Consensus Day 3, Recapped: The Battle Over Electronic Money

What you need to know today in crypto and beyond

May 26, 2021

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What happened at Consensus today

The Roundup

Scenes From the Battle Over Electronic Money

There’s no question that money is going digital, but the form that “digital cash” will take for the majority of global users is still largely up in the air. There are rapid advancements being made in central bank digital currency (CBDC) research and development, as well as fiat-pegged stablecoin and untethered cryptocurrency adoption. All signs point to a future where there will be myriad competing forms of money that people can use to transact and save in.

Some of the world’s foremost digital currency experts appeared today at Consensus to give their take on the future of money. They offered a glimpse at the current state of payments evolution, as well as the many blockers in place to bring about a “Hayekian moment.”

According to the latest figures, nearly 80% of central banks are exploring CBDC use cases. Although major economies – like China, Japan, the E.U. and the U.S. – are in various stages of research and development, it could be said most of the energy is concentrated in emerging markets, frequently cut off from the global financial system.

Perhaps in a sign of the times, this morning Bank of Mauritius Governor Harvesh Seegolam disclosed that the central bank is working to finalize details of a CBDCs pilot to launch by the end of the year. It would join Cambodia, Saudi Arabia and the United Arab Emirates, among others, in active research. Last year, the Bahamas made history as the first nation with a functioning digital fiat system (pegged to the U.S. dollar).

Digital fiat could improve financial inclusion and “address gaps that the traditional monetary system is not able to fulfill,” Governor Seegolam said today.

By comparison, the U.S. is taking a cautious approach to CBDC development. While there are notable proponents for a digital dollar, such as former commodities regulators Chris Giancarlo and Daniel Gorfine, there are as many detractors.

Federal Reserve Governor Lael Brainard, for one, mentioned a number of policy considerations that still need to be wrinkled out. These include privacy concerns, the effect state money would have on banks, the impact on underserved communities and cross-border concerns, she said during a Monday Consensus keynote.

Brainard added that private alternatives, like stablecoins that “reference” fiats, come with their own destabilizing risks.

Brian Brooks, the CEO of Binance.US and former acting Comptroller of the Currency, offered his opinion: a CBDC will “never” be launched in the U.S. “That’s not what we do in this country,” he said, adding that monetary innovation is and must be led by privately issued stablecoins.

Asked whether CBDCs would compete with or complement crypto-asset networks like XRP, Ripple CEO Brad Garlinghouse said in a separate panel that it depends on what use cases are being targeted.

Consensus on where we go from here is anything but assured.

Regulation – boom or bust

In public comments today, Christian Catalini, chief economist at the Diem Association, the body behind the digital currency project, presented a denuded version of the dollar-backed diem stablecoin. Once promised to be an easy-to-use, mobile-first digital payments network that could stand apart from any local government’s monetary system, Diem (formerly Libra) now aims to stay firmly within the system.

The to-be-released digital asset, issued in conjunction with Silvergate Bank, will act as a placeholder for an official, state-backed digital dollar, Catalini said. “The design of our network is really meant to mitigate the risk of currency substitution,” he said.

It’s common knowledge that the original vision for a multi-asset-pegged global currency had been whittled down by regulatory concerns – a vision Catalini now admits was “naive.” He said the group has spent innumerable hours working with regulators to bolster consumer protections and mitigate potential fraud.

Morgan Beller, a former Libra employee and current venture capitalist, gave insight into that process today. Still rattled from the “PTSD” and “regulatory scars” of working on the Facebook-led initiative, Beller now takes a more pragmatic approach to disruption.

Fiat, she said, has network effects that act as a “moat” to prevent disruption. There may not be incentives to move to new rails, and for regulators any amount of change introduces risk. But the system can still be changed.

From the top down, fiat brokers might see the benefits of novel technologies that CBDCs (“watered-down stablecoins,” to steal her phrase) or stablecoins can bring. That explains the numerous countries and corporations, like PayPal, that are building new, more decentralized plumbing.

Then, Beller said, there are these bottom-up grown swells where people adopt tools because it solves a real issue. “There has been a lot of crypto for crypto’s sake,” Beller said. But in emerging markets, there are people who need services that traditional fiat cannot supply.

What’s more, once these truly decentralized systems – the “immaculate conception coins” like Bitcoin and Ethereum – take hold they cannot be squashed. There was a confluence of forces that led to Bitcoin and Ethereum’s success – perhaps most notably that at launch, regulators were simply uninterested.

A melange

Can this be replicated? Could truly cryptographically secure sovereign assets take hold everywhere? Beller seemed skeptical that the majority of people would ever learn how blockchain or key management ever works. What’s needed, again, are useful products.

Cuy Sheffield, Visa’s blockchain lead, seemed to agree, but thought widespread adoption would happen selectively at first. He noted in speaking to his crypto clients that a number were performing the majority of their business deals in stablecoins like USDC.

“The first main use case for USDC is a settlement layer,” Sheffield said, meaning moving funds from wallets to Visa or for cross-border B2B payments. He said this is a trend that would continue, at the commercial level, before the company expects a mass amount of consumers to begin paying merchants directly in stablecoins.

But the world is a big place, populated with many different types of people. There can be a level of decentralization in products that different companies offer. Some people will always prefer custodial solutions, whereas others want to know their cryptographic keys.

For Sheffield, the future of money lies at the “intersection between fintech, crypto and banking.”

Other News From Consensus

PayPal will enable withdrawal
PayPal plans to let users withdraw cryptocurrency to third-party wallets, its blockchain lead said, a service that is currently unavailable. The payments giant has let people buy, sell and hold a few cryptocurrencies since October 2020. The company ships new developments every two months on average, he said, though it’s unclear when the withdrawal functionality is coming.

Ripple still plans to go public
Ripple is waiting for an ongoing SEC lawsuit to end before it looks to go public, CEO Brad Garlinghouse disclosed today. “The likelihood that Ripple is a public company is very high at some point,” he said. The SEC launched an enforcement action in December 2020 that accused Ripple Labs of conducting ongoing and unregistered securities sales. Though still in discovery, the suit could be a landmark moment in U.S. securities law.

Question worth asking
In a meeting of the minds this morning, Bitcoin Core leads discussed the meaning of network stewardship as well as the blockchain basics, such as, “What is a user?” Bitcoin devs Eric Voskuil, Adam Back and Rusty Russell all agreed that from a protocol consensus perspective, only those running and using a Bitcoin node to verify their economic activity are true users – though the conversation gets complicated when asking what a miner is, too. So who really “runs” Bitcoin: the miners, the nodes, the users or the core devs?

Big fan?
Tom Brady will speak at the closing night of Consensus 2021, following a totally unplanned and completely spontaneous invitation from crypto mogul Sam Bankman-Fried. Brady is a late – though apparently committed – convert to crypto, given his adoption of the bitcoin laser eyes. He is also backing a new NFT platform.

–Daniel Kuhn

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This Week at #Consensus2021

The quixotic dream of crypto has always been personal financial freedom without reliance on traditional intermediaries. Today, more than ever, these technologies are offering individuals a self-sovereign financial future.

This week at Consensus by CoinDesk, our virtual big-tent conference, we examine the trails being blazed and the people leading the charge.

Join our Explorations track "Dimension C: Life in the Parallel Financial System," sponsored by eToro, with Brooklyn Nets point guard Spencer Dinwiddie, eToro CEO Yoni Assia, Venrock's David Pakman and more at Consensus by CoinDesk, running to May 27. Register today.

Today's must reads

Top Shelf

‘ALTERNATIVE’ DEVS: Apple is looking to hire a business development manager with experience in the cryptocurrency industry to lead its “alternative payments” partnership program, according to a job posting. The company has made no public statements about its plans for the crypto space.

LEGAL HAPPENINGS: Cryptocurrency app Luno has been ordered to amend advertisements displayed throughout London’s transport network after they were deemed “misleading” by the U.K. advertising regulator. Meanwhile, a couple in Nashville, Tenn., has filed what could be the first major lawsuit against the U.S. Internal Revenue Service (IRS) over staking rewards. The couple apparently want restitution for $3,293 paid on “income” made from staking on the Tezos network.

BIG BANKS: BlackRock CEO Larry Fink said on Wednesday that the company is studying the potential of cryptocurrencies to serve as long-term investments, though it’s too early to tell if they’re “just a speculative trading tool.” Cowen Digital Asset Investment, a division of the financial services giant, raised over $46 million for what looks like a digital asset-focused fund. Finally, CEOs from three major Wall Street banks – CitiGroup, Wells Fargo and Bank of America – plan to discuss cryptocurrencies before the U.S. Congress this week.

MINIMIZING MINING: Iran's president, Hassan Rouhani, announced all crypto mining operations must cease until Sept. 22 due to the load they place on the national power grid, according to a report from Iran Front Page on Wednesday. The unusually dry spring has left Iran struggling with hydropower shortages that have already prompted clampdowns on the local crypto mining industry.

–D.K.

What others are writing...

Off-Chain Signals

–D.K.

Putting the news in perspective

The Takeaway

Eric Voskuil is a veteran Bitcoin developer and one of the lead maintainers of Libbitcoin, the first implementation of the Bitcoin source code. He’s the author of “Cryptoeconomics: Fundamental Principles of Bitcoin,” a deeply researched and reasoned take on bitcoin’s core mechanics, Austrian economics and anarchy. He also founded the CryptoEcon professional conference, which took place in Hanoi, Vietnam, in early 2020.

The topic of funding bitcoin development is important. Some companies will hire a bitcoin dev, some won't. How do you incentivize firms to "give back" to the open source commons?

If they see an advantage to doing so, they will do it. The developer must be able to provide value that a company needs, like any other employee. Developers can’t support themselves on charity. The tragedy of the commons is often interpreted as a market failure, but this is not the case. A commons is property owned by the state, as in a “public” grazing land. People don’t pay for it and all must use it, or their competitors will do so and put them out of business.

So the commons either fails to be useful, either due to overuse and arbitrary constraint, or becomes private property again (paid for). The market determines the price that ensures supply and satisfies demand. If companies need it, they will pay for it. A lot of people work on open source because they want to and can afford to. Others get paid for it. I don’t see any reason or way to improve upon basic market rationality.

Are there any lessons or takeaways from the Taproot upgrade process?

I could see during the SegWit [Segregated Witness] activation process that a lot of people were drawing false conclusions. Those then predictably surfaced during the Taproot process. For some reason the developer community, which surely knows better, didn’t speak up when clear errors had become accepted truths. I can’t count the number of people who told me that they were surprised to hear that soft forks are not “backward compatible” unless enforced by majority hash power. A fork is a fork; if you change the rules, you are on a new coin. The only question becomes how many people will join you. Hash power enforcement is the only way to ensure that everyone comes along. Once people started to understand this, momentum shifted rapidly.

People had been led to believe it was just a choice, and that “user activation” had been done before BIP [bitcoin improvement proposal] 16, which is not the case. Core devs certainly understand this, but for some reason did not speak up – though they did show significant resistance to shipping code that they knew could easily cause a chain split. While the Bitcoin Core team is very diverse, there are real pressures. This is why Amir [Taaki] started Libbitcoin (and the BIP process). If anything, we should take away that it’s healthy to have truly independent developers, which necessarily means independent projects.

Is there anyone "in charge" of Bitcoin Core, considering only a handful have "commit access" to the GitHub?

There are way too many people who want to commit code – into what is in many ways a fragile codebase – for nobody to be in charge. There is necessarily a small group of people who ultimately decide what gets in and what doesn’t. This isn’t a problem, as there is nothing stopping someone from doing exactly what Amir and others have done. It’s only a matter of time before other implementations mature to the point where there will be a competitive market. The idea, heavily promoted by many Bitcoin Core devs, that consensus criticality precludes competition is self-serving and ultimately irrelevant. There are many versions of Bitcoin Core, some of which have shown themselves (even in a single version, as a result of platform dependencies) to not be consensus-consistent. Dave Collins wrote a good article about it back in 2015.

Edward Snowden, for one, has said on-chain privacy should be the biggest priority in Bitcoin development. There are more users than ever, a greater interest in bitcoin among regulators and law enforcement and an industry made out of on-chain surveillance. Why have Bitcoin developers shied from implementing privacy features at the protocol level?

I’m not aware that they have. It’s really the central aspect of core development.

The common view is that miners are Goliath to users' David. You said this morning it's more of a Goliath versus Goliath situation. Could you add a little more here?

The term “user” is ambiguous. The people who matter in the context of rule changes are miners (those who are presently confirming transactions) and merchants (those who are presently accepting bitcoin). The latter category is likely at least as centralized and state-regulated as mining. The sea of HODLers has no say whatsoever in such changes. If they aren’t accepting bitcoin (themselves, not via exchanges) they don’t have any ability to reject invalid coins. That is the purpose of validation and the essence of enforcement.

Will miner-enforced upgrades become the norm as the network gets bigger? Or will there be a place for user activated soft forks?

It’s already the norm. User activation does also happen, resulting in altcoins. The question is always how to get everyone to change their rules and at the same time. You can either get greater than 50% of hash power (miners) or 100% of the economy (merchants). A soft fork is a new coin. The benefit to using soft forks is that majority hash power can bring everyone else along. If they don’t, you have an altcoin. It’s certainly possible that the old coin could die out, or the new. But with hashpower signaling, a large part of the economy can start enforcing (or activate) at the same time and the rest of the economy can change the rules over time. Without hashpower enforcement, chain splits are practically inevitable.

Any thoughts on the Musk/Saylor Bitcoin Mining Counsel? Or on the larger conversation of Bitcoin's energy consumption?

I’ve written on energy waste theories. They really just don’t make any sense. There is a cost to securing all things, and that cost is what the threat must exceed to be successful. Those costs are all grounded in energy. Bitcoin suffers from a PR problem in that its costs are entirely visible.

As for councils, these things will happen. I don’t see them as relevant to Bitcoin. They can have an impact, but Bitcoin will only thrive to the extent that it can operate outside of what are ultimately political strictures. That is, after all, why it exists.

–D.K.

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