Dear Reader,
For anyone in the industry, it didn’t come as a surprise.
On Monday, the Securities and Exchange Commission (SEC) issued its lawsuit against the world’s largest cryptocurrency exchange, Binance, and its founder Changpeng Zhao. And on Tuesday, the SEC did the same with a new lawsuit against the largest digital asset exchange in the U.S., Coinbase.
These were both well-telegraphed moves. Rumors had been swirling around about Binance for several months. And on March 22 this year, Coinbase had received a Wells Notice indicating that a lawsuit was coming.
The developments of this week feel more like the industry is reaching the finale of a long, drawn out, and very opaque agenda held closely by U.S. regulators.
For almost a decade, the industry has been making every effort to engage U.S. regulators, primarily the CFTC and the SEC, for both guidance and collaboration to develop a regulatory framework for digital assets.
By way of example, Coinbase alone asked for guidance from the SEC 30 times in 2022. It received none. Venture capital powerhouse Andreessen Horowitz even went so far as to draft a regulatory framework as a starting point for discussions with the regulators. It went nowhere.
Those in charge proved to be little, passive-aggressive people, hiding behind closed doors, operating in obscurity, and “ruling” by sudden enforcement. Standing in stark contrast have been the executives from the blockchain industry, who at every opportunity have proactively and professionally engaged regulators in hopes of developing regulations that will provide desired protections and maintain an environment that will attract investment capital and create new jobs.
What makes the regulators’ modus operandi so odd is that all industry players weren’t treated with the same dismissive behavior. Oddly, the head of the CFTC met with the now notorious Sam Bankman-Fried (SBF), the CEO of centralized digital asset exchange FTX, 10 times over the year leading up to the FTX collapse. And the head of the SEC met twice with SBF in the six months leading up to the collapse. And in the ridiculous category of you can’t make this stuff up, we now know that underneath the geeky, kind, woke, virtue signaling, “effective altruist” veneer, SBF was a fraud perpetuating one of the largest financial crimes in history.
Just like the emperor, the regulators have no clothes. We can all see that…
Despite the current environment over the last few years, industry organizations like the Chamber of Digital Commerce and the Blockchain Association have done incredible work engaging regulators and policymakers. And thousands of investors and executives from the industry have done the same.
And yet tens of billions of dollars in investment and an untold number of jobs moved outside of the U.S. in the last several years. The risk was too great without regulatory clarity. And with 33 countries having already established comprehensive rules for the industry, it’s easy to see how businesses would choose to domicile elsewhere.
Coinbase estimates that potentially more than 1 million more jobs could leave the U.S. if the U.S. regulators continue down its current path. The SEC appears hellbent on declaring all digital assets aside from ether and bitcoin as securities.
It’s natural for some to feel that this is the digital asset industry’s darkest hour. That’s what the headlines suggest.
But where the industry failed to meaningfully make progress with the regulators, it has made serious ground with policymakers and members of the U.S. Congress.
In fact, days ago, an extensive, 162-page discussion draft for a new Act regarding digital assets was released jointly by the House Committee on Financial Services and the House Committee on Agriculture.
In the summary of the discussion draft, the purpose of the Act is defined clearly:
The current regulatory framework for digital assets hinders innovation and fails to provide adequate consumer protection. The House Committee on Financial Services and the House Committee on Agriculture are addressing these shortcomings by establishing a functional framework that works for both market participants and consumers. This functional framework would provide digital asset firms with regulatory certainty and fill the gap that exists between the authorities of the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC).
It’s rare for these two committees to partner on what could become a monumental piece of legislation. The discussion draft was very ambitious in that it attempts to put forth a comprehensive framework for all digital assets and fit this framework within existing regulatory structures.
No discussion draft is ever perfect, but this is a great step in the right direction.
Because it’s easy to be distracted by the hype of “crypto” or bad actors like SBF, but it’s also easy to forget that blockchain technology is the next generation of internet technology and financial services.
The real meaning of this jointly developed discussion draft, developed in collaboration with the industry, is that there is a widespread acknowledgment that this technology is not going to “go away.” And because of that realization, regulations need to be put in place for the industry and the technology to move forward.
We’re nearing the end of this awkward and frustrating gray zone. The U.S. government will soon announce its plans for its digital U.S. dollar (effectively a CBDC). The lawsuits with Ripple, Coinbase, and Binance will get resolved, most likely with some small fines and agreements to do this or that. And a new Act providing a framework for digital assets will be passed allowing the industry to move forward, invest, create jobs, upgrade, and reinvent some of our decades-old technologies.
In the end, we will win.
An interesting energy-related development caught my eye last month. The U.S. Naval Research Laboratory (NRL) just launched a project around what’s called “power beaming” in outer space.
The project is called Space Wireless Energy Laser Link (SWELL). It’s a fascinating project with technology that has historically been in the realm of science fiction.
The NRL developed a system that consists of laser transmitters and photovoltaic receivers. The idea is that it can collect solar energy in space and then beam that energy to satellites, space stations, or even down to the surface of the earth or the Moon.
The key here is that collecting solar power in space is about 10 times more efficient than doing so on Earth. That’s because Earth’s atmosphere weakens the Sun’s energy.
So the SWELL project is going to test out this system. They just launched it into space on a SpaceX Falcon 9 rocket with a Dragon spacecraft for live testing.
The beauty of this system is that it could eliminate the need for wires when it comes to solar power systems for manned outposts on the Moon, Mars, and beyond. Instead of collecting solar power through panels on the ground and transferring that power through wires, the SWELL system can capture the power in orbit and beam it to wherever it needs to go.
Of course, this system could be used to beam power back down to Earth, also. The only challenge there is that the energy would have to travel through Earth’s atmosphere. That would result in some degree of energy loss. It wouldn’t be nearly as efficient.
Either way, it’s exciting to see this kind of system being put to the test. It will most certainly work. What’s left to understand are the efficiencies and the economics of a system like this.
There is one thing we should be aware of though. These laser transmitters could also be used as weapons. Obviously, if you can beam energy around, you could also cause immense damage to objects or even people. That’s why this project is under the U.S. Department of Defense’s oversight.
I can’t help but be reminded of the James Bond film Goldfinger and its laser satellite, or the Val Kilmer classic Real Genius where it takes a military super laser and directs it at a house full of popcorn kernels.
But, thinking optimistically, it’s great to see big challenges like this being tackled. My strong preference is that the technology is used to harness the energy of the Sun to produce clean energy.
A new Germany-based startup called Proxima Fusion just raised €7 million to begin building out a unique kind of nuclear fusion reactor. It’s called a stellarator.
We’ve discussed the prospects of nuclear fusion quite a bit in The Bleeding Edge over the last few years. It’s one of the technologies that I am most excited about. It has the potential to provide the earth with virtually limitless, cheap, clean energy.
That said, almost all investment in nuclear fusion has been in U.S.- and Canada-based companies. And most of the companies are working on what’s called a tokamak-style reactor.
Tokamak reactors are spherical in shape. And they feature a donut-shaped magnetic chamber in the middle. There, plasma is heated to extremely high temperatures such that the nuclei of its atoms collide and release energy. The magnets are used to control this reaction so that it continues to produce energy.
Stellarators are designed differently. Instead of a spherical shape, stellarators are toroidal in shape like a massive, twisted donut. They feature a lot of curved, interlaced parts. Here’s a visual:
Source: Financial Times
Here we can see the stellarator’s design. It’s toroidal like a donut. And the magnets weave in and out with the other components.
This design is more complex and expensive to build compared to a tokamak. But it confers a key benefit – the fusion plasma is more stable. That makes it easier to maintain the plasma reaction over longer periods of time.
That’s what makes this design so promising.
It’s ironic it took so long for a new company in Germany to be formed around this technology. The world’s first stellarator was commissioned by the Max Planck Institute for Plasma Physics in 2016. It’s called the Wendelstein 7-X reactor, which is quite famous in the world of physics. It seemed natural for a company to spin out in an effort to commercialize this incredible technology.
To my knowledge, Proxima Fusion is only the third private company looking to commercialize a stellarator design. A company called Type One Energy is also working on one. As is a company called Princeton Stellarator. These companies are both based in the U.S.
So this is very exciting. I’m glad to see we have three serious teams working on an alternative to all the tokamak designs that are in development right now. Trial, error, and iteration is how all new technologies come to be.
There will always be tradeoffs between the upfront capital costs and ongoing operational expenses. I suspect that one technological approach will prevail as a dominant approach for nuclear fusion reactors designed for grid-scale clean electricity production.
We’ll wrap up today with yet another exciting development for an Elon Musk-led company. This one came as a major surprise to the industry…
Musk’s Neuralink just secured approval from the Food and Drug Administration (FDA) to move forward with the first-ever in-human studies of its brain-computer interface (BCI). This is an important milestone – one that much of the neuroscience industry said Musk could never achieve.
As a reminder, Neuralink developed a device that, once implanted in the brain, will allow the user to control computers with just their thoughts.
The company first demonstrated how its BCI could sense brain activity in pigs. That was back in September 2020… yet the industry scoffed. Several expert neuroscientists called it simple “theater.”
Neuralink then showed how its BCI could empower a monkey to play the old Pong arcade game using only its thoughts. But again, the industry laughed at this. They said Neuralink would never get approval to test out its device in humans.
Well, here we are. Now the path is clear.
This is very encouraging. Neuralink’s technology could help people who are paralyzed use computers. And that will empower them to communicate with their doctors and their families once again. What an amazing outcome that would be.
Plus, Neuralink’s future road map includes plans for ocular implants that could restore human vision. And the company is working on an implant for the spinal cord that could restore movement to paraplegics.
These are all extremely difficult problems to solve. But doing so would bring an incredible benefit to society. And Musk and his teams excel at solving very hard problems.
So it’s going to be fun watching Neuralink continue to prove the industry wrong. I suspect we’ll see a series of exciting breakthroughs over the next year or two. I wouldn’t bet against Musk and his team…
Regards,
Jeff Brown
Editor, The Bleeding Edge
The Bleeding Edge is the only free newsletter that delivers daily insights and information from the high-tech world as well as topics and trends relevant to investments.
The Bleeding Edge is the only free newsletter that delivers daily insights and information from the high-tech world as well as topics and trends relevant to investments.
