Binance Bids for CryptoTulip Honors

Binance was once the crypto exchange.  Operating everywhere, with 150 million (!) reported customers and billions in assets, Binance never even pretended to care about US or other regulators.

This fall, Binance is on fire and adrift, after multiple lethal hits below the waterline from US and other regulators.

CZ himself forked over $135B (a record), plus $800M other penalties and faces possible prison time.  Binance will also pay FinCen and OFAC over $4B, and will stop doing business in the US entirely [1].

There is still a similar SEC action pending, so there may be more to come.  I’m not sure how many other cases may be pending around the world.

Ouch!

As one headline asks, “can Binance survive?” [3]  We’ll see.

It seems to me that Binance has demonstrated that the powers-that-be can, in fact, regulate cryptocurrency exchanges, regardless of the alleged affordances of blockchain technology and the fervent avowals of Nakamotoans everywhere.

How, then, can Binance 2023 not be a leading candidate for the Crypto Tulip of the Year Award?

For my money, the best part, the icing on this cake, was the individual punishment of the Chief Compliance Officer, Samuel Lim.  For his role in the crimes, he will pay a fine and leave the company and industry [2].

It is unusual to punish a compliance officer for individual behavior. But in this case egregious misbehavior, massive and deliberate non-compliance, was orchestrated by the so-called “compliance” officer.  I think the arrogance and insult of the job title was probably too much for the authorities to let pass.

For this action alone, Binance and the US DoJ deserve a special CryptoTulip citation, no?

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1. Nikhilesh De (2023) Binance to Make ‘Complete Exit’ From U.S., Pay Billions to FinCEN, OFAC on Top of DOJ Settlement. Coindesk,  https://www.coindesk.com/policy/2023/11/21/binance-to-make-complete-exit-from-us-pay-billions-to-fincen-ofac-on-top-of-doj-settlement/
2. Nikhilesh De and Jesse Hamilton (2023) Binance, Changpeng ‘CZ’ Zhao Handing Over Record $1.35B Fine in CFTC Settlement. Coindesk,  https://www.coindesk.com/policy/2023/11/21/binance-changpeng-cz-zhao-to-pay-285b-fine-in-cftc-settlement/
3. Daniel Kuhn (2023) Is Binance Big Enough to Survive a $4.3B Fine and Founder CZ’s Ousting? Coindesk,  https://www.coindesk.com/consensus-magazine/2023/11/22/is-binance-big-enough-to-survive-a-43b-fine-and-founder-czs-ousting/

Cryptocurrency Thursday

Distributed Autonomous Organizations Aren’t All That Innovative

Distributed Autonomous Organizations (DAOs) are one of the amazing, “disruptive”, so-called innovations out of Nakamoto’s Happy Kingdom.  The very name it exciting.  Distributed!  Autonomous!  Yet also, Organized!  Cool!

The core idea is to create something that works kind of like open source software is conceived, but with no official “owner” and all the work and decisions made by the contributors via the Internet.  For some, this is an opportunity for radical democracy to promote common good.

In practice, the blockchain version of a DAO basically is a shared stock partnership that anyone can participate in by purchasing (or being gifted) tokens.  Decisions are made by a “democratic” vote of token holders, using a blockchain as a distributed computer.

The organization is “autonomous” because all the actions of the DAO are executed by algorithms on blockchains.  No humans involved, “the code is the law”.  In principle, a DAO can keep ticking along doing business without any Carbon-based units paying the least attention.  And, since it uses Internet based blockchains, it neither knows nor cares about borders or laws.  How can it?  It’s just algorithms.

It’s kind of a neat concept. 

Of all the possible use cases, the one that has really caught on is, of course, DeFi, so-called decentralized finance.  There have been endless variations on what are basically investment schemes and related financial services.  These DAOs feature algorithms that implement trading and lending of digital assets.  To the customer, it looks the same as any other on-line investment app, but there is no human board of directors and no meat-space legal documents.

Since there is no official structure, and no one claims to be in charge, fundamentalist Nakamotoans have imagined that they are outside conventional legal systems.  (“It wasn’t me!  The algorithm did it.”)  Thus, like Bitcoin, DAOs are supposed to be “uncensorable”.  ‘The Man’ can’t tell them what they can and can’t do.

Unfortunately, that’s not how the law works, as most lawyers would tell you.

As Sam Reynolds reports, DAOs “are beginning to look like general partnerships in the eyes of U.S. courts.” [3]  He is specifically reporting on a case in California in which the humans who built a DAO are being held liable for negligence that caused losses to hackers.  This, and other cases, are basically finding that doing business together via a DAO is covered by existing laws about doing business together.

This makes sense to me.  I mean, a conventional organization accessed via an app behaves the same, and probably has similar algorithms.  The only difference is one bit of digital kit, the blockchain based protocols.  That and the fact that conventional organizations have people who are willing to take responsibility, while DAOs have people who wish to evade responsibility.

It’s not a very difficult call, honestly.

It’s been a bad year in Nakamotoland, overall [2].  With the collapse of several crypto friendly banks, there is more and more talk about exiting the US.   Moving offshore.  Taking our blockchain and quitting.  So there!

Will that work?  I’m not so sure.  The US government has taken the position that operating “offshore” and using shell companies and VPNs to evade legal restrictions is, in fact, a “willful evasion” of the law.  [1]  I mean, duh!  It’s not like this stuff is a secret.

Last year there was a lot of chatter about the need for “clarity” in US law.  Mostly, this meant legal recognition of crypto’s own views. 

Well, “clarity” is coming on fast this year.  And it is clear that DeFi and crypto are going to have to play by the same rules as everyone else. 

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1. Nikhilesh De, Jack Schickler, Oliver Knight, Jesse Hamilton, and Cheyenne Ligon (2023) Binance, CEO Zhao Sued by CFTC Over ‘Willful Evasion’ of U.S. Laws, Unregistered Crypto Derivatives Products. Coindesk,  https://www.coindesk.com/business/2023/03/27/binance-and-cz-sued-by-cftc-over-regulatory-violations/
2. Declan Harty, Crypto sector sees an existential moment in the U.S., in Politico, March 26, 2023. https://www.politico.com/news/2023/03/26/crypto-industry-clash-with-washington-00088476
3. Sam Reynolds (2023) The Liability of DAOs and Their Founders Has Been Put to the Test in Court. Coindesk,  https://www.coindesk.com/business/2023/03/29/the-liability-of-daos-and-their-founders-has-been-put-to-the-test-in-court/

Cryptocurrency Thursday

SEC Harpoons Kraken

Ouch.

Not being into finlaw, I’ve been trying to grok the headlines about Kraken [1]. What does this mean?

I know basically nothing about these “staking” contracts, and I definitely don’t have a harpoon stake in this game.  But it does seem to me that this is certainly bad news for a lot of crypto operations.

From what I understand, staking operations involve customers giving crypto tokens to a company which uses them to do business.  In particular, the tokens are used for “proof of stake” consensus bids, e.g., for Ethereum mining.   The customers still own the tokens and get payments based on how they are used.  This is basically a way to do mining pools for PoS.

Of course, in Nakamoto’s Kingdom, this straightforward process is digitized and decentralized.  And, in the case of Kraken, was turned into a business in itself (“staking as a service”). 

And it sounds like this “SaaS” was a bridge too far for the SEC, which ruled that the scheme is tantamount to lending, i.e., basically offering securities.  Unregistered, fairly opaque, potentially extremely risky securities.  Securities that compete with conventional products that follow the laws.

Not so much an “innovation” as, well, “cheating”.

(And, SEC or no, the powers-that-be on Wall Street don’t want to be “disrupted”, unless they are doing the disruptin’.)

This SEC action has thrown cold, Kraken-bloodied, water on a lot of Nakamotoan dreams.  Because registering these contracts as securities would be a gigantic pain, probably not worth the effort—if it even can be done.

However, as so often is the case in Nakamotoland, the overall concept might still be OK, depending on the details.  In Kraken’s contracts the returns to the customers were determined by the company, as opposed to simply passing back their share of any income.  This is particularly problematic legally, as it makes the contract more of a loan to Kraken, rather than just a pool.

So, Kraken’s staking business in the US is no more.  Plus, no one knows what the SEC may ultimately say the rules are for staking in general. 

This seems to be part of a general picture.  US regulators are starting to apply the conventional rules to crypto based fintech.  Despite claims that the rules don’t apply, the SEC is applying the rules.

Which is kind of their job, no?

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1. Nikhilesh De (2023) What Does Kraken’s SEC Settlement Mean for Crypto Staking? Coindesk,  https://www.coindesk.com/policy/2023/02/10/what-does-krakens-sec-settlement-mean-for-crypto-staking/

Cryptocurrency Thursday

Cryptocurrency Regulation: “The Man” Steps Up All Over the World

Nakamotoan cryptocurrency is designed to be “digital gold”, and the “trustless” protocols use the internet so they are “uncensorable”.  In short, Bitcoin and it’s ever growing disfunctional family are supposed to be out of the control of “The Man”.

This is the core of the Nakamotoan ideology, and the central feature of Bitcoin et al.  It’s why you bother with all the inconvenience of slow, wonky, DIY finance. 

This summer, “The Man” is pushing back, pretty much everywhere. 

At this point, I’ve lost track of what’s going on in China.

But in Europe and the US, regulators are cracking down on trading platforms that are so handy for moving money around without troubling with taxes or laws.  Surprisingly enough, the legal and tax authorities are neither stupid nor amused.

Binance and other similar platforms make money laundering so easy that even a dumb old socialist like me could do it.  In the last month there has been, as David Z Morris put it, “A Reckoning” [4].   Binance is being forced to close in Europe and Asia [2].  Binance already was limited in the US.

BlockFi and other “decentralized finance” services that offer unregistered securities.  Unregistered securities are, well, definitely illegal on the best day, and borderline fraudulent on most days. 

Regulators have noticed, and are shutting them down.  It’s hard to keep track, but one headline indicates that five US states have sued BlockFi for operating illegal services [3].  I mean, when Texas thinks you are operating illegally, that’s something.

In the US, the feds are wringing their hands a lot, and draft legislation has language that will greatly increase the reporting of cryptocurrency transactions [1].  The intention is to make cryptocurrency traders operate the same way as other financial trading.  Of course, this proposal isn’t popular with the people who have been making money operating outside current law [5].  We’ll have to see what actually comes out of this new legislation.

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And finally, let’s not forget that “The Man” is also a big part of the private sector.  And there ain’t anybody more “The Man-ish” that the major bond rating agencies.  Their hand extends everywhere.  When they aren’t kibitzing the boring details of Illinois state finance, they find time to have their own foreign policy.

As noted earlier, El Salvador is advancing legislation to make Bitcoin legal tender in that country.  I’m still not sure what that will actually do, and evidently Moody’s is unsure as well, but don’t like what they see [6].  This month they downgraded El Salvador’s bond rating, at least in part because the Cryptocurrency initiative is bat shit crazy reflects a “deterioration in the quality of policymaking.”  They also hint that officially supporting a money laundering friendly technology might increase tension with the US and other countries.  Ya think?

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Is this what Nakamoto dreamed of?  I dunno.  But cryptocurrency is certainly not looking as invincible as enthusiasts seem to think it is.

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1. Tanzeel Akhtar (2021) Framework to Regulate Crypto, Stablecoins Introduced in US Congress. Coindesk,  https://www.coindesk.com/congressman-introduces-new-legislation-to-regulate-digital-assets
2. Jamie Crawley (2021) Binance to Wind Down Derivatives in Europe; Malaysia Orders Closure. Coindesk,  https://www.coindesk.com/binance-to-wind-down-derivatives-in-europe-while-malaysia-issues-reprimand
3. Nikhilesh De (2021) Kentucky Orders BlockFi to Stop Signing Up New Interest Accounts. Coindesk,  https://www.coindesk.com/blockfi-receives-fifth-cease-and-desist-from-kentucky-financial-regulator
4. David Z. Morris (2021) A Reckoning for Binance and Other ‘Global’ Exchanges. Coindesk, https://www.coindesk.com/reckoning-binance-regulation.
5. Alan Rappeport, Infrastructure Deal Puts Cryptocurrencies in Washington’s Cross Hairs, in New York Times. 2021: New York. https://www.nytimes.com/2021/07/30/us/politics/infrastructure-deal-cryptocurrency.html
6. James Rubin (2021) Moody’s Lowers El Salvador Rating, Maintains Negative Outlook Partly Due to Bitcoin Law. Coindesk,  https://www.coindesk.com/moodys-lowers-el-salvador-rating-maintains-negative-outlook-partly-due-to-bitcoin-law

Cryptocurrency Thursday

NFTs: Non Fungible Tulips?

In Nakamoto’s Happy Empire, the flavor of the week this year is the ever soaring inflation of Bitcoin (which is somehow viewed as a tonic for the much feared but not visible inflation of fiat currencies).

Right behind the hype and spectacle of Bitcoin prices,  is the rise of so-called Non Fungible Tokens, NFTs.

These are basically digital forms of something like trading cards.  The token part is obvious, the ‘non fungible’ part means not replacible, as in not forgeable.  Digital objects are easy to copy, NFTs use cryptographic and network protocols to make sure only one copy is valid at a time.  The point being to own the rights to the only copy, and to sell, buy, and trade ownership.

Like I said, pretty much trading cards and other ‘collectables’.  A very simple form of Digital Rights Management.

Pretty much anyone can create NFTs, and they can symbolize pretty much anything.  An NFT can be tied to an analog object, either as title to it, or just by association (a la baseball trading cards).  NFTs are particularly easy for digital objects, because the object or a representation can be embedded in the NFT itself.

NFTs can be used for anything you might use a trading card for.  Which isn’t all that much.

But there is money to be made, that’s for sure.  It costs almost nothing to create NFTs, so any income is all gravy.  The key thing is salesmanship, so corporations are taking up these new boxtops.  And celebrities are adding NFTs to their portfolio of merch.  And artists are exploring NFTs as a way to issue signed editions of digital or analog art.

As with so much of Emperor Nakamoto’s magic kingdom, NFTs are not particularly innovative (and not very disruptive, either).  This is obviously a digital version of a “certificate of authenticity”, that have been around for millennia.   Even the digital version has been around for quite a while (e.g., this, this, this, this, this, this, this)

This shiny new version of trading cards may be easy to use, but you still have to deal with the same problems.  David Kuhn writes about the problem of “authenticity” [2].  Just because you create a cryptographically signed “certificate of authenticity” doesn’t assure that the token actually is “authentic”.

Semantic Web fans will understand that the NFT is an “assertion” about the provenance of an object.  Validating the assertion about authenticity requires tracing it to a trusted authority and/or the author.  Neither cryptography nor blockchain establishes this logical validation.  (In fact, Nakamotoan blockchains are said to be “trustless”, which doesn’t sound like a good basis for establishing trust.)

One area where NFTs are “innovative” is their ambiguous legal status.  It’s not that NFTs aren’t covered by existing regulations, laws, and taxes.  Nikhilesh De discusses how NFTs seem to fit multiple existing legal frameworks [1]. <<link>> They are objects of value, so covered by money laundering and sanctions laws.  Sales are subject to sales taxes, and also covered by fraud and anticounterfeiting laws.  The objects themselves are potentially subject to copyright and other intellectual property laws.

It looks to me like trading in NFTs could potentially be illegal from many points of view at the same time!   Now there’s a useful “innovation”!

NFTs have been nominated for the Crypto Tulip of the Year in the past, maybe this will be their year!

NFT = Non Fungible Tulips!

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1. Nikhilesh De (2021) State of Crypto: It’s Time to Talk About NFTs and Intellectual Property Law. Coindesk, https://www.coindesk.com/nfts-legal-questions
2. Daniel Kuhn (2021) The Node: The Problem of Authenticity in NFT Art. Coindesk, https://www.coindesk.com/authenticity-nft-art-column

 

Cryptocurrency Thursday

Ripple in trouble with SEC

Ripple has some good ideas.  It has generally been very realistic about solving the remittance problem, recognizing the need for local, trusted agents, and the difficult problem of establishing a chain of trust from end to end.

Technologically, Ripple is not strictly Nakamotoan.  The tokens, XRP, are issued by trusted parties.  This is “centralized”, and the organization manipulates the supply of XRP. I.e., XRP are not algorithmically mined.

It has always been a close question whether such tokens are equivalent to conventional securities.  For the past decade, Ripple has been able to claim that XRP is a currency, which is not regulated as a security.  (Ripple’s initial press release stresses this point.)

Evidently, the US SEC has decided to test the question again with a new lawsuit (maybe) [1].  We don’t know what the case might be, but it likely will hinge on how Ripple operates.  Perhaps Ripple has been treading close to the boundaries, or overstepped.

This is hardly the only case.  The US SEC has been blazing away at the crypto community which is basically recreating conventional finance with digital tokens.  Many of these business are indistinguishable from conventional securities businesses, and the SEC has been shutting them down if they don’t comply with rules.

For example, this month ShipChain was closed because its ‘ICO’ was ruled to be unlicensed securities [2].  The company sold tokens and used the money to run the company.  The regulators found that the tokens are, in fact, a form of security, which must be registered.

It is clear that, despite cyber-anarcho propaganda, blockchains and cryptocurrencies can be, and are subject to existing laws.  Cryptocurrency may or may not be censorship proof, but businesses are very much subject to state power.

Now, the timing of Ripple case is certainly peculiar, with a change in administrations due in a few weeks. And, as Ripple points out, the SEC seems to be leaving the details to the next administration.  Who knows whether the new folks will even pursue the matter?

Coindesk reports a fierce, and perhaps over the top (preemptive) response from Ripple [1].  It includes the fascinating assertion that, by picking on Ripple, the SEC has picked two winners “bitcoin and ether (whose networks are at the mercy of the Chinese Communist Party),” (!)  The SEC, they say, “ is handing over the future of our global financial systems – underpinned by blockchain and crypto technologies – to an authoritarian regime.”  (Ripple leadership quoted in  [1]) 

Wow!

This is a little hard for me to parse, because the Chinese government has no direct control over the developers of either project. I’m guessing that they are talking about the predominance of Chinese operations in the mining of Bitcoin and Ethereum, i.e., the implicit 51% control over the consensus processes.

This point appears to condemn the entire concept of Nakamotoan consensus-based systems, or any open Internet protocol, as “at the mmercy” of the authoritarian control of the Chinese government.  If this is a real criticism, then the entire Nakamotoan enterprise has failed because the global Internet has failed.

Leaving aside the question of whether Ripple is a better choice than Ethereum or Bitcoin (because of “China” or otherwise), this rhetoric doesn’t address the question of whether Ripple may have crossed a regulatory line recently.  Decisions in 2012 are hardly evidence that Ripple couldn’t have strayed in the mean time.

We shall see.

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1. Nikhilesh De (2020) Ripple CEO Warns SEC May Sue Company Over XRP Sales. Coindesk, https://www.coindesk.com/sec-to-sue-ripple-over-xrp-sales-ceo-says
2. Danny Nelson (2020) Abandon ShipChain! Logistics Startup Torpedoed by SEC Over $27M Unregistered ICO. Coindesk, https://www.coindesk.com/shipchain-ceases-operations-sec-settlement

 

Cryptocurrency Thursday

Whatever happened to Libra?

Facebook’s ‘Libra’ cryptocurrency is a perennial favorite for Crypto Tulip of the Year.

Announced with great enthusiasm in 2019, Libra attracted the attention of mainstream commentators—and antagonists.

It even won the not-at-all coveted Crypto Tulip of the Year Award!

Libra uses a blockchain, but has a number of features that are not really pure Nakamotoism.  It’s a privileged blockchain and protocol, and it is supposed to be tethered to conventional assets (though the details of the peg are hazy).

But most of all, Libra is the spawn of Facebook, which is not only “the man”, they are “the man” that “the man” is afraid of.

With Facebook’s reputation for rapid deployment and not-giving-a, Libra was supposed to launch in 2019 and go public in 2020.  That hasn’t gone as planned.

So what is going on with Libra now?

Long story short:  There has been intense pushback from a lot of directions, not least from government regulators.

Cryptocurrency enthusiasts have grown used to their overgrown hobbyist community, in which a single, incomplete “white paper” is considered sufficient documentation, and agreement among a handful of developers on github is considered sufficient for a design review.

But Facebook is a totally different league, so lots of people paid attention.  In detail.  With great skepticism.

Among other things, governments and banks were not excited by the prospect of Facebook subverting banking laws, enabling tax evasion, and generally undermining global financial stability.

Other companies, too, are rightly concerned that Facebook would use its currency to undermine their own digital empires.

All of this was exacerbated by the hazy governance system, which appeared to be dominated by Facebook and a handful of corporate partners.  Just how will this be governed, and whose interests will be served?

And, of course, getting all that software to work took longer than hoped.  (I’m sure the engineers have secretly welcomed the extra time, especially since the delays are not due to software problems.)

With one thing and another, Libra has yet to launch.  But it is still cooking.

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This winter, Libra rebranded to call itself “Diem” [1].  (Maybe that is supposed to sound Latin, but it sounds Vietnamese to me.)  In addition to the name change, The board was reorganized to remove Facebook from direct control (Zuckerberg’s space company is on the board, as is a Facebook subsidiary.).  Many of the original backers have departed, notably the conventional finance companies.

Another change is that, at least at first, DIem seems to be focused on single coin tethers, rather than the poorly understood “baskets” of the original design.

A new version of the whitepaper is out, which is a lot longer than the 2019 original.  The new text notably has a long section on compliance to regulations that was not in the old version.  The new text essentially promises to follow all the rules for international money transmission, including know your customer rules and international sanctions.

With these changes, the Nakamotoan promise of pseudoanonymity and permissionless transactions are pretty well out the window.

Organized in Switzerland, Diem is now awaiting approval from Swiss authorities for its first stable coin, the “Diem Dollar”.  Who knows when this may be approved?

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At least one critic is unimpressed with the “rebrand”.  German finance minister Olaf Scholz has remarked,    “A wolf in sheep’s clothing is still a wolf” [3]. <<link>>  It seems that the powers-that-be are not interested in being “disrupted”, no matter how you brand it.

“We must do everything possible to make sure the currency monopoly remains in the hands of states.” (Schotz quotes in [3])

Quite.

Diem says it is now ready to launch in 2021, pending approval.  We’ll see.

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One of the tenets of Nakamotoism is that the peer-to-peer, decentralized blockchain, like the internet, cannot be regulated or censored.  Libra/Diem seems to have hit a lot of pretty effective resistance.  Of course, Diem isn’t really all that “decentralized”, and the participating organizations have been subject to pressure and potential coercion.

I’ll note that Facebook itself could be subject to coercion. It is easy enough to imagine authorities that don’t like Diem deciding to ban Facebook itself to keep out Diem. Is Diem cool enough for Facebook to risk the rest of its business for?

At this point, we can ask just how Nakamotoan Diem really is.  It’s privately run.  Users and services must be authenticated and approved by governments.  The digital tokens are pegged to “fiat” currency or other conventional assets.

Basically, the only features of Nakamotoan blockchains retained is the ubiquity and alleged efficiency of the blockchain.  If it works as intended, Diem will provide conventional financial services cheaply and, ideally, to people who are reached by Facebook but not conventional banks.

This is not nothing, but it may not be quite as disruptive as enthusiasts hope.

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1. Nikhilesh De (2020) Libra Rebrands to ‘Diem’ in Anticipation of 2021 Launch. Coindesk, https://www.coindesk.com/libra-diem-rebrand
2. Jaspreet Kalra (2020) Rebranded Libra Still a ‘Wolf in Sheep’s Clothing’: German Finance Minister. Coindesk, https://www.coindesk.com/libra-wold-in-sheeps-clothing-german-finance-minister
3. Reuters Staff, Facebook’s renamed cryptocurrency is still ‘wolf in sheep’s clothing’: German Finance Minister, in Reuters – Technology News, December 7, 2020. https://www.reuters.com/article/uk-g7-digitial-facebook/facebooks-renamed-cryptocurrency-is-still-wolf-in-sheeps-clothing-german-finance-minister-idUKKBN28H202

 

Cryptocurrency Thursday

 

 

Libra for the unbanked?

Facebook’s Libra cryptocurrency builds on everything that has been done in last decade (Anno Post Nakamoto?).  They also are recapitulating many of the same claims and enthusiastic hopes (with the difference that Facebook has considerably more oomph than a bunch of Libertarian hackers).  But, unfortunately, they are not necessarily learning all the lessons they might.

One of the imagined benefits of Libra is “inclusion”, providing service to the “unbanked” [3].   Facebook reckons there are a billion and more such “unbanked”, and they imagine that Libra can do what Bitcoin and everything else has failed to do, get these people into the global economy.

One key part of this “inclusion” is serving refugees and remote workers, including cross border remittances.  This is an obvious use case for cryptocurrencies, but to date it has not really worked out.

I guess Facebook figures that they are different, so they can solve these problems where others have failed.

Daniel Evans notes that over half of the “1.7 billion unbanked” Facebook looks to “come from just seven countries: Bangladesh, China, India, Indonesia, Mexico, Nigeria and Pakistan”, places where cryptocurrencies are banned, facebook is restricted, and face significant sanctions and legal barriers [2].  The other half probably include a lot of people with very little money, and probably with limited access to the digital world.  So how realistic is this target demographic?

“It just isn’t credible that this is about servicing the unbanked”. [2]

Worse, Facebook doesn’t seem to know anything at all about retail banking of any kind in the real world. People need to be able to transact in local fiat currency [1] .  Tokens are mostly useless. And, by the way, most of the “unbanked” have very little money, so what exactly is the business model?

“The bottlenecks aren’t blockchain scalability, the real bottleneck is between the real world and the virtual world,” said a Bitspark user who works in the crypto sector” (quoted in [1])

“The unbanked experience a starkly different reality to what Facebook’s Libra portrays it as,” Ryan said. “This is apparent by their members – where there isn’t a single consideration for cash settlement. … If [Libra] did [understand], they would have members like Western Union who do service the unbanked with cash settlement as the focus.”  (Maxine Ryan quoted in [1])

(And Daniel Evans makes the interesting point that a tethered cryptocurrency like Libra is essentially foreign currency—which exposes users to exchange rate disasters (see Greece, Argentina, etc.). [2])

As Evans suggests, we don’t really know what Libra is really up to. But they don’t seem to be serious about serving the unbanked.

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1. Leigh Cuen (2019) This Tiny Crypto Startup Has Lessons for Libra’s ‘Unbanked’ Dreams. Coindesk, https://www.coindesk.com/this-tiny-crypto-startup-has-lessons-for-libras-unbanked-dreams
2. Daniel Evans (2019) Examining Facebook’s Claim Its Crypto Is for the Unbanked. Coindesk, https://www.coindesk.com/examining-facebooks-claim-its-crypto-is-for-the-unbanked
3. Zack Seward and Nikhilesh De (2019) Facebook Unveils Libra Cryptocurrency, Targeting 1.7 Billion Unbanked. Coindesk, https://www.coindesk.com/facebook-launches-subsidiary-to-support-new-libra-crypto

 

Cryptocurrency Thursday

 

Yet Another Nakamotoan “Innovation”

I know we are all shocked, shocked! to read reports that 95% of reported cryptocurrency trades are fake [3].

Nakamotoan cryptocurrency is designed for unregulated exchange, and the Nakamotoan dream is to “disrupt” money, mainly by doing away with all those “centralized” services that “censor” economic activity.

Not surprisingly, an “uncensored” market will mainly be filled with fake trading and other fraud.   (And I love the way the headlines spin this:  referring to the “95% junk trades” report, the headline is “Bitcoin Futures Volume Is More Significant Than You Think”)

Interview with a Russian Bot Master

Anna Baydakova reports on an unusually frank and easy to understand explanation of how this happens [1].  In an interview, Alexey Andryunin describes his business Gotbit, which, as the headline says, “For $15K, He’ll Fake Your Exchange Volume”.

Why would you do this?

It’s called pumping, and it’s basically fraud.

A scam ICO (and most of them are scams) “can live a couple of months on fake volume, allowing the founders to cash out, then stop paying for the “market-making,” after which the token’s price will plunge. They close down a couple of months later.”

This is, of course, completely illegal on legitimate markets.  But crypto exchanges aren’t particularly legitimate.  In fact, they seem to be complicit in this sort of nonsense.

Just to be clear: this is not a brilliant invention, nor technically difficult.  This was invent thousands of years ago, and is definitely illegal.  Andryunin is a college student, which will give you an idea of the low bar for implementing this ancient scam.  (In my experience, college students have beginner’s skills, lots of time, and little sense of responsibility.)

But why can he be so open about his “not entirely ethical” (indeed, criminal) business?  For one thing, his “company” isn’t legally registered anywhere, and most of the exchanges are barely legal.  No one is going to get in trouble for admitting the crime.

The other reason is that he knows that the grown ups are coming, and regulators are cracking down on cryptocurrency exchanges.  Applying even the most basic financial and anti corruption rules will shut down these exchanges and Andryunin’s side hustle.

Get back to your school work Alexey! : – )

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1. Anna Baydakova (2019) For $15K, He’ll Fake Your Exchange Volume – You’ll Get on CoinMarketCap. Coindesk, https://www.coindesk.com/for-15k-hell-fake-your-exchange-volume-youll-get-on-coinmarketcap
2. Nikhilesh De (2019) Bitcoin Futures Volume Is More Significant Than You Think, Bitwise Says. Coindesk, https://www.coindesk.com/bitcoin-futures-volume-is-more-significant-than-you-think-bitwise-says
3. Matthew Hougan, Hong Kim, and Micah Lerner, Economic and Non-Economic Trading In Bitcoin:Exploring the Real Spot Market For The World’s First Digital Commodity. Bitwise Asset Management, 2019. https://www.sec.gov/comments/sr-nysearca-2019-01/srnysearca201901-5574233-185408.pdf
4. Yogita Khatri (2019) Public Perceptions of the Bitcoin Spot Market Are Wrong, Says Bitwise. Coindesk, https://www.coindesk.com/public-perceptions-of-the-bitcoin-spot-market-are-wrong-says-bitwise

 

Cryptocurrency Thursday

QuadrigaCX: Early Charge for Cryptotulip of the Year

The CryptoTulip of the Year competition is off to a fast start!

Canadian crypto exchange QuadrigaCX (QCX) exploded and cratered, with an unprecedented oopsie.  As even the mainstream media have reported, the big cheese of QCX died suddenly (in India), and no one seems to know where his secret encryption keys are.  This means that a bunch of customers’ cryptocurrency is locked up in accounts that no one can get to.  It’s not ever clear whether anyone knows all the accounts.

Oops!

In hindsight, everyone is wondering just what was going on. Why would you have a multimillion dollar service under the control of one guy, with no backup plan?  And why would anyone entrust their money to such a system—not that anyone really understood that was how it was set up.

The dark comedy continues, as the company managed to accidentally send yet more bitcoins to an account they can’t access [1]

Oops!  Again.

Amazingly enough, lawsuits are raining from the sky.

Yessir, definitely and innovative and disruptive technology!

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QuadrigaCX has to be a strong candidate for CryptoTulip of the Year for 2019, not so much because of the epic and innovative oopsies, but because of the so-not-Nakamotoan nature of the oopsie.

The entire point of Nakamotoan cryptocurrency is to be decentralized,  so that the failure or corruption of a single institution or person does not cripple the system.

At the typical levels of irrational exuberance surrounding crypo technology, there is little room for downers like planning for the possible death of a key individual.  (“We’re disrupting money over here!  We have no time for legacy concerns like death and taxes!”)

In hindsight, it is obvious that QCX was highly centralized, and therefore highly non-Nakamotoan.

But, wait. Bitcoin is decentralized, no?  And there was no error in the Bitcoin protocols or blockchain, right?  So everything should be fine, true?

Obviously not.

QCX also gets CryptoTulip points  for being such a useful object lesson.  Essentially, QCX shows us that The alleged properties of Nakamotoan technology—decentralization, trustlessness, anonymity—cannot be assumed to be true for a real system built on top of the technology.

Once again, we see that regardless of the Nakamotoan protocol, the actual real world system includes lots more than the blockchain and “consensus” protocol.  And the rest of the system typically has “centralized” components, and “trusted” parties, and so on. The bad news is, the whole chain still is only as strong as its weakest link.

In fact, generally speaking, the trustlessness of the Nakamotoan protocol means that other parts of the system have to be trusted, including the users (who can very well lose their own keys) and exchanges (which, shockingly enough, have to enforce tax and money laundering laws).  And so on.

Basically, Nakamoto’s design has pushed “undesirable” properties (such as “centralization” and “trust”) out of the core protocol and into the rest of the system.  I think there is a sort of a conservation law for requirements, here.  The total amount of “trust” is inelastic: you can move it around, but you can’t get rid of it.

Psychologically, you may wish that you didn’t need to “trust” third parties, but the fact is that the world is mostly “third parties” and you have to figure out who and how to trust them. Like it or not.

(There Ain’t Any Such Thing As A Trustless System. (TRANSTAATS ?))

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So let’s put QuadrigaCX on the board for potential Crypto Tulip of the Year for 2019.  There’s plenty of time left, of course, and who knows what great “oopsies” may happen in the rest of 2019.  (Ethereum is still working on a traumatic upgrade hard fork, so that will be interesting.)

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1. Nikhilesh De (2019) QuadrigaCX Lost Another $500K in Bitcoin By Mistake. Coindesk, https://www.coindesk.com/quadriga-inadvertently-sent-btc-to-dead-ceos-cold-wallet-ey-report

 

Cryptocurrency Thursday