David Gerard is an expert in crypto and blockchain technology. Through his work, David raises awareness about this new form of finance. His criticism about it, makes of his point of view a shocking thesis that claims caution and encourages research.
Welcome to Fyggex, David. Tell us a bit about yourself.
By day, I work as a Linux system administrator in a publishing company in London. I got into writing about cryptocurrencies because I had been following the field for a few years, and I thought it was amusing and interesting. I was very cynical about Bitcoin, crypto and blockchain. Then I decided “I’ll write this up as a book”. That book was “Attack of the 50 Foot Blockchain”. I started it in 2016, when nobody cared, and it came out in 2017, just in time for the big Bitcoin bubble. It took off and did surprisingly well. I caught the wave at the right moment.
This developed into half a job as a cryptocurrency journalist. I try to approach it as being a finance journalist, specializing in cryptocurrencies and blockchains. I feel that is the best way.
I have written another book “Libra Shrugged: How Facebook Tried to Take Over the Money”, which is all about Facebook’s attempts to do the Libra cryptocurrency.
In “Libra Shrugged” you do a comprehensive critique to Facebook’s crypto ambitions. Why, in your opinion, isn’t Libra a feasible project now?
The idea of Facebook doing a payment system is a reasonable idea. You can easily imagine doing a payment system, like PayPal, but in Facebook. It might even be a useful business. However, their approach quite explicitly started with “we would like to do blockchains, how can we do a blockchain and apply it to a billion Facebook users? Let’s do a cryptocurrency!”. They sort of started from the solution and then tried to work out a problem for it.
This is of course the wrong way to do things. And that is a problem with a lot of blockchain proposals in the enterprise. They do not start with “we have a problem; how do we solve it?”. They start with “we have a blockchain; how do we use it?” This is the wrong way around.
Do you think we will see Libra in 2021?
They had this complicated plan in 2019 of a basket-based currency with a massive backing reserve. They would basically be a bank issuing private currency. This plan was not acceptable to any regulator.
What they had done was to recreate the sort of money market funds type of arrangements that were largely responsible for the 2008 financial crisis. If there are one thing regulators have nightmares about, it is someone doing a 2008 again. Regulators literally reacted within hours, and told Facebook, “you cannot do this”. So, they (Facebook) came back with a revised plan in April 2020, which still was not good enough. The trouble is that is being done by Facebook (which nobody trusts) and at a Facebook scale.
The way to be a systemic risk is to be big and careless. All their reactions to the Libra version one objections, were really worrying. They did not understand the problem. And that worried people a lot.
What is the problem in your opinion?
There was an ECB paper that said that this would make Libra the biggest money market fund in Europe. That is a problem. And the fact that it is backing what is supposed to be used by people as money, does not make it less of it. They (Facebook) did not do any of the reading. They were so ignorant of history and so confident in their own brilliance, that they had forgotten what happened just 11 years before.
I do not understand how these smart people could have missed that.
In your website you wrote about how Coinbase (one of the main crypto exchanges) is dropping the idea of trading in margin. Do you think traders could expect to leverage crypto again in Coinbase?
I think that Coinbase was not happy with certain rules that the CFTC (Commodity Futures Trading Commission) put into place about physical delivery of Bitcoin. Coinbase wanted to keep this as book entries because it is much faster, since blockchains are very slow and inefficient.
Coinbase tried to do lots of margin trades at high volume fast. However, they cannot scale it up to having all of these execute on the Bitcoin blockchain. They decided it was too hard, so they stopped.
These are commodities, and if Bitcoin is going to be treated by the same rules as delivery of aluminum or steel, then physical delivery or control is going to be involved at some point when you terminate a physical delivery contract. Otherwise, you are just doing speculation.
Talking about commodities, do you think Bitcoin will be the next gold?
No, definitely not. Bitcoin as a digital version of gold is one of its founding myths.
Gold has a stupendous amount of cultural and historical weight. As a commodity, gold has a lot of problems. It is super volatile and overly speculated on. But unlike Bitcoins, gold has a use case. Since 1971, it is not even money but a very popular shiny rock. If gold collapsed in price, that would not really affect the world’s finances. I think that the idea of Bitcoin as gold is just a myth that Bitcoin promoters advanced early on.
Do you think there are too many ads or too poor-quality content from cryptocurrency and blockchain media?
Cryptocurrency and blockchain media are frequently terrible.
I know a lot of cryptocurrency journalists who are good and sincere. The trouble is where the money that pays for it, comes from. To a large extent, a lot of crypto media is sponsored by the companies that want to promote Bitcoin trading. So, the content tends to be less like trade press and more like promotional press, with some journalism happening in it. And I do not know a good way around that.
I really like The Block’s approach, where journalists are basically paid by subscribers. That sets up the incentives correctly. At least, they are writing for their readers. There are a lot of good crypto journalists, who are talented people, know the area and are serious professionals. We just need to give them a space to work in.
What are your thoughts on CBDC’s (Central Bank Digital Currencies) launching their own cryptocurrency?
The current wave of interest in CBDC’s is entirely because of blockchain. But implementations get less blockchain-like since you do not need it at all. We are talking about a centrally controlled thing, literally a central bank. So, the blockchain is just a sort of data store and communication mechanism. You would have a much more efficient system with a more central database.
The biggest CBDC that will be coming out first is probably China’s. In China, they started off from the blockchain interest unit at the People’s Bank of China, so, they were thoroughly blockchain from the beginning. Then, they ran actual tests on transaction rates, and they discovered that blockchains could not possibly scale up to what they needed. It turns out that China is quite big and if they were going to do a digital currency, they would have needed to sustain 300,000 transactions per second.
The interesting thing about central bank digital currencies has nothing to do with blockchain. The interesting bit is when it is the central bank that has liability. This is literally cash. These are literally currency units. If you are a banker, you care a lot who the liability is against.
The main thing is, whether these (CBDC’s) are a good idea, whether you need them or whether they serve a consumer purpose. Again, you should be starting from the solution, going to the problem.
Could you give as an example?
My favorite one is the Bahamas Sand Dollar because it started with a problem. In this case the central bank stepped in and did a currency with an application. In Bahamas, lots of people are quite poor, and cannot get bank accounts. They all have phones, but network connectivity is bad. There were a whole bunch of parameters, and they set up the system based on the problem. That is the right way to do it.
As it turns out, the Sand Dollar looks like it will be a useful new payment mechanism because it solves an actual problem that consumers have. I think that is the key to a central bank currency taking off. It is not about what bankers would like, but about having an actual need clearly set out, and then trying to solve it.
Pioneers have been in the crypto long time, why the early majority is not yet in?
This is the use case problem again. Bitcoin was originally proposed as electronic peer-to-peer cash. It was supposed to be a payment system, but it turned out to be bad at it for several reasons.
Bitcoin is very consumer hostile because of its irreversibility. Irreversibility is bad because people want refunds and disputes to be possible. They do not want to try to build fancy escrow mechanisms to perform a basic function of finance, such as being able to pull your money back from a crook. You cannot really get a new payment system to take off without reversibility.
Bitcoin is really brittle, and this applies to all cryptos too, not just to Bitcoin. If you make one mistake, your coins are gone. If you accidentally throw your hard disk, lose your keys, or get hacked, your coins are gone. All hacks, thefts, frauds, and fat finger fumbles are final. And that is bad.
What are in your opinion the biggest threats in crypto?
The biggest problem is that it is very hard to use and that you must be your own bank. But being your own bank is not a feature. I do not want to be my own bank because that is not my skill set. Civilization is built on division of labor. I am not a banker and I do not know security well enough to do that job. And I outsource it to people who are regulated under legal constraints. Being your own bank is not a feature.
You claim that being your own bank is not a feature. Yet isn’t that what many praise about Bitcoin and Blockchain?
Some people want that. There is a payment use case for Bitcoin and cryptocurrency.
In the US for example, there are some businesses (like sex workers and cannabis businesses) that cannot get banking. Not because they are illegal, but because banks are pushed not to supply these legal use cases. Then, they would have a legitimate use case for another payment system, in this case cryptocurrency.
World has more cryptos than traditional currencies (FIAT). Why new are still created?
For the simple and obvious reason that one way to get rich for free is to make your own magical internet money. It took until about mid 2011 for someone to just make a copy of Bitcoin. I think it was called Ixcoin. Basically, the guy that created this coin, changed the parameters of the Bitcoin code, making it another coin. Then, he sold it for some Bitcoins and then disappeared in an exit scam.
The motivation is that if you make your own magical internet money, you might be able to get rich for free.
In your opinion, which countries/jurisdictions have most advanced crypto regulation?
I really do not know. Switzerland has tried really hard to have a good delineation of the various types. They have not had a lot of huge scandals
Cryptocurrency trading markets are dollar derivatives. You get into crypto trading because you want US dollars, which is why everything is priced in US dollars. The US dollar is the world’s reserve currency, and the US is very aware of that. So, there is a lot of regulation in the US coming along, especially in the state of New York. All the US dollars go through New York eventually because that is where the banking is.
Some people talk about how much they love a completely unregulated market, free of the oppression of governments. If you are trading on the London Stock Exchange with another trader, you know that one of you wins, and another loses. You both know what the game is about. But neither of you has as your threat model that the London Stock Exchange is going to rip you off. That is not even something you consider. In crypto however, your exchange is a threat. What if the exchange decides to rip you off? What if it decides to wash trade against you or front run you? Or what if it just disappears with your money one day? This happens a lot.
Is there a trustworthy crypto exchange?
Gemini is a good example. I have heard bad stories about every crypto exchange out there. The only one I have not heard weird scandals about, is Gemini. Their whole pitch is “we are serious business. You can trust us. We behave”. It is good that someone is doing that. But you will also notice that Gemini’s volumes are much lower than anyone else’s.
What is your favorite coin and why?
I think they are all terrible. I have not seen a cryptocurrency that I would trust yet. I do not think cryptocurrencies were a good idea. I do not think they are useful, and I have no interest in holding any of them myself.
What do you think is the next big thing with the cryptocurrencies?
I do not know. Markets do whatever weird things they want to do, and the Bitcoin market is really manipulated. You cannot trust it. It is not a safe and sane market. If you want to, you can totally make money trading cryptos, but you are swimming with sharks and you look tasty. So, be aware!
I would say that Bitcoin will be increasingly regulated. It will be tied down further and further, and eventually will become a highly regulated game for the well off. The US is seriously moving towards a strong regulation on self-hosted wallets, meaning just having your own bitcoins on your computer. If you want, you can trade between yourselves, but if you want to touch the actual US dollar system, then you are going to have to show the provenance of those Bitcoins thoroughly. That is already the case in Switzerland where you have to say where your bitcoins came from if you want to introduce them from outside into the exchange system.
I think that more regulation is definitely what is going to happen.
Crowdfunding. Raising capital in traditional methods is hard. Angel investors, VC, rounds of investors, and so on. How do you think crypto changes the game?
Private traders know that zero is a number and that their investments can go to zero. But ordinary people, like your “mum and dad investors” they do not understand that. Retail investors do not really think that their personal investments could go to zero. And of course they can.
In my opinion, retail needs to stay away from crypto and crypto needs to be kept away from retail. You do not want retail people getting into this. And it is not good news for crypto either.
American regulations on ICOs look at these as securities. So, in terms of doing a crowdfunding, the US regulations have loosened up a bit to allow this to happen. But it is a tricky balance between freedom of action for the trade investor and making sure that retail ones do not get skinned.
Where do you think you would be if it were not for blockchain and crypto?
I have absolutely no idea. I completely fell into this. I have been following the Bitcoin world for several years. Just being amused at the silly stuff that happened. And then I was chatting to a friend and said, “why don’t you write a book”. I went” that sounds good”. Nine months later I had 50,000 words and 400 footnotes.
Thank you David for taking the time for this interview and for sharing your story and expertise. We wish you all the best of luck for all your current and future projects.
David Gerard is the author of “Attack of the 50 foot Blockchain” and “Libra Shrugged: How Facebook tried to take over the money”. Both books are available through his website: www.davidgerard.co.uk
— Fyggex (@fyggexchange) August 12, 2020