The State of CLARITY Act with Natalia Li

0:00Alex Thorn:Welcome to Galaxy Brains.

0:25Alex Thorn:Welcome back to Galaxy Brains. As always, I'm your host, Alex Thorne, head of firmwide research at Galaxy. Bitcoin's not zero. We have a great episode for you this week. Natalia Lee, Galaxy's head of U.S. policy, joins us to talk about the state of the Clarity Act, lack of movement on the bill, an update on our odds of passage this year, what needs to happen before the Senate will actually put it to a vote, which still, as we record this on Wednesday, August 5th, the afternoon, has not been scheduled. And of course, we'll check with our good friend, Bim Netta BB from Galaxy Trading, as always, to talk about markets.

1:01Alex Thorn:Before we get to the show, I want to talk about the cold card exploit. Now, I know if you follow our content and my content, you'll know that I've been working on this from one of the angles. My focus has been tracing the on-chain movement of funds for victims to help them make their reports to authorities and also to identify attacker addresses. I've sent hundreds of what I think of as high confidence addresses that belong to attackers containing stolen funds and continue to do so. I've sent those to U.S. federal law enforcement authorities, cybercrime and anti-fraud organizations, crypto exchanges, crypto compliance and investigations firms, etc.

1:45Alex Thorn:In order such that those addresses will be labeled as hackers. And so if any of the funds ever flow from them into a centralized intermediary, they can be frozen and perhaps hopefully returned to the victims. In the process of doing this, I've talked to about 150 victims directly. And I have to tell you, it is incredibly, incredibly sad. You know, it's one thing if like a – and I think by our measure, we're going to be up to around like 120, 130 million-ish pretty soon that we consider high confidence confirmed stolen. And I'll talk briefly in a minute about why it's high confidence and not like definitely guaranteed.

2:28Alex Thorn:That puts it in the top 20 of like crypto hacks ever, but close to the bottom, like in the 20s. It's not the total number, though, that's so sad and unique here. It's the type of attack and the demographic of victim, right? The average loss is about 0.6 or 0.7 Bitcoin. That's not a ton of money in the grand scheme of things, right? That's, you know, 40K. And that's a lot of money, obviously, for a lot of people. But these are average people that were saving Bitcoin, by and large. It's not a story of a$1 billion hedge fund blowing up. It's like, okay, that's a much bigger number, but that's like wealthy people losing some of their investment money.

3:12Alex Thorn:This is a lot of everyday Bitcoiners' savings, and the average dormancy of coins is about four years that's been stolen. Again, so these are long-term hodlers, right? This is not big speculators. These aren't people who are bridging to DeFi and chasing yield down the risk curve in the crypto ecosystem. They didn't lose their money gambling on meme coins. And by the way, they also did nothing wrong. They didn't leak their private keys. They didn't post their seed phrase on a bulletin board or on a website. They didn't drop their hardware wallet into the hands of a criminal. They weren't even physically robbed.

3:49right and and i would say all all of those are sad when people lose money no matter and and certainly when it's stolen from them um but these people uh thought they had done

4:01Alex Thorn:everything right and um in many ways i want to tell them that they did do everything right it's not your fault you should not feel ashamed you things will get better so stay positive if you are a victim of the cold card attack please DM me directly on X I will help we can trace your stolen funds and produce forensic reports that you can use to supplement or even in totality for filings for your local authorities and FBI's IC3 in the United States I can also provide a list of other similar anti-fraud and cybercrime prevention organizations in your jurisdiction if you need that it's essential that you report because um there's no chance of recovery if you don't right and and the funds are found and also the nature of the attack is such that the attacker has your private keys and the nature of the vulnerability is such that um eventually all these private keys will be available so everyone will have the public keys so you're going to need to establish your ownership by some way other than cryptography.

5:08Alex Thorn:And one way is to file early and first. To keep your hardware device, that's evidence. They may be able to prove that you had the keys first in the event of a recovery. If you bought coins and float, if the coins that were stolen, you bought from an exchange that had know your customer onboarding, KYC, that will help, right? And so any records you have related to that, please store them. I know that it hurts and it's a sickening feeling. Self-custody is not supposed to end this way. We in the Bitcoin community need to do better educating. And I would also say if you don't feel, if you are self-custody coins, definitely on a cold card, but certainly on any other device, and you don't feel confident that you fully know what you're doing, it is totally fine to send your coins to a crypto exchange or a Bitcoin brokerage like River that you trust until you feel you have the confidence and education to self-custody your own.

6:07Alex Thorn:One last thing I want to say, I've had this block clock over my shoulder here. Chris, how many episodes we've done? Like 265 or something. For all of those episodes, this block clock is made by CoinKite, the same company that made the cold card. And we know now, and I don't devote much time, there are people working around the clock on additional vulnerability detection on software open source and otherwise that impacts the bitcoin world they're working overtime to go ahead and realize that we're in a brave new world with ai enabled cyber and so people are red teaming all of the stuff and and looking and patching vulnerabilities now um it was a coin kite introduced bug that caused this like it is their fault.

6:52Alex Thorn:I'm not going to speculate now about what level of blame. I don't personally believe it was malicious. I believe it was negligence. But I do want to say that this is a beautiful piece of hardware. They made and make beautiful hardware. Apparently their software is terrible. And so I'm going to keep using this block clock because I love it. But I do want to say just, you know, you're lucky that I didn't unplug you block clock and throw you into the fucking Hudson River. Let's get right into it with Bimneta BB. Let's go now to our guest, Bimnet Abibi from Galaxy Trading. As always, Bimnet, welcome back to Galaxy Brains.

7:26Alex Thorn:Thanks for having me. Man, it's an exciting time, as always, in markets and in Bitcoin. Obviously, people probably know about the cold card vulnerability and hack, and I've been covering that a lot on X. And I will just reiterate here, if you haven't reached out to me, if you're a victim, please DM me on X. I can help provide forensic tracing and information that can help you make your filings with authorities. if you are on a cold card device still and you have doubts about whether or not it is secure, please migrate your funds as soon as possible. Even despite that hack and Michael Saylor and strategy selling more Bitcoin this week, we're still at 64K here on the block clock, by the way, made by CoinKite as well.

8:11Alex Thorn:Not a hardware wallet. Yeah. No, Bitcoin is exhibiting symptoms of seller exhaustion in the sell-off that you had in broader equity. it basically held 62. Yeah. And I think you're at the point in the market cycle where it's feasible that you might have bottomed. Yeah. I think the way to think about it is, you know, our Bitcoin target was levels-oriented, but it's also timeline-oriented. And every day now that passes, you are getting to the point where you are one year from the past cycle high. Yeah. So October, early October, I think, gets you there. And so, like, if you're within spitting distance of that kind of, like, timeline bottom and you already had these, like, crazy capitulation events, the MSTR, kind of, like, doom circle fear.

9:01You really couldn't get below 58. Not really. And so the market's starting to look a lot more constructive. I think over the medium term, you know, you're probably meant to, like, start accumulating if that is your kind of view. Yeah, if you have a long-term view. Correct. Right. And I generally, you know, I think even without clarity passing, there's been so much good stuff that's happened broadly in terms of adoption of stable coins with prominent financial institutions, more products, like better kind of understanding of the space, etc. etc., tokenized assets, custody solutions. I mean, all of these big institutions have kind of put their best foot forward on crypto.

9:48And so, yes, Clarity is nice to have. Yeah.

9:52Alex Thorn:But it isn't absolutely essential. I think that's right. I think that's right. We'll talk more about Clarity, too. But the—and, you know, we're recording this on Wednesday, what, August 5th? The clock is up now before August recess. So I think we're not getting anything now until September at the earliest when the odds still diminish. But I agree with that. I think we want clarity to prevent rollback risk from a hostile administration in the future. But for the next two and a half years, you've got agencies that are committed to providing good guidance and relief and protections and regulating.

10:26Alex Thorn:And so we're going to get most of what we need, I think, from them. So I agree. And I think also the market has priced in, like it's priced to perfection on clarity. The market knows it's unlikely to pass. Yes. Poly markets, 25%. So like that's good though. That's good, right? You're not likely to get like a shock if it doesn't pass. Yeah, absolutely. And then some of the other macro kind of factors are also starting to be a little bit more supportive for Bitcoin. By that I mean kind of, you know, there's some doubts over the Fed's credibility. We can get into that a little bit later. But you're having aggressive monetary intervention in markets.

11:11You have certain banks that are super reluctant to raise rates, even though it seems like the appropriate thing to do.

11:18Alex Thorn:They're keeping policy easier than they should. Yeah. And then to go on top of that, U.S. equities are trading really well at fresh all-time highs. So risk sentiment is certainly improving. So the dip in equities that was a Leopold Aschenbrenner cause? There was a lot of things. Well, he was a marker of it happening though for sure, right? But that's over now. Is that over? I think fundamentally the themes that we've seen that have driven AI and AI-related investment higher are still there. And in fact, you could argue that certain signals are even accelerating. It's really hard to get a NVIDIA GPU right now.

12:08Right. Almost impossible. People still need power for these data centers. The token usage forecast is through the roof for the next handful of years. And these hyperscalers, while they're shifting their business models a little bit, They are still increasing their AI capex, and it's actually expected to go even higher next year. And so the biggest and best companies in the world are telling you that they're investing heavily. And to go along with that, the concern was, will you see a return on invested capital? And we kind of got a glimpse into that story with Amazon earnings this week, and they beat, particularly on the AWS numbers.

12:57And so I think the pathway for investment in AI to real returns that benefit shareholders is a little bit more clear to the market. In addition to the AI name, memory prices are still going through the roof. And so nothing fundamentally has really changed. You just had this huge positioning washout. Yeah. But the fundamental theme seems like it's still there. So it was a hiccup. like Nvidia is still going to sell how much of the

13:31Alex Thorn:melt up from before the correction do you think was situational awareness not so much that they're the ones that caused the crash but they might have been aggressively causing the money it's hard to pinpoint one fund some amount they were a big fund though but that's so interesting because for the last basically we had Bitcoin at 84k as recently as April I believe, if I recall correctly. And I know that I do because I can literally redraw the price of Bitcoin. And then obviously Bitcoin sparked, I think, by MSTR's test sale of$32 million worth of Bitcoin. And then we ran all the way back down and did 58, the whole thing at 58 again.

14:15Alex Thorn:We've sort of held there and bled marginally higher. But during that time in what, June and In July, there was a significant minor in the long scheme of things, but a very notable drawdown in equities, right? And Bitcoin couldn't go lower on that. Maybe it had already gone as low. But now you're saying they're back at all-time highs, and Bitcoin's still just pinned in this range, right? I think it's just a matter of time. The fact that it doesn't move up and down 3%, 4 % per day doesn't attract the necessary attention. Close to like the lowest realized vol in a long time. Correct. And so the lack of volatility isn't helping.

14:56And there's also not a great narrative. But I'm a big believer in the fact that narrative follows price action. Yeah. And so the moment, you know, Bitcoin starts taking out a key level or two, you know, folks will be like, why? Maybe I should pay attention again. And they'll be like, oh, the four-year cycle, we've bottomed. Yeah. And, you know, you're having some other, like, you know, stocks at the highest. gold is up like four and a half percent today looks like it formed a bottom as well yeah uh and so i don't think it'll take that much for people to dive back in uh and then you have to think about it from a kind of like a catch-up trade yeah uh kind of standpoint where if you miss this like rebounded ai or you're missing some of the gold move or like you know you don't feel comfortable buying equities at the highs like what's left on the board that hasn't like actually caught up yet And so I think there's going to be a little element of that, especially post, you know, kind of the August vacation, Labor Day vacation stuff.

15:53And so when folks come back, they're going to look at their board. They're going to be like, what looks cheap? Yeah. And I think Bitcoin will certainly have a solid case at that point. But again, like all you need is a good chart and a story in markets. And the moment the chart starts looking good, the story will follow. Let's leave it there. Bim Nettabibi from Galaxy Trading.

16:15Alex Thorn:Thank you so much. Thanks for having me. Let's go now to our guest, Natalia Lee, Galaxy's head of U.S. policy down in D.C. Natalia, welcome back to Galaxy Brains. It's awesome to be here. Thanks for having me here. So we haven't done a Clarity Act episode in a while on the show. You and I haven't in a long time. I did do one with Greg Exothalis and another Washington lobbyist a couple months ago. But one of the reasons we haven't done it is that we've been covering it in written form quite extensively, but also, especially recently, there's really just not much to say, right? We all kind of know what the status is and we've been waiting now since I think at least June for the Senate to set a vote.

17:00Alex Thorn:And that hasn't happened yet as we record on Wednesday, August 5th. Would you give us an update, Natalia, on just what the status of the bill is? Sure. It's quite a fortuitous time for me to be here. I think it's very fair to say at this point, to quote your newsletter from last week, we are really in the 11th hour and sort of the 91st minute of stoppage time for Clarity Act. As of this recording, it's Wednesday afternoon. We have had one bill filed and that one has to do with college athletics. So it's a policy bill, but it's not ours. It's not Clarity. It's not our bill. It's not our bill. What we're kind of waiting for is the forcing mechanism here is the filing of the cloture and the motion to proceed to start the first of what could be two or three cloture cycles.

17:48So it's not just one, right? So what we're hoping to do here is really to just start this procedural vote. And we haven't had that clock kind of come on yet. And so Leader Thun has not filed a cloture and motion to proceed. if he does file tonight, there's still a chance that he does. The soonest we can have this procedural vote is Friday, Thursday being the intervening day for, you know, Senate procedure.

18:13Alex Thorn:So the Friday, though, is August 7th. That is the last day of this, what do we call, working period? As with everything, this working period, this may not be their last working day. So I would just remind folks, you know, I know we've all been very focused on clarity, But there is Senate business before clarity. I feel like every time I come on here. They have a list. And so before Senate leaves for August recess, and they'll come back on September 14th. But before they leave, they want to finish a couple of things. Number one being the continuing resolution to fund the government through December so that we can get past this critical November election period.

18:54Number two, there is a rush to confirm attorney general, Todd Blanche. and then there's also Russian-Iran sanctions legislation that needs to move and sort of that has already been put in motion.

19:05Alex Thorn:I'm not going to like make you explain that to me but like it's don't we already have the authority to do all the sanctions they need? Like they actually need yet another law? Surely they can just go ahead and sanction them already. Anyway, I don't want to get too diverted. Sorry, don't even bother. Don't even bother with that one. I think, you know, there's plenty of things within the sanctions regime that they already have authority to do but there's also kind of a larger package with maybe some additional tariff authorities. And that's coincidentally is kind of the sticking point because some folks don't like that additional tariff authority given what's been happening.

19:38So where the negotiations stand on clarity at this point is, you know, we haven't been covering it on this pod for a while because we've put out a lot of written commentary on it, but also because frankly on the policy side, we're down to just a handful, not even a handful, one handful of issues, right?

19:55Alex Thorn:Yeah, one issue, but it's a handful. One issue, exactly, exactly. There has been a flurry of bipartisan negotiating activity over the past 24 hours. So Republicans and Democrats, the staff, the industry, sort of the folks in the policy space in crypto here in D.C. have been incredible for this whole kind of Congress. But I think especially this month, it's just been nonstop. And so in the past 24 hours, they're trying to put to bed all these technical issues and policy issues that we've been debating, including developer protection, specifically the text in the Blockchain Regulatory Certainty Act.

20:33Some of the specifics of regulating digital commodities, intermediaries and exchanges. There are technical amendments that folks are negotiating that have to do with provisional registration, with state law preemption, with vertical integration, all kind of like technical policy stuff. Right. But I would say the final and the most consequential out of all these issues and, you know, the outstanding point has to do with a compromise around ethics guardrails that apply to any government official that engages with crypto.

21:04Alex Thorn:But including the president and vice president, crucially from a political standpoint, right? Crucially, specifically including presidents. Also including the White House, yeah. And we've talked about this, and I think people are aware that this is the top of the list of outstanding issues. I think it's not clear. I think it's basically, as you said, it's ethics. It's possibly the RCA or what the hawks are calling illicit activity. that issue. That's right. And now it seems like that's basically it. There's rumblings, as we've seen still from some Republican senators that they've said publicly on yield, stablecoin yield.

21:47Alex Thorn:Seems to me like if you actually understand the issue deeply, like it's not like the quote unquote Tillis-Alsobrooks compromise is like, it's pretty good. Like it's, I wouldn't, I'd bet that that's not what holds up the bill ultimately. But we can't really talk about this moving forward until there's an ethics provision that can get 60 votes, right? That's like really the core blocker. And last week, I believe it was reported that on Thursday morning, July 30th, this new compromised language or new negotiated language by Tillis and also Brooks and Gallego and some others, right, was sent to the White House.

22:26That's right.

22:27Alex Thorn:But I have yet to see, and maybe I missed it, I have yet to see any reaction from the White House, at least publicly, right? They have not publicly said whether they support it or not? No, that's right. That's right. It's last that we've heard that the ethics, language, and compromise went into the White House. They've received it. Message received. Message has been received. There has not been, to our knowledge or to my knowledge, kind of a response or a counter to that. And there hasn't been a public one, to be clear. There's been no public statement or like, you know, rejection of it. Well, I'll tell you more.

23:00There hasn't even been a public release of the text of the compromise, right? Because the idea is to, you know, best deals are done behind closed doors. So the idea is something went into the White House. I cannot tell you exactly what went in. Right. And then hopefully there were supposed to be a response or a counter to that or an acceptance. We don't know if that's occurred.

23:20Alex Thorn:Right. And we have not heard that that has occurred. The vote basically can't be called unless, at least behind the scenes, someone has received a response to this, right? Because it doesn't seem likely to me that Leader Thune will call the vote with not knowing the status of this, let alone it resolving unfavorably for the bill's prospects. But you certainly can't call it without knowing the status of the negotiation here, right? Right. You're kind of looking at the root cause of the issue here. So it's would Leader Thun call a vote that fails and fails with a very low count of senators who vote for it?