Global Open Source Currency Index (GOSCI) is an independent volatility benchmark for Stablecoins

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An independent volatility benchmark for Stablecoins

The GOSCI mission is to create an independent volatility benchmark for Stablecoins.

Many in the cryptocurrency community worry that Facebook’s cryptocurrency will usher in centralized corporate control on a global scale.

This what motivated us to launch GOSCI – Global Open Source Currency Index. We want a level playing field via a benchmark that is independent from institutional control (either corporate or government).

The best Stablecoin is the most stable (aka least volatile) Stablecoin. Low volatility not corporate clout is the measure of excellence.

The GOSCI Idea

GOSCI (Global Open Source Currency Index) is designed to be the exact opposite of Bitcoin and other cryptocurrencies in three ways:

1. GOSCI is Non Volatile by design. It is a model created from a basket of Fiat currencies, comprising more than 90% of global GDP.

2. GOSCI is a model/index, not a stablecoin. You can use GOSCI to benchmark any Stablecoin – including Stablecoins from corporate giants such as Facebook.

3. GOSCI does not compete with Fiat. GOSCI is not a threat to Governments that issue Fiat Currencies, because GOSCI cannot be used directly as a store of value or a currency/medium of exchange. Even if some governments decided they did not like GOSCI, it cannot easily be shut down because GOSCI is free and open source and does not require any regulatory approval.

From a regulatory point of view, GOSCI is not a Utility Token or a Payment Token or a Securities Token or an Asset Token. GOSCI is simply a spreadsheet formula filled with data that is in the public domain – which anybody can use (it is open source).

The model is a free/open source project, created by Daily Fintech, but with an independent governance structure.

You have the option to pay for the right to use the GOSCI name and to be involved in GOSCI model governance, see later.

How GOSCI can help the Stablecoin ecosystem

You can use GOSCI to benchmark any Stablecoin. We are not in the business of benchmarking Stablecoins. Our focus is to create the least volatile basket and invite anybody to benchmark any Stablecoin against that index. You can benchmark your own Stablecoin or any Stablecoin. 

There are three different approaches to creating a Stablecoin and each requires a volatility benchmark:

  • cryptocurrency derivative . You use algorithms to match supply & demand of an existing volatile cryptocurrency such as ETH to create a cryptocurrency derivative that is stable.
  • audit heavy/tech light. These ventures match each Stablecoin purchased with a corresponding deposit in a Fiat bank account. The Fiat bank accounts are audited so that investors can be confident that the Stablecoin is a real asset.
  • algorithmic central bank. You automatically buy your Stablecoin when it is below the planned peg/benchmark and automatically sell your Stablecoin when it is above the planned peg/benchmark.

Why License GOSCI when it is Open Source?

We publish the model and the formulas. The data for the model is in the public domain (GDP data by country from the IMF). GOSCI is free, open source and permissionless. There are two benefits of Licensing GOSCI:

  • You are licensed to use the GOSCI name in your marketing.
  • You get a vote on changing the model weightings (see Governance).

The Bitcoin volatility problem is not going away

Bitcoin is a great store of value but flawed as a medium of exchange due to volatility. Layer two services such as Lightning Network may solve the scalability problem, enabling low value payments, but they do not solve the volatility problem. For more on the limitations of using Bitcoin as an interim store of value for payments to enable it as a Medium of Exchange  please read this November 2015 post on Daily Fintech.

GOSCI is non-volatile by design.

USD Is Not The Gold Standard Of Non Volatility

USD is less volatile than BTC, but many sophisticated investors try to hedge against USD volatility risk with assets such as Gold, Bitcoin and Currency Baskets.

GOSCI is built from 36 national currencies that in aggregate account for more than 90% of Global GDP (vs about 25% for USD).

GOSCI is non-volatile by design.

Why & how we use GDP numbers for rebalancing the Index 

GDP data is widely available. Even if some GDP numbers lack credibility it is the best data available to track economic activity and over the long term economic activity drives currencies.

With 36 national currencies that in aggregate account for more than 90% of Global GDP we are confident that GOSCI is non-volatile. Chasing 100% of Global GDP would add a lot of complexity with little extra benefit. There are 164 national currencies, so the 10% long tail includes 128 currencies.

When GDP changes, the index rebalances. For example if China GDP grows faster than US GDP, this will impact the currency weightings.

Why Now

At some point in the future, USD will be replaced as the global reserve currency. No global reserve currency lasts forever. In other transitions, the currency shifted to the rising economic power (e.g from Britain to America). The problem today is that the rising economic power is China and the Yuan is not credible as a global reserve currency and many countries will resist China in that role for geopolitical reasons.

The transition to the next global reserve currency coming at a time when cryptocurrencies are gaining traction is a unique moment in history.

The question is what will replace the USD?

GOSCI is designed to avoid the control of large corporations over  cryptocurrencies. Many BigBank and BigTech companies, such as JP Morgan and Facebook, have announced plans for their own proprietary cryptocurrency. GOSCI is designed to empower a world that is decentralised and permissionless and not controlled by large corporations.

Any single Fiat currency will be resisted for geopolitical reasons, so the three non-corporate alternatives are a) IMF SDR b) Gold or Oil c) Bitcoin.

Why GOSCI is a better volatility benchmark than the IMF SDR.

The SDR is an international reserve asset, created by the IMF (international Monetary Fund)  in 1969 to supplement its member countries’ official reserves. So far SDR 204.2 billion (equivalent to about US$291 billion) have been allocated to members, including SDR 182.6 billion allocated in 2009 in the wake of the global financial crisis. The value of the SDR is based on a basket of five currencies—the U.S. dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound sterling. The SDR was initially defined as equivalent to 0.888671 grams of fine gold—which, at the time, was also equivalent to one U.S. dollar. After the collapse of the Bretton Woods system, the SDR was redefined as a basket of currencies.

  • It is easier to change the GOSCI model index. We believe that 5 currencies accounting for 65% of Global GDP is not enough, but imagine the politics of getting 36 countries making up 90% of Global GDP (ie the GOSCI model) approved by the IMF.
  • GOSCI is a more neutral and open solution. GOSCI is neutral from a geopolitical point of view and no institution or country can control GOSCI.

Why GOSCI is a better volatility benchmark than Gold or Oil.

Gold is flawed as a volatility benchmark for two reasons:

  • Gold is traded by speculators. Therefore it is volatile.
  • Gold has an unpredictable inflation policy.  If new sources of Gold are found (or improved mining) there will be inflation, but that rate is unpredictable.

Oil has the same flaws as a volatility benchmark as gold.

Governance

GOSCI was created by Daily Fintech, but with an independent governance structure.

One License One Vote builds on a well proven principle. You can only buy one GOSCI License. If you pay the GOSCI Annual Licensing Fee, you get a vote on how to change the model (in addition to the branding rights).

The way Governance works in GOSCI:

  • Anybody can create a GOSCI Model Improvement Suggestion (GMIS). For example you may suggest adding Gold at a 10% weight. You do NOT need to be a Licensee to suggest a GMIS (only to vote for one). We want the brightest minds suggesting GMIS, regardless of their financial resources. We will publish the method for doing this within one year (ie the current model will be in place for at least one year).
  • Licensees vote on the GMIS. Once 10% of Licensees vote for a GMIS it is published (ensuring that the wider community gets a chance to look at it). Voting is done once a year on all GMIS submitted in the prior year.
  • Once more than 51% of Licensees vote for a GMIS it is implemented.

To have influence, you need to be a Licensee (but the annual fee is low enough for even bootstrapped or self funded early stage ventures).

Annual License Cost

0.1BTC (translates to USD1,000 per year if BTC is at USD10,000).

Why Licensees pay in Bitcoin not GOSCI or Fiat

GOSCI is not an asset. You cannot buy anything with GOSCI. So you cannot pay in GOSCI (but you will be able to buy things with Stablecoins that use the GOSCI model).

As Cryptocurrencies work globally and Daily Fintech readers come from all over the world, any Fiat currency we chose would incur exchange rate risk and fees – and it may seem odd for a site that writes a lot about Crypto enabled payments innovation to charge in Fiat currency. 

By charging in Bitcoin, we give Licensees an incentive to buy sooner rather than later. We assume that anybody who gets this far in a nerdy post knows how to pay in Bitcoin and is a long term Bitcoin bull (and therefore expects the price to rise from here). If you want to protect against Bitcoin increasing in value you can buy up to 5 years of License in advance.

Please send an e-mail to julia at daily fintech dot com if you are interested in licensing GOSCI.

The Model

You can see the model in this Google Sheet. We use data from the IMF for GDP per country.

References

What the rise and fall of Basis Stablecoin tells us about the future of corporate Stablecoins such as Facebook GlobalCoin

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TLDR The brief history of the Basis Stablecoin is that it was founded in Brooklyn in August 2017, announced a $133m round from top tier investors 8 months later in April 2018 and then shut their doors just 7 months later in December 2018. All the news was announced on the Basis site. The ambition was huge – to be the global algorithmic central bank. Despite plenty of cash & brains, Basis failed. Now in the days when we wait for the launch of Facebook’s Stablecoin on 18 June 2019 and witness the stunning growth of Tencent/WeChat in China, we piece together the story of what happened and what it means for the Blockchain Economy. 

This update to The Blockchain Economy digital book covers:

  • Escrow type funding with Regulatory approval trigger
  • Tough borderless SEC
  • Algorithmic Central Bank vs legacy Central Banks
  • $133m is a drop in the bucket if you need to defend a peg
  • Context & References

Escrow funding with Regulatory approval trigger.

This funding strategy is key to understanding the Basis Stablecoin. This is similar to what we saw with Seba bank. Money is wired and held in an escrow type account until regulators give the green light. We may see more of this type of funding. It makes sense because a) there is no chance of getting regulatory approval without a lot of capital b) the prize is big if the venture gets the nod from regulators c) nobody will invest a lot of capital in the hope of getting regulatory approval.

This funding style means the demise of Basis is not a classic venture failure story. The scenario of non-approval by regulators is planned for at time of capital raising. Some capital is burned from funding to non-approval, but only a relatively small % of total capital invested. 

The investors were top tier (such as Bain Capital Ventures, Google Ventures, Stanley Druckenmiller, Kevin Warsh, Lightspeed, Foundation Capital, Andreessen Horowitz, Wing VC, NFX, Valor Capital, Zhenfund, INBlockchain, Ceyuan Ventures, Sky9 Capital) so this structure is hardly a surprise. We can expect this structure as the norm for ventures that plan to be regulated. However as the next section describes, a non-regulated approach of seeking forgiveness not permission might be the takeaway from the Basis story. 

Tough borderless SEC.

The SEC loves cracking down on tokens that they deem to be securities – which is pretty well every token (except ETH, Bitcoin and utility tokens that have zero resemblance to securities).  There is regulatory overlap in America by State and by asset type and the SEC has firmly planted its flag in the camp that says they regulate everything that is crypto. This scares investors and entrepreneurs. The SEC is also not afraid to take action cross border, so a venture anywhere that does any business in America needs to be wary of the SEC.

As Basis CEO Al Naji put it in a Forbes interview: “The SEC generally avoids saying that something will definitely be one way or the other. But from that meeting we got the impression that we would not be able to avoid securities classification.”

There are thee possible takeaways from this:

  • Be Regulated. If you want to be a regulated entity, have a big budget for lawyers and lobbyists and plenty of capital and play within the rules laid down by legacy Finance.
  • Be Unregulated. That means offering a tech service, not a finance service. In an earlier wave of disruption for example, Skype positioned as an unregulated tech service, not a regulated Telecom service.
  • Be Chinese. That is obviously not a real strategy unless you are Chinese, but it is interesting to see how Chinese tech companies such as Tencent and Alibaba have been able to launch and scale financial services.

It will be interesting to see what strategy Facebook unveils on 18 June. Obviously  Be Chinese is not an option for Facebook. They have probably chosen Be Regulated. Given that Facebook has announced a date, they must have already got regulatory approval. It will be interesting to see how this plays out as we are in uncharted territory.

Algorithmic Central Bank vs legacy Central Banks

The Basis white paper, published in June 2017, described Basis as an “algorithmic central bank”.

The Legacy Central Banks won’t give up their power without a fight. 

Like Legacy Central banks, the algorithmic central bank strategy was simple:

  • buy back Basis tokens when the price dropped below the benchmark peg

 

  • Create new tokens when the price went above the benchmark peg

The difference from Legacy Central Banks was:

  • Transactions were done on-chain.

 

  • Transactions were automated and baked into code ie could not be subject to political change.

Despite these two differences, the core strategy was exactly like Legacy Central Banks.

$133m is a drop in the bucket if you need to defend a peg.

Central Banks need a lot of capital to defend a benchmark peg. Just ask the Bank of England after they lost the battle defending the peg of GBP to the European Exchange Rate Mechanism (ERM) to George Soros.

In a history rhyming footnote, Stanley Druckenmiller (who worked with Soros) was an investor in Basis.

Facebook has a big capital base. Whether investors will be happy letting  Facebook use this capital to defend a benchmark peg is another matter.

Grab your popcorn for an epic rumble in the jungle (image source).

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Context & References

Investing in Payment Tokens and Stablecoins (aka new currencies).

Why StableCoins are so important (but also so hard to get right)

Facebook Ambitions in Fintech (note, from October 2014)

The Facebook GlobalCoin stablecoin won’t kill Bitcoin but many companies should be worried.

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Bernard Lunn is a Fintech deal-maker, investor, entrepreneur and advisor. He is CEO of Daily Fintech and author of The Blockchain Economy.

I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post.

Subscribe by email to join other Fintech leaders who read our research daily to stay ahead of the curve. Check out our advisory services (how we pay for this free original research).

The Facebook GlobalCoin stablecoin won’t kill Bitcoin but many companies should be worried.

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TLDR. Facebook’s move into crypto enabled payments has led to hyperbolic reactions that Bitcoin will be roadkill in front of their thundering truck. This post argues that we are nearing the end of the Facebook era and that the Bitcoin honey badger is not scared of Facebook and that Facebook is moving into dangerous territory where they will be competing with other behemoths.

This update to The Blockchain Economy digital book covers:

  • What we know and don’t know about Facebook’s stablecoin
  • Bitcoin is the honey badger that is not scared of Facebook
  • Big players who will feel threatened by Facebook
  • The end of the Facebook era is coming
  • No, don’t short Facebook, yet.
  • Which companies should be most worried
  • Context & References

What we know and don’t know about Facebook’s stablecoin

The news outlets did a copy/paste on Facebook Press Release. Plus we get the salacious factoid that Mark Zuckerberg spoke to the Winkelvoss Twins.

PR also tells us that all doors are open to Facebook, telling us about conversations with:

  • Bank of England governor Mark Carney.
  • Officials at the US Treasury.
  • Western Union.

Facebook has the clout to talk to anybody on the planet, not matter how high and mighty, but talk is cheap.

What we don’t know:

  • what will be the the real name of Facebook’s stablecoin when it finally launches? PR says it is “internally dubbed” GlobalCoin but that is too close to GlobalistCoin and that does not play well in the cyperpunk/anarchist/libertarian crowd that loves Bitcoin. There is a cute sounding internal name which is Project Libra, which maybe more consumer friendly.

 

  • When Facebook will launch. PR says “first quarter of 2020”.

 

  • Where Facebook will launch. PR talks about “in a dozen countries”. Earlier PR in December 2018 talked about India as launch venue.

 

  • What Facebook will launch. It will be a cross border digital payments system aka a remittances system.

 

  • Which Fiat currencies they will peg to.

There is lots of negative sentiment. You can expect this from the privacy and crypto crowd. It must be more worrying when Bloomberg, which is hardly known for bleeding heart anti establishment ranting, has this headline:

Dr. Evil Would Love Facebook’s “GlobalCoin”. “More than 2 billion users spending one currency, controlled by one billionaire. What’s to worry about?”

Facebook’s strategy in the past with negative sentiment has been to take one step back, issue an apology, then proceed to do exactly as they had planned. However that may not work today, because Facebook’s Stablecoin is between a rock & a hard place. Bitcoin is the rock. The hard place is all the big players who will feel threatened by Facebook. 

First the rock…

Bitcoin is the honey badger that is not scared of Facebook

You cannot shut down Bitcoin. Facebook can lobby Governments all they like and Governments would love to shut down Bitcoin and do deals with Facebook, but you cannot shut down a decentralised permission less network. You need a CEO that you can pull onto the carpet and grill.

Next, the hard place….

Big players who will feel threatened by Facebook 

The hard place is all the big players who will feel threatened by Facebook.

This is a huge move by Facebook. They are moving well beyond their media comfort zone into currencies, payments, remittances and e-commerce. The big players in those markets, including Governments, will feel threatened by Facebook’s move into their territory.

The end of the Facebook era is coming

You can see trend from the chart at the top of this Chapter (based on research by Daily Fintech) – the dominance years are getting shorter. Our thesis is that decentralization won’t lead to one dominant company because dominance is a feature of centralization. In the decentralization era, dominance may go to a leaderless open source protocol (Bitcoin), with many companies thriving within the ecosystem created by that protocol.

I never got the Facebook habit. I am as addicted to social media as the next 21st century human, but my social drugs of choice tend to be blogs, Twitter, Whatsapp, YouTube, & LinkedIn. Occasionally I can only see something online if I have a Facebook account. So I set up a fake account and enjoy the recommendations I get from that fake account where I am a woman born in 1997 in Chiang Mai, who now lives in Mongolia and who studied Thermodynamics at The College of Hard Knocks. My bio says “FB algos do not deserve to know me”.

The usual way that big tech eras come to an end is a mix of:

  • Regulation. That is happening to Facebook in Europe and China and there is even political pressure in America
  • Disruptive Technology. In past eras, the regulators jump on board just when disruptive technology is doing a much more effective job. For example, IBM could manage regulators but could not control PCs, Microsoft got sideswiped by the Web, Google by Social. In the coming transition, centralized services will be replaced by decentralized services.

Facebook the service is no longer cool, even if Facebook the company controls the two biggest competitors – WhatsApp and Instagram. Soon Facebook the service will be a digital landfill populated by:

  • Institutions selling you stuff. Institutions, both political or corporate, use pinpoint personalised marketing to make sure you buy/vote what they want. My little messing with Facebook’s algos is not likely to do them much harm, but billions tuning out ads will damage them at some point.
  • People willing to view ads for a fee. Pay to view ads is desperate race to the bottom by sites with low quality content. Advertisers get the attention of the people with the least money or influence brought in by Mechanical Turk to compete with robot scam traffic.

No, don’t short Facebook yet.

Mark Zuckerberg is one is the greatest entrepreneurs of all time. He has navigated one big disruption before. When mobile threatened the Facebook franchise he solved the problem by buying into the game at great cost with the WhatsApp and Instagram deals.

So, don’t count him out. He could pull it off with GlobalCoin. The odds are against him because this disruption is different:

– mobile changed delivery front end but the core concepts of centralized data to sell advertising remained valid.

– Decentralized Blockchain networks challenge the core concepts of centralized data to sell advertising.

It is inconceivable that Facebook, which has a market cap of over 500 Unicorns (ie over $500 billion), could head into a deep decline. Look at past eras and the dominant company of the day looked equally invincible.

Although Facebook’s long term decline is inevitable, don’t try shorting Facebook stock yet as there is a big difference between inevitable and imminent. 

There are companies that should be worried by Facebook’s move into crypto-enabled payments. They could be accidental roadkill as Facebook searches for relevance in a game that they no longer control.

Which companies should be most worriedWhich companies should be most worried

A. Decentralized social media companies funding via Tokenomics such as Steem and Brave. Content creators will prefer to be paid in either Bitcoin or a reputable Stablecoin from a neutral player.

B. Remittances companies such as WorldRemit and Western Union. The latter may do OK as Facebook will need their off ramp into local Fiat, but that will be a hugely reduced role.

Context & References

Facebook Ambitions in Fintech. Note date (2014); over 4 years ago we were forecasting this move by Facebook.

The PewDiePie deal with Dlive is a big move forward for decentralized Blockchain media.

Why I am closing my Steemit account and why I am a bear on EOS.

Bernard Lunn is a Fintech deal-maker, investor, entrepreneur and advisor. He is CEO of Daily Fintech and author of The Blockchain Economy.

I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post.

Subscribe by email to join the other Fintech leaders who read our research daily to stay ahead of the curve. Check out our advisory services (how we pay for this free original research).

Globcoin GLX StableCoin to power payments for the Daily Fintech SmartExpert service.

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The Daily Fintech SmartExpert Service is an easy engagement model for our advisory services. Now you can start working with us by simply choosing your expert, paying for the hour and scheduling your call with the Expert.

In this post we unpick that simple phrase “paying for the hour” and explain why we decided to innovate on that front by partnering with one of the next generation of StableCoins for payments rather than simply using the credit card rails and what we learned from that experience. We like to write about payments innovation. With this partnership we are testing our theories in the laboratory of the real world and making that experience available to our readers.

In this post we will describe:

  • Why we are using a cryptocurrency for payments, rather than relying on the legacy credit card rails.
  • Why we use a StableCoin rather than Bitcoin or any other Tokenomics funded cryptocurrency.
  • Why we chose the GLX StableCoin
  • What we learned during this project.

For our big picture view on why StableCoins are so important (but also so hard to get right), please read this update to The Blockchain Economy digital book that was published on Saturday.

Why we are using a cryptocurrency for payments, rather than relying on the legacy credit card rails.

First, we do offer legacy credit card rails as an option. If you are not comfortable using cryptocurrency, just use Paypal.

Second, we like to test our theories in the laboratory of the real world. Back in April 2017 Daily Fintech articulated the thesis that Bitcoin Will Move From Darknet Early Adopter Niche To Clearnet Mainstream:

“This will happen first among free agent, knowledge workers who offer digital products/services cross border.“

“Free agent, knowledge workers who offer digital products/services cross border“ describes the Daily Fintech SmartExpert service. Now it is time to test that theory in the laboratory of the real world.

Third, it just makes practical sense in a borderless world for DailyFintech’s global subscribers and Experts. Once you really look at how cross border payments work using legacy bank and credit card rails, you see three big practical problems:

  • Problem 1 =  FX costs. Including spread, real FX costs are often over 10%. Consumers can see the fees quite easily, but the spread is pretty hidden. You don’t see the spread unless you look up the interbank rate at that precise moment in time that you get money from an ATM or pay via a credit card in a foreign currency. It is now possible to do this using mobile phones, Google and currency pairs. It is possible to stand in front of an ATM, Google a currency pair such as CHF GBP (if arriving in UK from Switzerland or vice versa) and compare the Interbank rate with what the machine gives you. I have done this, but unless you geek out on obscure Fintech subjects you probably won’t do this.  Bank and credit card networks have been very good at isolating consumers from the problem, but if merchants have to pay they will pass on those costs to the consumer; it is a real albeit hidden cost.
  • Problem 2 = Fraud is an existential threat for Merchants getting paid by Credit Card. Fraud can destroy a small-business owner with a momentary lack of attention. If Merchants accept payment from a stolen credit card, they will a) not get paid for the product they sold b) banks may look for additional reimbursement for permitting the transaction and c) payment processors may terminate their account and put them on a blacklist; the latter can be the death knell of a small business. In contrast, cryptocurrencies enable a simple irrevocable payment or can be done using smart contracts and the equivalent of an Escrow service; either way, it is not an existential threat to the merchant.
  • Problem 3 = Returns. That is why our thesis is that change will come first from digital products/services where there is no physical product to deliver/return.

Our theory is that change will be driven by Merchants not Consumers, because Merchants have the motivation. We decided to test this theory by offering payment for the Daily Fintech SmartExpert Service using a StableCoin.

Why use a StableCoin rather than Bitcoin or any other Tokenomics funded cryptocurrency.

in a word – volatility. When we first started thinking about how to do this, we planned to use Bitcoin and we created a clever (but, in hindsight,  overly complex) way to deal with the volatility problem. When we discovered  StableCoins, we saw that we did not need a complex way to deal with the volatility problem. The complexity of explaining how we dealt with Bitcoin volatility would have created friction that would have impeded the chances of success for the Daily Fintech Expert Service.

So much for Bitcoin. What about all the Altcoins that offer quick, low cost payments? They solve the speed and fees problem very well, but they do NOT solve the volatility problem. Any cryptocurrency that is funded through Tokenomics has an inherent volatility problem. The venture and their early investors want the price of the coin to rise and some traders bet against it rising; the push and pull of these bulls and bears creates volatility.

What is needed is something that is a) a cryptocurrency b) non-volatile by design. In short we need a StableCoin. For more on Stablecoins, please see this chapter of The Blockchain Economy Book

The next question was – which StableCoin?

Why we chose the GLX StableCoin

GLX is a StableCoin issued by a company called Globcoin.

We chose the GLX StableCoin for 5 reasons:

  • Basket not single Fiat. In the chapter on Stablecoins in The Blockchain Economy Book we describe the difference between Single Fiat and Basket. Single Fiat typically means US Dollar (but could be EUR or any relatively stable Fiat currency) but many big corporates and investors prefer a basket that is less volatile than a single currency. GLX is a basket of 15 currencies plus Gold that together account for more than 80% of the World Economy; this is less volatile than even the famously stable Swiss Franc.
  • Fiat Collateralized The book also describes three forms of collateralization (ie what proves that the StableCoin really is worth what the promoters say it is). Those three forms are Fiat, Crypto and Issuer Collateralised. The book describes why Fiat Collateralised (sometimes called the tech lite/audit heavy model) is the most secure. GLX is Fiat Collateralised.
  • Experienced team. A StableCoin that is a) Basket b) Fiat Collateralised is easy to say. It is much harder to achieve in practice. The team behind GLX Globcoin, led by Helie d’Hautefort, has decades of sophisticated currency management experience before the Blockchain era. Helie started his career as a currency option trader in New York. He joined the Peugeot Citroën group in Geneva, where he was in charge of currency hedging. In 1998 Helie founded Overlay Asset Management, the first european currency management business offering currency overlay services, managed accounts and pooled fund programmes. By 2012, in partnership with BNP Paribas, the business had grown to over USD 23b of assets under management, with a client base from 16 different countries. Since 2010 Helie has focused his research on the creation and management of the Global Reserve Currency Index, an innovative systematic virtual currency that mirrors the world global economy. In 2014 he created Globcoin to extend the scope of client users thanks to Blockchain technology. Helie has built an experienced team based in Switzerland and London that can manage a StableCoin that is a) Basket b) Fiat Collateralised.
  • Globcoin card. If you get paid in a cryptocurrency, you want to be able to spend the money. You may decide to save some, but it is unlikely that you want to save 100%. If cryptocurrency remains in it’s pre-chasm phase, you might get paid 10% of your income in cryptocurrency and save it because a) 10% is a good saving rate b) you are a long term bull on cryptocurrency. On the other hand if cryptocurrency crosses the chasm to the mainstream and you get paid say 80% of your income in cryptocurrency you might choose to save 10% and spend 90%. One simple way to spend is via a PrePaid Debit Card and that is one of the services offered by Globcoin. For more on prepaid debit cards please see this post.
  • Regulatory Framework in Switzerland. StableCoins attract the attention of regulators because a) they are sometimes deposit takers and b) they can facilitate the on/off ramps from/to Fiat/Crypto. The question  is – which regulator in which jurisdiction? GLX is based in Switzerland which is interesting for two reasons:
    • FINMA (the Swiss financial regulator), regulates Tokens depending on their use case and has a specific regulatory framework for payments.
    • Switzerland is legally a multi-currency country. What? We all know Switzerland is multi-language, but we also know the famous Swiss Franc. It turns out that there is an alternative currency called WIR that was set up in 1934 that is quite legal. The WIR was set up by people wanting to create an alternative to a financial system that had failed so dramatically in 1929. This has echoes from 2008 and the Satoshi Nakamoto White Paper. WIR accounts for a tiny % of Swiss GDP but it is real and it is legal. So the idea of adding another legal currency was not too big a stretch. That is why you can pay taxes in Bitcoin in Switzerland and buy Bitcoin at any railway ticket machine. It is also why a StableCoin that plays by the rules can be a legal currency in Switzerland.

In fact, in full disclosure, I like Globcoin so much that I agreed to join their Board and help make things happen for them.

What we learned during this project.

  • Don’t make it hard to do business with us. That is why we also offer a Paypal option if you are uncomfortable with cryptocurrencies. We think that many Daily Fintech readers will want to learn from the experience of using a StableCoin for payments, but not everybody.
  • There is still friction in the on-ramp and off ramp due to regulators and AML/KYC. We filled in more forms than we wanted to, but that is life in crypto land today.
  • The crypto world really is easier, once you get started. Gen Z and later will use cryptocurrencies and tokens without thinking, as easily as how we now use email. For those of us who grew up with Legacy Finance, we have a transition to go through.  It is a bit like learning to ride a bike – a) easier to learn when you are young b) a lot more efficient once you are past the learning curve. Part of our mission at Daily Fintech is taking big complex subjects and making them understandable. Our written materials are always free, but if you want a more personal trainer type of service (where we explain just what you want to know in your context) please book an hour of our time using the Expert Service – and pay using a StableCoin.

Bernard Lunn is a Fintech deal-maker, investor, entrepreneur and advisor. He is the author of The Blockchain Economy and CEO of Daily Fintech.

Subscribe by email to join the other Fintech leaders who read our research daily to stay ahead of the curve. Check out our advisory services (how we pay for this free original research).

Why StableCoins are so important (but also so hard to get right)

Stablecoins.001.jpeg

TLDR. When Vitalik Buterin and Balaji Srinavasan were asked whether certain trends were either underrated or overrated, they both said that StableCoins were underrated. This post is my explanation of why I think they are right. Yet we have already seen some high profile StableCoins fail, which is why the headline also refers to why StableCoins are also so hard to get right.

In the image above you see the usual path to a currency – from Store of Value to Medium Of Exchange to Unit Of Account. Bitcoin could be all three but today faces a volatility chasm, with wild bull and bear markets. A StableCoin is designed from the start to be all three.

Today Bitcoin is a speculative Store of Value (the digital gold thesis). I am on the record saying that Bitcoin has more upside than downside and have been a buyer, but it is certainly a speculative bet. Even though it is speculative, Bitcoin has some credibility as a Store of Value.  However Bitcoin is weak as a Medium Of Exchange (there is not much you can buy directly in Bitcoin) and Bitcoin is not credible at all as a Unit Of Account. You will know when Bitcoin becomes a Unit Of Account – we stop referring to how much something costs in Fiat currency and only refer to the cost in Bitcoin or Satoshi units.

Watch Vitalik Buterin (Ethereum) and Balaji Srinavasan (Coinbase and A16V) talk about StableCoins around minute 38

This update to The Blockchain Economy digital book covers:

  • Mixing SpeculativeCoin and StableCoin in one venture does not work
  • StableCoin for JP Morgan, Facebook & Samsung is just the tip of the iceberg
  • Why a StableCoin has to be multi-currency basket
  • Don’t bet against Government backed CBDC.
  • Low volatility is essential for Cross Border payment rails
  • Bitcoin as a Medium Of Exchange faces hurdles that will take a long time to overcome
  • You cannot manufacture a stable result out of unstable/volatile base
  • Audit heavy/ tech lite is simple key to trust in redemption
  • StableCoin can be a currency for passionate global communities
  • StableCoin can be bridge into crypto for conservative adopters
  • Context & References

Mixing SpeculativeCoin and StableCoin in one venture does not work

We call them StableCoin to differentiate from coins/cryptocurrencies that are speculative. So I coined (sic) the word SpeculativeCoin.

SpeculativeCoins have benefited from a great business model, defined as Tokenomics (funding via coins that you sell into a rising price). The idea got discredited in the ICO hype and got nailed by the SEC (details here).

Ripple has been masterful at using Tokenomics to boost XRP. Whether that means XRP has value is more debatable, but there is no question that Ripple has done well with this model. It is debatable how many Altcoins will do well, but what is absolutely certain is that you cannot mix SpeculativeCoin and StableCoin in one venture.

Speculative Coin/Tokenomics might work. StableCoin might work. An investor might mix SpeculativeCoins and StableCoins into a portfolio just like you might have Facebook and Exxon Mobil in the same portfolio. However, the two models are totally different. It would be like combining Facebook and Exxon Mobil in the same operating business.

StableCoin for JP Morgan, Facebook & Samsung is just the tip of the iceberg

It is hard to keep up with the flurry of PR from big companies offering their own branded StableCoins. Without trying too hard to stretch the memory banks, we have seen StableCoins launched by JP Morgan, Facebook & Samsung. Other big banks, social media networks and consumer electronics companies will soon have to issue one to compete. Soon we will have a StableCoin for each Global 2000 corporate and then it may move to SME.

When every company has their own StableCoin, it will add about as much competitive advantage as having your own .com address.

Why a StableCoin has to be multi-currency basket

A single Fiat currency StableCoin, whether USD or EUR or CHF or any other reasonably stable Fiat currency is not good enough for two reasons, one of which is critical:

a multi-currency basket is more stable than any single Fiat currency. Even if a Fiat currency has been stable for a long time, smart investors don’t like betting that politicians won’t do something stupid in future. Printing money is a pretty big temptation!

a single Fiat currency could be seen as a threat by the nation state that issued that currency. Although governments cannot shut down Bitcoin or Ethereum (for more, read this chapter in The Blockchain Economy), they have more  control when it comes to a single Fiat currency StableCoin. This is an existential threat to a StableCoin venture pegged to a single Fiat currency. As the news of Basis shutting down shows, this is not just a theoretical risk. Basis shut down, despite raising over $100m from top tier investors, because of regulatory pressure.

Don’t bet against Government backed CBDC.

CBDC = Central Bank Digital Currency. A CBDC cuts out the FX Interbank market but not the Central Bank. It is a more efficient Fiat currency; still Fiat but faster and more efficient. Governments that are frustrated by their ability to shut down Bitcoin (because it is decentralised and there is no Bitcoin company) will not hesitate to shut down any threats that are easy to shut down.

That is why a single Fiat currency, which could be seen as a threat by the nation state that issued that currency,  faces existential risk from Governments.

Low volatility is essential for Cross Border payment rails

Daily Fintech wrote about this back in October 2015:

“Use case # 3 is using Bitcoin as an invisible interim store of value. Neither sender nor receiver cares about Bitcoin. If you wanted an interim store of value for this purpose, the last thing you would invent is Bitcoin. You would create something that was almost a mirror image of Bitcoin:

  • Had the lowest possible volatility against the major Fiat Currencies.
  • Was not perceived as a threat by the Governments that issue those Fiat Currencies.”

Look at the 10×3 problem. Imagine getting paid for a product with a 10% margin and in the 10 minutes to settle on-chain, the price declines by 10%. You just lost money on that sale, even if fees are zero.

Bitcoin as a global Medium Of Exchange faces hurdles that will take a long time to overcome

We may pay for most our purchases with Bitcoin at some point in the future. The problem is that may be so far in the future that we a get our space flight to Mars before Bitcoin becomes a global Medium Of Exchange.

Our theory is that it will happen first via the excluded in countries suffering a currency crisis (for more, read this chapter in The Blockchain Economy). So we may see local networks where Bitcoin crosses the chasm to become a Medium Of Exchange (for example in Venezuela). Then it may replicate in other failed states who lost control of their currency.

For Bitcoin as a Medium Of Exchange to cross the chasm in the developed world, we will need a wave of startups to create services to meet needs that consumers are not even aware of yet.

Both will take time.   

You cannot manufacture a stable result out of unstable/volatile base

The idea that clever math/code means you can create a StableCoin automagically from unstable/volatile cryptocurrencies sounds like creating Triple A mortgage bonds out of junk loans – and we know how well that ended in 2008!

Audit heavy/ tech lite is simple key to trust in redemption

As there is no magic tech solution, the best solution is the audit heavy/ tech lite approach that we define in this chapter of The Blockchain Economy book:

“Fiat collateralised (Fiat deposits held in custody). This is the most popular and easy to understand and used by most StableCoins. For example, Tether/USDT pegs to the US Dollar via reserves held in custody. So if you buy $1 of USDT, you are told that it is backed by $1 of US Dollar held in a bank. This obviously requires some confidence that the StableCoin operator really does have the assets properly custodized; there has been serious concern whether Tether/USDT was doing this. Confidence measures include an audit by a reputable firm. StableCoins will increasingly fall under regulatory scrutiny as they are deposit taking and need at least AML/KYC processes. This model has been described as “audit heavy/tech light”. It is operationally complex, because you need all the Legacy Finance relationships; bridging the worlds of Crypto and Regulated Banks is not easy.”

StableCoin can be a currency for passionate global communities

We live in a world where more people are members of Facebook than are citizens of even huge population countries and where we often have as much in common with “tribes” across the globe than we do with our physically close neighbours. People who are passionate about something (diet, fashion, religion, whatever) want to find others like them when they travel and when they want to give cash to that person, a multi fiat StableCoin can be trusted by both parties.    

StableCoin can be bridge into crypto for conservative adopters

On a panel at a conference, I told the panelist next to me (a senior banker) that I was a Blockchain and Bitcoin bull. The banker asked me if that meant that I was an anarchist. I laughed and said “look at me, I have grey hair and wear a suit, how can I possibly be an anarchist?” The point is that when you leave the cryptosphere and talk to mainstream business people and investors, they look for something that feels more normal and less mind bending than Bitcoin – like StableCoins.

Context & References

Investing In Payment Tokens And StableCoins AKA New Currencies.

Mega Waves In The-blockchain Economy And The Dams Holding Them Back

Is Bitcoin suitable as an interim store of value for a payment rail?

Bernard Lunn is a Fintech deal-maker, investor, entrepreneur and advisor. He is CEO of Daily Fintech and author of The Blockchain Economy.

I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post.

Subscribe by email to join the 25,000 other Fintech leaders who read our research daily to stay ahead of the curve. Check out our advisory services (how we pay for this free original research).

Venezuela’s Petro: Does Blockchain deserve this?

May be you are tired seeing the Petro saga unfold and spam your social media feeds. May be you are thinking, there you go, the joke of the decade. May be you are angry that the PR nightmare that has affected Cryptos is getting worse with this.

I must confess, I had all these thoughts going through my head when I saw that video of the Venezuelan President, Nicolas Maduro talk about Petro. The question that popped on my head is, how can human greed create so much mess? Does Blockchain deserve this?

Philosophical points aside, I must share my brain dump of the thoughts I have around this episode. Let us start with where Venezuela are economically – and perhaps that will set the context.petro

Image Source

Venezuela’s currency Bolivar has been hit by hyper-inflation which is at about 16800%. What does this mean? An economist and an entrepreneur originally from Venezuela told me this week that he has had experiences of buying a property, and going to bed only to find the property value had depreciated by 30% the following day.

That is the reality on the ground when hyper-inflation hits. Its worse than the worst Bitcoin price action.

Venezuela has been hit with sanctions which meant they don’t have free access to world markets and in essence capital. They have historically relied on their oil reserves to bail them out.

Venezuela is one of the most crypto savvy nations in the world. Their per capita crypto usage is one of the highest across the world. Put all these points together, there can be a logical happily-ever-after finish with a state-backed-stable coin. And that is exactly what they have tried to do.

While that is the logical way forward to get back some economic sanity, it can only be fruitful if the transition from Bolivar to Petro was well executed. Well executed in this case would include words like integrity, transparency, governance, monetary policy etc.,

The Petro has its own Blockchain, and derives its value from oil, gold, diamonds and iron. 50% of the value is derived from oil, and the supply of the Petro has a cap. But the state owned oil firm PDVSA has debts which is almost 8 times the market cap of Petro. So, I would doubt the integrity behind the decision of using Oil as an asset to back the crypto.

While there were close to 200,000 global purchases of the crypto as per the government, there hasn’t been any audit of these purchases. That makes the decision sound like a scam. There have been several other complaints about the petro. But for me, if a state backed stable coin cannot demonstrate sound policy and principles behind it, it is prone to a major failure.

However, if this is a genuine attempt by the government to turn its economy around , and if it managed to succeed, it would become a case study for many emerging markets countries to follow. And it would be a stark warning to the global markets that an alternative capital market is born.

I really hope the anger from the crypto community is more with the HOW of this petro episode, rather than the WHAT and the WHY. If the fears of the sceptics are found to be baseless, this could be the best thing that could have happened to the world of Blockchain and Cryptos.


Arunkumar Krishnakumar is a VC investor focusing on Inclusion, a writer and a podcast host.

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