The cryptosphere–especially from the inside out–is, well, a bit of an echo chamber.
After all, the technology that runs cryptocurrency and blockchain networks–as well as the possible use-cases for this technology–are so new and so esoteric that there’s almost a language barrier between crypto community members and the rest of the world; people on the inside speak about decentralization, hash rates, and Byzantine fault tolerance without blinking an eye, while onlookers simply scratch their heads.
It is exactly this gap in information that has at once led to the alienation and glorification of blockchain technology: crypto and blockchain seem both too outlandish to use in a widespread and serious manner, and also so ground-breakingly innovative that they must be great investments.
In other words, most of the narrative around blockchain technology is very polarized: the perception seems to be that either you’re an all-in, born-again Bitcoiner, or you’re a skeptic who couldn’t possibly understand the tenets of Satoshi Nakamoto’s creation nor its progeny.
This lack of nuanced conversation of the blockchain world has had disastrous consequences in the past–the ICO boom and bust of 2017 was largely fueled by a whirlwind of hype and misinformation; the financial fallout–as well as the reputational damage to individuals and companies working to make blockchain technology meaningful to society–still continues today.
Therefore, developing a culture of healthy skepticism and deep understanding of blockchain and cryptocurrencies–warts and all–is essential.
David Gerard, crypto journalist, historian, and author of Attack of the 50-Foot Blockchain, is doing just that.
Finance Magnates recently sat down with David to speak about the current state of blockchain and crypto, the newest iteration of Libra, and what (if anything) blockchain is actually good for.
On Libra: “It was bizarre.”
“I’m not actually a great fan of this stuff,” he began, “I don’t think any of it works very well, I don’t think it’s a good investment; I think there’s lots and lots of reasons to stay away from it, particularly for a retail investor–but it’s also really totally fascinating, and really interesting to follow.”
For Gerard, this seems to be particularly true for Facebook’s Libra project, which officially published a ‘2.0’ version late last week.
He explained that in the early days of Libra–and even before Libra–”no one could work out what [Facebook] was doing or how it would make sense.”
Indeed, the earliest iterations of the Libra project–and even the first official version–were so far out of the mainstream view of the financial realm that it was difficult for society to contextualize.
As opposed to, for example, “being a money transmitter”, which is typically regarded as “a respectable business [model] that’s well-understood, well-regulated”, the Libra project involved a largely novel–even quirky–technological basis.
“People went, ‘oh! They’re doing a cryptocurrency? No, they can’t be doing a crypto, that doesn’t make any sense!’ And then we saw what they came out with in June, and it made no sense,” Gerard said.
Facebook's Libra: national currency tokens, a new white paper — what this means https://t.co/La8sTxu3xj Facebook is slowly being dragged, kicking and screaming, to running Libra like an ordinary, compliant payments processor. Paypal, but it's Facebook.
— David Gerard (@davidgerard) April 16, 2020
“It was bizarre,” he said, making a comparison to “those ICOs that you’d read about in the 2017 era, when they’d say, ‘our coin for bananas or dentistry will revolutionize the economy–$4 trillion of DentaCoin will take over the world!’”
“It was obviously stupid and impossible,” he continued, “and when regulators hear some crypto bozo say, ‘our CryptoBananaz™ will take over the world!’ They go, ‘that’s nice, just don’t break any laws.’”
However, “when somebody the size of Facebook starts talking the same way, governments get worried, because Facebook is a company with a continent-sized user base–they’re big.”
For context, Gerard said that if Libra operated on a global scale comparable to the way that companies like WeChat and AliPay operate in China, it would have a “substantial chunk of a trillion [dollars]” locked into its network.
“That’s a country-sized amount of money just sitting there as the float,” he said. “Regulators are going to get worried about that. This is why Facebook had such a hard time out the gate.”
“Weird cryptocurrency dreams”
In other words, one of Libra’s biggest hurdles is the sheer scale of the project: it can be argued that most regulators are inherently wary of handing over large chunks of financial power to private companies.
However, the size of the project wasn’t the only thing that was hard for regulators to swallow: the project was imbued with “these weird cryptocurrency dreams” that are typical to the small and insular world of Bitcoin fanatics: “‘and we’ll have this completely backed currency! And then it’ll go permissionless!’”
(And–by the way—”how do you have a backed currency that’s permissionless?” Gerard asked. “So much about it was contradictory and didn’t make sense–the Libra whitepapers contradicted themselves, and you’d see them change over time… there have been eight different versions of the main one, for example, that I’ve found, before the main revision that they’ve just released.”)
In any case, however, despite the fact that Libra was scorned by certain factions of the Bitcoin community, Gerard explained that “it’s very much a creature of the Bitcoin subculture–very much the Bitcoin one specifically, because David Marcus”, co-creator of Libra and the head of Calibra, “is a huge Bitcoiner.”
"Libra is nothing more than a brazen attempt to override national monetary sovereignty by creating a global-scale Federal Reserve equivalent — within which Facebook's dominance is veiled by the cunning use of buzzwords" https://t.co/2IoCOEJEnH via @FinancialTimes
— David Gerard (@davidgerard) June 18, 2019
Bitcoin vs. Gold: Which is a Better Buy this Fall?Go to article >>
“[…] That’s never been a secret, it’s just that people don’t talk about it,” he continued. “But it’s highly relevant–if you read the original Libra whitepaper, it’s got all these Bitcoin dreams–’we’ll bank the unbanked!’, with no detail as to how they’ll do this; ‘we’ll have all these crypto freedoms and instant remittances and it’ll all be amazing and out of government control, and so on…it was hauntingly familiar to anyone who’s ever read crypto whitepapers.”
“And that’s why it was totally bizarre and baffling to the mainstream finance press, because they’d never seen this sort of weird stuff coming out of a serious company. And this is why […] Bruno Le Maire came out against Libra literally minutes after the announcement,” and many other important regulatory figures in the financial world followed shortly after–with gusto.
“PayPal, but it’s Facebook.”
After months of running the regulatory gauntlet, Facebook came forward this week with a new plan: Libra 2.0, which includes key changes to several of its original tenets, including its decentralization model and the single-currency concept.
Facebook Libra is Architecturally Unsound "… the artifact they open sourced is so hilariously unsuited for the task they set out to do it can only be regarded as an act of hubris" https://t.co/I8KnxsFiNF
— David Gerard (@davidgerard) November 5, 2019
In a comment for the Financial Times earlier this week, Gerard described this newer, easier-to-swallow, diet version of Libra as “PayPal, but it’s Facebook.”
“That’s an idea that I can see actually working as a business,” he said to Finance Magnates. “It makes sense, it’s reasonable, it could possibly bring value, you know–give them a go, and they’ll have to be as regulated as PayPal, where compliance costs are quite a huge chunk of their cost of doing business.”
CBDCs & the Politics of Banking
Even though the newer version of Libra may not be quite as disruptive as the original iteration of the platform was slated to be, the project’s launch (and the media cycle that followed) caused a serious shift in the discussion around central bank digital currencies, or CBDCs.
“One of the jobs of central banks is to think about what might happen in five years–they have to go off on excursions into weird into hypotheticals because they have to not be surprised…but Libra was announced, and they all went ‘oh, crikey!’, and they had to get all the papers out, and suddenly maybe apply [their hypothetical theories.]”
“So, all the talk of CBDCs now is because of Libra,” Gerard explained. This has created a sort of scenario in which Libra has given itself a reason to exist: “now, Libra is saying, ‘right, with CBDCs, this shows a clear need for Libra!’–no it doesn’t,” he said. “It just shows that [Facebook] scared [banks.]”
After all, “[…] I think that CBDCs are much more a matter of the politics of banking–who gets to be the bank, who gets to do certain things–because the way that money is actually issued now is not a great big printer at the central mint…it’s commercial banks making loans. That is where new money actually comes from.”
Of course, “central banks could also issue cash, and that would change the mix of who’s supplying dollars to the economy,” but, on the other hand, “central banks don’t really want to be commercial banks, I would think; I think that’s a bad idea, because they’re used to having a few tens of customers that they know really well, as opposed to hundreds of thousands of random people coming up to them.”
Essentially, “they’d have to become the commercial bank if they took their place…and there’s a lot to object to in the current financial system, but I’m not sure that’s one of the things.”
Still, “[…] a CBDC could be useful,” Gerard said, but only “in inverse proportion to how ‘blockchain-y’ it was.”
Bitcoin is “a Pain in the Butt to Use”
What does this mean on a practical level? Gerard made a comparison to Bitcoin: “the usability of Bitcoin was one of the big problems for it as a consumer currency–it’s a pain in the butt to use.”
And slow transaction times aside, Gerard believes that BTC–and almost all other cryptocurrencies–have a serious, inherent flaw that will prevent them from ever being adopted for widespread use without serious, infrastructural changes–”irreversibility,” he said. “Mistakes aren’t fixable.”
This also means that on a baseline level in crypto, “all fraud is final.”
“If I pick your pocket from the other side of the world, those are my Bitcoins now,” he said. “You’ll have a few [exceptional] cases, like the most recent DeFi hack on [a platform called] dForce, where the attacker stole a bunch of tokens that were literally not exchangeable except in one place…so they gave them back.”
The bottom line, however, is that “consumers demand reversibility…like most people in Europe, I have a card in my wallet that contains pounds; that card is hooked to an ccount at my bank, and I just wave my card, and I can make small purchases. But that’s actually got complete reversibility–if I don’t like any transaction that I see, at the end of the day I can contact my bank…and they’ll reverse it. They’ll eat it.”
welcome to my twitter! high-context content and dumb jokes aplenty!
also, cryptocurrency and blockchains are … bad.
also, my book is good – low-context, friendly to general readers. read it, you'll enjoy it lots.
— David Gerard (@davidgerard) January 22, 2020
“There’s reversibility built into the banking system at quite high levels,” Gerard explained. “Fraud is traceable and generally reversible–this is why clearances generally take a day or two, because there are good reasons for it.”
And indeed, “none of the problems with remittances and delays in international transmission are technology,” Gerard explained. “None of the problems are. We know how to change numbers on computers; we’re quite good at it.”
Therefore, “when you transmit money from one bank to another bank internationally, they just shuffle numbers in their computers,” he continued. “But they do it under the purview of a regulatory regime.”
“[…] All delays in international payment are basically [because of] regulation and making sure things are done very, very properly,” he said. “Because, of course, crooks are very creative.”