SAB 121 Repeal

Two weeks ago, the Senate voted to repeal Staff Accounting Bulletin 121 (SAB 121). This came as a surprise to the industry as Senator Schumer and other Democrats broke ranks with Senator Warren and the Biden administration’s threat to veto the bill. Prior to the repeal, the SEC’s directive required banks to treat crypto custody as part of those firms’ own balance sheets. This required capital charges (think dollars) against those assets. State Street’s assets under custody or administration are nearly $44 trillion — but these customer assets don’t require State Street to hold capital against them. This directive effectively prohibited traditional custodians from pursuing the opportunity as it became costly from a capital perspective. What now?

• If the SAB121 repeal passes Biden’s desk, the largest custodians in the US will be able to offer digital asset custody. There are massive pockets of capital that have historically been hesitant to buy crypto because custodying those assets with a crypto-native player felt at odds with how they held other assets (equities, bonds, etc.). If Biden chooses not to veto, this friction will be removed.
  - Prediction: Asset managers, wealth managers, endowments, and other large allocators can now lean on existing relationships with the likes of BNY Mellon to hold spot crypto.
• The cost to custody crypto has been declining over the last decade. Bringing in new entrants with other business lines should drive the cost to custody down even further.
  - Prediction: Crypto-native custodians will benefit from selling software-like services to existing traditional custodians. A wave of new buyers with tremendous distribution will be unlocked should Biden choose not to veto the repeal of SAB 121.
• Custody will be step one for many financial institutions looking to serve this new asset class. Products to monetize this base will emerge on top — similar to how these FIs treat the other assets they custody. JPM spent $9.3 billion on technology, communication, and equipment last fiscal year. Six years ago, State Street acquired Charles River Development, a technology service provider, for $2.6 billion. These players have an appetite for financial market infrastructure.
  - Prediction: Crypto-native market data, prime brokerage, trade execution software, lending, and derivatives businesses now have a whole swath of new buyers with deep pockets.

Ethereum ETF

Following the Senate repeal of SAB 121 and Trump’s crypto endorsement , the White House appears to have done a 180 on the asset class with the SEC’s approval of 19b-4’s for eight Ethereum ETF sponsors. It’s worth noting that the approvals came with sponsors removing staking from the ETF. What now?

• There’s a new way for the masses to get exposure to Ethereum. People will now be able to buy exposure to Ethereum through traditional online brokerages. The Bitcoin ETF is considered the most successful ETF launch in thirty years with nearly $13.7 billion of net flows since launch. BlackRock, Fidelity, Ark, and Bitwise products have cleared $16.5 billion, $8.7 billion, $2.6 billion, and $1.9 billion of net inflows, respectively. BTC is up ~140% over the last year to ETH’s ~100%.
  - Prediction: We anticipate new buyers will have a material impact on ETH’s price performance.
  - Prediction: We believe the wealth channel will adopt separately managed accounts for clients to hold spot BTC and ETH to enable direct ownership, tax optimization, and access to other assets. Eaglebrook (CIV portfolio company) has built a crypto investment platform for wealth managers to optimize for tax-loss harvesting and direct ownership for end clients through a SMA structure.

Financial Innovation and Technology for the 21st Century Act Passes the House

The Financial Innovation and Technology for the 21st Century Act (FIT 21) provides clarity on the oversight of digital assets — with restricted digital assets overseen by the SEC and digital commodities overseen by the CFTC. Definitions are outlined such that restricted digital assets have a path to become digital commodities once they are deemed decentralized. With the passage of the bill, what does this unlock?

• The two big winners here are brokerages and the startup ecosystem. Brokerages finally get the clarity they have been looking for on tokens (security or commodity) and they can touch both and be dually regulated. Entrepreneurs in the US who have considered creating a protocol with a token now have a playbook to follow. We believe the unlock in entrepreneurial activity is under-discussed. Many entrepreneurs have been hesitant to build in the crypto industry because of unclear regulatory guidance and regulatory enforcement actions toward some of the industry’s best actors. You may not love the specifics of the bill, and it will certainly get reworked and fought in the Senate, but a market structure bill has extraordinary impacts on the startup ecosystem and legitimization of the asset class for all institutional participants.
  - Prediction: Expect to see a tidal wave of entrepreneurs entering the crypto industry in the next five years. Expect to see more experienced operators jump to growth stage crypto companies as the asset class will be de-risked from a regulatory lens.
  - Prediction: Better protocols get built as entrepreneurs can build what they want to build and focus less on regulatory theater.
  - Prediction: New categories are going to emerge across the board — new primitives, new needs to ensure compliance with the law, etc.
  - Prediction: Real-world assets on-chain will emerge faster than expected as traditional financial institutions partner with crypto-native players to tap into new pools of global liquidity through a composable structured product.
  - Prediction: As regulators become more entrenched in the industry, we anticipate chain monitoring companies, compliance software, and analytics businesses will benefit from must-have buyers.
  - Prediction: Cash-flowing protocols now have regulatory guidance, which will result in more value-based investors and activist investors within these decentralized organizations. Broadridge, a tech-enabled investor communication service for financial institutions, is a $23 billion public company, and we think voting and coordination software like Tally (CIV portfolio company) should benefit.
  - Prediction: We’ll see a surge of M&A as banks and broker-dealers will finally have regulatory clarity on the asset class and be looking for teams and products to service a new institutional asset.

CBDC Anti-Surveillance State Act Passes the House

Whip Emmer’s Anti-CBDC bill was approved in the house — mainly along Republican lines with a few Democrat defections. The bill prohibits the Federal Reserve from issuing a central bank digital currency without Congressional approval. With Congressional approval, a CBDC would need to be open, permissionless, and private. We remain incredibly impressed with Whip Emmer’s knowledge of the power of public blockchains and the benefits they bring to society. While we believe the bill will not pass the Senate, it’s a step in the right direction. How would this impact the industry?

• Existing issuers like Circle would benefit greatly if the bill passes, as they do not have to worry about competing with the federal government on a centrally issued stablecoin.
• Stablecoins are now the 16th largest buyer of US treasuries when compared to sovereigns. It makes sense for the government to allow the private sector to finance the never-ending amount of debt our bloated government allegedly requires.
  - Prediction: The green light would be on for privacy-preserving mechanisms around open and permissionless stablecoins. We think zero-knowledge startups will benefit, as issuers think through privacy-preserving, cash-like mechanisms to spend digitally.

New Leadership at the FDIC

Marty Gruenberg, the architect behind Chokepoint 1.0 and 2.0, agreed to resign following allegations within the FDIC of sexual harassment and bullying among ~10% of his workforce.

• It’s hard to overstate Gruenberg’s negative impact on the crypto industry. Startups have struggled mightily to get access to banking, and it’s all thanks to the illegal, Mafia-like directives that Gruenberg allegedly instituted to pressure banks not to provide accounts for crypto companies.
  - Prediction: As the anti-crypto army craters and crypto’s legitimacy as an asset class grows, growth stage capital will increase in the next two years in the industry. Startups are inherently risky, but the risk of losing a bank account created challenges for growth capital investors in the last 18 months. Expect to see that come roaring back in the next few years, as the entire industry just got de-risked.

The Kid Gloves Are Off

The seismic shift over the last two weeks didn’t really come out of the blue. Industry organizations like the Chamber of Digital Commerce, Coin Center, and the Blockchain Association have been hard at work educating and advocating in DC. Following the exposure of the White House administration’s effort to choke out the industry early last year, many industry participants increased their dedication through dollars and becoming more vocal online. The results have been astounding, and the industry is now recognized as a force. Today, Fairshake is the third largest political action committee in the country. As we have seen already, crypto PACs were able to swing close races in the primaries in favor of pro-crypto candidates. President Trump discussed freeing Ross Ulbricht and supported the individual right to self-custody Bitcoin at the Libertarian Convention this past weekend. The White House appears to be backpedaling on the Warren-driven anti-crypto army as politicians look at close House and Senate races and wonder if the effort to thwart new technology is worth losing power in DC. A recent Harris Poll found that 33% of US voters would consider a political candidate’s position on cryptocurrencies. For the first time ever, politicians are being asked about their perspective on crypto. As a political actor, if you have a problem with crypto, you run the risk of losing votes and dollars.

While many of the developments above are not perfect, they are the first time the industry has seen progress on a bipartisan basis in DC. If the momentum continues, the gating headwinds the industry has faced have suddenly been removed. There may have never been a better time to build and invest in crypto in the US.

The Impact of a Dramatic Two Weeks in DC was originally published in Castle Island Ventures on Medium, where people are continuing the conversation by highlighting and responding to this story.

Stablecoins have shown remarkable growth compared to traditional systems, and continue to trend towards becoming a universal settlement layer.

(Source: CIV Research)

Robust stablecoin systems have four core requirements: efficiency in speed, cost, reliability, and security. If adequate functionality exists, creating a successful stablecoin payment network becomes a matter of driving adoption. The lion’s share of crypto adoption — users, developers, infrastructure, and applications — currently exists in the Ethereum Virtual Machine (EVM) ecosystem. The EVM has a critical mass of innovation and willing users above the base layer but stands to benefit from base layer performance improvement. We may exist in a future world of Layer 2’s, but this nevertheless thrives off of an optimized base layer. Monad brings a parallelized design to the EVM, resulting in a fast, performant Layer 1 chain that is compatible with innovation native to the EVM ecosystem. Monad, in turn, stands to power stablecoin use cases within the EVM in a way not previously possible.

An EVM-based stablecoin payment system is akin to mobile-powered web2 payments. Checks and bank transfers are functional ways of sending money. However, internet users spend most of their time on mobile phones; thus, mobile payments have prospered. In crypto historically, users spend time using EVM-based technology; this presents a market opportunity for a network powering fast, low-cost p2p payments within the EVM sphere. We believe crypto/stablecoin payments will thrive on the back of web2 mobile payment adoption, as prospective users naturally spend more time already using digitally-native commerce solutions.

Online commerce transactions are particularly ripe for stablecoins. Per this 2023 report by McKinsey, digital payment growth (Apple Pay, Google Pay, Samsung Pay, etc.) has been markedly more pronounced for online purchases (73% of 2023 responders) vs in-store (25% of 2023 responders). There appears a greater willingness of consumers to readily adopt novel payment solutions online vs in-person. Possibly, this is due to the friction of using credit cards online (inputting information) vs in-person (simple tap/swipe) which pushes users to newer, incrementally better alternatives.

(Source: https://www.mckinsey.com/industries/financial-services/our-insights/banking-matters/consumer-digital-payments-already-mainstream-increasingly-embedded-still-evolving)

Through performance and compatibility with existing infrastructure, Monad offers the scalability necessary for stablecoins to continue marching toward global adoption. In recent months, we’ve seen immense growth in stablecoin usage powered by companies like Felix, Yellow Card, OvalFi, DolarApp, and many others. Many of these companies bring stablecoins to emerging markets, increasing financial freedom for those in relatively less robust local economies. Monad stands to be the piping of this emerging global payments layer. CIV will continue to support companies building in the Monad, stablecoin, and Monad x stablecoin arenas.

Disclosure: CIV is an investor in Monad. Felix, Yellow Card, and DolarApp are also CIV portfolio companies.

Monad & Stablecoins was originally published in Castle Island Ventures on Medium, where people are continuing the conversation by highlighting and responding to this story.

2023 was a groundbreaking year for crypto.

Fifteen years ago, Bitcoin emerged as a rival store of value, medium of exchange, and unit of account to fiat currency. In 2015, Ethereum unveiled the power of smart contracts – to trustlessly facilitate contractual agreements, powering a host of modern decentralized finance use cases. In years to follow, new layer 1’s and layer 2’s brought about improvements in the speed and cost of execution.

New blockchains coexisted, but were largely segmented. Value creation stayed largely within the confines of its chain of origin. Technologies like LayerZero, Axelar, and Wormhole progressively made it easier for users and applications to traverse blockchains, but until recently there was little to no synergy between chains.

In 2023, we witnessed an emergence of technologies that created inter-blockchain synergies for the first time. Eigenlayer pioneered restaking (or “shared staking”) – the re-use of one staked cryptoasset to secure a new network beyond its native one. This allows networks to launch with staking-based security from the outset by “borrowing” security from another staking network. In Eigenlayer’s case, Ethereum’s security is borrowed for re-use in networks built on top of Eigenlayer. Newer players like Babylon (Bitcoin restaking; CIV portfolio company) and Exocore (omnichain restaking) have entered the fray as shared security stands to become increasingly common practice.

In another trend, new layer 2 blockchains are increasingly utilizing networks outside of Ethereum for data availability. Celestia (CIV portfolio company) and Avail are two leaders in outsourced DA.

Finally, some new participants look to reconcile technology from one virtual machine (a base layer of blockchain technology) with a new ecosystem. Movement Labs and Eclipse, respectively, are building L2’s that bring Move VM and SVM technology to Ethereum. These innovations mark a transition for crypto, with different blockchain ecosystems moving beyond being interoperable to symbiotic.

Despite the breakthroughs of 2023, we see one opportunity ripe for cross-pollination: Bitcoin and the Bitcoin ecosystem.

Bitcoin L2’s like Lightning and Bitcoin sidechains like Stacks and Rootstock have been around for a number of years, but novel Bitcoin use cases at the scale of newer blockchains have yet to meaningfully flourish. These technologies haven’t catalyzed mass adoption either by Bitcoiners or DeFi users to date.

To date, new Bitcoin layers have largely sought to build entirely new ecosystems on top of Bitcoin. These systems have technological promise but struggle with the cold start problem of attracting new applications, developers, and users.

BOB circumvents this issue with a modern approach to scaling Bitcoin: bringing the ecosystem of Ethereum to the mass of Bitcoin users and capital. BOB is building an EVM-compatible Bitcoin L2.

Alexei Zamyatin and Dominik Harz, the co-founders of BOB, have been active in the Bitcoin space for almost 10 years. In 2019, Zamyatin and Harz set out to build Interlay, a DeFi hub for Bitcoin built on Polkadot rails. Interlay delivered novel DeFi functionality to Bitcoin but was hindered by limited Polkadot adoption. Following the experience of building and managing Interlay, the pair set out to harness the adoption of the EVM and build BOB.

BOB (“Build on Bitcoin”) is a first-of-its-kind hybrid layer 2 powered by Bitcoin and Ethereum. BOB seeks to close the gap between Bitcoin as a vehicle for mass adoption and Ethereum as a hub for innovation by combining the security, liquidity, userbase, and innovation of the two largest blockchain ecosystems. Structurally, BOB leverages the EVM at its base layer to power smart contracts and will launch on the OP stack as its system of rolling up to Ethereum L1. From there, BOB will introduce Bitcoin PoW security via a new, more efficient form of merged mining, making BOB one of the most robust L2s in the market. Eventually, BOB looks to settle directly on Bitcoin L1 through new unlocks like BitVM. Initial Bitcoin liquidity on BOB will come from leading Bitcoin bridges. BOB’s direct access to stablecoin liquidity from Ethereum, as well as BTC and novel types of Bitcoin assets leaves it uniquely positioned to foster a lively environment of applications and users.

BOB’s Core Stack

(Source: https://docs.gobob.xyz/docs/learn/introduction/stack)

BOB sets the stage for symbiotic protocols that sit between Bitcoin and the EVM ecosystem. Ultimately, we see BOB as enabling a proliferation of new Bitcoin use cases in years to come, including:

• Stablecoin-based payments and DeFi
• 1-click deployment of BTC into DeFi strategies
• High-performance DeFi
• Real World Assets On-chain
• Lending/borrowing
• Cross-chain Swaps & Interoperability
• Access to Ordinals, Runes, and other Bitcoin assets for ETH and EVM users

The team at Castle Island Ventures is excited to partner with BOB and continue to invest in the future of Bitcoin innovation.

For more information on BOB, please visit BOB’s documentation: https://docs.gobob.xyz/

With thanks to Alex Lin and Jake Lynch for proofreading and feedback. Photos courtesy of the BOB team.

Disclosure: Of the other companies/protocols mentioned in this piece, CIV is an investor in Babylon and Celestia.

Why We Invested in BOB (“Build on Bitcoin”) was originally published in Castle Island Ventures on Medium, where people are continuing the conversation by highlighting and responding to this story.

About Us

Castle Island Ventures is an early-stage venture fund with offices in Boston, New York and Miami. Our mission is to partner at the earliest stages with visionary entrepreneurs that are building infrastructure and applications leveraging public blockchain technology. We are currently investing in Pre-Seed, Seed and Series A opportunities out of our third fund.

We are looking to add an investor to our team. We view venture as an apprenticeship business and are eager to find someone passionate about our industry and early stage investing. Candidates should be interested in learning best practices on deal sourcing, how to conduct a rigorous diligence process, deal structuring, and how to be an effective board member. The position will be based in Boston.

About You

You Are:

· Passionate about the implications of public blockchains and their impact on the monetary, financial and technology fields.

· Intellectually Curious and willing to ask questions and conduct primary and secondary research in order to refine your point of view.

· Humble and able to revisit your hypotheses in the face of new developments and information.

· Empathetic and ready to roll up your sleeves and work with entrepreneurs on their most pressing problems.

· Discerning and capable of establishing yourself as a trusted partner for management teams in our portfolio.

· Comfortable with ambiguity and a role where every day will be different from the last.

· Team Player willing to work alongside the Castle Island Ventures team to execute on our vision.

Primary Responsibilities

· Meeting with entrepreneurs, attending events and sourcing early-stage investments for the firm.

· Conducting due diligence on prospective investments.

· Researching emerging technologies and markets in the public blockchain ecosystem.

· Working with existing portfolio companies on their strategic initiatives.

Qualifications

· 1–3+ years of experience in investing, consulting and/or investment banking

· High-energy, high-integrity with a team-first mentality

· Passionate about public blockchains

Interested? Please email us at: Jobs@castleisland.vc

We are hiring a new investor was originally published in Castle Island Ventures on Medium, where people are continuing the conversation by highlighting and responding to this story.

I’m pissed.

I’m pissed that this industry continues to put eccentric sociopaths on a pedestal. I’m pissed that the retail public continues to get steamrolled by liars and thieves. I’m pissed that for all the technical possibilities that public blockchains introduce, we don’t take advantage of nearly enough of them.

In this industry I’ve met some of the best people in my life — and I’ve encountered some of the worst people on the planet. I started Castle Island Ventures because I saw something special was happening and I wanted to be a part of it.

I saw entrepreneurs that were mission driven. Entrepreneurs that wanted to change the way that money works, the way that financial services work, and the way that the internet itself works. Entrepreneurs that wanted to create a world where people were self-sovereign over their money and their digital identities. Their passion made me take the leap to become an entrepreneur myself.

Along the way we’ve always had scammers and grifters. We’ve had way too many of them lately. Their existence undermines what we are trying to do here.

We have something that could be great.

We have some of the most talented people in the world spending their waking hours trying to improve the human condition and give people the tools to be more independent over their money and digital identities. The real builders in this industry would be building regardless of crypto prices. They are purpose driven.

If we want to get this back on track, we need to clean up our industry. I don’t have all the answers, but there are some things I suggest we redouble our efforts on:

• Self-Custody: We need to make it easier to for people to safely hold their private keys. There are companies building technology in this space — but we need more builders. We need to make it easier. We need to move the user experience up the priority list.
• Proof of Reserves: We need to acknowledge that not everyone is going to hold their own keys and will opt to use a custodian. So, we need to hold our custodians and exchanges more accountable. My partner Nic has been banging the drum on this for a long time with his proof-of reserve page. Proving reserves needs to be the industry standard in the same way that getting an annual audit is the standard for a well-run company.
• Exchange Hygiene: Centralized exchanges need to implement cross-exchange trade surveillance sharing agreements to eliminate market manipulation. It’s a good thing for customers, so we should do it — end of story. We also need on-ramp providers to comply with the travel rule — whether you like the rule or not it’s the law and you are putting your customers at risk by not complying. Lastly, we need clear legal assurances segregating client and operating capital.
• Conflicts: The financial services industry learned a lot of things in the 1930s. Parts of the crypto industry seem intent on making the same mistake all over again. Exchanges shouldn’t own prop trading firms. Insider trading and disclosure frameworks should exist. Exchange employees and affiliates shouldn’t front run listings. Let’s wake up.
• Token Vesting: This has the potential to be the next great scandal of the industry. We need to align on a set of standards around investor/team token holdings and vesting schedules immediately. The way this works now is a total joke and is structurally set up to prey on retail investors. Ryan Selkis at Messari has been banging the drum on this for a long time. It’s time to listen.
• Permissionless Finance: We should protect the right of individuals to transact peer to peer on public blockchains. We should invest in privacy preserving technology and user-experiences that protect end-customers. We should use the benefits of public blockchains to build systems with verifiable real-time disclosure instead of trusting centralized actors. We should encourage regulators to regulate the on-ramps, not the networks.
• Regulatory: The industry is about to have a rocky road ahead in Washington. We need to work collaboratively and demonstrate that SBF/FTX are not the face of the industry. We need to work towards getting clarity on which assets are securities, and who oversees the crypto-commodity and crypto-securities spot markets. I continue to believe that the answer to the securities question can be best addressed through Commissioner Peirce’s Token Safe Harbor Proposal 2.0.

The next few months are going to be rough as we collectively sift through the fallout. If we take this time to get our house in order, we can build this industry back from a new foundation.

I’ll be here for it.

Matt

It’s time to grow up was originally published in Castle Island Ventures on Medium, where people are continuing the conversation by highlighting and responding to this story.

___________

Today we are happy to announce Castle Island Ventures III, a $250 million venture fund. The new fund will support our mission to partner with visionary entrepreneurs building transformative companies powered by public blockchains. We are excited to expand our roster of limited partners who believe in this mission. This LP group includes representation from endowment, foundation, asset management, insurance, family office and fund of fund groups.

We believe that public blockchains represent a paradigm shift in the way we interact with money, financial services, and the internet itself. This new fund gives us the ability to support three big themes that continue to excite us:

• Monetary Networks: We are in the early days of a monetary transition towards a rules-based monetary order. This transition is happening across both non-sovereign monetary networks like Bitcoin and Ethereum and is also in evident in the rapid rise of stablecoins, which give regular savers worldwide a free choice of currency — in many cases for the first time. The addressable market for these new monetary networks is enormous and is matched only by the scale of the entrepreneurial ambition working on the associated companies and projects.
• Financial Services: We envision a financial system that is more programmable and transparent, less politicized, exclusionary, and intermediated. Such products and services are no longer academic in nature — they are in production and changing institutional and consumer behavior and market structure. The inability and unwillingness of legacy financial services firms to evolve in the face of this transition will be viewed in a similar fashion to the disruption that took place in the newspaper industry as the web became pervasive.
• Internet Architecture: In parallel to the monetary and financial transformation that is underway, ‘web3’ and new internet architectures propose digital property rights and enable new protocols and businesses that seek to disrupt and disempower online data and tech monopolies. The pendulum is swinging back towards giving individuals rights, ownership, and freedom online. Composable and decentralized internet topologies will prove commercially superior to highly centralized models and they will enable new business models to emerge. These systems are in the process of restoring the internet to the distributed ambitions of its early creators and we are excited to continue backing entrepreneurs that are building them.

We are also thrilled to announce that Ria Bhutoria has been promoted to a General Partner, joining Nic, Matt and Sean Judge as GPs. We will be growing our team significantly over the next year, so stay tuned for more on that front.

If you are an entrepreneur that is building towards this future, we would love to speak with you. Please email us at info@castleisland.vc

We will continue to test our hypotheses and think in public. Some ways to keep in touch:

• Our Website
• On The Brink Podcast
• Our Weekly Newsletter
• Twitter: Nic, Matt, Ria, Sean

Onward,

Matt & Nic

Announcing Castle Island Ventures III was originally published in Castle Island Ventures on Medium, where people are continuing the conversation by highlighting and responding to this story.

____________

Today we are happy to announce the closing of Castle Island Ventures II, a $50 million fund to continue our mission to partner at the earliest stages with visionary entrepreneurs that are building products leveraging public blockchain technology. We are grateful to have such supportive limited partners that are aligned with our thesis that public blockchains are changing the world.

We believe that public blockchains are a transformative technology and will change the way that we interact with money, value transfer, trusted third parties, and even the fundamental architecture of the internet itself.

We believe that we are in the early innings of a monetary transition towards a rules-based monetary order that has been in the making for decades. Startups are well poised to create generationally important businesses at the infrastructure layer of this shift. Make no mistake, every financial services firm in the world will need to participate in this transition. The fact that many of these firms don’t realize this yet only excites us more about the road ahead.

We envision a financial system that is more programmable, less politicized, less exclusionary, and less intermediated. The disintermediation of financial market structures isn’t a pipe dream — it is already well underway.

In parallel to this monetary and financial transformation, ‘Web3’ and new internet architectures are restoring digital property rights and enabling new business models that seek to disrupt and disempower online data monopolies. Not only are the addressable markets enormous, but we feel that the pendulum is due to swing back towards protecting the rights of the individual online. Federated and decentralized internet topologies will not simply prove commercially superior to highly centralized models — they will bring the internet back into concert with the visions of its originators.

The scope and scale of this transformation is limited only by the imagination and ambition of the entrepreneurs and open-source developers that are building these services. From our vantage point, the future is very bright.

If you are an entrepreneur that is building towards this future, we would love to speak with you. Please email us at info@castleisland.vc

As part of this next phase of Castle Island Ventures we are looking to grow the team and are hiring for an Associate role. If you are interested contact us at jobs@castleisland.vc

Lastly, we continue to test our hypotheses and think in public. Some ways to keep in touch:

• On The Brink Podcast
• Our Weekly Newsletter
• Twitter: Nic, Matt

Matt & Nic

Castle Island Ventures II and the road ahead was originally published in Castle Island Ventures on Medium, where people are continuing the conversation by highlighting and responding to this story.

Re: FinCEN Docket Number FINCEN-2020–0020, RIN 1506-AB47, “Requirements for Certain Transactions Involving Convertible Virtual Currency or Digital Assets”

To Whom it May Concern:

Castle Island Ventures welcomes the opportunity to submit this letter for consideration by the Financial Crimes Enforcement Network (“FinCEN”) with respect to the Notice of Proposed Rulemaking regarding “Requirements for Certain Transactions Involving Convertible Virtual Currency or Digital Assets” (the “NPRM”).

We respectfully request that FinCEN extend the comment period for this NPRM to 60 days in order to allow greater industry participation and dialogue around this issue.

About Castle Island Ventures

Castle Island Ventures was founded by Matt Walsh and Nic Carter and is an early-stage venture capital firm based in Cambridge, MA. We are focused on supporting businesses that are building infrastructure products and services in the public blockchain ecosystem. We believe that public blockchains are a breakthrough new technology that will have a transformative impact on a wide variety of industries, in a similar way that the commercial web has transformed nearly every industry since its deployment in the late 1990s.

Like in the early days of the commercial web, we believe that the United States can lead the way and establish itself as the premier jurisdiction for entrepreneurs to build companies in this category. We are hopeful that regulators will work collaboratively with companies and policy groups in this emerging field to ensure that these breakthrough companies can thrive in the United States.

Comments

Castle Island Ventures supports FinCEN’s objectives to combat money laundering, terrorist financing and other types of illegal activities. We believe that these objectives are aligned with the goals of the overwhelming majority of market participants in this industry.

Castle Island Ventures has several concerns with the NPRM, and also supports the comment letter put forth by the Chamber of Digital Commerce, of which we are members. Among our highest concerns with the NPRM:

• Shortened Comment Period: We believe that the 15-day comment period is wholly inadequate and raises process questions under the APA. We do not see an immediate necessity beyond the change of Administration on January 20, 2021. Given the level of impact on commercial interests and citizens in the United States, we believe that this issue warrants at minimum a 60-day comment period.
• Impact on Data Privacy and Personal Security of Cryptocurrency Holders: As currently contemplated, the proposed rule would unnecessarily compromise the private data of cryptocurrency holders. Unlike cash withdrawals, many cryptocurrency users withdraw funds from exchanges and brokerages with the intention of storing and holding these funds, not spending them. The current rule would in effect create honeypots of personal data including user addresses, that would make cryptocurrency holders vulnerable to personal attacks and attempted thefts. Additionally, because public blockchains are transparent and allow for the traceability of transactions, this rule would have the effect of permanently assigning personal identity to blockchain-based assets. If the database tying the identities of Americans holding digital assets to blockchain addresses were to be leaked or hacked — not an unlikely prospect given events of the last month — this full dossier could be used by adversaries to target these individuals. Because digital assets are bearer-style assets that can be transferred digitally, holders of these assets are frequent targets for fraud, phishing, extortion, and even physical threats. This rule would have the net effect of endangering the millions of Americans who already use digital currency by exposing. The permanence and traceability of these ledgers means that once one’s identity is tied to an address, it can be virtually impossible to break that linkage. Thus these requirements impose a far more onerous and invasive standard of disclosure than their equivalents for transactions with physical cash.
• Detrimental Impact to United States National Interests in the Technology Market: Public blockchain technology has the potential to be a platform infrastructure that drives economic growth for decades to come in the United States. It is a technology that is on-par with the commercial web in terms of the breakthrough new business models that will be enabled and the myriad of jobs that will be created because of its existence. This is a technology that is very much entering the mainstream and will exist — the question is whether the United States will lead the way like we did with the commercial web. Applying onerous and undue regulation to companies in this nascent field will have the effect of forcing these entrepreneurs to build their businesses in other jurisdictions.
• High Compliance Costs: We echo the sentiments in the ErisX comment letter, especially with respect to the significant compliance costs that the NPRM would impose on small startup entities. These costs include data storage, proprietary software development, increased compliance vendor spend and potential fines. Competitive companies in non-U.S. jurisdictions will be unnecessarily advantaged over their U.S. peers if the NPRM proceeds as drafted.

Castle Island Ventures appreciates the opportunity to provide this public comment.

Respectfully Submitted,

Matt Walsh, Founding Partner

Nic Carter, Founding Partner

FinCEN Comment Letter was originally published in Castle Island Ventures on Medium, where people are continuing the conversation by highlighting and responding to this story.