Crypto Week Kicks Off in Congress, Will Tesla Invest in xAI? & Google’s $2.4B Windsurf Deal

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Today's number?

10%.

That's how much more money people spend at restaurants when classical music is being played in the background.

Funnily enough, it is also how much less money people spend on food after taking GLP-1 drugs.

Put another way, we have found the solution to McDonald's problems.

It's Mozart.

Welcome to Profit Markets.

I'm Ed Elson.

It is July 15th.

Let's check in on yesterday's market vitals.

The major indices all rose as Trump threatened to impose tariffs of up to 100% on Russia unless it agrees to halt hostilities in Ukraine within within 50 days.

The Nasdaq reached a record high.

Bitcoin also hit a new all-time high above $123,000.

We'll talk more about that in a second.

And the yield on 30-year treasuries hit its highest level in more than a month as investors awaited June's inflation report do this morning.

Okay,

what else is happening?

Bitcoin hit a record high yesterday of $123,000.

It's up 28% year to date and 100% in the past year.

This rally is coming as three pieces of pro-crypto legislation make their way through the House, emphasizing the Trump administration's pro-crypto agenda.

The House Committee on Financial Services even officially decreed that this week is crypto week in a statement that outlines their quote efforts to make America the crypto capital of the world.

So a

great week for Bitcoin and the crypto community is understandably very excited right now.

Big rally happening in Bitcoin.

Now, why is this happening right now?

Well, one piece of it that we should recognize is the dollar.

As we know, the dollar has fallen 10% so far this year.

It's the worst start of the year since 1973 for the dollar.

So since we are looking at the dollar price of Bitcoin, when the dollar falls in value, that means that there are now more dollars for every Bitcoin.

So that is partly why we're seeing this rise in the value of Bitcoin.

If we were to look at the price of Bitcoin in, say, Euros, for example, then you will find that actually this rally is a lot less historic.

If we were to look at the price in Russian rubles, which is the best performing currency of the year so far, that actually Bitcoin has not hit a record high this year.

It's actually down since the beginning of the year.

So just the first point, a lot of this has to do with our perspective.

From an American perspective, Bitcoin is looking really strong, but you also have to realize that that is also because the US dollar is really weak right now.

Now, does that mean that the declining dollar is the only thing that is driving this Bitcoin rally?

No, there are other forces at play here that are adding to this demand for Bitcoin.

And one of the biggest forces is this new crypto regulation that we're seeing from Congress.

So what is that regulation?

Well, there are three main bills.

We have the Genius Act, we have the Digital Asset Market Clarity Act, and we have the Anti-CBDC Surveillance State Act.

Now, what do those three acts actually do?

Well, here is Hilary Allen.

She is a law professor at American University.

She's going to break it down for us.

So, what these do in many ways is take apart regulatory regimes that have been in place for a long time to protect consumers, investors, things like that.

So, for example, there's been banking regulation for a long time that says that only banks can accept deposits.

But the Genius Act says that you don't have to be a bank to issue a stablecoin, which is the functional equivalent of a deposit.

The Genius Act also takes apart the separation between what we had banking and commerce.

So it used to be that Walmart could now open a bank, but Walmart will be allowed to issue a stable coin.

And more to the point, so will Meta, so will X.

So we're taking apart protections that I think have stood us in good stead for a long time.

Similarly, the Clarity Act, the goal here is to basically

make a big hole in the securities laws so that the crypto industry doesn't have to comply with the securities laws.

But the problem with that is not only is it problematic for the crypto industry to enshrine the fact that they can issue things to investors without registering with the SEC, without having to disclose financials,

without having the panoply of investor protections that the SEC provides, it creates this loophole basically on the basis of whether you use a blockchain or not.

So there's an opportunity there for vast swathes of the financial system, the traditional financial system, to migrate into

this new regime by using a blockchain.

And that is going to be highly problematic for investors, even if they aren't investing in crypto.

The Anti-CBDC Act is something that I think has gotten a lot less attention.

It basically sort of wants to rule out the possibility of the Federal Reserve introducing its own central bank digital currency on some kind of blockchain.

Frankly, the thing to be really careful about with this legislation is depending on its final form, it could actually hobble the Federal Reserve in other ways if it restricts them from engaging in technological improvements and things like that.

How much of a leg up do these regulations actually offer the crypto industry?

industry?

So it's a good question.

So Bitcoin is, in many respects, a Ponzi-like asset.

It has nothing behind it.

Its value only comes from being able to attract more investment.

And the name of the game lately has been trying to encourage institutional investment to get sort of the biggest investors to play in this space.

But part of the appeal has been that These assets are not regulated and others are.

So the underlying blockchain technology itself is pretty clunky, doesn't scale well.

If that was your only advantage, you wouldn't be doing well as a business if the blockchain technology was your only competitive edge.

But

what has happened is by using this blockchain, a lot of people have gotten away with not complying with the rules that everybody else has to comply with.

And that is creating a competitive edge.

So one of the things I've been wondering about is

with these loopholes that these pieces of legislation are opening up that aren't just for the crypto industry, but will attract people from other parts of finance as well, will that actually be counterproductive for crypto?

In other words, if you can get any stock without having to comply with the securities laws, does Bitcoin retain its appeal?

And so I wonder if this might end up in the long run being counterproductive for the crypto industry.

Well, Hillary makes an important point here, and I'm glad she brought it up.

And that is that the crypto industry seems to be a little bit too excited by a piece of legislation that could actually come back to bite them.

And I would add something on top of that.

And that is that while, yes, this regulation recognizes digital assets as an asset class, yes, it's supposed to be pro-crypto, but it also brings in several laws that the crypto industry was originally designed to not comply with.

For example, one of the most important themes in crypto is the abolition of this thing called KYC or know your customer.

And this is basically a law in banking that says that you have to know the identification of the customers of your bank.

Crypto was supposed to get rid of that.

That was one of the original theses of crypto.

But the Genius Act says that actually, if you want to issue a stablecoin, you have to comply with KYC.

Put another way, this is basically just regular banking all over again.

At the same time, crypto is also supposed to get rid of the dollar, or at least untether from the dollar.

Well, the Genius Act says that actually all stable coins have to be backed one-to-one with US dollars or with US treasuries.

Again, there goes the original thesis of crypto.

In fact, a lot of this new regulation is just reiterating things that we already know.

The Clarity Act, for example, clarifies that Bitcoin isn't a security and therefore it should not be regulated by the SEC.

That's the big change in that regulation.

But it's funny, the SEC already clarified that.

In fact, that's exactly what Gary Gensler said when he was head of the agency.

So what does this even change for Bitcoin?

Claire spoke with Corey Freyer, a former advisor to Gary Gensler, who offered a perfect anecdote that really captures the futility of all of this regulation.

There's a great quote from Bradley Garlinghaus.

He's the CEO of Ripple.

And in 2017, before he entered into litigation with the SEC, he said on a number of interviews, podcasts, public

appearances, something to the effect of regulatory clarity is just a euphemism for we want to ignore SEC regulations.

So look, we're not just going to ignore it.

The Bitcoin rally is legit, no question about it.

But the forces that are driving that rally are, in our view, less legit.

You've got, on the one hand, a dollar that is declining and increasing that price of Bitcoin, and at the same time, regulation that is barely regulating.

So yes, today one Bitcoin is now worth more than $120,000 US dollars.

But besides that number,

we don't see anything new here.

Tesla will be holding a shareholder vote on whether or not the company should invest in XAI.

This comes just after Musk's decision to have SpaceX invest $2 billion in his AI startup, which was also merged with X at the beginning of this year.

This vote may prove difficult, as shareholders have already expressed concern regarding Musk's activities outside of Tesla.

Tesla stock closed up just over 1% yesterday on news of the vote.

Okay, so Elon wants Tesla to invest in XAI.

How much does he want to invest?

We don't know the exact number yet, but we do know the valuation that XAI is currently seeking, and that is $200 billion,

which would make XAI more valuable than Blackstone, more valuable than Uber, more valuable than ATT.

Put another way, this isn't just like a little angel investment into a small little AI startup.

This is a very significant investment.

This would be a very significant decision by the shareholders of Tesla, who are already, by the way, in kind of a precarious position.

I mean, the stock is down nearly 20% year to date.

Sales are in major decline.

Profitability is shrinking.

So to invest in this new AI company while you're strapped for cash seems to be a slightly strange decision.

Why would you do that right now?

Well, of course, the one detail that I have left out that might explain all of this is that XAI isn't just any AI company.

XAI is Elon Musk's AI company.

He created it.

He owns it.

And as the owner of that company, he has every incentive to sell shares in XAI for as much money as possible.

So what do we have?

We have the CEO of a public company asking his shareholders to buy shares in his other company, which seems to us to be a conflict of interest, but is it?

We spoke with Charles Elson, founding director of the Weinberg Center for Corporate Governance at the University of Delaware to find out.

Full disclosure, yes, Charles is my uncle.

We've had him on the podcast before.

We are related, but don't let that color your opinion of him.

He is a leading expert in the field of corporate governance, and we are very happy to have him.

People originally invested in Tesla, so it's said, because of the AI potential of Tesla.

It wasn't just a car company.

It was a lot more.

And about a year or so ago, as I recall, Mr.

Muss said, well,

I will develop AI for this company, but you're going to have to give me a huge chunk of the company, Tesla, for me to do this.

Well, that raises conflict of interest

issues because he said, if you don't,

I will set up my own AI company.

And that is what is known as the corporate violating something we call the corporate opportunity doctrine, or possibly, which says that if you're an officer or director of a company and an opportunity, business opportunity comes to your company, you have to allow your company to have it first before you look at it.

But here,

he's saying, well, I will take it on my own,

unless you give me a bigger chunk of the company that I've already invested in.

You invested in too, Tesla.

And the idea is that you can't, an officer or director has a duty of loyalty to their own company, and you can't take an opportunity of the company for yourself and not allow the other shareholders to share in it.

Now, the resolution of this typically is the shareholder would bring a suit and said, look, this is a corporate opportunity.

You can't take it on your own.

It has to be shared by all of us.

That was why we invested in this company.

But in this case, he moved the company to Texas.

Texas now says for you to bring a suit like that, a derivative suit, you have to have at least 3% of the stock of the company itself.

Well, a company as big as Tesla, I doubt if anyone other than Mr.

Musk and maybe one or two others, a few others, have that kind of position.

So the opportunity to bring a suit in Texas is basically almost impossible on this.

So what do you do next?

Well, he comes back and says, okay,

I'd like, I'll give you a chance to invest in my new company.

All right, that makes some sense if you think about it.

But for him to have the capital to invest in that company, as he did with X, he'd have to probably sell some Tesla stock, which he doesn't want to do.

So instead, he asks Tesla to fund his new company, which obviously he's going to control.

And ultimately, I would expect that the shareholders would take less of the gains and certainly have no control

than if the Tesla company itself had made the initial investment.

It's called having your cake and eating it too.

Is there any precedent for this?

Have you seen anything like this before?

This is one for the books.

Has it ever existed like this?

I don't know, perhaps somewhere, but I've never heard of it.

And it's extraordinary.

It's very clever.

But the question is, ultimately, in our system, if you take the public's money, your responsibilities change.

If you owned 100% of Tesla, as you would have other companies has, you do what you wish.

But this is different.

It's a public company, and you have taken other people's money.

And that's where your responsibilities change.

And that's why we have such tight guardrails around this sort of thing, a a la corporate opportunity, because if you didn't, people wouldn't invest.

Or certainly they wouldn't invest in equities.

They would simply

use debt, which is not a great way to start a new business.

And that's the problem.

This has implications, not just for Tesla, but you think about it, the entire system that we have for investing.

And if this

goes as I guess he wishes it will go, it has profound implications for other businesses.

That was Charles Elson, founding director of the Weinberg Center for Corporate Governance at the University of Delaware, or as he is known to me, Uncle Charles.

Well, if there's anyone out there that still believes that this is a good fiduciary decision, that he is just doing this for the good of Tesla shareholders, I'm not sure how you could believe that after what Charles just told us.

But I would also just encourage you to simply examine the company that they're buying.

And that is an unbelievably expensive company with a very underwhelming business.

I mean, this is the company whose chatbot just turned into Hitler last week.

This is a company that is burning through a billion dollars per month.

This is a company that is competing with Gemini and OpenAI and all of these other extremely strong AI companies.

They've got 11 times fewer users than Gemini, and they've got 17 times fewer users than OpenAI, and yet they are seeking a valuation of $200 billion,

which means they're going to be trading at 400 times forward sales.

And you compare that to OpenAI, which trades at 24 times forward sales.

So this company is just way overvalue.

And then you realize the only reason it's priced that high is because the primary investor has been Elon Musk.

I mean, as we covered a few months ago, Elon has been investing his own money into his own companies at ridiculously high valuations, basically in order to make the price look normal.

He did it with X at $45 billion and he's doing it again with XAI.

And now he wants Tesla shareholders to just join him along for the ride.

So if Charles's comments didn't confirm it for you, I would hope that just looking at the business itself might confirm it.

This is a total and utter conflict of interest.

So unless the Tesla shareholders get some gigantic discount here, unless they get those XAI shares for literal cents on the dollar, then there's just no question.

This investment makes no sense.

After the break, another chapter in the AI Aqua Hiring Story.

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We're back with Prof G Markets.

Google is set to pay $2.4 billion to license technology from Windsurf, an AI coding assistant platform, as well as hire multiple top researchers, including Windsurf's CEO.

This comes just months after it was reported that OpenAI was acquiring Windsurf for roughly $3 billion.

That deal fell through, though, due to conflicts with Microsoft.

That's a whole other story.

But then, Google swooped in and bought the technology and the CEO.

Then, yesterday, the saga continued when it was announced that Cognition, another AI coding startup, would be acquiring what's left of Windsurf.

The exact terms of that deal are unclear, but a statement from a co-founder of Cognition confirms that all Windsurf IP, its branding, its product, its customers, and all remaining employees will become a part of Cognition.

Additionally, all Windsurf employees will, quote, participate financially in this deal.

But like I said, the deals are uncertain.

I did exchange some DMs with the new CEO of Windsurf, Jeff Wang, who I've had on the podcast and who I think is fantastic.

I asked him for an update and he said, quote, it's been a day.

So we don't know that much right now, but we do know that Google paid $2.5 billion for this licensing deal.

And this brings us to a theme that we have discussed before.

And that is the takeover of AI by big tech.

This strategy where instead of buying up competition and triggering antitrust enforcement, you just invest in these AI companies and then attach all of these crazy strings that result in something very similar to just owning the company.

We've seen it with Microsoft and OpenAI.

We've seen it with Microsoft and Inflection, Meta and Scale AI, Amazon and Adept AI, Amazon and Covariant, Google and Character AI.

The list goes on.

In each case, big tech invests in the company and then they essentially take control of that company.

And so now we're seeing a new twist in the story, but ultimately the same story.

Google is paying $2.5 billion to, quote, license the technology from Windsurf and take along with it the founder and CEO.

If that sounds like an acquisition to you, channeling my inner Scott Galloway here, trust your instincts.

This is an acquisition dressed up not as an investment, but now as a licensing deal.

But it's the same story.

And it's becoming almost comical how frequently this is happening in AI.

There is not one reputable AI startup in the world right now that is not in some way dependent or controlled by big tech.

Big tech has compromised the entire industry.

And we're now devolving into an ecosystem where competition just doesn't really exist anymore.

I mean, you could be a great AI company.

You could be building models even better than Gemini, better than Llama, better than ChatGPT.

But the reality is that sooner or later, you're going to get a knock on the door.

And one of Mark Zuckerberg or Saty Nadella or Sunder Pachai is going to show up with terms of your surrender and also the biggest bag of money you've ever seen in your life.

And they're going to say, take the money, join us.

And you're not going to say no.

Because these companies, they've just gotten so rich and so powerful that they can pay you anything to turn you to the dark side.

And to the dark side, you will turn.

We've seen it over and over again during the biggest technological revolution in the past 20 years at least.

And all of the value is being accrued to a handful of multi-trillion dollar companies.

In this case, Google takes the technology of Windsurf.

They also take a bunch of the researchers and the CEO.

And we'll see what happens with this wrinkle in the story where cognition comes and buys what's left.

But the solution here is simple.

The FTC and the DOJ need to start doing their job.

I mean, the point of these agencies isn't just to review acquisitions, it's to prevent monopolization.

And as we're seeing, there are many ways to monopolize that don't mean just acquiring a company.

I mean, you can monopolize by building one of these partnerships or investing or taking a non-observing board seat as Microsoft did with OpenAI or licensing the technology, hiring the CEO, et cetera.

It all amounts to the same thing, and that is unbridled and unprecedented power.

So I think this is the moment.

This is the time for the FTC to step up and get to the root of the problem here in big tech.

Stop waiting around for an acquisition to trigger the review.

Just trigger the review now.

And I think the evidence will be pretty clear.

This is anti-competitive behavior and it's time to go to court.

Okay, that's it for today.

Thanks for listening to Profit Markets from the Vox Media Podcast Network.

I'm Ed Elson.

I'll see you tomorrow.

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