#4 The Context 03.02.22
Countries and corporations' first attempt at crypto
Hope you’re well. In this week’s look at crypto trends, we attempt to pull together some threads involving Meta, regulation and CBDCs. We also add a section of early takes on things that might be of interest but are, at least for now, still in the long grass.
As usual, a note: We’re not here to evangelise or criticise, but hopefully to add perspective, context and a bit of insight about the week’s moves within DeFi, as well as on its fringes.
Your feedback is welcome, and if there’s anything we can help more on, don’t hesitate to ping us at thecontext@yapglobal.com.
tl;dr
Meta’s Diem travails: Why Facebook’s crypto was doomed from the start
IMF’s El Salvador headache: an outlier or crypto domino?
Adopting a digital currency: China has set the pace, but who’s next?
[Who gets to define a currency?]
The Washington Post did a deep dive into Facebook’s Diem cryptocurrency failure, finding that internal discord and heavy government opposition effectively killed the project. The latter was probably clear from the get-go, and might best be considered as the opening cannon-blast in a wider battle between crypto and regulators.
But that is not the only way of looking at this.
Firstly, it’s Facebook/Meta: they don’t represent anyone but themselves – and their 2.9 billion monthly active users. They are an industry unto themselves and will inevitably draw scrutiny (to the argument that this is a replay of Microsoft’s antitrust travails in the 1990s, allowing Google and others to develop internet-based services and steal a march on the beleaguered incumbent. Now it’s DeFi that is building out a new industry while Facebook and others endure the glare and ire of regulators.) Others may not buy this perspective: crypto has been developing since 2008, and the technology that underpins it by definition is fundamentally antithetical to Facebook’s vision of bringing it into mainstream financial infrastructure.
At its heart, though, the Libra/Diem battle was over who gets to define a currency. Which is at the heart of the IMF’s campaign to douse the ardour of governments to deem some cryptocurrencies legal tender. The IMF’s recent statement on El Salvador “urged the authorities to narrow the scope of the Bitcoin law by removing Bitcoin’s legal tender status”. Given that the Bitcoin law’s purpose is “to regulate bitcoin as unrestricted legal tender with liberating power, unlimited in any transaction, and to any title that public or private natural or legal persons require carrying out”, that would narrow it down quite considerably. El Salvador is not backing down.
The IMF is in an awkward position. Some countries have fared better than others amid two years of pandemic, but assistance alone is not going to lift some countries out of their holes. Indeed, the pandemic has pushed a lot of people to try their hand at DeFi and other crypto activity. This might well be prompting some flipflopping by other countries: Thailand, badly hit by the tourism slump, and one of the leaders in DeFi adoption, has had to back-pedal plans for a 15% cryptocurrency tax. The bigger fear of the likes of the IMF? That El Salvador is the crucible for an experiment others are considering copying. There’s even some appetite at the U.S. state level, though the law might be against them.
The other side of this, er, coin is that governments are increasingly pondering - or being pushed to ponder by peer pressure - adopting a digital currency of their own. To be clear, a central bank digital currency, or CBDC, is not crypto, but it might carry some of its characteristics. China is already well ahead on this, forcing other countries to speed up their deliberations. Japan has pointedly called for international cooperation with the U.S. and Europe, but there’s little sign of that yet, and Japan has more basic problems to deal with, like bank network outages.
Indeed the purpose of and motivation behind a CBDC is going to vary from country to country – for Japan it’s more about dragging the populace into the 21st century and away from cash – and so it’s hard to imagine any strong international initiative towards standardisation. Indeed, Japan’s peculiar domestic banking situation makes it more likely a private digital currency will appear before a government one, one effectively controlled by banks. One of its key architects is a former BOJ official, who has warned against a CBDC. Zennon Kapron does a great analysis of North Asia’s Central Bank Digital CurrencyProgress , although it’s a few months old now.
[Tidbits]
Stuff we found interesting:
Rinse and repeat: A closer look at non-fungible tokens (NFTs) and crime by Chainalysis, a company that specialises in analysing blockchain data. The stratospheric growth of NFTs (contracts receiving $106 million in 2020, against $44.2 billion last year) has also been accompanied by wash trading – where one entity is party to both buy and sell transactions, seeking to artificially increase an asset’s value. NFTs have also been used for money laundering, Chainalysis says, where stolen funds are used to purchase NFTs. Both form a very small part of the overall pie, but are issues for exchanges and could undermine efforts to build trust in NFTs, Chainalysis concludes. Chainalysis Detects Significant Wash Trading and Some Money Laundering In this Emerging Asset Class - Chainalysis
Unmasking tape: Crypto sleuthing unmasks convicted felon Michael Patryn as the head of treasury of a DeFi project called Wonderland. This again raises questions about the ability of crypto to police itself, and about the role and value of anonymity: the identity of the pseudonymous treasury head was known to the project’s co-founder, but not to others. “It’s probably a negative blow for anonymity in DeFi,” Bloomberg quotes crypto podcaster Aaron Lammer as saying. “If the anonymous nature of DeFi means that a person like Michael Patryn can be in charge of a major DeFi treasury, that’s a pretty big problem.” Crypto’s Cloak of Anonymity Makes DeFi a Wonderland (TIME) for Felon - Bloomberg
[Early takes]
Stuff that is going on but not really visible in the mainstream (yet):
Hack of the day: samczsun and others deconstruct an attack on Wormhole, a bridge to move crypto assets across blockchains, apparently exploiting a vulnerability to mint 120,000 ETH, about two thirds of which they were able to bridge from Solana back to Ethereum That’s at least $250 million (could be more). Here’s another couple of threads: Alex Smirnov and Kelvin Fichter.
NFTs, anyone? And on the topic of crypto sleuthing, an analysis by @TopShopFund asks: Is Mark Cuban promoting a shadowy cabal of scammy NFT copy pastas?
This newsletter is pulled together by a team led by Jeremy Wagstaff, formerly of the WSJ, BBC and Reuters and Samantha Yap, founder of YAP Global. Other members: Farhan Musa, Rebecca Campbell and Ruby Wu. Many thanks to Joey Woo for production. Any views expressed here are not necessarily those of the writers, YAP Global or its clients.