David Gerard (twitter.com/davidgerard)
Bryce Weiner (twitter.com/bryceweiner)
Richard Yan (twitter.com/gentso09)
Today’s motion is “Diem is a glorified PayPal.”
Diem of course used to be called Libra. It’s a cryptocurrency floated by Facebook in 2019. It was a big deal back then. A global borderless currency for 2 billion install base is a game charger for commerce and remittances, and would have implications on capital control. There were some very high profile congressional hearings held on this matter with Facebook executives including Mark Zuckerberg. This also supposedly accelerated the adoption of CBDC by certain countries.
So, what are the ambitious promises and regulatory constraints around Diem? What are the politicians’ biggest concerns on Diem? Will it end up getting reduced to a PayPal? How will Facebook make money from this? Our two guests will cover all of the above.
If you’re into crypto and like to hear two sides of the story, be sure to also check out our previous episodes. We’ve featured some of the best known thinkers in the crypto space.
If you would like to debate or want to nominate someone, please DM me at @blockdebate on Twitter.
Please note that nothing in our podcast should be construed as financial advice.
Source of select items discussed in the debate (and supplemental material):
David Gerard is the author of two crypto books, “Libra Shrugged: How Facebook tried to take over the money” and "Attack of the 50 Foot Blockchain: Bitcoin, Blockchain, Ethereum and Smart Contracts." He is a no-coiner, and writes a popular no-coiner newsletter also named “Attack of the 50 Foot Blockchain.”
Bryce Weiner is a former Fortune 500 developer with over 20 years of software engineering experience, with nearly a decade in cryptocurrency development and monetization. He is the lead developer of the Tao smart contract network and the CEO of US-based exchange AltMarket.
Motion: Diem is a glorified PayPal
[00:00:00] Richard: Welcome to another episode of the blockchain debate podcast, where consensus is optional, but proof of thought is required. I'm your host, Richard Yan. Today's motion is: Diem is glorified PayPal.
Diem, of course, used to be called Libra. It is a cryptocurrency project floated by Facebook in 2019. It was a big deal back then. A global borderless currency for 2 billion people is a game-changer for commerce and remittances, and would have implications on capital controls.
There were some very high profiles congressional hearings held on this matter with Facebook executives, including Mark Zuckerberg. This also supposedly accelerated the adoption of CBDC by certain countries.
So what are the ambitious promises and regulatory constraints around Diem? What are the politician’s biggest concerns on Diem? Will it end up getting reduced to a PayPal? How will Facebook make money from this? Our two guests will cover all of the above and more.
If you're into crypto and like to hear two sides of the story, be sure to also check out our previous episodes. We featured some of the best-known thinkers in the crypto space.
If you would like to debate or want to nominate someone, please DM me at @blockdebate on Twitter. Please note that nothing in our podcast should be construed as financial advice. I hope you enjoy listening to this debate. Let's dive right in!
Welcome to the debate. Consensus optional, proof of thought required. I'm your host, Richard Yan. Today's motion: Diem is a glorified PayPal. To my metaphorical left is David Gerard, arguing for the motion. He agrees that Diem is a glorified PayPal. To my metaphorical right is Bryce Weiner, arguing against the motion, he disagrees that Diem is a glorified PayPal. Welcome Bryce, and welcome back to the show, David.
[00:01:55] David: Hello!
[00:01:56] Bryce: Thank you very much.
[00:01:57] Richard: Here's a bio for the two debaters. David Gerard is the author of two crypto books: "Libra Shrugged: how Facebook tried to take over the money," and "Attack of the 50 foot blockchain: Bitcoin, blockchain, Ethereum, and smart contracts." He is a no-coiner and he writes a popular, no-coiner newsletter, also named "Attack of the 50 foot blockchain." Bryce Wiener is a former Fortune500 developer with over 20 years of software engineering experience with nearly a decade in cryptocurrency development and monetization. He is the lead developer of the Tao smart contract network and the CEO of the US-based exchange Alt-Market.
We normally have three rounds: opening statements, host questions, and audience questions. Currently, our Twitter poll shows that 62% agree with the motion and 27% disagree with the motion. After the release of this recording, we'll also have a post-debate poll between the two polls the debater with a bigger change in percentage of votes in his or her favor wins the debate. I think it helps to describe what Diem is about, what problem it's looking to solve and what key functions and features are being promised here.
So David, could you do that as the first part of your opening statement? And then tell us why you don't think these ambitions will be realized. And Bryce, and your opening statement you can supplement anything David may have missed in terms of Diem's goals, and tell us why you think Facebook can pull them off. With that said, please go ahead with your opening statement, David.
[00:03:25] David: Okay. So Diem, or Libra as it was, it was a plan for Facebook to deploy something based on a blockchain to 2 billion users. That was literally the idea they started with a blockchain for 2 billion people. This became a plan to do their own crypto. Something that would work as retail-level, digital cash. They also wanted to bring financial inclusion to the world banking the unbanked though, they talked about that one a lot, but they didn't give any detail on how they do that bit, but it was clearly in their minds.
Anyone from the crypto world would recognize all their ideas and goals of Diem. It was created by Bitcoin people. It would be a crypto token backed by a reserve. So the difference was this was being proposed by Facebook, to operate at global scale. So quite apart from it being Facebook, who nobody trusts, the trouble is that the governments and financial regulators, they worry a lot about money and in quantity and how it works. And they worry about financial stability because the backing reserve might be on the order of a trillion dollars and that's big enough to move markets. So when a big new player comes along with big plans, they have to show that they know what they're doing. Facebook didn't do that at all.
They didn't seem to understand a lot of the objections. So regulators around the world started saying no, and they finished saying no. Libra now, Diem, they changed the name, has come back with a smaller scale plan, but it's still a plan that would have a massive backing reserve. So it still has all the same problems.
If they're allowed to do this, they still don't have all the permissions. It would be at a much smaller scale and it'd be a money transmitter. A lot like PayPal. So this isn't a matter of how hype all the technology is. Cause you know, you can do all sorts of things with technology, all the tech itself, the blockchain, the smart contract language, that's secondary.
It's a question of what Facebook's allowed to do and that's what the regulators let them do. Now, central banks and regulators have written a lot of reports of working papers or how any coin like this, they're calling them global stable coins, which is a euphemism for Libra will have to be restricted.
And it all adds up to something that I think we'll look to consumers much more like PayPal than anything else. None of the fancy possibility stuff. Facebook wanted to do more with it, but they won't get to do any of that in the foreseeable future. The restrictions were in place before they've even launched.
[00:05:52] Richard: Okay. Great. Thank you, David. So Bryce, please go ahead with your opening statement.
[00:05:56] Bryce: The reason why Diem is not like PayPal is because Facebook already has PayPal. You could already send cash between users on Facebook. So what is the benefit to Facebook to implementing this on top of their existing cash wallet system, or even in replacement of, they haven't been very clear if that's actually going to be the case? What Libra has done, well Diem now, is the basket of currencies that was previously going to back Libra is now directly in use with a series of Diem based localized, stable coins intrinsic to the value of various nationalities. So if in the United States you'll use US Dollar, Diem. If you're in the UK, you'll use British Pound Diem in the EU, etcetera.
Now, the actual idea of the quote-un-quote floating Diem stable coin as it were, or the old Libra idea also still exists.
And there's something very unique about why this idea is palatable to regulators and the previous idea was not. And that's the way that this floating Diem currency is calculated. Long story short, it's calculated like special drawing rights and special drawing rights are a very unique sort of money created by the IMF for the world bank, which allows nations to settle debts. One special drawing right is essentially a conversion rate between a basket of various national currencies held by the world bank. And this means the United States can settle a debt with Russia and not have to use you US dollars.
So that allows them to settle that without currency exchange and their national currencies. Libra now fulfills that role. However, you and I can not use special drawing rights, but anyone in the world could use Libra. And the new Diem Coin is calculated exactly like special drawing rights, and bringing that into the hands of people. So we talk about things like international remittance and Nostro Vostro accounts, suddenly these become almost frictionless and absolutely feeless in order to execute, this is a sea change in monetization and how value could be transferred between individuals around the world.
It's inestimable how this might impact financial markets. And there's a good reason why various governments, not regulators, but various governments have complained. Even with the US legislation that's the Stable Act, which was submitted to Congress. That's a nonstarter. I'm very familiar with the financial services committee in both the house and Senate. I lobbied them both in 2018 personally, and I have to tell you that legislation will never exit committee. It's dead on arrival.
[00:08:43] Richard: Okay. Great. So before we start with round two, Bryce, I wanted to follow up with something you said. So you mentioned special drawing rights, which is a basket of various foreign currencies from a subset of G7 countries. You're saying that the Diem coin will be priced off of that, but you also separately said that there will be these Diem stable coins, such as Diem USD, Diem GBP, and so on.
So what is the difference between the Diem coin that I mentioned first, and then the separate Diem stable coins.
[00:09:15] Bryce: No, this is not my assertion. Facebook actually mentions that it's not backed by special drawing rights. It is calculated in the same manner as special drawing rights. This is actually in the White Paper at this moment. Like they kinda rolled back the curtain on this and it just said it. We're competing with the world bank and IMF who holds this monopoly on international settlements.
[00:09:40] Richard: Right. But I think the clarification that I'm trying to make here is that I was under the impression that Diem is rolling out these country-specific stable coins. And I thought that's all the tokens they have. I was not aware that they're also rolling out another token, that's calculated based on the way special drawing rights as calculated. I thought that was White Paper 1.0, where they didn't have that stable coin concept.
[00:10:04] David: The current plan is to do the national currency stable coins, and then calculate the Diem currency unit from those, although in their first plan, they just seem to want to do the dollar and do the others later.
[00:10:17] Bryce: And the purpose stated in the White Paper for the Diem token itself is to reach those consumers whose national currency is not represented in any single basket. So one could imagine, for instance, Venezuela would be using Diem tokens.
[00:10:36] Richard: Okay. I see what you're saying. So for example, if I'm in the US and I want to purchase something with a Libra token, maybe the best way to do it is to purchase a Libra USD stable coin. But if I want to send remittance to Venezuela, and Venezuela doesn't have it's Libra version of stable point, then they can take advantage of this Libra hybrid coin, if you will. That is calculated off of the way special drawing rights are calculated. Is that understanding correct?
[00:11:05]David: Something like that.
[00:11:07] Bryce: And that's where the Move smart contract language comes in because that all happens invisibly in the background. So you will send and receive US Dollars if you live in the United States to everyone on Facebook. And it doesn't matter where they live now, the currency they receive could be totally different.
[00:11:22] Richard: Got it. Okay, great. Thanks for the clarification. Let's move on to round two. Let me ask David a question first. So, David, I read your book Libra Shrugged. And I wanted to point out a few issues that you raised with Libra/Diem.
So the first problem is Money Laundering laws. The second problem is regulator Fud, thanks to guilt by association because of Facebook's history. And the third problem is financial risk management related to the way the Libra association is going to manage their portfolio. First of all, am I right in summarizing the main issues as these three? Do you see any other ones?
[00:12:03] David: I think the main issue is the financial risk management and secondarily that they don't trust Facebook and assume that everything Facebook does is to get more personal data. Money laundering laws are also a big problem, sanctions, and so on because this is what they were saying during the Senate hearings about Libra. Yeah, that's a summary of the operational problems that regulators have, but the financial stability one, I think is the biggest issue.
[00:12:28] Richard: Right. So can you maybe speak a little bit more in detail as to why each of these problems is a grave concern? And I'd like to follow up with some questions and Bryce, feel free to jump in at any time if you disagree.
[00:12:42] David: So the financial risk management one, this is the big issue. As I said, the labor reserve might be on the order of a trillion dollars. That's quite a lot of money to have in the form of. It would have to be cash and cash equivalent securities like treasuries, government paper, super-secure cash gorilla assets that are highly secure, can be cashed out quickly.
And so on. There's only a limited amount of those. So for this one reason why that's a risk they could easily soak up quite a lot of the available government paper. Even the US was worrying about this. And the reason, they're concerned about it, is because they remember the 2008 financial crisis. One of the many factors was money market funds who would hold your money and then spit it out the next day with a tiny bit of interest and they'd make a bit more money on the float.
They were regarded as super secure cash equivalents and they were backed by further cash equivalent investments. They took up so much of the cash equivalent paper that other institutions at the market responded. It created new super stable investments backed by AAA-rated securities, things like collateralized mortgages.
So we have all heard the story of this, how those all went bad, roughly as soon as the housing market dropped. A lot of these super secure investments turned to dust, backings disappeared. A lot of people failed to get their money back. So then suddenly banks were really reluctant to lend credit.
And this led to being called the credit crunch. So these days regulators have a lot more rules around money market funds and things like them. And the thing is that. Facebook's Libra plan. The original plan looked really a lot like our large money market funds. There's one EU paper that came out earlier this year, which said that Libra alone just in euros might be the largest MMF in Europe.
So what Facebook did was they presented the regulators with literally one of the things that caused the crisis 11 years before. This made the regulators suspect that Facebook didn't know what they were doing.
[00:14:51] Bryce: Wait a minute. The existing implementation of Diem is exactly the same as Libra with one change. The national currencies are now stable coins that will be used inside those countries. If you have euros, it'll be held in European bank. If you have US Dollars will be held at the US bank. So a lot of those complaints, it has been absolutely addressed of the current implementation.
[00:15:16] Richard: David, you said financial risk management was the number one problem in the way Diem is setting things up. So I think you are concerned with the fact that Facebook. Or whatever organization uses to manage the money. Won't be able to source enough secure treasury assets in order to maintain this capital portfolio. And this is what economists were calling saving glut in 2008, basically, too many people were saving, and as such too much capital chasing, too few instruments and that squeezes the yields, and that's when new quote-un-quote innovative financial instruments need to be invented in order to provide that kind of return. And that's how we have the subprime mortgage crisis that we got ourselves into. So I can understand that point, although I'm wondering, if there are no real solutions to this because you're literally talking about people putting money into banks. Just like Bryce said, in London, the British will put their pounds in banks instead of having them in cash because Libra is basically the digitization of bills. And think about how China's dealing with this. So, many and very few people use coins and notes in their daily transactions now. Everyone's using Wechat pay or Alibaba pay. And I think one potential solution for this is right. This might sound naive, but what if you just don't invest in anything? To the extent that you can't find things to invest in, just don't invest in it. So just put some amount in treasuries, and then have the remainder just sitting there not doing anything.
[00:16:47] David: The trouble is it's hard to actually do that. A bank account with a thousand dollars is quite different from a fund with a trillion dollars. Cause it has to actually go somewhere.
[00:16:56] Bryce: Okay, hold on. When you talk to this trillion dollars number, there's two things that I need to say about this. Number one, I'm looking at Facebook's filing for 2019, and they have $1.1 trillion in liquid assets so they already have that now, Number one. Number two, the way that Diem is currently constructed, you take your debit card.
Here's what it looks like. You take your debit card, you enter it into the Novi wallet. You say, I want to load up a hundred dollars into this wallet, which is exactly how Facebook pay works now, and everything else on the planet and you get, three squiggly lines, USD to the amount of $100. If you're the only person on the whole planet that puts US Dollars into that system, there's only $100 in there. So every dollar that's put into that system, it's not invented out of nowhere. It's actual liquidity from consumers that they are electing to place within this system. Just like CashApp, PayPal, Volt. So it's important to understand number one, Facebook already has this $1 trillion in liquidity. They're already dealing with it.
[00:18:03] David: Is that $1.1 trillion of cash equivalents?
[00:18:06] Bryce: Total cash. Yeah.
[00:18:07] Richard: Yeah. It's definitely the cash and cash equivalent. So it's probably some will be deployed in US treasury, muni bonds, or even mortgage-backed securities. Fannie, Freddie debt.
[00:18:16] Bryce: But again, understand that it's two different issues. Number one, they already know how to handle that much liquidity. Number two, that doesn't apply at all to what actually happens in Diem. Diem only holds the money that consumers put in there. If consumers only elect to put a hundred million dollars worth of liquidity in that system. That's all it will have.
[00:18:40]David: So that's the question, because how big will the backing be? Will they do it like the Chinese do where they put quite a lot of money. There's quite a lot of money in the float in WeChat pay and AliPay. But in Europe, they tend to use the bank account instead. So it would be smaller. So it's really hard to guess how much it could be.
So the estimates are somewhere between $150 billion worth and three or $4 trillion worth with a trillion on the order of a trillion is the number. That's why I say on the order of a trillion, that's the sort of number people are talking about, but yeah, it's a wide range.
[00:19:13] Bryce: The number one FinTech app in the United States for the last seven years is Walmart Pay. So when you talk about PayPal and then you start to talk about WeChat. Because WeChat is effective when you refer to that sort of remittance you call it DD or whatever that is actually more like Walmart Pay than anything else.
And so when you talk about competitiveness, does anybody envision in the United States Diem competing with Walmart Pay. No, not unless Walmart begins accepting Diem and it becomes this natural sort of shape that forms, based on what the existing landscape and why people use the remittance that they use. I use Facebook money. So you know, their Facebook wallet to send money to friends.
[00:20:00] David:You're one of the few people who use it.
[00:20:03] Bryce: No, absolutely. And also, recognize with that they have all the bank accounts, all the accounting, all of the buddy transmission licensing, they've got literally five years experience doing this. And it never got any as much attention as Diem. So as a product replacement, that's pretty savvy.
[00:20:21] Richard: So the way I see it is that treasury management seems to be something, lots of payment systems are already dealing with It's just that, that expertise might not necessarily have been mentioned explicitly in the White Paper and the plans that Libra has put forth. And I think that Facebook probably could have done a better job of highlighting how they were going to make up for that expertise shortfall or demonstrate ability to do this treasury management.
So let's pivot really quickly and talk about the elephant in the room, that is this trust issue with Facebook. So the guilty by association issue I talked about earlier.
[00:20:59] David: The [Facebook data collection. That's always a worry with Facebook because Facebook have a long and documented history of violating privacy, really badly lying about it being caught, apologizing, and then doing it again like they'd just been fined by the FTC $5 billion in 2019 for breaking their previous agreement, the FTC from 2011.
And that came just in time for them to present this a currency plan to the US that is a factor that..
[00:21:29] Bryce: I got to cut you off. Cause this is silly. In the EU, there's a bunch of legislation coming out. Instead of calling them monopolies, FAANG stocks, Facebook, Apple, Google, et cetera. They call them gatekeepers. And that sort of language is incredibly powerful because that's what they are. They gatekeep the data that their users create. And in sequestering it, it creates value because they're the only people who can use that data and then sell you ads. But this Libra represents a drastic change in banking because the blockchain, everybody has the data. You can see everything. And if you look at the source code, which is open source. You can see everything it does . You can connect up to the Diem Testnet right now.
[00:22:13] David: That doesn't actually really answer what I was going through, which is that these are what the regulators are worrying about and concerned about. Firstly, they're worried about that because it's Facebook and this is what Facebook do. Secondly, a lot of the actual workers will be done by the wallet software so far that's Novi, and that none of the other members have announced wallets that I know of.
And so quite a lot of the action will be happening inside the Novi wallet which will be complete spending data, the sort of stuff that Facebook really loves, they've stated repeatedly they won't let that data go from Novi to the Facebook advertising engine. I don't trust them based on their track record. And a lot of regulators don't trust them based on their track record. So that is a real factor. Like we literally know that's something they're worried about.
[00:22:59] Bryce: So it's factually correct that regulators are worried about this. Okay. There is the regulators of stupid. And I will straight up tell you this is not regulated in the United States because regulators in the United States understand blockchain technology.
They understand how this all works. They're very savvy at it, quite frankly more so than anyone usually wants to give them credit. So I'm wondering when you say regulators, it's just the EU, right?
[00:23:22] David: No, I'm pretty sure it's the US as well, but also the blockchain argument doesn't hold because functionally it's a two-layer system layer. One's the Diem blockchain. Layer two is the Novi wallet. A lot of the action is just going to happen inside the Novi wallet and get reconciled to Libra periodically.
[00:23:35] Bryce: That's ridiculous. That's not how it works. In fact, you can actually look, they have a sample wallet. That'd be the wallet itself. See, you can't keep the wallet closed source. So you can actually see what it does. Right. And it's not doing what you say it does. You can look at it.
[00:23:51] Richard: Actually before we move on, Bryce, you made a point earlier about how the data is visible to everyone anyway because it is a blockchain. Is that a point that you asserted?
[00:24:00] Bryce: That's not asserted. It's true.
[00:24:01] Richard: Isn't that a bigger problem then? Because then, if the regulators want the transaction data to be private. Now you're saying that data is actually completely exposed in the open. So it's not just about Facebook being egregious about it. It's just the fact that by design the transaction data is fully open.
[00:24:18] Bryce: I wanna qualify this event because to say that is disingenuous, in that privacy protocols for smart contract languages, are somewhat optional affairs. The base operation of a blockchain is openness and transparency. However, every single, including Move at this point, I am probably sure, have a privacy protocol where if you download your copy of the blockchain, certain information is obscured through zero-knowledge proofs. And it could be the transaction amount, probably not the sender or receiver in the case of Diem. But probably the transaction amount.
[00:24:58] Richard: Right. So I would assume that the final form of this architecture, in order to appease regulators, would probably need to obfuscate everything associated with each transaction, namely the sending address, the receiving address, and the amount right.
[00:25:14] Bryce: I think that's where Facebook is simply using a blockchain as it was designed as every other blockchain that's been launched has been working minus of course, the privacy-specific blockchains and then letting regulators tell them what they want.
And I think that's very responsible. Because it doesn't try to anticipate what the will of the people essentially through their elected representatives would be. And it allows them to say here, this is what we have. This could potentially be better than what exists.
[00:25:44] Richard: Yeah. So the other thing actually I have questions about is whether a blockchain is actually required in this case, obviously here, we also need to make sure that the definition of blockchain is clear to everyone.
[00:25:56] David: It's a permissioned blockchain with authenticated validators who are allowed to participate.
[00:26:01] Richard: Right. So I guess the thing I'm still trying to wrap my head around is number one: what kind of data should be exposed to the public? And number two: will there be ways to make sure that the regulation related to data privacy is actually being observed by Diem?
[00:26:19] Bryce: Every single blockchain in existence that isn't a privacy blockchain violates data, privacy laws. So GDPR effectively outlaws every cryptocurrency in existence, but cryptocurrency still exists and the EU is not trying to kill them. So when it comes to that level of interpretation, there's also much legal precedent already, the fact they haven't done, it would be treating this special just because it's Facebook and that's not an equal application of the law.
[00:26:47] David: No, they're phrasing this very carefully. They're not doing it because it's Facebook. They're doing it because it's a global stable coin, which is always a euphemism for Facebook's coin, but they're sitting out general plans because their entire worry is that this thing will be over systemic scale.
That's absolutely a hundred percent of what they worry about in financial terms, the stability aspect because Facebook's huge. And the whole plan was to make this be huge. So huge financial things get a lot of regulation. Because it's other people's money and quite a lot of other people's money. So other people have strong ideas on how that should be handled, hence regulation.
[00:27:26]Richard: Yeah. And I think the other thing is if Facebook really wanted to pull this off, there might be a need to set up some kind of independent auditing service and they might need to have someone outside the firm lead this project right now. It's David Marcus, who seems to have consolidated power across various Facebook finance-related divisions, right?
[00:27:50] David: Diem is a project of Facebook, functionally it's independent, but Facebook still pays most of the wages and do most of the engineering. So it's a very Facebook project. They wanted to be separate. Some of the other Diem members want it to be separate, like Anderssen Horwitz definitely insisted this is not going to be just Facebook, so they really want it to be what they were talking about, but it isn't yet.
[00:28:14] Richard: Right. For example, Square is a big fan of Bitcoin and they regularly write grants to Bitcoin developers. They've actually created something called the Square crypto. So what I'm saying is that, if only Facebook could follow its footprints and essentially give out a huge amount of grants to organizations or developers that could lead this and basically hire independent third-party project management, right?
Ultimately this should still benefit Facebook in some way, which we'll get into later. But I'm just saying that these could be ways that Facebook can mitigate this in appeasing regulators.
[00:28:50] David: I must note there's been all sorts of stories of Diem, there's been people looking at what Facebook is doing and thinking that looks really weird and dumb and doesn't make sense. Perhaps they're actually doing a smart thing and then they'll hypothesize all the 12-dimensional chess that Facebook might be playing, but I think we need to consider this hypothesis that maybe they didn't actually do their reading, and didn't know what they were doing in a lot of cases. I don't think we should work so hard to hypothesize stuff they haven't done yet.
[00:29:17] Richard: Okay, by the way, can you give me an example when you said Facebook did something really stupid, but people thought it was really smart?
[00:29:24] David: What's a good example. They were thinking why it's a good idea to be doing it on a blockchain, actually, why it's a good idea, not to be revealing what you're doing, actually, why it's a good idea that they didn't go to the regulators first actually. And actually, all of these were not very bright things like particularly the worst thing was not going to be regulated at first.
[00:29:44] Bryce: I can appreciate that from a certain perspective. However, the United States legal system is: act first and apologize later. See, this is the thing the regulatory frameworks around cryptocurrencies were very well-defined by the time Facebook announced this project.
[00:30:01] And they complied with all of them. And it wasn't until after people realized because it's Facebook and the scope and scale potentially of what it was they could do based on their users base that people started to really seriously consider what this technology was depending on, who was launching it.
[00:30:20] David: It's a matter of scale. If you're doing it and you'll get this, the Libra White Paper proposed a lot of stuff that you've seen in ICO, White Papers, and so on, but those guys are all small. Facebook could have been instantly systemic. That was the big problem.
[00:30:33] Bryce: Laws that can't scale are bad laws. And the regulations work for every other cryptocurrency that currently exists. So if they can't scale to match what Facebook is doing there, the regulations are bad and need to be changed. That's just how it is.
[00:30:46] Richard: I think we've probably picked off enough meat from the Facebook association bone. Let's maybe move on to another topic. As far as we're talking about use cases and we're touching upon international settlements, I like to also point out that it's hard to think about international settlements and crypto, and not think about Ripple, right? Who presumably it has formed many relationships with banks around the world for international settlement, but it just seems that their adoption has been pretty slow so far and not for a lack of capital or effort.
So how will Diem overcome Ripple's challenges in this case?
[00:31:24] David: I think that they don't really have challenges because Diem and Ripple are completely different propositions. Business-wise Ripple's pitch is to become part of the banking system. They very much want to become part of the system selling services to banking. And maybe based around XRP, they want to be part of that, the existing regulated environment, and do it better and beat Swift. How well they're doing, you might have opinions on that. I don't think they're doing very well. I don't think their proposition is very strong, but that's the proposition they're doing. Diem is trying to be retail-currency for ordinary people to use as cash. But I think that they're not really very comparable things in terms of what they're trying to do.
[00:32:01] Bryce: This is one of the rare places where David and I actually agree completely. But the long story short of it is Facebook actually has users. And much like David was saying, Ripple, is a solution looking for a problem. And Facebook is a market that is going to be served by a medium of exchange. So the propositions are totally different.
[00:32:23] Richard: All right. So David, previously, we were enumerating the issues that Diem will be encountering, and one of them is actually money laundering laws. And you mentioned in your book that self-hosted wallets are a big problem and it will be difficult to basically comply with Money laundering laws if self-hosted wallets or self custody wallets are allowed. Can you talk about this point?
[00:32:47] David: Yeah. So this is something that has been expressly raised by regulators, they worry about the criminal use case for cryptocurrencies and they worry that Libra would become part of that. And again, Bill Foster, who's in the blockchain caucus and is quite a fan of this stuff. And he's also a programmer and knows this stuff technically and tried out the Libra code as it was. He raised this point himself. I hadn't realized until I wrote the book. Just how damn serious they are about this. As one of them said, explicitly, we use sanctions instead of sending soldiers.
The US dollar must stay supreme. Sanctions against regimes the US disapproves of must stay in place. And if Libra or Diem could mess with it even slightly, the US won't stand for it. I think that those are just straightforward facts as far as they're concerned. So this is why the laundering thing is a real problem.
They also worry about terrorists. They worry about crooks. They worry about ransomware. This is re-, this is why a lot of regulatory heat is coming down on cryptos at the moment.
Sure. There are legitimate payment use cases for cryptos, but when one of your big ones is crime, then you've got a problem.
[00:34:03] Bryce: Hold on a second. You brought up so much stuff.
[00:34:06] David: So I'm not speaking in terms of what I think necessarily. I'm trying to describe what the regulatory thinking is on this.
[00:34:14] Bryce: Oh, absolutely. And in a big one that you actually missed was the FATF travel rules.
Which says that you have to have AML, KYC on both ends. And there has to be some communication before the transaction itself. The travel rule itself, number one, begins to encroach on US authority and how they conduct their own financial markets, which is why it's only been semi, sorta, enforced, what are you going to do to us in the United States? And secondly, there is a fundamental facet of how not only the Diem blockchain but most cryptocurrencies on the planet works and you have your wallet is a simple string of numbers. It's based on mathematics. And the inclusion of this identification for the travel rule or, to address some of the money laundering issues as they have been traditionally addressed, don't apply. It can't apply. It will never apply. And that's been a big problem for regulators because they must admit that, the travel rule, as they applied it to cryptocurrencies, everybody thought it was going to be this huge death nail and it was going to outlaw self-hosted wallets.
You can't outlaw self-hosted wallets. That's silly. It's not a self-hosted wallet. You are either in possession of the keys or not. And you cannot stop anyone from being in possession of keys.
[00:35:37] David: This is all about how it interfaces to the world of real money. Basically. It's not about the operation of the blockchain at all.
[00:35:43] Bryce: It is when they begin to apply the legacy understanding of the flow of funds to the actual engineering, technical operation of a blockchain. And this is why the travel rule has all but been ignored within the cryptocurrency space. And there's been zero enforcement because it was really just performative.
It has absolutely no teeth and no government at this point has the political will to enforce something like that on an industry that employs tens of thousands of people, especially in the middle of a pandemic.
[00:36:17] David: Yeah. There are three regulators to think about here. The US, the EU, because they use the paint on the backside to deal with in regulatory terms, but it's also 750 million people, so they don't wanna leave that market behind and Switzerland because that's where they're incorporated. So if they can get those three, get something to work with those three, then they'll be very happy indeed. They will absolutely go to whatever regulatory lengths they want to make this happen. Because if you're doing business with real money out in the world, you're going to be regulated. And that's good, actually.
[00:36:49] Richard: Okay, great. So let's pivot the conversation a little bit. Now we all know for this project to be sustainable, it helps if the project sponsor makes money from it. So maybe walk us through different ways Facebook can derive revenue from this project. Maybe Bryce, go ahead.
[00:37:05] Bryce: There's the simple fact that they collect interest on all the accounts that hold the user’s products. That's not user money, that's Facebook's money. And when you're talking about a billion dollars at 4% or 2% annual interest, even 1%, that adds up pretty quick. And that custody in and of itself is a significant source of revenue.
Also because of the currency translations that Diem does, when you use the native Diem token at the end of the year, there's always going to be some reconciling that needs to take place between the cash basket.
And there's an opportunity to realize a profit off of those transactions as well, simply because you're adjusting the currencies back and forth. And, if 1% variance needs to then be reconciled because the money moved around so much, that there was a 1% change that needed to happen, that they could make a significant amount of profit from that.
[00:38:01] Richard: Okay. I think if I understand you correctly here, you're basically saying the FX portfolio that Diem maintains in the treasury doesn't have to reflect its outstanding liabilities in terms of Diem EUR, Diem USD, Diem GBP, and so on, and Diem would have the opportunity of essentially trading and managing that portfolio for profit.
[00:38:26] David: This was one of the big questions with Diem. No one could understand how Facebook was going to make its money from this. Because they just wouldn't say. Which is why the theory that it's about gathering data is a popular one. In fact, they're not even sure they'll get interested on the reserve because there's a lot of low interest or zero interest liquid investments, these days, cash equivalents.
Which is why the Libra 2.0 White Paper included a plan, where the Libra association, that is Facebook, would subsidize it if necessary, if they needed to make it up. I still think it's quite an open question.
[00:39:03] Bryce: I think that's actually why Facebook declined to answer because it's essentially competitive intelligence. And that's perfectly understandable.
[00:39:12] David: Yeah, one of the things in the White Paper, both versions were the prospective. Moving, not to small amounts, but larger amounts of money internationally with less barriers, less capital controls. But, Facebook has really quite a lot of money in some countries that it would love to repatriate, but it doesn't want to pay taxes on.
So some have hypothesized that as a mechanism. I'm not so sure. Cause that'd be really obvious and blatant tax evasion and they might not be that brazen yet. But that is some thinking that is happening, that Facebook would actually go that far. Cause it's important to remember Facebook resent regulation, they resent governments. They feel it's an affront to them as self-actualized Silicon Valley capitalists.
[00:39:55] Bryce: This is the second place where we agree. Facebook views itself at corporate as a nation-state. And the ability to issue currency ties that knot and brings it all together.
[00:40:07] David: All they need now to be a country is a beer and an airline.
[00:40:09] Richard: All right. Maybe to reel back to the original debate topic a little bit. If we were to compare something like Diem to PayPal one obvious difference, there is the fact that there's a programming language associated with the Diem framework and it's called a Move language. So Bryce, can you talk to us a little bit about what you can do with a Move language? And what's so special about it.
[00:40:31] Bryce: Sure. And I'll begin with the thing that kind of glaringly jumps out at you is that there's not a lot of information on how you actually deploy a Move smart contract. There's plenty of developers’ resources. There's plenty of examples. And that makes me wonder if the execution of smart contracts on the Diem network is going to be a function of being a member of the Libra Foundation in some sense? Where so they can have some sort of accountability. You may not need to be like a Facebook, Coinbase, Spotify, member of the Diem foundation, but you may need to sign up as a Diem developer and, ostensibly, I would assume they would probably do some AML KYC in order to keep everything on the level. But that's not really explained yet.
So beyond that, Move is very similar to solidity. It's a bytecode assembled language, just like, solidity is. The syntax is a little more elegant than solidity. And it has the capabilities to do things like decentralized finance.
[00:41:38] David: I think we're well off into the woods of the question here. Even if we can see that Move is an excellent smart contract language. The thing is, whether that can be more than a PayPal equivalent is not a question of what they could do, because they could do all sorts of things just by writing programs to manipulate the data. And whether that those programs are smart contracts, which are of course, equivalent to database triggers or stored procedures or a separate program, doesn't make a difference in how they implement the things they're allowed to do, because this is going to be a regulated entity. It's a touchable entity.
If they do something like DeFi and you end up with a whole new world of consumers learning the word rugpull, then they're going to have a lot of trouble directly because they're running it on their chain. It's not about what they can do, even if they can do quite amazing things.
[00:42:34] Bryce: The blockchain itself has no token and the operation of Diem and all of the stable coins and the conversions between them and the Oracleized conversion rates between these currencies, these are all smart contracts so that, they've essentially invented Uniswap on the blockchain to simply fulfill the basic use case. So they already have decentralized, but you know what we're talking about are some of the more advanced features. That to me doesn't seem like it's going to be a possibility. However, can you create tokenized commodities? Sure. I don't think that's going to be much of an issue. That's pretty much a well-worn road in 2020. Can you create tokenized securities? No, because you can't do that anyway.
So you know what we might begin to see If we look at Facebook's existing economic systems that Facebook marketplace, for instance, which is like Etsy except has geographic boundaries. Well, If you take off the geographic boundaries then suddenly there's all sorts of economic activity and that sort of economic activity is the foundation for all of the speculation that existed in financial markets.
So while we won't see decentralized finance as we see it or Ethereum, because nobody uses Ethereum to buy a pen that some old lady made in Saskatchewan, they will use Diem for these things. That does enable a more advanced and sophisticated derivative to be created via the Move smart contract language.
[00:44:08]David: I'm happy to concede that's possible, but again, I'm wondering how much they'll be allowed to do it. There's a question in some papers that the Financial Stability Board dropped in October which would basically anything like Diem back to 2023, if it wanted to send money between countries, even.
So that's a really good question. At this point, I'd have to engage in Kremlinology of Facebook, because Zuckerberg has barely mentioned Libra or Diem since the hearing in front of the house in October 2019. It's mentioned a couple of times in earnings calls when people asked them about it, it was talking about things like, and then you can send people money internationally with WhatsApp Pay.
He's very big on that at the moment and opened up WhatsApp Pay in India. They were originally going to try to back it with their blockchain project. That got knocked back, after about a year of wrangling with the Indian regulators, the sticking point was whether they were allowed to move the data out of India.
They'll finally put it into place, just backed by a unified payments interface at the same thing that everyone in India uses. I'm not sure how it's going yet. I heard it's attaining some popularity because they charge zero fees. Because that seems to be the thing. If you've got a payment system on Facebook, they'll charge you zero fees.
They tried to open one in Brazil as well recently, WhatsApp Pay Brazil. The regulator knocked them back cause they were trying to open up a huge thing through a regulatory loophole. But now they're having to launch it slowly with a pilot program in an orderly, reasonable manner, like most other new payment systems.
And that's going to be backed by PIX, which is Brazil's new real-time resale settlement system. So they're very big on the WhatsApp Pay idea at the moment, and that branding.
[00:45:55] Richard: Okay. So you mentioned some substitute products in the form of domestic electronic payments systems in Brazil, for example. That reminds me of something you mentioned in your book about how if you live in Asia and Europe, you are already quite familiar with certain electronic payments systems, and therefore something like Libra domestically, at least wouldn't add so much value to your daily transactional needs. But I'm really curious. Can you speak to the UK, like how the electronic payment systems work there?
[00:46:26] David: So basically we have FasterPayments. That's what the system is called. It's called FasterPayments. Basically all the banks got together, they set up a network where you could instantly transmit money between them, or it takes seconds to clear. And that works really well. You can send them money by knowing their account number, knowing their account number doesn't mean you can reach in and take their money. If there's fraud, you know both ends. So you have some chance of tracking stuff down. And this is the backbone for the card-based systems that everyone uses now as money. I barely use cash. Everyone lives off cards here.
[00:47:01] Richard: So basically a cashless society. And when you say card, these are debit cards, credit cards you are referring to?
[00:47:07] David: Debit cards or credit cards, whatever has a touch card mechanism on it. So they set up the whole touch to pay infrastructure. It has very strong guarantees on reversibility if you want to repudiate a transaction, you basically can. But yeah, it works well in practice. By 2017, card payments were bigger than cash. Both in number of transactions and volume of transactions. You don't need crypto for this job, we have existing systems that do it.
[00:47:36] Bryce: Hold on. Yes in Europe. You guys do it all the time. In the United States. That's like mind-blowing technology. Because literally people still collect change to ride the bus, believe it or not.
[00:47:48] David: You can't use currency on London buses anymore.
[00:47:51] Richard:Okay, let me go to an audience question here. The latest White Paper doesn't talk explicitly about the Diem investment token, which was previously mentioned in the initial version, but the latest White Paper vaguely mentioned some kind of setting up some incentive for the project’s success.
So what is the latest on this investment token? And this is for both of you.
[00:48:12] David: There's been no news. Basically, they originally planned a complicated ICO type offering, which would have been effectively what blockchain world knows as a SAFT simple agreement for future tokens, where you would buy tokens and those would be Libras and they would somehow transmute into non-securities once you let them loose on retail.
So it turns out that SEC isn't very keen on SAFT type arrangements. They totally took Telegram to the cleaners over trying to push one. And the SAFT concept isn't very favored at the moment in ICO land.
[00:48:46] Bryce: And the investment token is dead. The White Paper specifically mentioned that the Diem token is available technologically and permissibly on the network itself to be traded in public exchanges. In fact, in their sample code, they even show you in Python code, how to create a small Diem exchange. That's how easy it is.
And with that in mind. So now we can see the incentivization is they're going to print a bunch of Diem tokens, and then it gives it to everybody in the Diem foundation. And then when you actually convert a currency from one to the other on the backend, you'll be buying those Diem tokens from there.
It's just like an additional distribution. So until the tokens are used, they're going to sit there and have no value. But as soon as a user needs to remit that value, that token will be purchased for that value from one of the Lieber foundation members and then used in that transaction. So it's it. And also, because they're publicly traded, the price of a Diem will be a function of the computation from the basket currencies that Facebook employees. So as the value exchange rates of various currencies fluctuate, there will be a small variance in the value of Diem and that will enable holders of Diem to speculate to some degree on future prices.
So there's a slight amount of volatility involved as national currencies adjust against each other.
[00:50:16] David: I was going to say that when I looked at the currency token plan and that Calibra as Novi was called, wasn't going to charge a fee. It was really obvious. The very first thing that would happen would be a swarm of Forex trading bots. Even if they have limited amounts per individual, you could have a rack of a thousand phones with robots tapping away at them.
[00:50:36] Bryce: What we learned, in the last two years in the cryptocurrency space is market making, liquidity provider, liquidity as a service is in fact a profitable business. So when you talk about all these trading bots, I absolutely, Facebook will make money providing liquidity for their own market.
[00:50:56] Richard: Thank you. Let's move on to the concluding remarks stage. I think this would be a good point to synthesize your thoughts and maybe talk a little bit about what you envision will happen to this project, whether you think it will be further water down in order to get regulatory approval, whether you think that this project will wither due to regulatory pressure. I would love to hear your prognosis. Maybe starting with Bryce.
[00:51:23] Bryce: Overall, I think that this was an inevitability. Somebody, some corporation somewhere was going to try and create their own coupon-based token network. And Facebook just happens to be the one company on the planet that has the greatest incentive to do and so they did. I for a very long time did not believe that Libra would ever see the light of day.
And if it did it wouldn't see the light of day, at least until 2025 after FedNow and Fed360, The fact that the cryptocurrency regulatory landscape has become so well crystallized. So well-defined that even various States are now implementing their own blockchain legislation and regulatory compliance pathways.
Now presents a different landscape where this might actually succeed. The things that Facebook are doing when you compare them to say things like Tether or USDC or other stable coin projects, Facebook is actually doing it a lot better than any current market participants. They are actually doing more transparently.
[00:52:27] David: They're a completely different proposition to Tether or USDC though. Those are trading coins. This is a retail coin. I mean they're both dollars, but they're for different purposes.
[00:52:35] Bryce: Breaking that retail barrier is something that only Facebook could do it because we'd have these cryptocurrencies, like Tether or like USDC that have never been able to be used in any sort of coverage other than training other cryptocurrencies.
So it becomes obvious that Facebook is the entity that can do that. They have the resources, they can throw hundreds of millions of dollars at a project like this, have it fail for years, and still have it pay off if it succeeds. And that's the thing that I believe is really what sets this apart.
[00:53:07] Richard: Great thank you. How about you, David?
[00:53:08] David: So nothing is going to happen for years. They want to start this in January 2021. I think they've got an uphill battle for that. They're not going to proceed until Switzerland lets them and Switzerland is not going to let them until Switzerland knows that both the US and the EU are on side, at least as well as other countries. Because Switzerland is well-respected, but it's small one can do without the heat. So I think that they are absolutely going to push until something is released. The proposal that's being floated at the moment, a Diem dollar is basically functionally going to be something that will work like PayPal. They may have aspirations beyond that and the technology and the language might open up all sorts of possibilities, but it isn't a question of what they can do. It'll be a question of what they're allowed to do.
So I think that for the foreseeable future, it will be a single country, PayPal like a money exchange or money transmitter. The current FSB recommendations, Financial Stability Board, these are recommendations in the sense of this is how it's going to be -- when they recommend something, that means this is how it's going to be -- this recommends that for CBDC's they'd have to work out international movement of currency and all the regulatory issues around that, they've got a roadmap that goes out to having that happen around 2023, 2024. Then in their stable coins paper, they included that bit by reference. So you wouldn't be able to do remittances with Libra probably until about 2023, 2024. This is even if you assume the basic PayPal-like structure. That's my basic thesis, that it's not about what they can do. It's about what they will be allowed to do. And they will go along with it as long as they get to release.
[00:55:00] Richard: Right. You know, I've always wondered if Diem could gain more momentum, If they were to just round up a few developing countries with terrible payment infrastructure and essentially do their CBDC for free for them and in between those countries
[00:55:18] David: I don't know why they haven't. There must be a reason.
[00:55:20] Bryce: If you read the Diem White Paper, that's exactly what this is. I picked Venezuela very specifically because it has a high penetration of Facebook users and an economy where they would rather use Bitcoin there's a local currency. Diem would absolutely, I believe, find unexpected adoption within countries like Venezuela.
[00:55:41] Richard: Wonderful. Well, thank you for joining the debate today, David and Bryce, how can our listeners find both of you, starting with David?
[00:55:48] David: I'm at Davidgerard.co.uk and get to my blog there. @DavidGerard on Twitter. Basically, my search engine optimization game is brilliant because I've been posting since 1995. So if you search for my name or my name plus Bitcoin, you'll find me.
[00:56:03] Bryce: And you can find me on Twitter @Bryceweiner, B R Y C E W E I N E R.
[00:56:09] Richard: Perfect. Thank you both. So, listeners, we would love to hear from you and to have you join the debate via Twitter, definitely vote in the post-debate poll. Also, feel free to join the conversation with your comments on Twitter. We look forward to seeing you in future episodes of the Blockchain Debate Podcast. Consensus optional, proof of thought required.
Thanks again to David and Bryce for coming on the show.
To summarize: David thinks that Diem's plans are way too ambitious and are threatening nation-States controls on their own currency. He thinks it also doesn't help that the project sponsor has a soiled reputation and did a terrible job rolling out the project.
Bryce, on the other hand, thinks Facebook can pull this off, and get to provide the core offerings initially promised by the project, with their vast amount of resources, capital, and patience, especially given the absolutely tremendous commercial upside.
What was your takeaway from the debate? Don't forget to vote in our post-debate Twitter poll. This will be live for a few days after the release of this episode and feel free to say hi or post feedback for our show on Twitter. If you like the show, don't hesitate to give us five stars on iTunes or wherever you listen to this.
And be sure to check out our other episodes with a variety of debate topics, Bitcoin's store of value status, the legitimacy of smart contracts, DeFi, POW vs POS, and so on. Thanks for joining us on the debate today. I'm your host Richard Yan. And my Twitter is @gentso09. Our show's Twitter is @blockdebate. See you at our next debate!