Hey, it’s Gavin with your weekly recap of all things internet & money.

This week in fintech: A Russian court slaps Coinbase. Blackrock gears up to launch an Ether ETF. Stocks fly as inflation cools. And more.  

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STORIES OF THE WEEK

1) Kremlin vs Coinbase 🇷🇺

Coinbase has found itself on the wrong side of Russian law, with a Moscow court slapping the company with a 1 million ruble fine. Before you worry about imminent bankruptcy, it’s worth noting that 1 million rubles amounts to about $11,000 dollars. So, why did I want to talk about it?

The court found that Coinbase was guilty of failing to localize the data of its Russian clients. What does that mean? Russia has fairly strict data localization provisions, effectively mandating that companies process and store certain data on Russian citizens domestically, in Russia (rather than on some server racks in Seattle or Singapore). 

In 2022, Coinbase declared in a blog post that it fully supported sanctions against Russia, blocking thousands of wallet addresses linked to the country. However, Coinbase isn’t the only company that has run afoul of Russia’s rules on data localization. Airbnb, UPS, Spotify, Zoom, Tinder, and Twitch have all been fined. 

• 📊 Digits: Coinbase was hit with a fine of 1 million rubles (~$11,000)
  

• 💬 Words: “Failure by the operator, when collecting personal data, to fulfill the obligation to record, systematize, accumulate, store data of Russian citizens” — Moscow court ruling

What it means → 

The fines Coinbase faces amount to peanuts in the grand scheme of things. 

But they point to a large (and growing) challenge for companies seeking to operate across borders in an increasingly fragmented world. 

Early in my career, I worked at part of the White House called USTR, responsible for negotiating and implementing trade and investment policy for the U.S. government. This was back in the mid 2010’s, but even then many countries were increasingly asserting control over digital information within their borders. This wasn’t just something that increased compliance costs for businesses. We viewed the trend as a challenge to the very concept of a free and open internet, where data can flow unimpeded across national boundaries. 

Today more than ever, it feels like that vision for a free and open internet is under attack from all fronts. Digital localization requirements, prohibitions of free cross-border data flows, and source code review requirements are the new tools that countries wield to carve off their own national corner of the internet. Even the Biden administration has stepped back from digital trade policies that the United States has long espoused, claiming the need to find more “policy space”. In short, they are worried that commitments to a free and open internet will prevent them from enacting stricter regulation on big tech. For example, if the U.S. signs a global agreement in which countries promise not to require companies to disclose source code for software, would that lead us open to international litigation if we start requiring AI platforms to share LLM training data? Probably, hence the concern.

This may seem like the realm of niche (and boring) trade policy expertise, but it is going to continue to have real world impacts. The internet brought the world together, but as governments continue to regulate the internet in their own ‘national interest’, the impacts of differing regulatory regimes across hundreds of companies runs the risk of pulling us further apart.

2) BlackRock’s Ether ETFs 📈

The crypto world is witnessing yet another pivotal moment, this time involving its beloved Ether, the currency of the Ethereum blockchain. BlackRock, the global asset management giant with over $10 trillion in assets under management, is gearing up to launch an Exchange-Traded Fund (ETF) tied to Ether's spot price. 

• 📊 Digits: Upon the announcement, Ether jumped 7%, eclipsing $2,000 for the first time in 7 months
  

• 💬 Words: “You could point to applications built on ethereum that have hundreds of thousands of users on a daily basis; that just resonates with financial advisors at a level” – Matt Hougan, chief investment officer of Bitwise.

What it means → 

The approval of a spot Ether ETF is largely viewed as a positive. Why? 

It drastically increases access to the asset class for large pools of capital like pension funds, family offices, and RIAs. That said, the ETF represents a deviation from the core ethos of sovereignty and self custody that underlies blockchain technology. With the introduction of the ETF, institutions will be subjected to significant counterparty-risk and credit-risk. (Counterparty risk, in particular, has played a key role in every major crypto collapse and fraud since the technology's inception). 

The quip “Not your keys, not your crypto” is used to explain the fact that trusting a third-party custodian is akin to relinquishing ownership all together (crypto-natives praise self-custody wallets as the solution). Of course, with the regulatory oversight and disclosure requirements required to issue and maintain ETFs, you can argue that investors will be protected. In the SECs defense, there have been no counterparty or credit issues thus far with the already approved Bitcoin and Ether futures ETFs. 

Despite concerns around market manipulation, it is likely that the SEC will approve the BTC and Ether ETF applications within the next year. This SEC approval will mark a new chapter for crypto, where currencies like Ether are not just fringe elements but growing mainstream fixtures of the global financial system. The potential integration of a crypto asset by an institution as influential as BlackRock could mark a significant milestone in how digital currencies are not just regulated, but also perceived, by the market.

BYTE OF BLISS

From Senator Markwayne Mullin (R-OK), a quote you probably didn’t think you’d hear during Senate testimony:

Hope you enjoyed this week’s episode. As always, let us know if there’s anything you’d like us to cover next week.

Gavin + Malcolm