The End of an Era

Hi everyone, this is Charles Hoskinson broadcasting live from warm, sunny Colorado. Today is November 22nd, 2023, and I'm wearing a really fun shirt. I wanted to make a video to talk about the Binance situation briefly. As many of my friend CZ stepped down as CEO of Binance. He stated, "I stepped down as CEO of Binance.

Admittedly, it's not easy to let go emotionally, but I know it is the right thing to do. I made mistakes, and I must take responsibility. This is best for our community, for Binance, and for myself." He appointed Richard Tang, a former regulator at the ADGM, who I recently visited. They’re great guys.

Richard is the regulatory officer of the Singapore Exchange and the director of Corporate Finance at the Monetary Authority of Singapore. He is a very effective operator and a smart guy, and I think he’s going to do a phenomenal job. CZ was part of a class of entrepreneurs in the cryptocurrency space who epitomized the "move fast, grow, and innovate" mentality. He ran a business that was regulated or quasi-regulated, depending on the jurisdiction. During the early days of crypto, nobody cared.

I’m old enough to remember when people would go to Mt. Gox and transfer money using PayPal or other services just to buy Bitcoin. There was LocalBitcoins, where you’d find people, give them cash, and they’d send you Bitcoin. An escrow agent would handle it. I remember people trading Bitcoin on spreadsheets over Bitcoin Talk and other websites.

There were many notable figures back then, like BitPay, Roger Ver, Eric Vorhees, Mike Hearn, and Gavin Andresen. It was a very small club. Peter Vines tried to create the Bitcoin Foundation, which didn’t work out as well as hoped. We had our villains back then, like Mark Karpeles. CZ came in with a second wave, and Binance was started around 2017.

They became a leviathan in our industry, part of the second wave of exchanges after the failure of Mt. Gox. He was one of the greatest entrepreneurs of our time in the industry; trillions of dollars of assets flowed through his exchange. For a new exchange, that’s pretty much unheard of, especially given that all those assets were completely invented by this industry. The fact that they had that kind of valuation is extraordinary.

What’s happening right now is a fundamental change in the industry as a whole, where there’s a movement towards regulated business. The legacy world is merging with the crypto world, and this is difficult because the legacy world is radically incompatible with the crypto world. CZ wasn’t brought down like SPF, who engaged in massive fraud and stole from his customers. CZ had no intention of running a business that way. He opened up markets that allowed the enemies of America to trade and operate.

Open permissionless protocols tend to invite that, and the United States has a financial regime that has been weaponized. There are great books, like Juan Surati's "Treasuries War," that describe how the global sanctions regime, AML, KYC, and anti-terrorist financing work. This is just how the legacy world operates, and every single bank and financial institution is subservient to it. The regulatory panopticon that’s been constructed includes everything from suspicious activity reports to "trust us, we know." The world is becoming very multipolar, and many countries are no longer following that regime.

Crypto is caught in the middle of all this. Many entrepreneurs in our space, during the era of "we don’t care, we’re not going to pay attention," got swept under the rug. Binance will continue on, and it will be under leadership that will work with the U.S. government as a partner moving forward.

This means that every substantive business decision they make from this point on will likely be in consultation with the U.S. Treasury Department, from token listings to new product development. There’s going to be a big timeout as they change management and get where they need to go. The good news is that we, as innovators, still have a lot of power.

That’s why we created Midnight. Midnight is the idea that you can have algorithmically generated law, regulated value transfer protocols, and combine them with zero-knowledge proofs. There are many interesting academic projects, like Stanford’s Codex, which works on something called computational law. They bring together engineers, lawyers, and entrepreneurs to algorithmically define law. In the Ethereum space, there’s even a project called OpenLaw, where they take real-world contracts and try to add a legal DSL to them.

You combine a smart contract with a legal DSL, but you need a privacy component for this to actually work, which is why Midnight exists. I believe we can make it quite interoperable with these things. The fourth generation of cryptocurrency is no longer about scalability and governance; that’s the third generation. The real fourth generation is about merging the legacy world, which has these draconian regimes incompatible with decentralization, with what we’re trying to achieve in the decentralized world. We need to find a way to make most people happy, understanding that concessions have to be made on both sides.

The era of the crypto industry I grew up in is over. Binance was the last holdout to that, and I’ve watched many people fall one by one. I suspect the U.S. government will start targeting more liquidity providers, and non-custodial wallets will likely face scrutiny, especially if they integrate with DeFi and these types of things.

Perhaps MetaMask and others will be affected at some point. This is an attempt to capture all the core infrastructure of our industry from a regulatory viewpoint. You’ll notice in the press conference held with Merrick Garland and Janet Yellen, they repeatedly mentioned "national security." The reason they do this is that national security is tied to the financial markets. Reading Juan's book "Treasury War" shows how the U.

S. government thinks about these issues. Crypto has grown large enough and significant enough that it must fit into the national security mindset of the United States, the European Union, and other great powers as they engage in a global chess game. We in the industry have to innovate. We have to invest and build better technology.

Ultimately, I believe we can square this circle. For my part, CZ is a friend of mine. He’s a good man and will go through some hard times in the coming months and years. However, I believe he will come back and be a great entrepreneur again, but he will need a long break, just like Charlie Shrem had to. I’ve been on his podcast many times, and I remember when he was the young guy in the room.

CZ and I will move on as the space evolves. We just have to adapt, change, and grow. I’m certainly getting a little older, which is why I wear these colorful shirts to try to keep me young. You all keep me young, and there’s always something new to tackle. For our part, we predicted this with Cardano and understood the need for how to innovate with integrity and comply with integrity.

We’ve invested heavily in core technology like Prism, which allows self-sovereign identity, and Midnight, which provides data confidentiality required for handling PII in a regulated context. We’ve put a lot of thought into how to build dApps and DeFi in a way that makes people happy while preserving the tenets of decentralization. We’ve also carefully considered how to measure decentralization through the Edinburgh Decentralization Index and ensured proper checks and balances in governance to prevent key individuals or institutions from being captured and used as leverage points to control the entire protocol. There’s a lot of work ahead. It’s a bittersweet week, and we’re entering a new chapter in crypto—the age of the fourth generation, the great merger of the legacy and DeFi worlds.

As Hegel used to say, there’s a synthesis and an antithesis. We’re going through a thesis and an antithesis, and we will achieve a great synthesis as they merge together. There will be a way to go beyond this, but it will require many conversations, hard work, education, and innovation. We as a community will do it; we always rise to the occasion. The dream never dies, and I believe our best days are still ahead of us.

These are difficult times because nothing is simple anymore. It’s not just about growth; now it’s about careful consideration. Cheers, everybody. We wish CZ and Binance well and hope for the best for everyone. Cheers!