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Facebook is reportedly developing GlobalCoin a likely cryptocurrency travesty

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According to rumours reported by Bloomberg, Facebook is developing a cryptocurrency to be initially released in India that will let its users transfer money on WhatsApp.  Apparently more hush hush but this is going to be a stablecoin pegged to the US dollar. There are further murmurings that there will be supporting assets to protect the value of the coins.

 Without going any further its already daft, if you collateralise a currency then you don’t need a blockchain or a crypto currency come to that, if you are pegging the crypto currency how can you make that work without full collateralisation. Jumping into payment systems is not for the fainthearted and for the uninitiated it is likely to get them into a lot of trouble.

The first issue we need to understand are account based payment systems and direct asset transfer systems. If you pay with cash you are making a direct asset transfer, there are no intermediaries involved, no transaction fees, its anonymous and you are in charge of looking after your own money. It goes without saying that you can have electronic direct asset transfer protocols with the same properties for example as physical cash, MonZap is such an example. In fact such systems are better than cash because you can be protected from losing your money.

Account based system are pretty well the reverse, somebody is holding your money and you deal through them to make payments to others. There are intermediaries by definition so there will be transaction fees and it can’t be anonymous for the same reason. Somebody else is looking after your money so you had better trust them. If you are managing consumer accounts then you have various regulatory directives one of which is that you will resolve disputes and manage the attendant charge backs. In the early days PayPal badly miscalculated these dispute resolution overheads and many of its merchant customers were equally unhappy when their accounts were frozen.

Are cryptocurrencies account based? Yes of course they are and please have a look at my previous article on Banks, Blockchains and Trust. The success of most cryptocurrencies so far is nothing to do with a medium of exchange, unit of account or a store of value but more about a speculative punt that its value will increase significantly in a short time. Cynically people might say that you believe you can find somebody who will pay you more than you did when you bought it. For the avoidance of doubt they are bubbles and in due course they will burst, unfortunately that is pretty hard to predict and when it comes it will happen with alarming speed. Bitcoin for example could not withstand a run on its value because it is weakly resourced on transaction processing , no matter what you do you cannot exceed the transaction limit of about 7/sec without a change of design. Bitcoin Cash was an attempt to do that but was not widely accepted. It is for these reasons Bitcoin has poor liquidity.

It is perfectly possible to front a blockchain cryptocurrency with a direct asset transfer system. Let’s assume that you have bitcoin asset tokens where 1 unit of the token is equal to one bitcoin. With such a system you could move bitcoin value token instantaneously with no transaction fees and anonymously. We are now back to the same place, is that cryptocurrency collateralised, does the operator of the system actually have an equal backing for the crypto currency as the value of asset tokens issued? Generally not, which is why the blockchain is used but compare that with a physical cash system where we would normally trust the central bank to have adequate reserves.

But the cryptocurrency has a worse problem even if it is fully collateralised. Imagine there is a run on say bitcoin where a large number of holders want to cash out into fiat currency. The system is limited to about 7 transactions a second and finality of a transaction is at least 1 hour. You can see immediately that the price would rocket down as everybody tries to get out the fastest. This will happen it’s just a matter of when. Even if you design a blockchain system with a higher transaction speed you will still get the problem unless you suddenly find a way of handling 50,000 transactions per second and then I would be very suspicious of the security of the consensus system.

I really can’t understand why organisations such as Facebook wouldn’t just go for a direct asset transfer system, fully collateralised of course, the blockchain is not scalable to meet the needs of a high volume low value electronic payment system. If they did the banks would worry because that would potentially end up with them losing control of at least the lower value part of the electronic payments world. I know I’m biased but why wouldn’t they use MonZap?

Dr David Everett


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