Goldman Sachs released a 34-page analysis of the effects
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Facebook’s Libra Currency Could Threaten the Global Financial System. Here’s How
This week, both the Senate Banking Committee and the House Financial Services Committee grilled Facebook’s David Marcus, head of the Libra cryptocurrency project. Lawmakers bluntly laid out a variety of doubts about the Libra proposal, including whether the system could prevent money laundering, and whether Facebook should be trusted to collect transaction data, given its shoddy history of handling user information. But perhaps the most high-stakes question on legislators’ minds was whether Libra might introduce a new kind of systemic financial risk. Though often derided for their speculation-fueled volatility, bitcoin and other cryptocurrencies are largely disconnected from the mainstream financial system, and represent a relatively tiny slice of global value. Libra, by contrast, is designed in a way that could make it very large, and very closely entwined with things like national currencies and even small local banks. If and when Libra gets up and running—Facebook has said it will launch in 2020—it would have a built-in base of nearly 2.5 billion Facebook users worldwide, or roughly one third of the entire global population. Facebook and Marcus have said that reaching unbanked people is a major goal for Libra, and pointed towards close integration between Libra and Facebook tools such as Messenger. The social network, then, plans to push hard to get its users to convert funds to Libra. Rep. Michael San Nicolas (D–Guam) yesterday speculated that Libra could easily attract $100 billion in deposits—about one tenth of the assets held by Goldman Sachs—and potentially much more. Funds converted into Libra by users would be placed into a “Libra Reserve” made up of conservative instruments like treasury bills and national currencies. The value of Libra will not be ‘pegged’ to any single currency, and will instead ‘float’ in a global market, much like most national currencies. David Marcus nonetheless described its structure as “1 to 1” backing, in the sense that the reserve funds will not be lent out, decreasing risk. But there’s no real guarantee the Libra Reserve would be stable in practice, especially when broader conditions get rough. The problem, according to numerous experts, boils down to this: What looks safe on paper can hide unpredictable risks. “We’re talking about finance, which is inherently fragile,” says Columbia Law School’s Katarina Pistor, “And subject to crisis, time and again.” Pistor studies the legal structure of financial systems, and testified before the Financial Services hearing Wednesday. She thinks the idea that Libra can be insulated from crisis is based on “very strong assumptions that probably will prove to be wrong.”
The Libra bank run
One of those assumptions is simply that certain currencies are ‘safe.’ “In the last decade, we’ve seen even the Euro under very significant pressure,” points out Lars Seier Christensen, an experienced currency trader and founder of Saxo Bank, a Danish investment bank. Even without the risk of lending out its reserves, Pistor says she “would not exclude the possibility of a run on the Libra,” as one slumping currency in its ‘basket’ could trigger a collapse of faith, causing holders to scramble for the exits. Because its value would float in the market, a sudden global rush to sell Libra would potentially mean a big (if temporary) hit for the last holders to exit. It doesn’t take much to trigger such a run: Pistor points out that the Reserve Primary Fund, a ‘safe’ money market fund, had less than 2% of its assets in Lehman Brothers when Lehman collapsed in 2008. Yet it caused a run, ultimately forcing Reserve Primary into liquidation. Libra’s possibly huge size would make it a threat to more than just its own holders. “Let’s say one of these [Libra Reserve] assets began to fail, for whatever reason,” Christensen says. “Presumably, if people began to reclaim the counter value of the Libra, [the Reserve] would actually have to start wholesaling the other assets for the shortfall in the original failing asset.” A large enough selloff, even of national currencies and short-term government bonds, could be a shock to the broader market. A scenario along these lines seemed to be on the minds of House Financial Services Committee members on Wednesday. Rep. Gregory Meeks (D-N.Y.), for instance, recalled the “absolutely terrifying” unfolding of the 2008 financial crisis, and argued that if even 10 percent of Facebook users began using Libra, “that would absolutely make [Libra] a systemically risky financial institution, and we would expect FSOC [the Financial Services Oversight Council] to designate you as such,” subjecting Libra to heightened ongoing scrutiny by regulators.
The moral hazard of the Libra Reserve
These risks are compounded by one of the most worrisome elements of Libra’s proposed structure. Even many conservative instruments that might be included in the Libra Reserve return a percent or two of interest. Those returns, according to the Libra proposal, would not go to depositors, but to Libra Association members and other investors in the system. Despite the notional pledge that the Reserve will only hold the most conservative instruments, Christiansen finds this structure deeply problematic. “If all of the interest value falls to the consortium,” he muses,“Would there not be a slight temptation to go just a little bit higher on risk than you might if you didn’t have an upside? Would not the incentive be to move the yield from 100 [basis points] to 150 or 175?” That troubling dynamic collides with a hard truth: “Safe assets are not infinitely available,” says Pistor. “You could argue even today we have a scarcity of safe assets.” So even if not out of greed, the administrators of the Libra Reserve could find themselves extending into less safe territory as the currency grew. This again has shades of the 2008 financial crisis, when heightened demand for mortgage-backed securities led to increasingly dicey loans being bundled into them.
Disrupting global monetary policies
On July 11, U.S. President Donald Trump commented about virtual currency, including Libra, on Twitter. “We have only one real currency in the USA,” he said in part. Libra is clearly anticipating this sort of anxiety, with Marcus taking pains in his Banking Committee testimony to say that “The Libra Association . . . has no intention of competing with any sovereign currencies or entering the monetary policy arena.” But Libra’s very structure and mission may inevitably disrupt government monetary policy, says Pistor—especially in countries with less stable currencies. When Libra is sold by a local agent in a country like Kenya, for instance, the Kenyan shillings traded for Libra would in turn have to be traded in for something acceptable to the Libra reserve. “This could have an effect on the exchange rates of local currencies, and their stability,” says Pistor. Further, the conversion of local currencies for Libra could interfere with local banks’ ability to provide credit, for instance to local small businesses. Pistor says even cryptocurrencies that make no claim to stability—for instance, bitcoin—have seen significant uptake in places with weak money, making these impacts entirely plausible.
Also… It’s Facebook
One of the most striking takeaways from this week’s hearings was how little credence legislators gave to Facebook’s claims that it would not control Libra once it launches. For instance, Facebook has gathered a consortium, including the likes of Visa and Uber, that would, in theory, come to oversee Libra through a Swiss-headquartered nonprofit. But as Rep. Anthony Gonzalez (R-Ohio) pointed out, the fact that Facebook has gathered those parties could give the social network outsized power. Facebook’s role clearly has legislators particularly suspicious of Libra’s general trustworthiness. So much so, in fact, that they’re already preparing to block it ouright. The Finance Committee has posted a discussion draft of a bill, referred to as the “Keep Big Tech Out of Finance Act,” that would explicitly make it illegal for “a large platform utility” (read: Facebook or Google) to “establish, maintain, or operate a digital asset” (read: Libra). Such a sweeping prohibition seems unlikely to gain traction, but its very existence shows just how much Libra worries the people in charge.
Interesting Crypto: EOS - What is it all about? Who is behind? How does it work? What is the potential?
When Block.one announced their ICO (initial coin offering) without a fixed price and with a maturity of one year, there were many skeptics. People found it strange because an ICO of this type had not been completed before. Why would a company spend so much time collecting money? The rumors therefore started out quickly. Was EOS a scam? What was the meaning? Many investors were therefore also initially in relation to the EOS and ICO design. A number of prominent investors, many ongoing development committees and re-investment in the EOS economy have replaced skepticism with optimism - no matter how John Oliver spins his comedy.
What is EOS?
EOS is a platform and an operating system for scalable decentralized applications (DApps). The vision behind EOS is to build a platform that makes it easy for developers to build strong functional DApps, where scaling vertically as well as horizontally is possible. For example, it could be Smart Contracts. EOS structure means that the architecture behind EOS can potentially support millions of transactions per second without fees.
EOS is being developed by Block.one. Block.one is owned by Brendan Blumer and Dan Larimer, who are CEO and CTO, respectively, in EOS.IO. Larimer is among others known from Steemit and BitShares. EOS is thus Larimer's third project on Blockchain - his biggest to date. Blumer has previously sold different startups. Richard Jung also owns a stake in Block.one. Ian Griggs is also a partner in Block.one. Previously, Brock Pierce was also a partner, but he has left Block.one recently. Block.one collaborates with a number of investment funds with famous people at the forefront:
Galaxy Digital with Mike Novagratz in the lead (former partner of Goldman Sachs)
Tomorrow Blockchain Opportunities with Derek Rundell (known investor and serialist)
TomorrowVentures with Eric Schmidt (former CEO of Google) in the lead.
EOS is therefore one of the capital-wise largest supported Blockchain projects by over 1 billion. usd collected. Block.one has expressed confidence in sending a lot of money back into the EOS ecosystem.
How is the product structured purely technically?
EOS is designed on the basis of four crucial principles - scalability, flexibility, governance and applicability. Therefore, EOS also sets requirements for the Blockchain applications in their whitepaper in relation to design principles:
There must be support for many millions of users
The users of the applications should not pay for the use
It must be easy to upgrade and easy to correct errors
High performance both in relation to "bandwidth" and parallel execution
Potential, development and risk?
It is important to emphasize that the entire field of crypto that works with DApps is new and relatively immature. Therefore, elemental elements are also changing continuously, just as new challenges arise. For example, ETH is quietly implementing the programming languages Viper and Casper. The way Smart Contracts is built is also still optimizing - both due to bugs, security and new ideas. NEO works for example on this last part. Another important feature is that when you buy EOS today, there are actually ERC-20 tokens on the Ethereum blockchain that you buy. Everyone who owns the EOS ERC20 token before launch will be awarded tokens that are used to keep EOS-DApps running. Compared to alternatives such as Ethereum, NEO and Cardano (ADA), EOS is built with better possibilities for scaling and decentralization. EOS's approach to decentralization and security stands a little in contrast to the other DApp platforms, which, to a greater extent, mean that everyone who has a computer should be able to participate. For example, it is the mindset for Ethereum. Hackers can therefore, in principle, participate in the consensus mechanism from Day 1 in Ethereum, where all EOS registry parties will have to be chosen for this. However, security in EOS can also prove to be a risk because it is not clear how well or bad the voting system around testifies to verifying transactions works on a larger scale. Tested examples with EOS are, however, promising. The question is, therefore, whether this method can really substitute the verification principle? EOS and ETH represent two different paradigms in this context, in which we do not fully know the full extent of the security aspect - in good and evil. Another crucial issue to deal with when it comes to the future of DApp's platforms like EOS, ETH, NEO, ADA mf. is how developers see these now and in the future. What possibilities and limitations may be. This is essential because a platform only becomes worthwhile when it develops on it. Where ETH has already built a large community of developers, EOS needs to build this mass more from the bottom by convincing developers that EOS as a platform includes more potential through better scaling and stronger tools. The language can be a barrier, but also an advantage. How this prioritization and approach of developers will go on over time will have enormous impact on investment potential and EOS dissemination. Potentially, EOS may become the preferred DApp platform, but there is tough competition from a large and well-established ETH community. However, the EOS community regularly receives more members and at Discord, eostalk.io and forums.eosgo.io, there are already arranged meetups all over the world, as well as started teams that develop on DApps of different genres. Maybe there is room for both EOS and ETH? That means Dan Larimer himself. Most recently, quotes that current ETH contracs can be converted to EOS in a week. The potential of EOS is great and it will be exciting to follow both in the short and long term.
EOS has a strong team with a good history - even in crypto. The team behind is not "in it for the money". It's all rich people, with big visions. Dan Larimer is considered one of the most skilled and visionary people in the crypto world. Dan Larimer has stated that he expects to participate actively in the development of EOS apps subsequently.
EOS is backed by major experienced venture capitalists who have roots in The Bitcoin Foundation, Tomorrow Blockchain Opportunities and the Financial World. It not only gives credit in terms of thorough technical due diligence, it also makes it easier to attract talented developers to EOS projects. It seems obvious that the VCs will own equity in the startups that come on EOS. It is potentially another advantage.
Block.One sends money back into ecosystem for further development (1 billion usd to EOS Apps)
EOS combines the security of Bitcoin with the theoretically best scaling, performance and security of all DApp platforms. Unlike ETH, EOS operates without fee for verification.
Most commits to github of any currency, especially in relation to the market cap. The number of commits has been high for a long time. A budding community with great growth.
Existing EOS ERC20 token owners receive tokens before launch. These are tokens that are probably worth something. When the number of DApps on EOS rises, it seems obvious that the value of the new tokens increases.
Bitfinex has announced the launch of EOS finex. A decentralized crypto exchange based on EOS.
ETH Smart Contracts will work on EOS through ETHVM.
Risk and uncertainty about EOS
General fluctuations in crypto. If the crypto collapses as a whole, EOS also does.
EOS does not have a real product yet. The development is still under way. If there are problems with launch, it is problematic.
EOS is often presented and marketed as an "EOS killer". It is a message that has produced a very negative mention. Dan Larimer has also removed EOS as a competitor to ETH.
Prominent names, including Vitalik Buterin, believe EOS architecture / design is lacking. Often there are concerns about centralization in block production and voting power.
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