Bitcoin Analyst: Beware of Facebook’s ‘Crypto’, Big Trouble for Major Banks, Authoritarian Regimes and the Financial Services Industry
In a Bitcoin Q&A on Facebook’s GlobalCoin, computer scientist and Bitcoin advocate Andreas Antonopoulos maps out how Facebook’s upcoming stablecoin, which will be used to send money across borders, will disrupt banking, and why it is not a true cryptocurrency. He argues that there are “five pillars” that define a true cryptocurrency – public, open, neutral, borderless and censorship-resistant – and that none of them apply to GlobalCoin.
Technically, GlobalCoin will rely on miners, like Bitcoin; however, unlike Bitcoin, GlobalCoin will operate in a closed system that will have to comply with the law of the land in various jurisdictions. Also, unlike Bitcoin, in order for a miner to join the network and operate a full node, each will reportedly have to pony up $10 million.
“Fundamentally, the thing to understand here is that what Facebook or any company like Facebook is proposing is not a cryptocurrency. It doesn’t have any of the fundamental characteristics of cryptocurrency. It doesn’t stand on the five pillars of an open blockchain.”
“Anything that’s created by a centralized organization … cannot achieve any of these five pillars. And the reason they cannot achieve it is because the law prevents them from doing so. So first of all, they can’t be censorship-resistant.”
“They can’t be censorship-resistant because they are legally required to prevent the transmission of funds to certain entities. These entities include sanctioned countries like Iran, North Korea, Venezuela, etc.”
“It also can’t be borderless because you’re prohibited from sending money to certain countries which means that you have to be able to identify both who is receiving this money and where they are. In order to identify who and where they are, you have to do know-your-customer, anti-money laundering counterterrorist financing regulations. Essentially you start behaving like a bank. Anybody who implements a payment system that’s centralized has to follow all of the rules of a money transmitter or bank. At that point, you’re no longer neutral.
The protocol itself cannot be neutral, because neutrality means – any sender, any recipient, any value regardless. And the protocol does not care where you are, who you are, what you’re doing with that money and why. And a regulated entity cannot not care about all of those questions. They have to check all of those things. Who are you, where are you, what are you doing with that money, and where did it come from. You may notice those very specific questions you probably recognized. Your bank has probably asked you some of these questions. One of the exchanges you’re dealing with has probably asked you some of these questions. ‘What is your income? Show us your ID. Which country are you? Are you an American?”
“Facebook operates as a borderless company in many aspects of its operation. Money is not one in which it can do that. It can do that with content through various protections of the law, and even that results in Facebook being blocked and banned in a number of authoritarian countries. But to try and follow the payment regulations for two billion customers who are split in 194 countries is a morass, and it would result in the same kind of problems that PayPal has. Why is PayPal not a global company that serves 194 countries equally? Because they can only serve 20 or 30 countries equally, and even there they have to do all of these things because they became a bank. They’re not censorship-resistant. They’re not borderless. They’re not neutral, and they can’t be public either because they can’t make all of this information publicly available because that would violate various laws.”
“As a result, most importantly, they cannot be open. They cannot give you access to send it or receive it outside of their platform. They cannot allow you to extract it from their platform. They cannot allow you to sell it to someone else without them being an intermediary. They will have to sit in the middle and control every transaction. They’re not open. They’re not public. They’re not neutral. They’re not borderless. They’re not censorship-resistant. They’re not a cryptocurrency. They’re a bank. They’re a bank just like PayPal and JPMorgan Chase.
Now, they’re going to be a very large, multinational, very powerful bank with a lot of users. So banks should be really scared because when technology companies start playing in banking, and they have all of these users and all of this experience in technology, that creates real challenges for banks. Because even though Facebook cannot be as open, as borderless, as neutral and censorship-resistant as a cryptocurrency, they can certainly be more open, more borderless and reach more countries than JPMorgan Chase, and they start off with more users.
So that should be scary for all of the existing financial services companies. It should also be scary for some authoritarian regimes that will try and fail to block Facebook, and then try legal shenanigans and again, probably fail or face an army of lawyers. So this does affect central banks as well, especially central banks in countries that have problems. It does affect fiat currencies because it’s going to force banks to basically modernize. So again, all of these legal restrictions are going to get challenged, of course, which is going to probably make the banking system more open, and that’s a good thing, but it can never be a cryptocurrency and it can never be as open as Bitcoin or any of the other open, borderless, public, censorship-resistant cryptocurrencies.
So I’ll hold what I have because for me this is not about convenience of payment. It’s not about access to a two-billion user base. This is about being able to be free to hold my own money, to not have anyone be able to freeze it, censor it, tell me who I can transact or when I can transact or how I can transact or what I can transact for. That freedom is at the core of cryptocurrency, and that freedom is the one thing that you can’t do with this GlobalCoin.”