Stablecoins: Cop Out Or Compromise

I would call myself a cryptocurrency purist. The reasons why digital assets appealed to me in the first place are their decentralized nature and the fact that the blockchain is ‘trustless’. Furthermore, it is a riposte to the banking community, which for a very long time has controlled us all unchallenged. And then they caused a financial of the collapse of such proportions that stability was ripped away from the average citizen. People lost their jobs, their homes, and there were even worse tragedies.

So when the Bitcoin whitepaper was published in 2009, it felt like a way forward. One of the problems was that the early Bitcoin believers were perceived as being anarchic hackers and the techie equivalent of punk rockers. And yes, some of them were, but there were also technology entrepreneurs like myself who embraced its possibilities.

In the early days, the buzz suggested that the crypto revolution would be an easy process, but of course, we have discovered that it is a rocky road and we are nowhere near mass adoption a decade later. Much of this is attributed to the price volatility, the lack of opportunities to spend crypto and the opposition of regulatory bodies in numerous global jurisdictions.

Along Came Stablecoins

And then along came stablecoins. If cryptocurrency was a sport, the purists were all shouting ‘foul’ and ‘cheat’. What I want to consider in a calm way is this: are stablecoins a cop-out, because they are ‘fake’ crypto’ to some extent? Or are they a compromise that could ultimately open the floodgates to mass adoption of all forms of digital assets?

In respect of a compromise, I’d compare stablecoins to the trainer wheels on a child’s first bicycle. They help the child get used to the idea of balancing on two wheels. Eventually, these ‘stabilisers’ can be removed and the child can progress to the reality of riding a bike without them. Now, even as a purist, I can see the potential advantage of this. I recently met an economics student, a Generation Z crypto enthusiast, who is invested in a small way in digital assets. He happily extolled what he believed would be the benefits of Facebook’s Libra, as just that kind of ‘trainer crypto’ that would enable mass adoption. I don’t put this forward as a conclusive argument for this view of stablecoins, but only as anecdotal evidence about possible public feeling, especially amongst Millennials and Gen Zers.

How else might stablecoins benefit us? I looked up some expert opinion on the topic.

MakerDAO says,

“A successful stablecoin implementation would be a major catalyst for disruption to global financial infrastructure, challenging weak governments and mismanagement of national economies. Furthermore, stablecoins allow for decentralized insurance, prediction markets, transparent credit and debt markets, and create a level playing field between small and large businesses in global finance.”

If MakerDAO is correct in their assertion, then isn’t it the case that stablecoins are performing the same kind of disruptive element crypto purists believed Bitcoin would deliver?

Stablecoin As Cop Out

As you know, stablecoins are tied to fiat currencies such as USD, GBP, Euro, etc. And there are those who believe that is their fatal flaw. What they are saying is that stablecoins are only as good as the asset they are tied to, and the way in which the two assets are tethered. This is a more complex debate. But, if I can simplify it at all, I’d say this: the core problem purists see with stablecoins is that they are still centrally controlled, they can be manipulated by market forces, and they are certainly not ‘trustless’ in the same way that BTC, ETH or LTC are. Some, such as Ben Prentice argues that stablecoins will simply lead us into the same trap as the old order of fiat currencies. He writes, “I believe inflationary fiat currencies where monetary policy is decided by few individual humans is not a sound form of money.”

So, I ask you — what do you think? Do stablecoins have the potential to help people slowly adapt to the decentralized digital assets, or are they a cop out intended to ensure that fiat currencies, controlled by a global elite according to some, remain dominant in the way we make all of our financial transactions?

The real reason Uncle Sam is afraid of Libra

A lot of column inches have been devoted to Facebook’s Libra coin so far, and we can expect many more to come. The tech giant’s stablecoin has put the wind up Uncle Sam, and a few other countries as well, but with the USA being the home of Facebook, its reaction is the one that most observers are following.

And here’s an amazing fact to consider: Facebook has 2.5 billion ‘citizens’ and the USA has 350 million users, as Clem Chambers, a senior Forbes contributor points out. . This Chambers claims is the root of the fear of Libra.

Who needs the dollar?

What the US government and others fear is that Libra will usurp their sovereign currency. This is particularly important to America, because it exports its dollar as a way of maintaining solvency. If other countries didn’t look to the dollar as a ‘safety net currency, what would happen? Clearly, the US government has been asking itself that question, then asked David Marcus for some answers. None of which seemed to reassure them.

As Chambers says in his article, “bad things would happen to the US status as a reserve currency …if the 2.5 billion Facebook users started to use libra, a basket of currency linked money.” The USA is sitting on a debt mountain, so any threat to the value of the dollar is an issue of mega proportions. As Chambers warns, “If a new private sector money is created and made available instantaneously to 2,500 million people a lot of unpredictable things will happen.”

Disrupting the retail sector

He has been working on a site that has developed its own crypto ‘Plus1’ for social media validation, and he suggests it provides us with a laboratory of sorts, where we can see the possible outcomes for Libra. Chambers’ site has around 3 million site users a month, so it’s a very scaled down version of Facebook. But the use of a ‘native’ cryptocurrency is working very effectively, despite some slowness in uptake.

He says his first two observations are: “crypto works within an online community, and crypto takes a goodly time to permeate into usage.” So adoption takes a while, but it does happen. His data also shows what we already know from other social media usage: older users are less likely to engage with what he calls “new-fangled stuff,” but “mature members” do engage with it quite quickly. By contrast, “The young’uns however, are all over crypto like butterflies on summer lilac.” Chambers says this age dynamic makes adoption slower than most might think.

Furthermore, Chambers says that while you can buy things with crypto, this has been slow to happen. He suggests Facebook’s Libra should be the coin that changes this and acts as a major disruptor in the retail arena.

Libra may also lower the barrier to entry for consumers. Using and owning crypto at the moment is not simple enough to have a broad appeal, but again Libra could change that.

Furthermore, just the fact you can transfer fiat in and out of Facebook creates a massive bank. Will we have ‘Facebank’ in the future? I’d say it’s pretty likely.

And, as Chambers remarks, the lawmakers are completely focused on privacy issues with Libra, whereas what they should be looking at is “the techno-political structure over issuance and control of Libra’s proposed ownership and business model.”

Libra is just the beginning: in the future expect to see similar coins from Google, Amazon and Apple. And there will be others. Who will need the dollar, the yen, the euro and other currencies then? That is what governments really fear.

Cuban and Congress gang up against Libra

Just a few days before the Congressional hearings involving David Marcus, Facebook’s head of the Libra project, Mark Cuban, the billionaire co-host of “Shark Tank”, echoed President Trump’s tweets when he told CNBC that he “wasn’t a big fan” of Libra.

Libra is a gift to despots

There are seemingly quite a few people who agree with Cuban. He referred to the Menlo Park-based social networking company’s foray into distributed ledger tech as a “big mistake.” Most particularly he took aim at what he sees as Libra’s potential to further destabilise unstable economies and political situations worldwide. He said, “Some despot in some African country that gets really upset that they can’t control their currency anymore.” This doesn’t actually make much sense, but these days nobody seems bothered about rational statements.

Yes, Facebook is targeting the 1.7 billion unbanked people worldwide, a factor that David Marcus repeated several times during his first day of giving testimony to US Congress. The Libra Association’s white paper states: “All over the world, people with less money pay more for financial services. Hard-earned income is eroded by fees, from remittances and wire costs to overdraft and ATM charges… When people are asked why they remain on the fringe of the existing financial system, those who remain “unbanked” point to not having sufficient funds, high and unpredictable fees, banks being too far away, and lacking the necessary documentation.”

Cuban takes issue with this: he believes that Libra will unleash “reactionary impacts of extending financial access to the underrepresented.” Presumably he’s referring to that African despot again.

David Marcus is calm and collected

Meanwhile, in Washington, David Marcus looked cool as a cucumber as he took questions from a succession of senators. The primary issues for the lawmakers were those of privacy and trust. Senator Elizabeth Warren, who is crypto-unfriendly, asked about Facebook’s willingness to allow data portability: “If a Facebook user wishes to use a wallet other than Calibra, will you make it easy to allow the export of other data?” Marcus unequivocally replied, “Yes,” although he was noticeably more hesitant to respond so forcefully when asked about Messenger and Whatsapp data. Sen. Warren got her knife in some of the way when she concluded her remarks by saying, “what Facebook’s been really good at is figuring out how to monetize people’s personal data […] I am not reassured by your statement that you can not see any reason right now why there would not be any data sharing between these platforms.”

Nobody hammered bitcoin

On the bright side for crypto enthusiasts, Congress appeared to be very careful not to attack bitcoin. As Coindesk remarks, “Bitcoin was barely mentioned during the two-hour session and most of the lawmakers seemed far less concerned with the technology than with who was planning to leverage it: Facebook.” Indeed, Sen. Pat Toomey (R-Pa.) sounded bullish on blockchain in general, saying, “We shouldn’t prevent what can be a tremendous financial innovation. There is a big potential in blockchain technology.”

How’s the score looking for Facebook’s Libra as the Congressional interrogations resume today? It looks like most news outlets agree that it has the advantage, although they don’t say that in so many words. Congress appears to be more focused on the fact that it is Facebook (and Mark Zuckerberg) who is leading this project than the real potential of Libra. If another company had launched this project, perhaps Congress would be a lot less interested.

A letter to Facebook