A rugpull from NYC’s ex-mayor, prediction market hijinks & Lighter’s CEO | Fortune’s Crypto Playbook

Key Concepts

• Rug Pull: A malicious maneuver where developers abandon a crypto project and withdraw funds, leaving investors with worthless tokens.
• Decentralized Exchanges (DEXs): Cryptocurrency exchanges operating without a central authority, utilizing blockchain technology for peer-to-peer trading.
• Perpetual Futures (Perps): Futures contracts without an expiration date, allowing traders to speculate on the future price of an asset with leverage.
• Narrow Banks: Specialized financial institutions with limited banking functions, often seeking crypto banking charters.
• Prediction Markets: Platforms allowing users to trade on the outcome of future events.
• Zero-Knowledge Proofs: Cryptographic methods enabling verification of information without revealing the information itself.
• Auto-Deleveraging (ADL): A mechanism used on decentralized exchanges to manage risk during market crashes by automatically reducing leveraged positions.
• Tokenized Stocks: Digital representations of traditional stock ownership on a blockchain.

The Crypto Playbook - Summary of Recent Developments

This discussion on “The Crypto Playbook” covers recent events in the cryptocurrency space, focusing on regulatory concerns, project failures, emerging trends in decentralized finance (DeFi), and the potential for crypto to integrate with traditional finance (TradFi). The conversation, between Jeff John Roberts and Leo Schwartz, highlights both the risks and opportunities within the evolving crypto landscape.

I. The Eric Adams “Rug Pull” & Regulatory Concerns

The segment begins with a discussion of former New York City Mayor Eric Adams’ launch of the “New York City Token” and its subsequent rapid decline in value, characterized as a potential “rug pull.” The token was intended to combat antisemitism and anti-Americanism by educating youth about blockchain, but its purpose and execution were unclear. Developers reportedly withdrew approximately $1 million in profits shortly after launch.

This incident underscores a broader concern: the lack of robust regulation in the meme coin space. The SEC’s relatively hands-off approach was noted, with Roberts and Schwartz lamenting the potential for continued scams and investor losses. Schwartz pointed out the recurring pattern of individuals being “burned” by meme coin projects, framing the current environment as a “gambling economy” where individuals believe they can outperform others. Roberts suggested Adams’ involvement stemmed from a need for funds after leaving office, referencing his prior interest in Bitcoin and hosting a crypto summit during his mayoral term. The incoming mayor, Mamdani, has not yet indicated whether he will continue the blockchain office established by Adams.

II. World Liberty Financial & Trump’s Crypto Ambitions

The conversation shifts to World Liberty Financial, the crypto platform associated with the Trump family, and its application for a banking charter from the Office of the Comptroller of the Currency (OCC). This application raises concerns about potential conflicts of interest, given Trump’s past actions and statements regarding financial regulation.

The OCC charter, described as a “narrow bank” charter, allows access to the Federal Reserve account and payment rails (ACH and Fedwire) without full banking capabilities. It’s particularly valuable for stablecoin issuers, enabling custody of assets and stablecoin issuance. Several crypto companies, including Circle, Ripple, and Paxos, previously received conditional approval under the Trump administration. Schwartz expressed concern that denying the charter to Trump’s project could be difficult given his recent attempts to discredit the Federal Reserve chair. Todd Phillips, a Banking Law professor, warned that granting charters to unqualified companies could lead to systemic contagion. However, Schwartz also acknowledged the argument that the OCC is simply attempting to find a role for crypto within the banking system, and that the Biden administration’s initial approach was overly restrictive.

III. Prediction Markets & Insider Trading Risks

The discussion then turns to prediction markets, specifically Poly Market and Cal. She. These platforms allow users to bet on the outcome of future events, ranging from sports scores to political events. A key concern is the potential for insider trading, as individuals with non-public information could profit from these markets.

An example cited was a case in Venezuela where someone seemingly anticipated a US military intervention and profited significantly on Poly Market. Poly Market operates with greater anonymity, utilizing crypto rails and lacking Know Your Customer (KYC) requirements, making it more difficult to detect insider trading. Cal. She, in contrast, claims to prohibit insider trading but faces challenges in effective enforcement. Representative Richie Torres has introduced a bill to combat insider trading in these markets, and a former CFTC attorney highlighted the potential threat to market integrity. Schwartz acknowledged a libertarian perspective that individuals should be free to participate in these markets, but also noted the potential for perverse incentives and harmful outcomes.

IV. Rumble & Crypto Tipping

The segment briefly addresses Rumble’s decision to allow content creators to receive tips in Bitcoin. While viewed as a positive step for crypto adoption, Schwartz questioned the practicality of micro-transactions on social media, citing past failures of similar initiatives on platforms like Twitter and Patreon. He emphasized the importance of user experience (UX) and the need for seamless integration to encourage widespread adoption.

V. Hyperliquid & the Future of DEXs and Perps

The conversation culminates with a discussion of Hyperliquid, a decentralized exchange (DEX) that has experienced significant growth. Hyperliquid specializes in “perps” (perpetual futures), a type of derivative contract popular in crypto trading.

The founders of Hyperliquid, and lighter, a competitor, are described as highly qualified individuals with backgrounds in traditional finance and technology. Perps offer leverage and allow traders to speculate on future price movements without expiration dates. While offering advantages, they also carry significant risk, as demonstrated by a flash crash in October.

Vlad Navikovsky, founder of lighter, highlighted the potential for convergence between DeFi and TradFi, citing the increasing interest from traditional financial institutions in blockchain technology. He believes regulatory clarity in the US will be a key catalyst for growth. He also emphasized the security advantages of building on Ethereum, and the potential for perps to be applied to a wider range of assets, including tokenized stocks and even private company shares.

Conclusion:

The discussion paints a picture of a dynamic and often chaotic crypto landscape. While opportunities for innovation and financial gain exist, significant risks remain, particularly regarding regulation, fraud, and market volatility. The potential for crypto to disrupt traditional finance is evident, but its realization hinges on addressing these challenges and fostering a more mature and regulated environment. The interview with Vlad Navikovsky suggests a future where DeFi and TradFi increasingly intertwine, driven by technological advancements and evolving regulatory frameworks.