A new initiative from Jack Dorsey will be a full business unit inside the company.

This episode is sponsored by NYDIG.

Today on the Brief:

  • The mixed state of the U.S. government on crypto
  • China’s e-CNY will have native smart contracts
  • Saquon Barkley to take endorsement money in BTC

Our main discussion:

Square has announced a new initiative, titled “TBD,” that CEO Jack Dorsey describes as “focused on building an open developer platform with the sole goal of making it easy to create non-custodial, permissionless and decentralized financial services.” Dorsey intends the platform to be developed completely transparently: “open road map, open development and open source.”

In this episode, NLW puts the new initiative in the context of Square’s long-term relationship with Bitcoin, explains why it’s different from the company’s Square Crypto efforts and analyzes how different parts of the community are reacting to the news.

The Breakdown is written, produced by and features NLW, with editing by Rob Mitchell and additional production support by Eleanor Pahl. Adam B. Levine is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsor is “Razor Red” by Sam Barsh. Image credit: Eva Marie Uzcategui/Bloomberg/Getty Images, modified by CoinDesk.


What's going on guys, it is Friday, July 16 and today we are talking about a new initiative from Square that is poised to bring DeFi to Bitcoin. First up, however, let's do the brief. 

First on the brief today we're discussing the mixed state of crypto as it relates to the U.S. government. And when it comes to crypto in the U.S. government these days, there is an absolutely yawning gap between those who get it and those who don't. So first, let's talk about a few that do. The Securities Clarity Act is a bill that would, as the name suggests, provide regulatory clarity about the state of digital assets. Specifically, it would treat them as commodities and not securities. This would mean that companies could sell and trade cryptos without registering them as securities with the SEC. The bill was sponsored by Tom Emmer, a Republican from Minnesota, Darren Soto, a Democrat from Florida and Ro Khanna, a democrat from California. Emmer said: "There has been an unreasonable approach by regulators as to how federal securities laws should be applied to transactions involving the sale of blockchain-based tokens, and this lack of clarity is hurting American innovation." Now, the interesting thing is that this bill was originally introduced last year in September, but it was only sponsored by Republicans. The thinking is that with these democratic co-sponsors, it might aid passage in the Democratic-led house. If this were to actually make it through, it would represent a pretty significant shift in how the U.S. treated these types of digital assets. So, it'll be interesting to watch, even if it doesn't pass, who supports it and who doesn't and for what reasons.

But, as I said, this little brief is about a mixed bag when it comes to U.S. regulators. As I mentioned a couple times recently, a number of U.S. lawmakers just seem intent on dragging back the "crypto is or criminals" narrative. Last week, Senator Chuck Grassley of Ohio, the Senate Judiciary Committee's ranking Republican, told the Biden administration that bitcoin is enabling $76 billion in illegal transactions every year. Now, if that sounds high to you, you are not alone. Grassley's source is an interpolation of research from 2017 that said that half of bitcoin activity is illegal. The issue with that, as the CEO of Elliptical put it, is that "those figures are based on outdated and deeply flawed analysis." The frustrating thing here is that there is obviously so much more recent quality analysis available that is just being 100% ignored by the senator. I mean, every three letter agency has contracts, multimillion dollar contracts, in most cases, with Chainalysis and Elliptic and others at this point, the specifics of their concerns are also just not valid. Far from being untraceable, many privacy advocates worry that blockchains are too traceable. However, when people aren't arguing in good faith, it makes discussion impossible. So, which of these two poles of U.S. regulatory attitudes towards crypto wins out? We'll just have to wait and see.

Let's jump over now, however, to China. The People's Bank of China has put out a white paper for their digital yuan, aka the e-CNY. There are two really interesting things about it. The first is how they articulate the whys, the motivations for the project, quote, "Adopting blockchain and encryption technology, cryptocurrencies, such as bitcoin are claimed to be decentralized and entirely anonymous. However, given their lack of intrinsic value, acute price fluctuations, low trading efficiencies and huge energy consumption, they can hardly serve as currencies used in daily economic activities. In addition, cryptocurrencies are mostly speculative instruments and therefore pose potential risks to financial security and social stability. To tackle the relatively big price fluctuation concern of cryptocurrencies, some commercial institutions launched so-called stablecoins and tried to stabilize their values by pegging them to sovereign currencies or related assets. Some commercial institutions even plan to launch global stablecoins, which will bring risks and challenges to the international monetary system, payment and clearing system, monetary policies, cross border capital flow management, etc."

So, unlike, for example, the U.S. where a lot of the motivation for doing a potential digital dollar is to compete with other digital fiat currencies, China clearly identifies a threat in cryptocurrencies and stablecoins that they wanted to address themselves. The second major interesting thing about this white paper is that it reveals that one of the major features of the e-CNY is programmability. In other words, China's digital currency is designed to natively support smart contracts. Quote, "e-CNY obtains programmability from deploying smart contracts that don't impair its monetary functions. Under the premise of security and compliance, this feature enables self-executing payments according to predefined conditions or terms agreed between two sides, so as to facilitate business model innovation." This was the first time that China confirmed that its e-CNY would have these smart contract features. 

Finally, the paper gives a little bit of insight into the various tests that have happened with the digital currency so far. As of June 30, the tests that have happened across Chinese cities have seen 17 million transactions, totaling about $5.3 billion worth of the currency and flowing through 20 million retail wallets and 3.5 million business wallets. Matthew Graham of Sino Global Capital tweeted a piece about the white paper and said, quote, "The United States is making an enormous strategic mistake by not prioritizing e-USD." I think when looking at that, it's important to keep in mind what we discussed earlier this week in the context of the Federal Reserve vice chair's comments about stablecoins, it seems plausible that the U.S. just at some point enables existing fiat stablecoins, like USD, to play a bit of an official role, in which case, the playing field of who is ahead looks a lot different than it does if you're just looking at official government programs.

Finally on the brief today, the latest in athletes coming to the Bitcoin space, Saquon Barkley announced earlier this week on The Pomp's new daily show that he would be taking all of his endorsement money in bitcoin only, quote, "You see inflation, and you see how high it is right now and you learn that you can't save your wealth. So that's why I'll be taking my marketing money and bitcoin. This is my mind, that was my motto before coming into this league, just live off my marketing money. And now that I see about inflation and learning so much about bitcoin, I think it's just a smart thing to do and the right thing to do, to start taking my investment through bitcoin and through Strike." Barkley is slated to make $10 million in endorsements this year. So that is no small chunk of change. Now, to me, I think the thing that matters about these things is not the one-offs, Right? It's not one person and what that means for the new cycle, it's the idea of athletes getting an entire generation of fans to think about their money in generational terms. They're thinking differently, right? They're thinking long-term, thinking about money as investing in the future. These are frankly all disruptions to the way that the mainstream presents money and financial planning, and that could have huge social benefits far beyond even just what these individuals do. 

But with that, let's shift to our main discussion. Square has been, of course, one of the most important companies in the bitcoin space. There are a couple reasons for that. First, there's the commitment that Jack Dorsey has shown to bitcoin. Square was the second public company after MicroStrategy to put bitcoin on its balance sheet. At the time, some commentators thought that their $50 million allocation could actually be even more influential than MicroStrategy's as it created a realistic template for other corporate officers. Square has also created initiatives to support bitcoin developer efforts and as a whole division for bitcoin design and development that doesn't even have to care about P&L. A few weeks ago, Square announced the latest of their efforts, which was to build a hardware wallet. Dorsey laid out the design principles, including the idea of it being mobile first and having "assisted self custody that could appeal to and be useful for everyone rather than just a subset of people," and they also promised to build everything out in the open. 

Well, yesterday Jack announced something even newer, that Square is building a new business line. He tweets, "Square is creating a new business joining Seller, Cash App and Tidal focused on building an open developer platform with the sole goal of making it easy to create noncustodial, permissionless and decentralized financial services. Our primary focus is Bitcoin. Its name is TBD. Like our new bitcoin hardware wallet, we're going to do this completely in the open. Open roadmap, open development, and open source. Mike Brock is leading and building this team, and we have some ideas around the initial platform primitives we want to build. How is this different than Square Crypto? Square doesn't give direction to Square Crypto, only funding. They chose to work on LDK, and are doing an incredible job! TBD will be focused on creating a platform business, and will open source our work along the way." 

So, there have been basically exactly two types of reactions to this news. The first is, "Awesome! You're building DeFi on Bitcoin!" The second is, "Awesome! You're building Ethereum on Bitcoin!" Let's talk about the first. Allen Farrington writes, "There must be some language in which First Bank and Trust of the interwebs gives you TBD as an acronym. But, jokes aside, Square is the most important bank in the world." Muneeb, the founder of Stacks tweets, "huge validation for Bitcoin DeFi. We have the same thesis at Stacks." Muneeb has, of course, been on the show and articulated why so many people are going to want to build decentralized finance primitives with bitcoin as the base asset. Simon Taylor writes "Wow, FinTech meets DeFi on Bitcoin," Dan Held says "Bitcoin DeFi is happening," ZeroHedge even says "Square launches DeFi," and Vivek for real nails that when he says "Jack understands the importance of decentralized base layer and why it's worth building on that."

Now, as I said, there was another response as well. Anthony Sassano retweeted Jack and said, "Ethereum, you're building Ethereum." Cyrus Younessi tweeted, "Still processing that a centralized corporation run by a bitcoin maximalist is building a centralized version of ethereum and all the bitcoiners are rejoicing as if they wanted smart contracts and DeFi all along." So, what to make of this all? Well, first, I think the thing that is still hard for some to grasp is how much the trade offs on the base layer matter to many. Put differently, there are many bitcoiners for whom the problem with DeFi wasn't DeFi, it was Ethereum as the base layer. I've seen this opinion a lot. I don't think it is, at least not entirely, some "Johnny come lately" narrative switch because Jack is now doing DeFi on Bitcoin. Second, I think it's important to not assume that DeFi on Bitcoin is going to be designed in the exact same way as DeFi not on Bitcoin. There could be totally different sets of tradeoffs that map to the different values and priorities of the community making this, in the same way that protocols on Solano or BSC, might not make the same decisions as those on Ethereum. 

Third, all of that said, I don't think Etherians are totally wrong to call a little bit of hypocrite bulls**t. The idea itself of DeFi has often been thrown out with the bathwater of Ethereum. And I would argue that's why our hyperbolic language and purity testing in crypto tribes is far more distracting than illuminating. Again, this hasn't been the case for everyone. There have been many advocates for DeFi on Bitcoin. But, I think it's been more common than not. Fourth, I think that this being a full Square businessline is both extremely exciting, but also gives credence to warnings of centralization. What I mean is, the fact that this is a new division of Square, which is actually part of the business as opposed to Square Crypto, which can pretty much do whatever it wants, it means that it's going to get way more resources, but it's also going to have different pressures. What happens if and when there's something that would be good for Square and this new initiative, but bad for the decentralization of Bitcoin as a whole? I'm not saying that Dorsey shouldn't get the benefit of the doubt on situations like that, by the way, just that it's not an illegitimate concern. 

Fifth, and finally, for me, though, I'm just a fan of more competition in the market. I'm excited to see what types of tradeoffs these guys explore and how they differ from other versions of DeFi elsewhere. Ultimately, to me, the decentralization of finance seems like an inevitable follow up to the decentralization of money. So, I'm glad to have multiple contenders painting different visions with as I've said, different tradeoffs that we can choose between. Let the hyper capitalism commence. Alright guys, I hope you were headed into a great weekend. I appreciate you listening, until tomorrow. Be safe and take care of each other, peace!