Byte Me: the cryptocurrency monkey’s paw
One of the fondest hopes of the cryptocurrency true believers looks set to come true this year. Real decentralised value transfer systems could be on their way both to retail and institutional banking. But, in a cruelly ironic twist, they will be delivered by the blackest names in individual privacy and financial libertarianism.
Here at the Byte Me offices, stablecoins have long been held to be the most important innovation to come out of the tech world’s obsession with blockchain.
The idea is simple. Unlike bitcoin and the flock of altcoins, stablecoins do not have a value on which investors can speculate. That means you don’t get investors jumping in with critical cases of FOMO (Fear of Missing Out) simply to HODL (Hold On for Dear Life) in the hope of funding a lamborghini purchase.
Instead, you get a cryptocurrency collateralised by and pegged to fiat currency. That means a system wherein real, hard-as-nails, honest-to-god, central bank fiat currency can be transferred in a decentralised manner. Via the magic of a distributed ledger, you can instantly send cash to your neighbour, coffee vendor, or AK-47 salesman without the need to involve a bank.
At an institutional level, the benefit is perhaps even more pronounced. Rather than relying on traditional settlement methods — often with multiple day delays — a distributed ledger can see what cash its members have on hand without disclosing that to any of the other participants, removing the need for clearing and settlement delays.
Sadly, the concept’s reputation was tarnished by scandal. Tether, a stablecoin maintained and operated by Bitfinex, was beset by controversy. Bitfinex was accused of manipulating the cryptocurrency market through the issuance of uncollateralised Tether. While no charges have been brought, this week Bitfinex updated its terms of service to admit that Tether was not 100% collateralised. Astonishingly, this revelation did not cause an immediate run on the asset which, at time of writing, was trading at around $1.01.
But Tether’s reputation only really mattered where Tether was used: in the cryptocurrency world. Outside of that bubble (pun very much intended), the rules are different and, with big serious players behind it, stablecoins look set to take root, at long last providing a means to send each other money in a decentralised fashion.
Think of it as a cross between Paypal and bitcoin: a non-bank payments network for fiat currency, taking place across a distributed ledger.
Sadly for the crypto puritans, it’s as though someone made a wish with the cursed monkey’s paw from WW Jacobs’s story. They’re getting what they want, only to realise that it’s the last thing they’d choose.
If you were paranoid enough to object to trusting banks to manage your payments, discovering that Facebook is offering to take over is probably not your dream scenario.
Facebook is intending to launch Facebook coin — a collateralised stablecoin that will be available for its billions of users to send each other through its messenger service.
Facebook is making a big deal of end-to-end encryption and distributed ledger ensured privacy but… well, we’re talking about a company whose business model revolves around the sale of user data.
If Facebook coin’s success relies upon the question: “Do you trust Facebook?” then it might be doomed. Perhaps the question: “Do you trust Facebook more than you trust banks?” might be kinder to Facebook, but the prospects still don’t look good.
But, if the story of the distributed ledger as a means of guaranteeing privacy convinces people, then perhaps this is the future of payments.
Then again, we are still light on technical details. The technical standards and privacy protocols that Facebook will adopt remain utterly mysterious. When they become clear, we may discover that, on the continuum between Paypal and bitcoin, we are very much closer to the Paypal side.
Unless Facebook is offering a truly private and decentralised product, I would think very carefully before opening up the fertile landscape of my payments data to a company so demonstrably willing to profit from them.
On the institutional side, privacy concerns are rather different. No one is quite as worried about a central third-party overseeing trades. In the matters of high finance, the concerns are generally about whether or not the authorities can trust the denizens, rather than the other way around.
JPM Coin is one such offering, which Byte Me has discussed in detail. But since it comes from a single bank, it is necessarily limited. While lots of businesses have an account with JP Morgan, it is far from clear that JP Morgan’s competitors would be happy to transact in a coin hosted by their competition.
Deutsche Börse’s offering stands a much better chance. As a piece of market infrastructure, it is making a concerted effort to appeal to as many banks as possible. Moreover, rather than being collateralised by cash in a commercial bank’s accounts, its coins will be backed by central bank deposits. (See separate story for more details.)
The project seems to be the most advanced and serious attempt to create a genuinely valuable piece of market infrastructure using blockchain.
Just like with Facebook coin, Deutsche Börse’s may change the way finance operates, but not in the #disruptive ways the blockchain idealists hoped for.