Crypto News Over Nonsense Highlights

With the growth of my crypto newsletter, Crypto News Over Nonsense, I thought I'd pick out a couple of highlights from the last couple of weekly editions. The summer has been a busy in crypto thanks mainly to Facebook.

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So here are the highlights

Story 1: The Facebook Libra Coin Announcement

Facebook plans to launch its own cryptocurrency

The announcement of the project was made on June 6 but this week we got to learn details of what FB is calling Project Libra.

Cointelegraph has a good story on what to expect from Project Libra, with features including:

  • A separate non-profit foundation set up to oversee the cryptocurrency probably in Switzerland since they registered the name Libra Networks there
  • A no transaction fee coin to use across all their platforms meaning FB, Instagram, & WhatsApp. WhatsApp may be the key due to its huge global popularity.
  • Will be a stablecoin pegged to a basket of (mostly Western) currencies
  • Will use proof of stake model and validators cost $10 million to buy the license and operate.

Companies like Paypal, Uber, and Visa have already signed up to be validators for the FB Coin.

Two Opposing Takes on Project Libra

In one of the funnier takes on Crypto Twitter about this project, Open Privacy Exec Director Sarah Jamie Lewis helps boil down the primary criticism of this project.

While comical, in many ways this outlines what many in the crypto-economy think of FB and some of the others involved in this project.

One of my favorite crypto-legal go-to people, Caitlin Long, wrote a great piece for Forbes on what she expects from Project Libra.

Here’s what Caitlin has to say on the project. She makes 6 predictions.

  1. FB intends to market the product primarily to developing countries and in those countries it will be a force for good
  2. FB will pay interest to its Libra holders. And it is this action by FB that will finally lead to calls by the people to stop corporate subsidies for US banks. FB could earn substantial interest on its deposits and to avoid another potential hot button issue with the public Caitlin expects FB to share some of this with holders of the currency.
  3. The FB foundation will become a huge power in global capital markets. They are forming a separate foundation to lessen anti-trust claims as well as claims of decentralization. Yet, the foundation can become powerful on its own….and fast.
  4. FB will face regulatory uncertainty and this will show the public how outdated many financial regulations are.
  5. FB’s regulatory reporting program will open all kinds of interesting discussions. Particularly things like how many fake accounts are on the network, financial privacy and overseas asset reporting (which could be a big issue for them given how global they are as a company).
  6. FB’s cryptocurrency will end up being a trojan horse that benefits Bitcoin.

Our CNON Take: This last point of Caitlin’s predictions is the strongest one in my mind and what I thought from the beginning when I heard this news from Facebook. I also believe in her point #1. In developing countries with unstable currencies, there’s a good chance a FB stablecoin is more stable and therefore a force for good.

Back to point #6, I can’t see any way that a FB Coin is not tremendously bullish for Bitcoin. Here are my reasons:

  • FB is going to spend HUGE resources of time, money, and content on expensive online real estate on their platform to educate people about cryptocurrencies in general and theirs in particular. This is bullish for the entire crypto-economy.
  • FB is going to prove the training wheels to many people all over the world on sending money electronically without a bank or FI involved. And people will love it for its speed, low to no fees, and lesser bank nonsense. Again, super bullish.
  • Exchanges will be quick to include Libra and the ability to exchange it for Bitcoin or other cryptos. This will be the easiest on-ramp to cryptocurrency we have seen. Making it easier to buy = Bullish
  • After trying the pretender, they will want the real thing. In fact, I said this to Caitlin and fellow early Bitcoiner Hannah Rosenberg of Velas Commerce and co-founder of the Chicago Bitcoin Meetup

FB coin will be centralized, Bitcoin is not. Bitcoin is scarce, FB coin is not. After seeing all the benefits of using online currency, people will advance and want the best and safest ones. And that means Bitcoin. It might mean some others too but it DEFINITELY means Bitcoin.

Story 2 Libra Libra Everywhere

The biggest story of last week, the Facebook announcement of stablecoin Libra is an even bigger story now as details start to come to light. We looked at some initial details in last week’s report and now we know even more.

  • Using a proof of stake model
  • Will be a stablecoin whose value is pegged to a basket of Western currencies and low-risk securities like US Gov’t Bonds
  • They will issue a security token separate from the Libra coin called the Libra Investment token that the validators will purchase to help run the network (with their $10 million buy-in) and will be available to accredited investors too (eventually)
  • Many of the validators have been named already and they include NGOs like Kiva, who is not having to pay the $10 million but will be staking with a validator
  • Their wallet will be a custodial wallet, like when you leave your coins at Coinbase instead of moving them to a wallet and it’s called Calibra.
  • Libra will be open source under Apache 2.0 and its consensus is BFT (Byzantine Fault Tolerance) like Tendermint

Now we will dig a little deeper since we have much more information than we had a week ago……

Technical Features of Libra

I’m not technical although I try to understand at least some of the tech backbone of why Bitcoin is the way it is. Here are 2 of my go-to’s for the tech side of things.

Jameson Lopp, Bitcoin core contributor and CTO of CasaHODL is one of the best at explaining technical aspects of Bitcoin and blockchains. Here’s his tweet with a simple explanation that Libra is not a blockchain with a link to a more detailed Medium article about the project.

The Medium article outlines some other features of the project including

  • Why FB chose a Proof of Stake system
  • How they are starting as a permissioned system and hoping to move it to permissionless
  • FB’s development of their own language for smart contract protocols
  • How Libra’s data structure is more like Ripple or Ethereum than Bitcoin
  • What the Move language is and how validators will use it
  • Why Libra is not really a blockchain due to its different consensus algorithm (yes I know this is technical but some of you really like this stuff)

Another is Nic Carter of Castle Island Ventures, whose Medium article goes into trade-offs of cryptocurrency design.

Nic’s article addresses some of these trade-offs Bitcoin has made in its design, almost always opting for the more difficult short term but more stable long term choice. Nic believes Facebook will make many of the choices Bitcoin did not make which will make it very different in both its design and its use.

  • Managed/unmanaged exchange rates: Bitcoin is unmanaged and can be volatile. Central bankers around the world discount it as a ‘non-currency’ for this reason. As a stablecoin, price stability and an easily managed exchange rate will be important to Libra right out of the gate
  • Capped/uncapped supply: Bitcoin is capped at 21 million issued. No one expects a cap on Libra and, if FB follows through with its audit of assets, they will have to acquire more of their basket of currencies and securities to issue more Libra coins with no cap on the supply
  • Monetary policy management: Bitcoin has a predetermined monetary policy based on its supply (Litecoin does too). We expect FB to have a discretionary policy that benefits them and their validators

It’s a good article with some technicals and some economics in it and both this one and Lopp’s are worth a read.

Here are the technical papers if you want to read them for yourself:

  1. The Libra Blockchain WhitePaper
  2. The Libra BFT Consensus Algorithm
  3. The Move Language and Smart Contract Protocol

Libra’s Competition

Given all these differences from Bitcoin, is it really a competitor to Bitcoin? Most of us in the crypto-economy believe it isn’t.

One of Bitcoin’s biggest activists and educators, Andreas Antonopoulous describes who he thinks is threatened by Libra.

Banking has had the monopoly on holding onto our money and being the entryway into the financial system for centuries. Now that monopoly is on shakier ground. Especially in a country like Venezuela or Zimbabwe, FB is a more stable, more trusted resource than a local bank. For the West, that’s less true but banks have been doing such a bad job for customers that projects like Libra can try to come in and take what would have been bank deposits instead.

Larry Cernak of The Block outlines Libra's goal as 'Libra is a “low-volatility” cryptocurrency that’s designed to be “secure, scalable, and reliable”. Facebook said it mainly worked on addressing two problems:

- Banking the unbanked

- Facilitating low-fee money transfers globally"

These 2 issues mean that Ripple is a competitor for this coin. Retail and central banks are competitors for this coin. Some emerging market currencies are competitors for this coin and so is SWIFT, which is used for international bank transfers.

The Good and the Bad from the Cryptoeconomy

The Good

Erik Voorhees, CEO of Shapeshift, outlines a number of the project’s good qualities in an excellent thread. Here are 2 of the finer points.

I totally agree with this idea. It’s why I think this is so bullish for Bitcoin.

By backing with numerous assets, Voorhees argues Libra could be stronger than the USD since the USD is only one of the assets backing the stablecoin, making it a reserve currency candidate when the dollar falters.

Udi Wertheimer, prominent coder, podcaster and devil’s advocate for cryptocurrencies adds a couple of good things he sees from Libra including

I agree with this completely. Easier to comply if the exchange token and the security token are kept separate.

Use of existing exchanges is good for the crypto-economy and good for FB too.

This will ease education and adoption if key management is not necessary.

And as we covered last week, those in failed states, weak economies or with hyperinflated currencies will jump at the chance to buy this stablecoin. It can be huge for the unbanked.

The Bad

It seems like the bads are pretty obvious given the size and power of Facebook. Udi says it very plainly.

And as Udi and Lopp above have said, it’s not really a blockchain given that the data is not organized into blocks but organized using messaging from the BFT consensus algorithm.

Voorhees again…..

Definitely not censorship-resistant.

Not decentralized if they can block transactions.

This is all about seigniorage, the claim that governments have to be the only issuer of currency and to do so at a profit. It’s also about regulations at home and across borders.

Will Libra transactions be taxed like Bitcoin?

James Foust, research fellow at Coincenter is one of the first to address the taxable nature of Libra and if it will be similar here in the US to Bitcoin and other cryptocurrencies.

One of the more interesting things in this thread is that he believes Libra will be lumped in with Bitcoin and others as a CVC. This is convertible virtual currency meaning that all the same rules will apply. Foust believes that Libra, like Bitcoin, will NOT be eligible for the de minimis exemption that foreign currency transactions have meaning that even very small transactions will have to be documented, be taxable and monitored and paid by Libra users in the US.

It’s possible that Facebook’s influence on the taxing and compliance for cryptocurrencies can help OR hurt the crypto-economy. One thing is for certain. More people will be aware of what cryptocurrencies are and how they are regulated and this is a good thing.

Conclusion….for now

Based on what we’ve seen the last 2 weeks, we think for failed states, hyper-inflated currencies, and some other emerging markets that Facebook’s Libra coin can act like a quasi-bank account for them. They will be happy to have it and it will serve them well against the other options they have.

Convincing the West to use it will be more difficult. I expect FB to put lots of money and effort into education about cryptocurrencies as well as what money is and moving money across borders without the help of banks.

Separating the security from the Libra token is very smart. FB has made some other good decisions too, leading many of us to think as Erik Voorhees said above that FB will serve the mass market AND be a bridge to decentralized finance.

And like I thought before, even more so now, this is tremendously bullish for Bitcoin. If anything, I would not buy FB stock and I’d buy more Bitcoin. FB will do more to educate people about crypto than the entire crypto-economy has been able to so far. Many will use and stay with Libra, and others will decide they want something better and we welcome them with open arms. FB = mass adoption.

If you like this kind of analysis, go check out my newsletter on Substack Crypto News Over Nonsense. You can read 2 of them for free before you subscribe.


About the author

Stu Stu Lustman, the author of this post, is a Credit Analyst by trade trying to bring Commercial Credit Analysis techniques to the world of Peer to Peer Lending. Check me out on Twitter, LinkedIn and Google+

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