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Byte Me: Facebook’s GlobalCoin risks crypto wrath

Facebook has announced more details of its planned cryptocurrency payments system, GlobalCoin, and they are not likely to please the crypto community

As Byte Me has said before, Facebook’s foray into cryptocurrency is a bit like the fulfilment of a bitcoin purist's dearest wish, but carried out by an evil genie: a genuine cryptographic value transfer system with the potential for mainstream adoption, actually achieving what Satoshi Nakamoto, bitcoin’s mysterious founder, set out to do 10 years ago.

But the point of bitcoin was to ensure that you didn’t rely on a middle man to validate your transactions. That was supposed to mean there was no one to rent seek, no one to check you weren’t committing crimes, and no one to analyse and sell your transaction data to advertisers.

Given Facebook’s history, it would be hard to imagine a worse company muscling in on bitcoin’s territory.

Of course, technical details are still light. It’s possible that Facebook’s protection of transaction data and privacy mechanisms will meet the approval of every tinfoil hat-wearing paranoiac but we doubt it. The fact is that privacy is still not a popular feature from a public relations point of view. If it were found that Facebook’s GlobalCoin was being used to buy AK-47s and heroin its reputation would be ruined.

Facebook is intending to charge $10m to allow people to operate nodes (computers dedicated to verifying transactions on a blockchain). That idea is utterly antithetical to the democratic principles of bitcoin, but more importantly, it indicates the benchmark of value that Facebook expects companies to extract from running nodes.

Of course, people running bitcoin nodes charge users transaction fees, but unless there are stringent rules and cryptographic systems in place to prevent it, GlobalCoin node runners will be able to sell transaction data to advertisers.

Believe it or not, through the magic of cryptography (and something called zero knowledge proofs), it is perfectly possible to verify and settle transactions without revealing what they are. But Facebook may look on this as an unnecessary curtailment of a source of revenue.

Tether raises $1bn

In a normal market, a fraud investigation by the New York Attorney General’s office would probably be enough to keep a company out of the market. Not in cryptoland.

The prosecutor is investigating iFinex, the company behind Bitfinex and Tether, for losing $850m because of problems with its payments provider, the Panama-based Crypto Capital. When the money went missing, iFinex used $700m of the money used to back Tether, its stablecoin product.

For those who are not up with the world of crypto, a stablecoin is a cryptocurrency pegged to a fiat currency such as the dollar. 

It is not supposed to have any value as a speculative asset, but it has some important uses as a market utility. In the cryptocurrency market, stablecoins provide a convenient way for investors to park money overnight and avoid being buffeted by the notoriously volatile 24-hour cryptocurrency markets. In normal markets, banks are experimenting with their own stablecoins as a means of instant settlement.

Tether was supposed to be 100% collateralised by investor deposits, so lifting out $700m would be a serious breach of that. The allegations are long and complicated — perhaps too much so, drawing a rebuke from a New York judge for their “amorphous and endless” nature. Of course, iFinex rejects the claims.

But in the very midst of this legal battle, Bitfinex has gone ahead with an Initial Exchange Offering of cryptocurrency tokens.

Apparently the offering raised $1bn in 10 days.

We only have the word of Bitfinex executives to go on for that figure though, and the company already stands accused of fudging its numbers — and not just by the New York attorney general’s office. Bitfinex was subpoenaed by the CFTC in 2018, and has consistently refused to be audited.