. But it's the same thing. Yeah, SpaceX is taking share from US government funding NASA. Tesla's taking share from GM and Ford. And there's someone on the other side of that that's losing, but there's a consumer that's benefiting, and that's why competition is is in the interest of

everybody, but it we often as a public we are two-minded about it. On the one hand, we love the heroic entrepreneur, but then we criticize capitalism. >> Well, I I will say I think that's largely a misunderstanding of capitalism. Like I again, I have students and I we talk about this and many of the critiques of capitalism capitalism are not critiques of capitalism. They are just critiques of scarcity or like government action. Because if you're critiquing capitalism to me and the first thing you bring up is rules, that's a government problem. Because let me tell you this, regardless of what you think about Elon Musk, Elizabeth Warren is not the good guy here. Right? Like everything that is being proposed there is value

destructive. And if you don't like the rules of the game, think about thoughtfully changing the rules to get more of the best and less of the worst. But keeping the exact same rules and then trying to confiscate everything at the finish line is definitely the wrong path. So, let's talk about one more rule before we run out of time here, which is Reg NMS, aka rule 611, uh the order protection and trade through rule from the SEC. Created in 2005, it is the thing that has been a blocker for a lot of crypto, and the SEC just voted to propose was rescinding it. So, Alex Thorn, friend of the show at Galaxy Digital, said, "This is a TradFi story,

yes, but this is also one of the biggest unlocks yet for tokenized stocks. Uh TD Cowen called it broadly positive and expects finalization in Q1 2027." So, let's take the bull case. Paul Atkins, current SEC Chairman, said after two decades of rule 611, "It's high time that the SEC review its unintended consequences that have hindered the long-term growth of our markets and that things like on-chain AMMs have been effectively locked out of trading tokenized equities because they cannot guarantee the best national bid offer even to be fair if the user is not even looking for those.

On the other hand, Joe Saluzzi says, co-author of Broken Markets, says rule 611 protects retail investors from having their quotes traded through. This recession will not reduce fragmentation and will only end up harming retail investors. So, Chris, I want to start with you as somebody who's lived some of this brain damage. What do you think of this whole debate? >> I I can't begin to tell you that this is a humongous deal. This is what exact exactly is needed to unlock DeFi, to unlock tokenized equities on chain.

This was the rule, this was the obstacle, this was the hill that was standing in the way of this innovation. Um, I can't wait to watch these comment letters come in because when when the regulator puts out rules, comment letters pour in and people are getting armed right now and they're going into a battle. This is going to be a major major battle because it completely rewrites equity market structure that's been in place for over 20 years and hundreds and hundreds of billions of dollars have been poured into infrastructure that allows certain companies to take advantage of it. And so, you're going to hear, you know, people saying, "Oh my gosh, you can't roll this back. We are giving retail the

national best bid and offer. They're going to get the best price." However, the way it works today is that as that trade is directed to a national exchange, you know, one of the flash boys steps in and slightly improves it and that's how market structure works. And and So, why is this a big deal? Because now we have tokenized equities, right? I said again, tokenization is like electronification 2.0. It allows 24/7 access to markets. And to the extent you're able to now put them into DeFi, you can now avail yourself of their core strength, which is 24/7 global access.

Yes, there's other things we need to sort through around AML KYC, but that's totally doable. But but now you don't have to wait for the market to be open and you can deal with a more decentralized world where people can access markets direct. Uh my sense is that after all the hemming and hawing you're going to hear, the people that really are winning in this market structure, I think they're going to pivot and they're going to win in the new market structure. Because think about it, if you have a more decentralized environment, the amount of basis, the amount of arbitrage is going to be much more profound. And who better to take advantage of it than the sophisticated players that are out there today? And so, I go back to a conversation that I had with a buddy of

mine at one of these shops. Very very sophisticated uh entity. And I remember we were going through clarity and he's like, "Listen, like enjoy, you know, we don't really care about your silly little tokens, but don't mess with my equities." Well, now equities are in scope. Wait for the fireworks. Once these comment letters hit, the battle is just about to begin. >> I think one of the things that I'm watching for with this is what those comment letters are going to say because the reality is our current market structure is probably not delivering the best price to retail.

Chris, you've alluded to a lot of the complexity. But when you have the interaction of lit protected quotes based only on the top level quote against dark pools, things like payment for order flow, and an entire structure where it's essentially impossible to determine if I want to move a medium-sized block, am I actually getting the best price or not, that if call it comments come in defending Reg NMS on that basis, I think it's going to be very easy for the SEC to defeat them. Right? To look at those and be like, "Guys, we know the flaws. If this is what we want to do, it's totally valid.

You're profiting off the system." I think the disruptive situation here would be people proposing other alternative, call it trading methods that probably do give better long-term price discovery. You know, to get rid of some of the pernicious elements of high-frequency trading, you see things proposed like, "Why don't you just have auctions every second or every 5 seconds and just clear the top of the auction if people want to trade, right? Then you have fully disclosed prices on both sides that are commitments, so you don't have spoofing, you don't have fake orders, you don't have canary orders, like all these sorts of problems."

I'm very interested to see how radical some of the reform proposals are. And Chris, to your point, I feel like there's kind of two fronts of battle here. One is going to be the people like the Citadels of the world who are currently winning trying to defend their turf. The other one I could see piling in is some of the previous winners who won on things like balance sheet and order depth coming in to actually push their preferred market structure and try to take back territory. Because if I'm a big bank, like if I'm a JP Morgan, if I'm a Citi, if I'm a BofA, I'm going to look at this as an opportunity, not just a threat, cuz they've lost a lot of equities volumes, and boy would they love to win that back.

>> Great great thoughts all around. You know, I'd say one of the losers here is going to be Robinhood and other uh brokers that make their money through payment for order flow because if you have thinner bid offer spreads which is the goal of this policy then there's less economics for those companies. I don't think the market's priced that in yet. Now retail investors believe they get free trades from Robinhood. They're not. It's Citadel is paying for the trade. So that's something to I think that's probably a healthy thing like I think consumers should be smarter about how the economics of trade works. You might be better off paying subscription for higher quality execution where you've got someone acting in your best

interest. But it could change the landscape of retail brokerage potentially. >> Yeah, you know what do else wins in this? Agents because AI agents are amazing at optimizations. And so now if you have a much more fragmented marketplace those agents are going to be the ones who can get it done. So watch that space as well. >> All right. So you heard it here. The US government simultaneously hates and loves AI and cannot speak with one >> [laughter] >> of these things.

All right. Well, on that note I want to say thank you to everybody for joining us today. That's it for bits and bips today. Thanks for joining us today. Thank you for watching and hope you enjoyed this episode of bits and bips. Just remember nothing we say here is investment advice and please check unchained-crypto.com/bitsandbips [music] for more [music] disclosures. >> Woo!