Who owns the crypto? • CEO Letter #80

Taylor Culbertson -

Well well well, we meet again! This is Taylor, CEO of Hedgehog, the robo-adviser that makes it easy to keep your crypto portfolio in whack, not out of whack. That's the hot new lingo — all the cool Gen Z kids want to be in whack. (Full disclosure: I have no idea what's cool to Gen Z, but whack is back babbyy.)

As you know, there's a weekly giveaway at the end of every newsletter. Last time my question was whether you've started working on your 2023 resolutions. Best answer: "I haven't even started thinking about making a New Year's resolution, I have thought about thinking about it though, so there's that." Sounds like progress to me 😉

One step forward, two steps back

Speaking of progress, or rather the opposite… Hedgehog faced a frustrating setback recently. Crypto winter and the scandals of 2022 have spooked regulators and banks, when neither was a huge fan of this industry to begin with. Here's an example drawn from recent headlines:

Metropolitan Commercial Bank's holding company will exit its crypto asset vertical, pointing to the shifting regulatory environment for banks involved in crypto, developments in the industry and business opportunities.

The bank's shift comes a week after a trio of U.S. banking regulators warned about putting too much leverage in cryptocurrency.

As part of this blowback, Hedgehog's own banking partner for the upcoming app launch decided to take the same approach as Metropolitan Commercial. As in, straight-up refusing to continue working with crypto companies. Not because those companies did anything wrong, but simply because the industry is crypto.

It's almost funny, since crypto was created to avoid being surprised by banks. But the way things have evolved, the fiat and crypto systems need to be able to talk to each other for the sake of customer convenience.

I can't name our former bank due to confidentiality provisions in the contract we signed, but to be honest, we felt blindsided by the sudden about-face. Hedgehog was relying on this banking partner for the fiat side of our custody solution. Now we have to figure out a different system, and push back fiat-based deposit and withdrawals to post-launch.

On the positive side, I cannot say enough wonderful things about our partner Gemini. They've really stepped up to help as we explore alternatives for fiat depositing and withdrawal. Still, this is an unexpected blow, especially when we were so close to the finish line.

Soon I'll publish a dedicated blog post explaining the whole situation in more detail. But the gist is…

Tldr: You never expect the bank to rug you.

Read the fine print

As you may have heard, Celsius' bankruptcy judge decided that "Celsius Network owns most of the cryptocurrency that customers deposited into its online platform, meaning most Celsius customers will be last in line for repayment in the crypto lender's bankruptcy." Judge Martin Glenn deemed that "Celsius' terms of service made clear that the crypto lender took ownership of customer deposits into its interest-bearing Earn accounts."

Bradley Duke, co-CEO at European crypto firm ETC Group, shared some sage advice based on this news:

Judge Glenn called the terms of use "unambiguous" when determining who owned the assets deposited in Celsius Network's EARN products. This really drives the point home that before making an investment, it really is worth reading the fine print and thinking about what it would mean in a scenario of extreme stress. Well-structured investment products will be very clear about who has a claim on the assets (digital or otherwise) in the case of insolvency; they will have a "bankruptcy remote" structure in place and, importantly, an independent trustee to protect the interests of investors in case of bankruptcy and ensure they are made whole.

If we're honest, almost nobody reads the Terms of Service when signing up to try a new product. But once you have significant money invested, it's worth checking out those legal documents to find out what protections you have, if any.

Tldr: Why does it say here they get to repossess my dog? That's a dealbreaker.

Quick hits

Tldr: As I've said before, Tether seems sketchy, but it also seems immortal? That's probably an overstatement of reality, but either way, I appreciate this guy's chutzpah:

So we can't short Tether in a centralized manner due to counterparty risk. Where we're going, though, there is no counterparty risk. We speak, of course, of the magical world of decentralized finance, or defi.

Good luck, buddy. Meanwhile…

Tldr: I dunno, man. Pour some maple syrup on it.

Tldr: How do you establish identity without a single source of truth? The fundamental question remains unanswered, but there are some neat crypto tools to fill the gap. "This year, Soulbound Tokens (SBTs), Decentralized Identifiers (DIDs), and Verified Credentials (VCs) are poised to shape how identity will ultimately be handled in 2023."

Tldr: Come for the drama, stay for the discussion of complexity in measuring proof of reserves.

That's all for today, folks! Which means it's giveaway time. Let's have a cheerful topic…

Question of the week: What counterfeit Gen Z phrase are you passing off as real?

Whack is back, it's so fetch.
— Taylor

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