Management Team & Market Update

May 15th, 2023

Hello to all of our investors and friends of the fund. We hope this message finds you well and in good health. Please see our letter below for an update on our management team along with some recent regulatory news and a brief market update.

Management Team Update

We begin with some difficult news to share regarding our brilliant and beloved cofounder, Jamis; At the end of March, Jamis was involved in an accident in the Dominican Republic where he suffered a severe brain injury. After receiving emergency surgery Jamis was flown to Miami via life flight where he continues to receive world-class treatment from the neurocritical care unit at Ryder Trauma Center. Jamis had been on a retreat with a rotating cast of crypto founders, technology company entrepreneurs, investors and friends. Thanks to the extraordinary effort by that group and the incredible support of his family and friends, Jamis has been well cared for as we progress through this challenging time.

While the injury was severe, Jamis has shown remarkable strength and good fortune, and has made significant progress on his path to recovery. Jamis’ youth, good health, and his undeniable love of life have aided him well, and the medical team is optimistic that he will achieve a full recovery. What remains unclear is his schedule for recovery. Timelines for injuries of this sort can vary widely, so we must wait to learn more as he progresses through different rehabilitation milestones. After spending time with Jamis in Florida, we believe his resilience will continue to impress us all.

We will be sure to post this audience with any material updates on Jamis’ recovery. Importantly, investors should know that we activated our firm’s disaster recovery program and all fund assets are secure, with fund operations ongoing. For additional security, we are also taking measures to temporarily replace Jamis’ role as a co-signer on any multi-signature digital processes.

Witnessing the miraculous efforts to support Jamis has been a testament to his character and how well-loved he is by so many. We take comfort in knowing that our partner is receiving the best possible care. While we await Jamis’ recovery, your thoughts and support are much appreciated. 

Regulatory Update

In late April, the European Union parliament overwhelmingly endorsed (500+ votes in favor to ~30 votes against) MiCA(Markets in Crypto Assets), the first major regulatory framework for crypto assets to date. MiCA is a comprehensive set of rules to track crypto-asset transfers, prevent money laundering, safeguard against market manipulation, and provide a set of common rules for supervision and customer protection. The endorsement effectively paves the way for MiCA to become law in 2024, putting the EU a step ahead of the U.S. and U.K. This is a major step forward for the digital asset industry, where most actors have welcomed regulatory clarity. Importantly, MiCA 2 is already in progress and will cover other areas of the crypto markets, like DeFi, which weren’t considered in MiCA 1. Nevertheless, crypto operators have generally praised MiCA as being a major step forward in providing sensible regulation and a framework for compliance.

Meanwhile, you may have seen headlines regarding U.S.-based crypto juggernaut, Coinbase, and their recent efforts to expand their international presence. During the company’s recent earnings call, Coinbase CEO, Brian Armstrong stated Coinbase was committed to the U.S., however, last month the company established an offshore entity and Armstrong recently took to Twitter to condemn the SEC’s lack of good-faith participation and the damage that the lack of regulatory clarity has caused U.S.-based crypto companies. It appears that Coinbase, a publicly listed company in the U.S., could be voting with their feet, or at least laying the foundation to do so if push comes to shove. The move comes after Coinbase received a Wells Notice from the SEC, which typically precedes enforcement action. We enjoyed Armstrong’s recent comment wherein he analogized the disorganization of U.S. regulatory bodies (namely the SEC and CFTC) to sports terms:

“Imagine you’ve got both football and soccer refs on the field, but we’re actually playing pickleball (fastest growing new sport in America). The refs can’t really agree on the rules of this new game, and one of them decides to change a call they made back in April 2021.”

The April 2021 date is in reference to Coinbase’ public listing on the Nasdaq. The process for Coinbase’ public listing included disclosure requirements and a comprehensive business overview of the company. In their disclosure, Coinbase outlined their existing process for determining which digital assets are listed on the Coinbase exchange. At the time, regulatory agencies raised no issues with Coinbase’s processes, nor did they identify that any of the digital assets listed could potentially be considered securities, which would have required Coinbase to register as a securities exchange. But today’s SEC, now chaired by Gary Gensler, clearly believes otherwise, despite refusing to provide specific guidance or details around exact violations.

Coinbase’ Chief Legal Officer, Paul Grewal summed up the current sentiment for many crypto operators in the U.S.: “The truth is that today there is no clear rule book from the SEC on crypto, and efforts to engage with the SEC are met with silence or enforcement actions. They have not followed a good faith rulemaking process with industry, as required under the APA.”

It seems to us that the SEC’s existing approach has been largely ineffective in their two key mandates; Investor protection has broadly failed (see U.S. investors being robbed by FTX) and capital formation has been stifled, not expanded. And as a result, crypto companies and operators continue their slow march away from the U.S. Should Coinbase begin meaningful operations abroad it will be one of the loudest signals yet that the U.S. is losing ground to other countries. Make no mistake, crypto and digital asset development will continue regardless, but U.S. regulatory efforts may force the U.S. to forfeit its role as a leader in the industry, and the opportunity to enshrine American values in the regular course of business. 

Relatedly, you may recall that in March of last year Biden issued an executive order calling on federal agencies to evaluate the risks and benefits of digital assets, and to provide reports on their findings. In September, the white house released the resulting framework for the responsible development of digital assets. We’ve also mentioned before some of the bi-partisan efforts to promote healthy regulation and innovation for our industry (e.g. Gillibrand (D-NY) - Lummis (R-WY) Responsible Financial Innovation Act). Today, it laments us to acknowledge that digital assets have fallen victim to partisanship in the U.S., with Democrats apparently coordinating a broad anti-crypto agenda, with Republicans generally refuting it. This suspicion was validated last week when a memo was leaked, intended for Democrat members on the Committee on Financial Services. The leaked memo suggests that House Democrats are breing told to support the party’s position on crypto regulation and to broadly support SEC Chair Gary Gensler’s complete authority.

There are many frustrating points to the Key Messages listed within the leaked memo, some of which are blatantly dishonest (e.g. # 3, that neither the Biden Administration, investors, the SEC, nor other financial regulators have called on Congress to erect new legal frameworks for the crypto industry. – see Biden’s EO mentioned earlier). But despite the hardened stance from the left, we do believe there remains a cohort of individual Democrats who are constructive on the digital asset industry and its technological promises, even if they are now forced to do so privately.

Brief Market Update

The Bitcoin blockchain has been experiencing elevated transaction volume (and miner fee revenue), eclipsing 2021 activity and setting new highs (682k daily transactions). The increased activity stems from two related technology solutions; Ordinals and the BRC-20 token standard. Ordinals enable the inscription of new data types to blocks in the Bitcoin blockchain. The BRC-20 token standard utilizes Ordinals to create fixed-supply tokens on Bitcoin. While the potential applications for Ordinals and BRC-20 tokens are still very much in the experimental phase, they have led to a renewed interest from developers building new products and infrastructure on the Bitcoin blockchain, in addition to a surge in network activity and fees paid to Bitcoin miners. However, this flurry of network activity has led to significant chain gloat, with increased transaction costs and delayed processing times. As a result, we’re seeing increased pressure from the Bitcoin community to migrate certain types of activity to Bitcoin Layer 2s or Sidechains, such as Stacks (STX). Perceptive’s Flagship Fund has been an investor in STX and we hope to see continued growth and activity on STX as more complex activity moves from Bitcoin L1 to L2s and Sidechains.

While April saw most DeFi projects perform slightly down (DeFi Pulse Index down 6%) and the broader crypto market suffer modestly (Bitwise 10 Index down 2%), Bitcoin and Ethereum both posted another month of gains (up 3%), while the S&P 500 index was up 1.5% and the NASDAQ remained flat. On the macro front, global liquidity has recently ticked up, providing support for equity markets and Bitcoin. With respect to the debt ceiling debates, some expectations show the Treasury spending down the Treasury General Account (TGA) to zero by early-June. We’ll be watching this closely, but currently our base case is that House Speaker McCarthy (R-Ca) and the Democrats are able to come to an agreement (perhaps a temporary lift based on a conditional future agreement) to avoid any major market fallout. Any shutdown would have dramatic consequences for growth, and we don’t expect Democrats to shoot themselves in the foot leading into an election cycle. There are still many unknowns, but at this point nothing substantiates an expectation of a shutdown. While it could happen, as it has before, real growth is trending to zero, and either side playing tough will guarantee a much deeper recession as a shutdown will drag down growth. With respect to crypto, and zooming out a bit, we believe we are still in a broader bottoming phase, but may not have reached cycle lows. As a result, while we are still strategically accumulating, the Flagship Fund remains positioned relatively defensively, and we expect the general market to stay range bound in the short term.

We will continue to keep you updated, but as always, please do not hesitate to reach out to us.

Your Team at Perceptive