How a Fatal Weakness Forced Libra to Capitulate

https://financialservices.house.gov/calendar/eventsingle.aspx?EventID=404001#Wbcast03222017

Frances Coppola, a CoinDesk columnist, is a freelance writer and speaker on banking, finance and economics. Her book “The Case for People’s Quantitative Easing,” explains how modern money creation and quantitative easing work, and advocates “helicopter money” to help economies out of recession.

Libra was originally advertised as a revolutionary new payments system. By creating a totally new international currency, it would break down national payment barriers and enable the world’s unbanked to participate in the cashless economy, both locally and internationally. But the second edition of its white paper, released in April 2020, falls far short of this ambition. Instead of bypassing national currencies, it now embraces them. And the international currency, while not absent, has been downgraded to simply a basket of national currencies. Libra seems to have lost its soul.

Libra’s capitulation to government reminds me of the Biblical story of the Tower of Babel. A bunch of upstart humans challenged God (aka government) by building something that would, by reaching to heaven, threaten his authority. God had a look at what they were building and decided he didn’t like it. But he didn’t close down the Tower. He made it impossible for the humans to finish building it. Instead of a single language, the humans suddenly found themselves speaking multiple languages. Unable to understand each other anymore, they scattered across the world.

Currency is similar to language. It enables humans to understand each other sufficiently to trade. Through trade, humans build social architectures. When there is a single currency that spans the globe, money flows freely across borders and national boundaries are weakened. The U.S. dollar currently acts as a single global currency. By doing so, it reinforces the global dominance of the United States. Libra’s proposal for a single global currency which was not the dollar or the euro but, crucially, was backed by them, could have left Western governments dancing to the tune of the Libra Association and its Reserve. It had to be stopped.

And stopped it has been. Indeed, it was always inevitable that it would be. Libra’s apparent power, underwritten by Facebook, concealed a fatal weakness. Unlike Bitcoin, which from the start aimed to create an alternative financial system independent of government, Libra’s architecture wholly depends on the existing fiat currency system – and on the whims of the governments that control it. Governments can’t shut down Bitcoin, or force it to change. But they could shut down Libra.

So Libra can only succeed if it becomes a quasi-government project. As the second whitepaper puts it, it is a complement to, not a replacement for, domestic currencies.And to achieve this, it must comply with government demands. To this end, the white paper makes four major changes.

If you really want to challenge government authority, you don’t tie yourself into the existing system.

Firstly, instead of a single global currency, there will be individual currency stablecoins. Each stablecoin will be 100% backed by reserves in its own currency. Minor currencies that aren’t represented in the reserve will have no stablecoins.

The international LBR coin will still be issued, but it will effectively become an index consisting of “some of” the national currencies in the reserve, with fixed weights reflecting the proportion of the reserves denominated in each currency. This seems to be stealing a march on the IMF’s SDR, which has made little progress towards becoming an international settlement currency.

The white paper cheerfully says that LBR “can be used as an efficient cross-border settlement coin as well as a neutral, low-volatility option for people and businesses in countries that do not have a single-currency stablecoin on the network yet.” Of course, the U.S. dollar is already a neutral, low-volatility option for people and businesses in countries that don’t have widely traded currencies. But it lacks an efficient cross-border settlement system.

The white paper says that if a country’s central bank issues its own digital currency (CBDC), it could be integrated into the Libra network. When this happens, the central bank for that currency will become the issuer of Libra’s stablecoin in that currency.Secondly, Libra will fully comply with KYC/AML and other laws and regulatory controls for individual currency stablecoins and, by extension, LBR itself. The second white paper says that people subject to sanctions, or living in jurisdictions subject to sanctions, won’t be able to use Libra:

  • Protocol-level controls will apply to all network participants, including Unhosted Wallets and VASPs, and automatically prevent transactions involving blockchain addresses identified by authorities as associated with sanctioned persons (sanctioned blockchain addresses). In addition, these controls can be used to restrict amounts stored in sanctioned blockchain addresses.
  • Sanctioned jurisdictions: Protocol-level controls will automatically prevent transactions originating from IP addresses associated with sanctioned jurisdictions.

Others, especially those who don’t have access to banks, will have restricted access to Libra, such as strict transaction and balance limits. Libra is clearly struggling to maintain its commitment to financial inclusion.

Thirdly, Libra has given up any idea of full decentralization, apparently because it might be possible for subversives to take over the system and remove the KYC/AML restrictions:

…a key concern expressed by regulators in a number of jurisdictions, including the Swiss Financial Market Supervisory Authority (FINMA), is that it would be challenging for the Association to guarantee that the compliance provisions of the network would be maintained if it were to transition to a permissionless network where, for example, no due diligence is performed on validators.

Governments and their agents can’t bear to give up control. The price of getting a payments license from FINMA is abandoning any intention of becoming permissionless. The white paper claims permissionless aspects, like giving  members the ability to compete for the right to run nodes and validate transactions. But this isn’t remotely similar to a permissionless network, such as Bitcoin. Association membership is decided by the Association. Who controls the Association?

The final change prevents movements in the Libra Reserve from destabilizing fiat currencies. To be sure, since Libra’s entire architecture depends on the current system of fiat currencies remaining stable, it was surprising that the original white paper didn’t consider the effect of movements in the Libra Reserve on financial markets and governments. Or perhaps, the original writers just assumed that central banks would quietly backstop the Libra Reserve. Now, the backstop is explicit.

The Tower of Babel project is over. Libra will comply with everything that governments demand, and in return, it will be absorbed into the existing international financial system.

The lesson from Libra’s capitulation is that if you really want to challenge government authority, you don’t tie yourself into the existing system. You set up an alternative to it, and you defend it to the hilt.

Disclosure

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First Mover: BSV Doubles in 2020 as Bitcoin Offshoot Wins Devotees

Bitcoin Satoshi’s Vision, the controversial blockchain promoted by Craig Wright, is winning in digital-asset markets this year, with a token that has brought investors triple the returns of its better-known ancestor, bitcoin.

You’re reading First Mover, CoinDesk’s daily markets newsletter. Assembled by the CoinDesk Markets Team, First Mover starts your day with the most up-to-date sentiment around crypto markets, which of course never close, putting in context every wild swing in bitcoin and more. We follow the money so you don’t have to. You can subscribe here.

Bitcoin SV, or BSV as the token is known, has risen 96% so far in 2020, versus a 36% gain for bitcoin (as of Monday). It’s also beating the 18% year-to-date return for bitcoin cash (BCH), another offshoot from bitcoin.

fm-june-2-chart-1-price
Source: TradingView.com

The project, which split off from bitcoin following a series of disputes in 2017 and 2018, has faced accusations in the past that its token’s price is prone to manipulation. And Wright, who leads the BSV community through his software company nChain and claims to be bitcoin founder Satoshi Nakamoto, is embroiled in a lawsuit with his late business partner’s estate. He was recently described as a “fraud” in a public message signed with bitcoin addresses he claims to own .

But some investors and developers say Bitcoin SV has technical advantages over bitcoin and other cryptocurrencies that make it a worthy blockchain to build applications on. Those include Twetch, a social media platform based on Bitcoin SV that grabbed headlines last week when its Twitter account was briefly suspended; just hours before, the company had sent a tweet trolling Twitter CEO Jack Dorsey for fact-checking a post by President Donald Trump.

“We think this represents an incredible opportunity for anyone looking to buy in more cheaply to make a long-term investment on the only blockchain trying to scale and have mass adoption as a database,” Zack Resnick, managing partner of the money manager Unbounded Capital, wrote in an email. The firm invests in BSV tokens as well as projects focused on the blockchain.

It’s been just over a year since the giant cryptocurrency exchange Binance delisted BSV, with CEO Changpeng “CZ” Zhao tweeting at the time that Wright was a “fraud” and that “the real Satoshi can digitally sign any message to prove it.” In an interview in October with the publication Coin Rivet, Wright called CZ a “lowlife. Not exactly taking the high road.

The driving force behind BSV’s split from bitcoin during the late 2010s was the idea that a blockchain should be “scalable” – that is, able to smoothly handle a sudden surge in usage, similar to the way the virtual-meeting platform Zoom suddenly on-boarded millions of new customers during the first few weeks of coronavirus-related lockdowns.

Bitcoin SV’s backers say large data-block sizes, compared with those on the Bitcoin blockchain, could improve the network’s scalability. Bitcoin SV pushed to increase block sizes to 132 megabytes, compared with 32 megabytes for BCH and one megabyte for Bitcoin. And in February, BSV implemented a system upgrade that removed the size limits and enabled scaling up to 2 gigabytes per block.

According to the data aggregator Coin.Dance, the Bitcoin SV blockchain’s daily average transaction throughput exceeds levels for both Bitcoin and Bitcoin Cash.

fm-june-2-chart-2-transactions
Daily transaction volume on the Bitcoin SV, Bitcoin Cash and Bitcoin blockchains.
Source: Coin.Dance

Some Bitcoin SV critics say the data isn’t what it seems.

Moe Adham, CEO of crypto ATM operator Bitaccess, told First Mover in a direct message that he suspects much of the network’s transaction volume is “spam.”

“No exchanges support it, no services support it,” Adham said. “The only activity I know of is people dumping BSV to get out.”

Trading the token carries risks, such as thin liquidity on exchanges. Despite the ejection from Binance, BSV does retain listings on the cryptocurrency exchanges Huobi, OKEx and Bitfinex. But daily trading volume on legitimate exchanges averages about $30 million, compared with close to $2 billion for bitcoin, according to Messari data.

Such risks don’t seem to deter developers choosing the platform. Calvin Ayre, an online casino billionaire who has brushed with U.S. law enforcement and whose business interests include BSV mining, says on his holding company’s website that the token is the “one and only bitcoin.”

Twetch founder Billy Rose said he likes the Bitcoin SV blockchain partly because the network can handle more than a million transactions in a single data block, versus about 3,500 transactions per block on the Bitcoin blockchain. That’s key for the social-media platform because every post, like and reply on Twetch is archived on the blockchain, and each of those is essentially a microtransaction, according to Rose.

“BSV enables these low-fee microtransactions and on-chain scaling,” Rose told First Mover in an email.

Ryan X. Charles, the first cryptocurrency engineer hired at Reddit in 2014, told First Mover in a phone interview that BSV could be ideal for sending small amounts of value, known as micropayments, across the internet or on social media. Charles is the founder and CEO of Money Button, which can be used to send payments over the BSV blockchain.

“BSV has been making a steady gain this year due to adoption of real-world applications being deployed using the platform,” Jerry Chan, CEO of TAAL, which provides mining and software services for bitcoin SV, wrote in an email.

Tweet of the day

Bitcoin watch

nl-chart-5
Source: TradingView.com

Trend: Bitcoin has pulled back slightly from the overnight high of over $10,300, but remains safely in bullish territory.

The top cryptocurrency by market value is currently trading near $10,130, having hit a 3.5-month high during the late U.S. trading hours on Monday.

With a convincing move above $9,800, the cryptocurrency has broken out of a near month-long narrowing price range, as seen on the daily chart. Prices have now formed a pennant breakout, a bullish continuation pattern that often accelerates the preceding uptrend.

As such, stronger gains could be in the offing, more so, as both the daily and weekly chart relative strength indices (RSIs) are reporting bullish conditions with above-50 readings. The weekly MACD histogram, too, is signaling stronger upward momentum with higher bars above the zero line. And last but not the least, the daily chart shows a golden crossover, a long-term bull market indicator.

So, the charts look to have aligned in favor of stronger gains, possibly to $11,000 and higher. Popular analyst Josh Rager thinks the break above $10,000 is a positive development, but wants to see a daily close (UTC 00:00) above $10,370 before adopting an ultra-bullish stance.”Closing above $10,370 would be insanely bullish,” tweeted Rager.

The new bullish bias would be invalidated if prices find acceptance once more below $10,000.

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