Crypto Enjoys a Landmark Moment as Congress Greenlights Mainstream Adoption. Now the Industry Has to Prove It’s Deserved.
Plus, defense tech wins with Trump's big bill & fresh tax breaks for VCs
The Week in Short
Crypto gets fully integrated into the financial system with new friendly legislation. Defense tech startups including Anduril and Saronic poised to take a piece of the $150 billion in new military spending.
Behind the paywall: the 15 hottest defense-tech startups, OpenAI’s new agent, fresh tax breaks for VCs, Mira Murati’s new funding, and Substack goes unicorn.
The Main Item
‘Crypto Week’ Kicks Off a Promising Yet Dangerous Era in Global Finance
The Trump Administration this week delivered on a big piece of a highly consequential campaign promise when Congress passed the first of two bills that create new rules for the crypto industry, giving it the invaluable endorsement of the U.S. government.
The GENIUS Act, which governs stablecoins, now awaits Trump’s signature, while legislation setting broad rules for crypto assets passed the House on Thursday and will now be taken up by the Senate. (It faces some hurdles there, though sponsors are optimistic.)
Crypto investors and entrepreneurs, who despised Biden-era regulations and provided hundreds of millions of dollars to help elect Trump, were thrilled.
Yet the action in Congress this week also marks the culmination of a grand compromise, or even a surrender, on the central promise of crypto: a new type of self-governing global financial system that would operate outside the purview of central banks.
Crypto, and blockchain, are quickly becoming a part of the established system, not an alternative to it. The overthrow of the dollar and other “fiat” currencies will have to wait for another day.
It’s a bit analogous to the fate of the open-source software movement, which back in the 1990s envisioned a world of free, shared, collaboratively developed software that would provide a liberating alternative to the rigidly controlled and expensive universe of Microsoft and IBM. Now, open-source code is a crucial building block for the tech giants’ walled gardens — and an investment opportunity in its own right.
For crypto, the institutional embrace brings big opportunities, along with new vectors of risk.
For crypto punters in Silicon Valley, it’s a very worthwhile tradeoff. Stablecoins will have specific guidelines to make sure they are properly collateralized and the like, clearing the way for a wave of fintech innovation. If and when the second bill becomes law, issuing crypto tokens will no longer be automatically viewed by the SEC as the equivalent of selling stock, with all the attendant requirements.
As the mainstreaming of crypto proceeds, it’s helpful to think about the industry in three distinct but interrelated categories.
Bitcoin has established itself as a “store of value” akin to gold and implanted itself in the public markets, especially with the approval of Bitcoin ETFs early last year. Bitcoin now has a total market cap of $2.35 trillion, and a large and growing ecosystem of exchanges, wallets, and other tools that service it.
The second segment is the large universe of startups and others that are pursuing crypto-currency and blockchain-based innovation, especially in financial services. The current mania over stablecoins — industry pioneer Circle has seen an incredible 8X spike in its share price since its June IPO — is based on the belief that crypto-currencies pegged to the dollar are destined to play a central role in rewiring the global money system.
Major stablecoin and crypto-infrastructure players including Ripple, Coinbase, Block, Revolut, Robinhood and Binance also look set to ride that wave: the dream of crypto replacing the global financial “rails” controlled mostly by SWIFT, VISA, and Mastercard lives on. So does the vision of a world with self-executing smart contracts, robust micropayment systems, and new approaches to collective action, all enabled by the technical power of the blockchain.
Still, leaving the recent euphoria aside, blockchain companies have collectively had a tough time since the crypto meltdown of 2022, and fresh fundraising remains muted. In truth, revolutionary crypto applications have been more of a talking point than a reality for years now, despite all manner of trials and experiments. Innovators’ big promises will now be put to the test.
The third segment of crypto is all about crime.
When it comes to actually using crypto-currencies directly for commerce, there are still only three substantial applications: buying other crypto currencies, buying drugs or other illegal goods, and shielding transactions from the prying eyes of tax collectors and the police. For all the hype around Circle, it’s still the number two stablecoin behind Tether, which is based offshore and widely used for illicit activities.
Worse, President Trump himself has embraced the scam dimension of crypto, marketing a memecoin that functions only as a financial expression of loyalty, or a bet that the Ponzi is still in an early stage. His family company has launched its own stablecoin, also a mechanism for buying the President's favor.
In a gross display of fecklessness, Congress agreed to exempt the President from the GENIUS Act’s ban on Congresspeople and other senior government officials selling their own crypto tokens. (With luck the Senate may yet revisit the issue in the second crypto bill.)
Crypto entrepreneurs and investors can (and mostly do) try and steer clear of the illegal or brazenly scammy aspects of crypto, and many are privately critical of Trump’s shameless personal enrichment. Only a few brave souls have been willing to call out the President publicly.
Laying low is not going to be a solution to the crypto-crime problem in the end though, because “mainstream” crypto and its shady cousins are closely interrelated. Tools and technologies like wallets and exchanges might equally serve Bitcoin treasury operations, fintech innovators, and criminals. If a large crypto enterprise collapses due to illegal practices, the contagion can be immediate and devastating; just ask FTX’s counterparties.
Importantly, the new laws do not “deregulate” crypto, and much will depend on the posture of regulators, and how aggressive they are in rooting out wrongdoing. We see the logic in loosening restrictions on cryptocoin offerings, for example, but there are very good reasons that stock sales are regulated to protect investors.
It won’t take too many high-profile coin frauds to scare away the masses, as the NFT bubble showed pretty clearly. It also seems questionable whether highly manipulated memecoin “markets” can stand the test of time.
The scary macro issue is whether absorbing crypto into global finance is creating massive systemic risks. The value of Bitcoin is driven entirely by peoples’ belief in the future value of bitcoins; it’s a bit like gold in that regard, but you can’t even make jewelry out of it. Bitcoin’s history of extreme volatility, and the opacity surrounding who owns large chunks of the currency, don’t offer much comfort.
With the advent of bitcoin ETFs and public companies whose only business is buying bitcoins, the cryptocurrency is more widely held than ever, which should bring more stability. It also brings the risk that a crypto price collapse could stagger the global banking system.
The final arguments over the Trump crypto agenda may yet involve concerns over his personal activities, but so far the bigger stumbling block has been an effort by a few hard-right legislators to bar the Federal Reserve from issuing a digital currency.
In some sense the holdouts are mounting a defense of the early promise of crypto as an anti-government alternative. Yet the fact that the opposition to passing a bill without an express prohibition on a central bank digital currency is led by Marjorie Taylor Greene, not a person known for her forward-thinking or sophistication about finance, is nothing if not a definitive signal on which way the industry is going.
It’s all one big fintech party now. The establishment has subsumed crypto.
Newcomer Podcast
The Moments that Matter from Cerebral Valley AI Summit in London
Fresh off the heels of our Cerebral Valley AI Summit in London, Eric and his co-hosts Max Child and James Wilsterman dive into which topics stood out most at the event.
The models vs applications debate is back on the table, Uber’s decision to spin off self-driving was called into question, and Figma laid out its AI strategy just days before its S-1 filing dropped.
Two Big Charts
Trump Bill a Cornucopia for Defense Tech Startups
If there’s one sector in the startup ecosystem that stands to benefit very directly from the early July passage of President Trump’s massive budget bill, it’s defense tech.
The legislation includes $150 billion in targeted military spending that’s tailor-made for Silicon Valley’s fast-growing defense and space companies.
A big chunk of the funding is allocated to development and procurement of unmanned vehicles, which are a focus of big-name defense-tech startups including Anduril and Saronic. It also allocates $24.4 billion for integrated air and missile defense — the “Golden Dome” that President Trump has been pushing for to mimic Israel’s Iron Dome.
Here’s a breakdown of the over $150 billion in new defense funding:
The fresh defense funding is even classified as “mandatory” spending, meaning it’s not subject to government shutdowns or any restrictions in the continuing resolutions often used by Congress, said Teresa Carlson, president of the General Catalyst Institute, the firm’s internal organization which handles global government relations.
“The OBBB provides the new defense industrial base the opportunity to have established prime contractors and transformative startups partner together to solve national security’s biggest challenges,” Carlson said in a statement to Newcomer. Startups that win contracts will be able to rest easy knowing the funding will be stable.
But outside of budget line items, the bill also codifies tax incentives for research and development and manufacturing that will serve defense companies well. One key provision is the accelerated deprecation benefit, which will allow anyone building equipment to immediately deduct the full cost of eligible capital investments in the year they are put into service. Defense tech startups building any type of hardware will quickly reap the benefits of this new policy.
Another financial perk for startups comes from making regional “opportunity zones” with tax incentives permanent, said Gradient Ventures general partner Darian Shirazi. Much of Long Beach, California, is designated as an opportunity zone and is home to several fast-growing space startups like True Anomaly, Rocket Lab, Vast, Relativity Space, and JetZero.
Outside of drone and munitions makers like Anduril, Saronic, and Shield AI, robotics startups that cater to advanced manufacturing needs — the category includes Cobot, Standard Bots, Re:Build, and Senra — are poised to get more work from the government. Software companies that build models for defense systems, like PhysicsX and Nominal, are also in a good place.