Caitlin Long on Why Facebook’s Libra Coin is Good for Bitcoin

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Peter McCormack: Good morning Caitlin, how are you?

Caitlin Long: Hey, good morning Peter. I’m well thank you. How are you?

Peter McCormack: I’m doing very well. Thank you for agreeing to do this. This is your second time on. Your last show you did with me, I think it’s still in top three or four podcasts I’ve done!

Caitlin Long: Oh wow, fantastic! Well, hey, there’s a lot going on out here in Wyoming and there’s even more coming so it’s great to stay in touch with you. We’ll hopefully continue to work together in the future as well.

Peter McCormack: Hopefully! I think I’m going to try and come out to the Wyoming Blockchain week. Is it 21st to the 23rd or something of September?

Caitlin Long: Yes, it’s that weekend and we’re starting on Thursday with a Wyoming Blockchain task force meeting. There is a conference both for business people and developers, two separate tracks. Then we’ll have the Hackathon and along with the Hackathon is the sandcastle challenge, where the top two teams are guaranteed entrance into Dubai 2020. So I definitely hope your listeners will think about coming out, kick the tires on Wyoming, a lot of folks are thinking of doing that. Kraken is our lead sponsor.

I know they’re a big supporter of your podcast as well. Very similarly philosophically aligned and they keep spending time out in Wyoming, so I can’t vouch for what their plans are, but they’re busy people so you can read something into that and let them announce it whenever that timing is ready!

Peter McCormack: And you can confirm for me that Wyoming is real? It does exist?

Caitlin Long: Yes! It definitely is real. It’s really funny that that meme got started in the 1980s before social media came along. It was a Garfield cartoon and it was actually really funny. For whatever reason, out there on social media, the meme just never died! So a lot of folks are questioning whether Wyoming exists, but yeah, Brittany Kaiser, who is the Facebook whistleblower, has publicly announced that she’s moved to Wyoming and there will be others who will as well.

So stay tuned! This is not an overnight thing. I realize that the concept of moving to a new place and or relocating a company as opposed to just registering the business, those are major decisions and they take time, but it does feel like we’ve got momentum. We’ve already raised as much money this year for the Hackathon and we’re three months ahead. It’s still three months out and we already raised the same amount as we did last year.

The great thing about it is it’s a non-profit. It’s not one of these for-profit events where the event sponsors really are the ones who do well. This is a non-profit. The University of Wyoming is making its facilities available to us for free and that means that the developers actually take the money. So we paid out in prize money last year, more than most of the big Hackathons did and I think we’re going to be able to do the same this year.

It’s a real Hackathon for developers and Marshall Long put out on his Twitter, this was the best Hackathon he attended last year. So I’m really hoping that we get lots more attendance this year. Everybody saved the date and Peter, it would be great if you come out as well and kick the tires out here.

Peter McCormack: Yeah, I think almost certainly I’m going to try. I like the way you’re put in Wyoming on the map with your dedication. I’m trying to do the same with Bedford, but we don’t really have a centre for Blockchain here. It’s pretty much my podcast!

Caitlin Long: Yeah, you do a great job and let’s hope that this show meets those standards with regards to this Facebook topic, which is a hot topic for sure.

Peter McCormack: Yeah, what a topic! Also with the podcast recently I made a decision to focus on Bitcoin for a number of reasons, but I do think the Facebook project is highly relevant to Bitcoin and you noted that in your article, which by the way, I read through this morning. I’ve tweeted it out. I also read through all the comments on the tweets and one of the interesting things is that, I don’t think I’m alone in this, in that I have this kind of… I’m on the fence with it.

I can see so many positives for it, but there’s also a number of things that I naturally worry about. Probably mainly because of the history Facebook have had with questionable ethics towards privacy. What are your kind of general feelings before we dig into this?

Caitlin Long: Well, I have the same view. There are definitely pros and cons. I’m not rah-rah Facebook, but I’m also not completely rejecting it. It absolutely is something that is a double edged sword and it’s not black and white. There are going to be benefits to Bitcoin from Facebook. Literally they’re making cryptocurrency a mainstream word and they are making it.. It’s funny in the Wyoming Blockchain Coalition, I’ve always been careful to use the word Blockchain because I felt like that was more of a mainstream accepted word instead of cryptocurrency.

Now that Facebook is using the word cryptocurrency, that word I think will become more mainstream just in the vernacular, much less the actual use and getting people used to the idea of digitally scarce money. Now Facebook’s coin is not going to be scare! So, I do believe that over time people will do the same thing they did as Nick Spanos pointed out in Venezuela, when he we visited Venezuela, that once people got educated about what cryptocurrency is, that they naturally look for the best one that’s going to retain the most value over time.

That has the best stock to flow ratio, and that is Bitcoin! There are other crypto currencies that of course going to benefit from that coat tail effect as well. I also think this is a detour, kind of like, to use Andreas’ analogy, it’s the intranet before the internet. We’ve even seen it in this industry, “it’s Blockchain, not Bitcoin”, but people are coming full circle back around to Bitcoin. 

These are detours that are ultimately helpful to gaining adoption and wider support, but they’re not where we end up and I think we will end up in Bitcoin. As I’ve said, I’m a Bitcoin maximalist, just like probably most of your readers. I just think it’s going to take a couple of decades before we get there. We will have these detours that the more short term maximalists look at and shake their heads and say “waste of time.”

But right now we’re just not there yet in Bitcoin with the user experience and I think in the meantime, Facebook and others like Telegram, who are going to be doing similar things, are going to be helping to adopt by helping to educate what cryptocurrency really is. That is at the end of the day, a good thing for Bitcoin.

Peter McCormack: I think I pretty much agree with everything you said then. I think the best way to go through this will be to work through your predictions, because they’re a solid framework for discussing the Facebook Coin. I know it’s Libra, but I actually find it easier to call it Facebook Coin, I don’t know why! But there were a couple of things I just want to cover before we do that. So I initially thought this would be a Dollar pegged stable coin, but it’s actually been confirmed that it will be tied to a basket of fiat currencies. So my first question around that is, will it be its own currency then, not pegged to a specific currency?

Caitlin Long: Yes absolutely and I think you’re absolutely right, yes it will. Just like Bitcoin is its own currency and I don’t know where it ranks in the market value of all the global currencies. But last time I looked at was in the top 20, I believe, by value and I think Libra is going to be right there as well. It’s going to work like a central bank. It’s basically a private version of a central bank. That’s how I think about it. There are going to be managing reserves against the liability.

Liability for them will be the people who own the coins and they will be managing the reserves against that. It’s going to be very interesting to see how they peg it. I think the fact that it’s not a Dollar proxy 100%, means that when they said in one of, I think it was the information story, there was a confirmation that they are going to be marketing this in the developing world. This is going to be a developing world concept, probably more than a developed world concept. I was thinking also in preparation for talking with you, Americans are just not used to foreign exchange risk.

Oil is priced in Dollars. Most food stuffs and commodities are also priced in Dollars. There is no foreign exchange risk. All our oil and our food and other commodities are Dollar based. Whereas Europeans are used to that, especially in the UK. You’re more used to the notion of currency fluctuations. So my guess is this is mostly an emerging market phenomenon. Secondarily a European phenomenon and lastly a US phenomenon.

Peter McCormack: There’s going to be a UX issue for them with this though, because if they are part seeing for example, they can compete with Venmo as an easy way to send money back and forth in say WhatsApp or Messenger, people are used to sending Dollars back and forth with that. But if this is a brand new currency, there’s going to be a UX issue where people are understanding the exchange rate and how much value they are holding a specific time. So I kind of interested how they’re going to play that.

Caitlin Long: Yes. But again, I think that that’s why it was significant that they announced that they’re marketing this in the developing world where there is a desire to use a more stable store of value. So I wouldn’t be shocked if this is primarily a Dollar proxy, because in the developing world, lots of folks want to store value in Dollars more so than in Euros or Swiss Franks or Yen for example. But we’ll have to see what that basket is!

Moreover, that basket is not going to remain constant. I did say in the article that this foundation who is going to be figuring out what the Dollar or currency peg is for Libra and then implementing it over time. So they’re going to be trading it to maintain reserves, in a percentage basis that matches what they’ve told their customers is in the basket.

That foundation is going to be a very powerful force within capital markets, just based on the scale that we’re talking about. Assuming that a decent percentage of Facebook’s 2.4 billion monthly active users ultimately end up using this. I think WhatsApp has 1.6 billion users, so we’re talking about enormous potential scale here and that’s why I think that foundation is going to have enormous power in capital markets. It’s going to be a force to be reckoned with, no question.

Peter McCormack: Well let’s work through the predictions then. So we’ll start with number one, “Facebook’s crypto currency will be a powerful force for good in developing countries, which is where Facebook intends to market the product”, which you’ve already mentioned. Because the power behind it is a borderless currency without fees, as you noted. Is this going to therefore also be bad for the likes of PayPal and Western Union and other transfer services?

Caitlin Long: Yes, absolutely. But it’s wonderful for the people living in the developing world because it’s going to indirectly create pressure on their central banks not to devalue their currencies. So this is where I think it can be a powerful force for good, just simply because it’s going to retain its value better than most currencies. The obvious examples are Venezuela, Zimbabwe, but even Argentina, which has done a better job in recent years. It’s still devaluing faster than I suspect Libra’s value will.

Peter McCormack: Does that put a risk on these local currencies though, in that if people start using Libra quite a lot, could that actually devalue the local currency because it’s not being used? Is there anything in that?

Caitlin Long: Yes, and I suspect that the developing world central banks are nervous about this. The developed world central banks don’t seem to be as nervous, we’ll get to that in a moment. But absolutely, as this is going to take power away from them. It’s Friedrich Hayek’s “Denationalized Money” and it is the optimistic view of cryptocurrencies is that there’s not a nation state here.

There is a large powerful corporation, we’ll talk about that in a moment, but there’s not a nation state issuing this. So it’s powerful in the sense that it does create competition for those local currencies and that competition is going to create indirect pressure on those central banks to maintain the value of their currencies for exactly the reason you asked the question.

Peter McCormack: See, this is the reason I like it. When I hear things like this, I start to think, “okay, this is a power for good.” Even if it its got this huge company behind it, it can be a power for good, especially as you said in specific countries where they have seen mass inflation. One of the things though I do think about is, do you think there’s a chance that this will be banned in countries?

Caitlin Long: Yes, absolutely and this is the risk that I think Mark Zuckerberg is taking with Facebook. That all of a sudden by making this and by getting into money, it potentially creates the risk that Facebook itself and WhatsApp and Instagram and the like, are banned in countries. Facebook is not usable in China, which is why WeChat ended up developing the way that it did and Facebook obviously gets to see the youth that WeChat gets in China, it’s ubiquitous. Last time I went to China it was very difficult to spend paper money there as a foreigner. You really had to essentially pay the money to a local and they would use their phones to purchase things for you. It’s basically ubiquitous and that’s clearly what Facebook is going after here. But I’m sure they’re very aware that in certain countries, the dictators are likely to ban Facebook if it becomes too powerful.

Peter McCormack: Okay. I wonder if they can ban the use of the currency without banning Facebook itself.

Caitlin Long: That’s a good question. In Bitcoin it is censorship resistant. This is a huge difference between Facebook and Bitcoin and this is part of the reason why ultimately I think this has positive boomeranging effects for Bitcoin, because people will realize that if Facebook becomes too much of a threat, if Libra specifically becomes too much of a threat to the local central banker, who is devaluing the currencies, then people will now understand there is a real alternative and it’s called Bitcoin.

So again, I think this is not a problem for Bitcoin. Ideally everybody would adopt Bitcoin overnight, but it hasn’t happened. Facebook’s going to accelerate that and people are smart, especially in the parts of the world where folks are used to foreign exchange risk, they will look for the best store of value and it’s not going to be Libra.

Peter McCormack: Well that’s why one of the things I’m excited about is the Libra/Bitcoin chart because on a long enough time scale, that chart will even show that Libra is devaluing against Bitcoin.

Caitlin Long: Absolutely! Independently, since I came from Wall Street, I spent a lot of time looking at financial market indicators. There’s a great analyst whose stuff I read, especially any time we get into choppy financial markets. His name is Jeff Snider at Alhambra Investment Partners. Also another one, Doug Noland at Credit Bubble Bulletin and both of these guys are on the notion that, central bank balance sheets are going to be expanding. In Jeff’s case, he’s saying they’re way behind the curve of what’s happening in the world.

In Doug’s case, he predicted that in the next crisis, which is he’s expecting is coming relatively soon, that the Fed’s balance sheet is going to expand to $10 trillion. It reached a $4.5 trillion peak in the previous financial crisis. Now, when Doug predicted that a couple of weeks ago, I came out and said, “I think he’s way low.” It’s going to be that much bigger than we think because there’s so much tinder that’s been built up in financial markets right now. We don’t know what the spark is. We don’t know when it’s going to come.

Maybe it never comes, but it’s pretty likely that the Fed is going to have to come to the rescue and won’t just be the Fed. It will be the major central banks in the world. So again, Facebook’s Libra foundation is going to be right in the middle of that financial storm, and they’re going to have to manage the value of Libra against volatile developed world currencies when that eventually happens.

You will see, again this is where Bitcoin wins, you will see the devaluation of Libra as a result of the devaluation of those developed worlds currencies when that eventually happens. Just none of us know what the precise timing is for sure. But again, that’s when Bitcoin wins.

Peter McCormack: It’s funny because we are seeing the nature of money itself change before our very eyes. Not only with Libra and Bitcoin, but well actually primarily with Libra and Bitcoin. It’s a complete and fundamental change to what money is and what money means to people.

Caitlin Long: Yes and Jeffrey Tucker wrote a very beautiful article, he’s such a beautiful writer, over the weekend on the AIER website about Libra and he called it the “Dollars killer app” and again, he’s just like us, he’s a Bitcoin fan. But he’s recognizing that this is a potentially valuable detour that actually helps Bitcoin in the end and he’s talking here about we haven’t had any real innovation in money and payment systems in 50 years and now we’ve got all this innovation happening right around us and that’s a good thing.

It’s creating competition in money and we’re getting market forces to come out and actually allow people to have alternatives with regard to payment systems. PayPal never really worked because, and same thing with Western union, it never really worked because they had to use the existing payment rails.

Libra is obviously not going to be using ACH and similar central bank payment systems. So this is a big advancement in technology and it’s going to give power to a lot of people in the world. I just think the developed world folks are not necessarily going to be the big beneficiaries of it yet anyway.

Peter McCormack: What are the downside risks? Do we have a downside risk of central banks not having total control over parts of the monetary system?

Caitlin Long: Well, I happen to think that’s a positive!

Peter McCormack: I understand the positives and I’m thinking more, could it be a violent transition?

Caitlin Long: Well sure, it could be. We don t know how this is all going to play out, but to me, the biggest downsides are more Facebook specific. I’ll start by saying, Terry Kibby gave me a great line. She’s a freedom oriented person and she said, “conservatives fear big government, progressives and liberals fear big business, freedom loving people fear what happens when big government and big business collude.” I just love that quote because it just puts everything into perspective. We feared the central banks, now we actually have big business potentially colluding with the central banks and partnering at least, is maybe a better word for it.

But this is the downside, that we actually have something that the governments and central banks apparently have given blessing too and that this is going to be the one that they’re going to accept and that that may actually cause them, because they have accepted one, to crack down even harder on the truly decentralized cryptocurrencies. That gets to some of the other issues that people have flagged, one of which is of course the antitrust issue. Facebook banned crypto currency ads.

Well were they just bombing the runway for the introduction of their own cryptocurrency? There’s a major antitrust question there and I raised the issue in the Forbes article, will there be some sort of cooperation between Facebook and governments that gets them off their antitrust issue, because they’re going to agree to turn over all the data to the governments? What’s going to happen moreover when people get de-platformed from Facebook for censorship reasons?

This is clearly not a censorship resistant crypto currency, so how’s Facebook going to handle that? Is your money going to be trapped like it is in a bank, where you have to jump through a million hoops just to get access to your own money? These are major questions and the thing I’m going to be looking at most, with the introduction and in the next few months, how the government’s handled this, is did Facebook get some sort of special treatment relative to other crypto startups that have had a lot of problems with regulators, because the government has decided that this is the one that they’re going to back.

If so, is it all about wanting to get access, to track every financial transaction ever done? There is a big crackdown, we just saw it at the G20 meetings, it’s coming at the end of June from the Financial Action Task Force, which is a global organization that was created to try to keep the financial system stable after the financial crisis. They’re going to significantly increase anti money laundering and anti terrorism financing surveillance on the financial system.

We’ve seen this spoken about, for example, the Consensus conference last month, the Under Secretary of Treasury in the United States, basically painted the picture that not only do all cryptocurrency transactions have to embed information about the beneficial owner in them and literally someone asked her, “wait a minute, that’s, you can’t retroactively change a protocol to require that” and she said, “well, that’s your problem, essentially.” But moreover she also said she didn’t explicitly say that she wants to track every financial transaction, but here’s how she laid it out.

She talked about suspicious activity reports, which banks have to file in the United States for every transaction of $10,000 or more. She then went on to say that the average terrorist financing transaction is $600, and we should all agree that no terrorist should ever be able to use the financial system for terrorism financing. So the implication is, of course, they want to be able to track everything and every financial institution is not just tracking $10,000 payments and above, they’re tracking everything to ensure that terrorists don’t use the system.

So there’s a big clash coming between the truly decentralized, permissionless, censorship resistant cryptocurrencies and these more government approved versions. This is a long winded way of saying I suspect that a bigger crackdown is coming on the censorship resistant versions, precisely because they now have a non censorship resistant version that has been approved.

Peter McCormack: I think I took this from your article, but “in an era where a radicalized suicide bomber can bring a tragic end to the lives of hundreds for nothing more than a price of duck tape, a vest and supplies, we cannot afford to allow money to flow to terrorists.”

Caitlin Long: Right. She didn’t say we cannot afford to allow any money, but that is clearly the implication. Yes They want to track every transaction. Yes.

Peter McCormack: Yeah, see that takes us into that kind of scary dystopian 1984 Orwellian future, where everything is tracked and it kind of gets a bit weird. So that’s where I go into the area where I’m like, “I don’t really want to use Libra.” Say in a couple of years my son’s traveling and he needs some money and he’s like, “Dad, can you send me a £500?” Something like Libra would be great. But personally I can’t see me wanting to keep a significant amount of money in there and using it for my transactions for buying things, because I don’t know, I find it kind of weird and scary.

Caitlin Long: Right now the governments I’m sure are mapping all of the people with whom we have social media relationships, whether we’d know them or not, just people that we’re connected with. Now what’s going to happen is they’re going to be able to use those maps to trace who we do business with, as opposed to who we communicate with. So you could hire a plumber to come over, pay them in Libra, if the plumber happens to be a terrorist, all of a sudden your caught in that web and you didn’t do anything wrong.

One of the arguments that has always driven me crazy about from a financial privacy point is, “well, if I didn’t do anything wrong, I have nothing to hide.” Well the problem is that you may get inadvertently caught in these web without knowing it completely innocently and then all of a sudden your transactions could be de-platformed. So it really is a dangerous slippery slope. I’m quite surprised to be honest that the Trump administration, which has undergone a deregulation approach, is allowing the ratcheting up of the financial transaction surveillance state.

I wrote an earlier Forbes piece back when the Supreme Court case came out in the US called Carpenter, which said that the US government cannot turn a private business, in that case it was Verizon, the cell phone data company, into a data dragnet for itself, that it actually has to go get a warrant and have to prove probable cause to a judge, that there was a crime committed before the government can get access to that data.

I think that when these financial surveillance programs are tested through the US court system, that they will be struck down as being unconstitutional for the exact same reason that the cell phone data surveillance programs were struck down. But that’s going to take years and in the meantime, it’s what the Austrian school folks like to say, we don’t know what the opportunity costs of lawful business that was prevented from all of these regulations is.

So while there’s a lot of upside for denationalized money and for, as we were talking about earlier, the discipline that’s going to be coming to developing world’s central banks, those are all positives. On the flip side, the surveillance data opportunities both from big business and big government here are really scary and , and they’re going to get more prominent in the next few years, not less.

Peter McCormack: Who would actually challenge this? Because you said you don’t think it would survive a constitutional challenge, but who would likely challenge this?

Caitlin Long: So that’s where I think the crackdown on the true crypto industry is going to come. So here’s one scenario that I think is likely, this is the cryptocurrency that’s deemed okay and so everybody else now has to fall in line with these same regulations. Bitcoin, it’s your problem that the protocol doesn’t allow embedding of beneficial owner information transaction in every transaction. So that’s the attitude that the regulators are going to take.

We know they can’t shut it down. We know they can’t force a change like that, but it’s just going to be a very difficult period because I think is going to be more crackdown on the truly decentralized systems and there is going to be, for the crypto exchanges and money transmitters, there’s going to be a lot higher surveillance that that’s going to be coming into play as a result of these new rules, that are likely to be enacted.

Peter McCormack: So Facebook Coin could be good for Bitcoin, but at the same time it also could bring greater scrutiny, a greater lens over it, but it could make it stronger as well.

Caitlin Long: It could. There’s a very interesting article or a letter that I read from the US Senate Banking Committee, that they sent to Facebook back in March when news was breaking, that this project was coming and they were concerned because apparently Facebook asks a lot of the US banks for customer information and we don’t know if the banks actually shared the customer information, but where the Senate banking committee was going, was they were concerned that Facebook was going to use the customer information and all of its power to essentially create a social credit scoring system in the United States and that that would discriminate against folks that historically have been discriminated against.

So they were very focused on the Fair Credit Reporting act and was Facebook’s entry into this market going to create a whole new means by which folks can be discriminated against. So I actually take some solace in the fact that the US senator banking committee is going down that path because they’re saying, no, we don’t want that to happen. They’re not saying that they respect financial privacy. They’re saying we want to make sure Facebook doesn’t discriminate against protected classes, but that’s better than where China ended up. There is no such process in the social credit scoring system in China, to ensure that folks are not discriminated again.

So I see some rays of hope if you will, that the US isn’t going to completely replicate what WeChat has done in terms of creating a social credit score where you’ve got a big company with a big government partner, that effectively is forcing a change on the financial system and making it essentially very difficult for anyone to dissent.

Peter McCormack: It’s almost impossible to imagine Facebook could create this without having top level conversations with the government. I mean we know they’ve met with Mark Carney and we know they’ve met with the US treasury, but I find it very difficult to believe they would go down the route of creating this without some kind of pre-approval at some level.

Caitlin Long: Yes, I would agree with that. I don’t have any insight better than anybody else, but it’s pretty obvious that something this big and meaningful, will have been pre-cleared, no question in my mind. We’ll see! I mean I think there are going to be some regulatory issues. So one of the other issues that I raised in the article, I went out on a limb and said, “Facebook’s going to pay interest to its users.” Now by saying that I know full well that in the beginning they’re unlikely to do that and here’s why.

Because if they do pay interest, then under US law, Libra is a security most likely, under the Howey test. It would be considered an investment contract. So the challenge then becomes if it is a security, then you need a brokerage account to use it to buy a cup of coffee, which is absurd. So on the one hand I think it’s great that Facebook is essentially going to crystallize that debate, which has caused a lot of folks in the broader crypto industry, to have real problems creating truly decentralized systems that happen to run a foul of US securities laws and the SEC is going after them.

Some of those US securities laws are absurd. Securities laws were written back when securities were pieces of paper and they were not meant to be used and they weren’t meant to be consumed. They weren’t meant to be used in any sort of consumptive purpose.

Now we have things that might be securities, but they are definitely designed for consumptive purpose and so there’s a clash in the law in the United States and Facebook may trip over that line. But here’s the flip side of that. If they don’t trip over that line and they deliberately avoid being a security, then they can’t pay interest and then they pocket all of that money and this is where the populist in the United States I think are going to be screaming, because Facebook is essentially and this is where you and I chatted about the Barclays analyst, who estimated that Facebook could make $19 billion in profits from Libra and it’s all coming from interest income.

Basically the interest income that it would not be paying to the users of the currency, Facebook gets to pocket and that is going to cause, like you said in the beginning, a whole new conversation about money, because why is Facebook pocketing the float as opposed to paying it to its customers? Especially given that it will have bank partners, there is corporate welfare at the heart of the US financial system and Facebook’s going to be helping itself to that too and not sharing it with its users?

This thing is going to become a hot potato and the bigger it gets, the bigger the Dollar value and again, I suspect the Senate Banking Committee is going to be hauling Facebook in front of it for testimony on fairness issues and it’s just going to unveil the whole mess that we have in the unfair financial system and in the United States. If they don’t unveil it, then they are implicitly supporting a corporate welfare program for Facebook.

Peter McCormack: Well, yeah. So we’re on your second prediction now, that you said you’d pay interest to holders of the cryptocurrency and in that you said, “and this will eventually lead to populist calls to repeal corporate subsidies to banks at the heart of the US banking system.” Can you explain that latter part to me? Because this is something that was new to me when I read the article.

Caitlin Long: So since the financial crisis, the Federal Reserve has been paying the banks not to lend money, and the way they’ve been doing that is literally just conjuring up new Dollars out of thin air. The Fed is a special type of bank that can write checks on itself. So they create Dollars, they dilute every single holder of US Dollars and to the tune this year of $36 billion, which to put it into perspective, is about half of the size of the food stamp program for welfare recipients in the United States. So the banking industry is being paid for taking no risk and doing nothing. They’re being paid $36 billion in welfare payments. By partnering with banks, Facebook is going to get access to some of that.

Peter McCormack: Wow, okay! That’s very interesting. But they could also end up becoming like a bank themselves.

Caitlin Long: Yes.

Peter McCormack: If you’re holding Libra and you’re gaining interest, I mean this is essentially a very small version of a bank account.

Caitlin Long: That’s exactly right and it’s interesting to me that Facebook is going in this direction. I was actually listening to your podcast with the gentleman from Microsoft, who is doing decentralized identity over the weekend, which I thought was a fantastic podcast.

Peter McCormack: Yeah, Daniel Buchnar, he’s great!

Caitlin Long: And he said something interesting, which is that with Facebook and Google, ad revenue supported businesses really are going to be facing a pickle when it comes to decentralized identity, because they make money by selling your identity information, your spending habits, your personal preferences and the like. Once we can get all of that encrypted and decentralized, their revenue model really comes into question.

So he was making the distinction that Microsoft, because they don’t have an ad supported revenue model, is a logical place for putting a decentralized identity protocol and then Microsoft can build services and sell software on top of that or maybe Apple, which makes money off of hardware and not ad supported revenue, which is why it’s system has been historically more secure.

This is another distinction. So you’re getting this real split among big tech, you’ve got the folks that are ad revenue supported and the folks that are not. So this is going to be interesting because Facebook basically has to, as decentralized identities come down the pike, they have to find a way to remain relevant.

Otherwise they may be disrupted by decentralized identity and as a result, they’re pivoting toward financial services to try to create another revenue stream from all that data that they have on all of us, that they won’t be able to monetize as effectively in the future as we start to to gain decentralized identities.

Peter McCormack: Yeah because privacy is become a competitive tool. Apple are going to be providing their sign in with Apple, which will use random anonymized email addresses to protect your privacy. So all these apps and tools that we’ve been using to provide data about our identity, which is also then being sold and shared on the market, that whole model is going to change.

Quite interestingly, I think you’ll enjoy my podcast that went out last week with Jeremy Welch from Casa, because that originally started as a conversation about the ad tech industry, because he did a long tweet storm where he believes a number of things, GDPR, Bitcoin and politics is going to lead to a massive change in the ad tech industry. I also wrote an article called, “the decentralized threat to advertising”, in that as we have a more private web, which I believe what Web3 is going to be about, it’s going to be about privacy.

Suddenly all these companies are not going to have access to all this data which they have been using to target us with advertising. On top of that though, I also think there’s another problem with Facebook. I think the novelty of it has worn off. I think it was fun, it was new, it was interesting. But a lot of people I speak to aren’t using it anymore and I think in the US alone over the last year, they’ve lost 17 million users.

So the writing is on the wall for them as a product. I think they’ve milked as much advertising they can out of it. The ads aren’t working so well and then we’re moving towards a more private web. So I think moving into financial services is a clever next step for them, but the privacy side of things is going to be really super interesting.

Caitlin Long: I think it’s a defensive step to your point, those of your listeners who are financial markets people will understand that financial services companies trade at much lower valuations, much lower multiples of earnings or cash flow then tech companies do. So Facebook is seeing the writing on the wall and it is absolutely on the defense. Again, back to the earlier point, one of the things that I fear because they are on the defense on antitrust as well, is that they end up circling back and cutting the fallacy, where they’ll basically give governments whatever data they want or maybe even enter into tax reporting arrangements. 

Libra, just for your US listeners is considered a capital asset under US tax law and that means that you have to report capital gains and capital losses for every single transaction you make. There is no de minimis exemption. So when you buy a cup of coffee, that’s triggering a tax reporting obligation and Facebook will probably have to file all those tax reports. The way the tax system has evolved is that all employers send that information to the governments themselves. They don’t rely on individuals to report it.

Honestly, all that information gets directly sent to the IRS and then the IRS checks you, to verify that you have been honestly reporting your taxes. Facebook is going to be doing the same thing. So that’s the fallacy and bargain that I think may be coming, that they basically some runway against all of the antitrust issues, by agreeing that they’re just going to do all this tax reporting and providing all that information and surveillance for governments.

Peter McCormack: Sounds like an administrative nightmare!

Caitlin Long: Well that’s what the financial industry faces today. Even businesses, one of the things that we tried to fix in Wyoming, was the issue that if a company loses its bank account, regardless of whether it’s a crypto company or a foreign company or a gaming company or a firearms company, any sort of politically incorrect industry faces the risk that the banks stop banking them.

The problem in the United States is that if a company loses their bank account, they’re out of business, because US rules require that withholding taxes are remitted to the IRS electronically, which requires you to have a bank account. So if you don’t have a bank account, you can’t be in business. So it is scary the way the financial sector has been weaponized and how much it really does collude with the government already, almost by force. But now Facebook is going to be presumably doing all of that tax reporting on our behalf, just like the banks do.

Peter McCormack: They could also, as we said, become some kind of bank. They could become some kind of global bank, which you could see some benefits for. For example, if you move country, you would still be able to leave your money in this kind of Libra Facebook bank. But at the same time, I think there’s a huge amount of risk in leaving too much money in something like a Libra bank account because like you said, if your account is closed down, if you’re censored, you could suddenly lose access to all this money.

Caitlin Long: Yes, that’s right and it’s going to be interesting to see how Facebook handles that. If they de-platform you, do you get your money back or does it get confiscated under some sort of civil asset forfeiture law, which is another law that the US has. Again, I suspect that in other countries something is similar. The police, if you’re suspected of committing a crime, it is actually legal for them to confiscate your property and you may not be able to get it back.

Peter McCormack: Yeah, we have that in the UK as well now. We’ve got a law, I can’t remember what it is, but it’s like some suspicion… I can’t remember! It came out recently, because the wife of a banker who had been based out of Kuwait or he might have been working for a large company, but anyway, they couldn’t find out where all their money had come from.

So they’ve had to forfeit all this jewelry and all these other things! So we have it here in the UK as well. Okay, going on to your third prediction. You’ve got, “Facebook’s foundation will grow to garner big power in global capital markets.” How much power are we talking about here?

Caitlin Long: Well, it depends on how big it gets, but I’m making the presumption that this is successful and that at least WhatsApp’s 1.6 billion users will probably end up using and signing up for it. So basically this becomes, as we were chatting earlier, I think it will pretty quickly become a top 20 foreign exchange currency. So it basically, just by changing the basket, it can massively move markets. I’m thinking about the example of the People’s Bank of China, which also pegs the Yuan to a basket of developed world currencies.

It used to be pretty much a Dollar proxy and then four or five years ago, they switched to a basket and they didn’t disclose exactly what the basket was. It’ll be interesting to see if Facebook discloses the basket weights or not. But what’s in there is probably mostly Euros and Yen and Swiss francs and the like, you know the big dominant most liquid currencies.

Facebook is probably going to be doing the same thing, but just by nature of the fact that that basket is something that’s set by human beings and not by the market, it’s going to have a distortive effect. Moreover it is going to change over time. Facebook in one of the articles, there was an anonymous comment that low risk securities would be included in that basket as well. So just as with central banks, they’re not just buying the government bonds of the countries whose currencies the basket he’s trying to track.

They’re now also investing in corporate bonds and in corporate equities. So the Libra foundation, could end up being probably the largest money manager in the world in terms of short term liquid finances and this is going to be a market moving organization. It may take them a few years to get to that status, but I think it’s going to happen pretty quickly.

Peter McCormack: How does the basket actually work? What’s actually happened here, like in practical terms? Because I wouldn’t understand this.

Caitlin Long: Well, let’s say they set the basket at 90% Dollars and 10% Euros, just just to make it simple. What’s going to happen is as the Dollar and the Euro exchange rate moves, they’re going to have to adjust that basket. So they’re going to be trading to keep that basket constant. Then also money’s going to be coming in. I don’t know how they’re going to accept payment, that’s one of the big questions.

Are they going to be integrated with local banking systems? Maybe that’s how they’ve got the PayPal type of relationships that that’s the on-ramp into Libra. We don’t know exactly how that’s going to work yet. But as the money comes in, that basket is also going to be changing as well. You can’t just set a target of 90/10, in the real world things actually move and you also do have transaction costs.

They’re not going to be charging their customers transaction costs, which again I think is a huge threat to the Western Unions and PayPals of the world, because they do charge transaction costs. Libra is not going to charge any, they’ve already said that. So they’re going to be absorbing that because they’re making so much money on the interest income. But back to my earlier point, you can’t just set a target in the real world. You have all these leakages and you have markets that move every fraction of a second.

So you’re not going to be able to keep exactly 90/10 at all moments of the day. You actually have to trade around the two to keep within that target. So this is going to become a very powerful money manager. It’s basically going to be like the world’s biggest money market fund or I think more accurately it’s going to be like a private central bank.

Peter McCormack: Okay, so a global private central bank!

Caitlin Long: Yes, very powerful! Think about that concept, very, very powerful. Then another topic that I didn’t raise in my Forbes piece, but people have asked me on social media, is what are they going to do with that cash? Are they going to keep a 100% reserve? In other words, if there’s $1 trillion equivalent of Libra outstanding, are they going to have exactly $1 trillion equivalent of assets backing it?

Or are they going to do what every other central bank in the history of central banks has done, which is fractionally reserve it and basically create a gigantic CDO epicenter of Facebook! We don’t know that. At the moment they haven’t said anything.

But I’m going to be watching for that and these guys are also probably going to be engaging in repo transactions and other financial engineering, that most money market funds do and there’s huge leverage at the center of the financial system, the traditional financial system and whether Facebook joins in that game or not is going to be something everybody’s going to be watching in the financial industry. I’ll be watching it very closely as well to see if this thing is even backed 100%.

Peter McCormack: Have you been watching or looking much at these node operators and the role they play? Because you did note that some banks will be signing up as node operators.

Caitlin Long: Yes, it’s interesting that the leak that came out on Friday in the Wall Street Journal, did not list traditional banks. So we’ll have to see! I mean Facebook is targeting 100 participants in their initial group and there were some interesting names. Stripe was there, Vodafone was there, Uber, PayPal, Ebay, etc. But we didn’t see Goldman Sachs. We didn’t see JP Morgan.

We didn’t see Citi Group or Barclays or BNP, these global banks. We’ll have to see. Even if they’re not directly participating in the $10 million node, arrangement, they are going to still be major players in this market, because they’re going to be foreign exchange counterparties to that de facto central bank.

Peter McCormack: Do you think the banks are going to be scared of this? Is this a real threat to them?

Caitlin Long: I think they look at it the same way we are looking at it. They see a lot of upside and they also see a lot of downside. I think the one who should be the most scared is Western Union and PayPal and even Venmo, any of those payment systems that charge fees, because this is definitely in my mind going to disrupt those, because it’s fee-less!

It’s not going to charge transaction costs to the users. So anybody who is sending remittances, it’s just now so much easier to do it through Facebook. Again, this was one of the things that we all hoped with Bitcoin would take place. But I think Facebook, because of its power and scale is probably going to take off pretty quickly in those markets.

So yes, the big money center banks, like I just named the Barclays, the JP Morgans, the, the BNPs, the Credit Suisses etc, they are going to look at this as they’re gaining a new money market client and they’re going to have huge trading volume with this client. None of those names were listed in the Wall Street Journal leak on Friday. But I can’t believe that none of them will be involved. I suspect that many of them will be.

Peter McCormack: Okay. Well your fourth point was, and we’ve kind of covered some of this, but “Facebook will face regulatory uncertainty, but this will shed light on many outdated financial regulations in the process.” So again, this is another benefit in that, rather than try and fit Facebook into the old laws, it might be an opportunity to change regulations?

Caitlin Long: Yep. I suspect that they will be a powerful proponent for the ridiculousness of having to report capital gains or losses on every transaction to the US government for every customer. It’s ridiculous! They may help us tear down these crazy laws that have been standing in the rest of the industry’s way, absolutely. It’s like the red flag laws right, back when the horse and carriage was supplanted by the automobile and red flag laws were enacted.

It started in the UK and it actually hit the US as well, I think the state of Vermont enacted red flag laws. Those things were just basically designed to slow down the disruption of the automobile, to protect the horse and buggy carriage manufacturers. So the same things are true today. These outdated laws need to be set aside and it will be helpful to have Facebook to help argue, to set aside some of those laws that stand in the way of the rest of the industry.

Peter McCormack: Do you think this is why they registered the foundation in Switzerland?

Caitlin Long: I don’t know. The Swiss foundation laws have been most useful. I mean, that’s where Ethereum went and that’s where many of the big foundations went. They went to Switzerland and I am not an expert on exactly why. I don’t know why, but clearly they also expect it to be global. I used to work in Switzerland for Credit Suisse many, many moons ago and that is clearly viewed as a global neutral financial center. So that was also probably part of their thinking.

Peter McCormack: Okay. So point 5 we’ve covered, “Facebook’s regulatory reporting program will be opening all kinds of interesting discussions.” We covered that. Let’s get onto point 6, because I think this is the one people are going to be most interested in. I’ve come to completely agree with you that, “Facebook’s cryptocurrency will turn out in the end to be a Trojan horse that benefits Bitcoin.” I put it down for a couple of reasons myself.

I tweeted about this before. The first one being, just as you highlighted when we first started speaking is that, we’re exposing billions of people to the term cryptocurrency and it’s something people are going to have to get their head around. If it’s also Libra as its own currency with its own exchange rate, then people are going to have to get their head around transacting with something which isn’t pegged to their own currency.

So that’s going to have people starting to think about it and naturally they’re then going to be exposed to Bitcoin. As I said to you, I’m quite excited by people being exposed to the Bitcoin versus Libra coin chart and also therefore most likely the Bitcoin versus pound or Euro or Dollar chart as well. Then hopefully people will start to see over a long enough timeframe that any of their domestic currencies are losing value and that with Bitcoin, Bitcoin is a chance to retain value over a long enough timeframe. So that’s the bit that really I think I’m excited about.

Caitlin Long: Oh, you articulated it so beautifully, Peter! I have nothing to add. That’s exactly the point. I think this is just a detour.

Peter McCormack: Well I can quote you. I’ve got your quote here, “so people will migrate over time to the most honest ledger for storing their hard earned wealth and that’s not fiat currencies or derivatives thereof, including Facebook’s cryptocurrency”, because it’s not really a cryptocurrency. It’s just a digital fiat currency.

Caitlin Long: That’s right, yes. Even though they’re calling it cryptocurrency, absolutely. We haven’t really defined what a cryptocurrency is. I think to the folks who are listening to your podcast, most of us would say “decentralized, permissionless, censorship resistant, immutable” and Facebook’s Libra is probably none of those things. But they’re still going to be calling it a cryptocurrency and that will help. It will help people get used to the notion that it’s not national money and that is a really positive thing.

Peter McCormack: And then we need to therefore teach about scarcity.

Caitlin Long: We need to teach about scarcity. It’s exactly what Nick Spanos said when he observed what was happening in Venezuela. The number of Bitcoin transactions spiked as the government was educating its citizenry on what the Petro was and how it was going to be used and how it could be transacted using your phone and what ended up happening? People went to Bitcoin instead.

Peter McCormack: I did a really interesting interview with Jill Carlson? Do you know her?

Caitlin Long: Yes! She’s also been very active in Venezuela.

Peter McCormack: Yeah, so I did a great interview with her, Alejandro Machado who is a Venezuelan, he doesn’t live there anymore, but he is a national and Jamaal Montasser who worked for IDEO and they actually talked about that there is different scenarios in Venezuela that you have to use different currencies. So Bitcoin is useful, but you have to use the Bolivar at certain times and then other times you need to use the Dollar.

So people have to actually use three currencies there, which is kind of a bit mad. I added a prediction in of my own, so I hope you don’t mind. We’re going to finish on that. Actually, before I do that, do you think there’s any remote possibility at all that Bitcoin could form part of the basket?

Caitlin Long: Ah, very good question! I think over time it will. I actually think one of the potential outcomes long term is that the entire basket is in Bitcoin.

Peter McCormack: Wow!

Caitlin Long: And this becomes essentially just a wallet.

Peter McCormack: That’s amazing! So my bonus prediction that I’ve added in, is that I think there’s a potential that Facebook will allow people to buy Bitcoin.

Caitlin Long: I hope so! I don’t think they’re opposed to Bitcoin. The question is, will the governments force them to avoid it because Bitcoin is deemed to be the bad cryptocurrency and Libra is deemed to be the good cryptocurrency.

Peter McCormack: To be discovered! The only other thing that is kind of outstanding in my mind, and I actually posted up on Facebook this morning for my friends. I’ll tell you what I put, because I wonder whether you’ve thought about this much at all. I put, “as Facebook preps to issue their cryptocurrency Libra to be used across Facebook, WhatsApp, Instagram and Messenger, please be prepared if you think you might use this. Hacking is a significant problem with cryptocurrencies. You may wish to consider your security practices with your accounts.

Be Prepared for social engineering, brute force attacks, SIM swapping and physical threats.” Now I don’t know how the onboarding and offboarding with Libra coin is going to work. I don’t know if transactions can be frozen, reversed, none of that we know about yet, but I almost certainly think there’s going to be a significant number of hackers prepping for Libra coin and how they’re going to exploit it, how they’re going to hack into people’s accounts and start moving around and stealing their Libra. Have you thought about it?

Caitlin Long: I haven’t, but was just ruminating on what I said a minute ago about effectively if that entire thing, if the entire basket is allocated to Bitcoin and this effectively becomes a wallet, all that is, is a centralized exchange wallet effectively. So if you think about how often both the exchanges been hacked and how often the users of exchanges have directly themselves been hacked, it becomes the same risk, no question. I suspect that Facebook will have a lot of focus on the ease of use, like private key recovery mechanisms.

But they will have to by definition have given up some of the security and that’s the reason why the user experience as we know with Bitcoin itself has not advanced as fast as we all hope that it would, because there is a security tradeoff with user experience, with ease of use, there just is. So Facebook I think is definitely going to be more susceptible to that.

That’s maybe part of the reason why they think that going in on this foundation where they can socialize their own hacking losses may actually be a good outcome for them as well. But they don’t themselves basically face the risk of being a de facto guarantor on that gigantic pool of assets.

Peter McCormack: All right, well I think we probably agree that this is probably net positive for Bitcoin, which is great. But the Trojan horse essentially comes with a whole host of Orwellian 1984 things to consider and worry about and regulatory mess that’s probably going to come out of this as well. It’s going to be a, get the popcorn out and watch, but hopefully at the same time this brings a whole bunch of people into Bitcoin. So yeah, if it’s a Trojan horse that’s a great thing!

Caitlin Long: Exactly. Again you summed it up so well. This is a grab the popcorn! It is amazing the interest in this, and I suspect this particular podcast will be very popular, because there’s so much interest in trying to figure out what this means, not just from the crypto industry ourselves, but from the broader public who for the first time are going to, in many cases, be understanding exactly what cryptocurrency is. 

They may have the wrong impression because it is a centralized de facto fiat coin, but it’s a de-nationalized de facto fiat coin and that’s a powerful concept even of itself. It is progress, much as we hate that it’s stilted progress and everybody should just go straight to Bitcoin, but it is progress nonetheless.

Peter McCormack: All right, well I will share out the article in the show notes. I will share out the Tweetstorm as well, but as ever it’d be great if you would tell us what’s coming up for you Caitlin, and also how people can stay in touch with you.

Caitlin Long: Well, I am spending a lot of time in Wyoming and we are going to be working, obviously that’s part of the reason I listened to your decentralized identity podcast with Daniel Buchnar from Microsoft. We are going to be doing some interesting things with identity in Wyoming and we don’t know exactly what our next task force meeting is in August.

We’re thinking about, because Wyoming has been such a leader in innovating business entity forms, we’re thinking about, do we need to green light legally a decentralized autonomous organization or is it just better that we provide real meaningful protection for developers, who develop decentralized platforms? Those sort of big questions. So we’ve got more coming in Wyoming, we’re not done yet. I will end with definitely look at wyohackathon.io, that’s where the Wyoming Blockchain stampede information is going to be posted.

We will hope to have registrations open for that by the end of June and everybody, if you’re curious about Wyoming, thinking about coming out, you can either fly into Denver and drive or take a connecting flight directly into Laramie. It’s going to all be at the University of Wyoming. I’ll end by saying that Kraken is actually thinking if there’s a big enough interest, because Crypto Springs is right after that, they’re thinking about actually chartering a plane.

So there may be an opportunity for folks to fly directly from Laramie into the Crypto Springs venue. So the more people we end up having in Wyoming, the better the opportunity for everybody. So come on out to Wyoming

Peter McCormack: The crypto plain! All right, fantastic. Caitlin, thank you as ever and it was nice to finally meet you in person at the Magical Crypto Conference, even though we briefly passed in the corridor and said hello, but it was nice to finally meet you. Listen, I’m going to come out to Wyoming. I’ll come out to the week and we’ll hang out properly and we might maybe even record again.

Caitlin Long: That would be lovely, that would be great! Thanks so much Peter, best wishes to you!

Peter McCormack: Thank you!