WBD145 Audio Transcription

Preston Byrne & Jake Chervinsky on Regulating Libra

Interview date: Thursday 25th July 2019

Note: the following is a transcription of my interview with Preston Byrne from Byrne & Storm and Jake Chervinsky from Compound Finance. I have reviewed the transcription but if you find any mistakes, please feel free to email me. You can listen to the original recording here.

For the next episode in my Libra Deep Dive I talk to Preston Byrne & Jake Chervinsky about the regulatory side of Libra. We discuss whether Libra is a security, if the Foundation is really a non-profit and whether Libra is even a cryptocurrency.

“The thing that really bothered me about the Libra whitepaper was that they think we’re stupid, they think we’re dumb, they think we were born yesterday… but in fact they’re the neophytes, they’re the newbies, they just showed up and this is our house”

— Preston Byrne

Interview Transcription

Peter McCormack: Welcome to the show Jake, thanks for coming back. Let's be honest, we're starting this again because I just made a mistake, so we can be honest!

Jake Chervinsky: That's okay, it's take two and we only lost a couple of minutes, so no worries!

Peter McCormack: But welcome back Jake. Welcome on first time Preston!

Preston Byrne: Hi!

Peter McCormack: We tried to do this before, but we've got you now. So we're going to talk about Libra. I've been doing a few interviews about this and met a few people. I've got a changing view, which we're going to get into. Jake, you're going to have to tell us what you told us a moment ago again, but essentially I want to know two things from both of you to begin with.

I wanted to know what you thought when you first heard that Facebook were doing, and I'm going to say cryptocurrency and I know you don't think it is, but other people think it might be. Anyway, it'd be good to know what you thought before you saw the white paper, when you just heard about it and now there's some meat on the bones, you've seen the white paper, you understand what they're trying to do, what do you now think?

Jake Chervinsky: Yeah, so when I first heard about it, the thing that concerned me the most was that it seemed like Facebook was trying to hide under the term "cryptocurrency", when in fact they're launching a product or talking about launching a product, that really doesn't have any of the characteristics of a true cryptocurrency. So to me when you talk about crypto, you have to have at least three characteristics.

You have to be permissionless, you have to be censorship resistance and you have to be trust minimized and I didn't see any of that coming from Facebook given that what they need to do, is put together some kind of revenue model where this is making money for them.

When I saw the white paper, really my concerns about what they were doing were confirmed, because indeed it does seem like a permissioned system that allows censorship, that requires trust in a very specific set of companies, that I think the actual cryptocurrency industry is trying to get away from, not run towards. So I was not terribly impressed with Libra and my opinion hasn't changed too much since then.

Peter McCormack: Interesting!

Preston Byrne: So from my point of view, I remember back in 2014 I ran this start-up called Eris, which is now called Monax and it was the first permissioned Blockchain start-up. So you can imagine how Bitcoiners reacted when you said, "hey, guess what? You can use this Blockchain stuff without buying any coins." Of course people went completely ballistic and I got a lot of stick for it on Twitter, which wasn't great. So when I saw Facebook building something on a permission Blockchain, I said, "aha, this is validation!

After all the years of abuse I suffered at the hands of Chris DeRose, now finally I will be able to say, "ha-ha, I told you I was right." So I was initially fairly pleased that my thesis was turning out to be true. Fast forward to when they actually released it and the announcement, and it's not just a permission Blockchain, it is this panopticon Franken-chain that's supposed to be run by a hundred different Silicon Valley companies, each of which will have exclusive access to the data on the chain.

Not only that, there's going to be reserve asset, which is going to maintain a price that is separate from the dollar! When they initially announced it, they said, "oh good, they'll have USD payments that hop between the apps in their app ecosystem" and what they've done instead is they've tried to basically set up something that looks frankly a lot like a cartel. Whether it is or not is a legal question that I can't answer and it'll depend on what they actually do, but they've set up an independent currency. It's clearly designed to compete with local currencies in places like Rwanda, Botswana, Zaire and DR Congo wherever else, and be digitally native and digital first.

It's going to compete with things like M-Pesa. It's going to compete with things like WeChat Pay and I think with a company like Facebook, I don't buy their ambition that they're just going to try to bank the unbanked with something like this. If you wanted to bank the unbanked, you can do that with PayPal. What they're trying to do is something much grander, which is they're trying to offer a tangible, credible replacement to money itself and I think that's really, really dangerous.

Peter McCormack: So when David Marcus said, "it's not a currency, it's a payment tool", you don't agree?

Preston Byrne: I think it's a security as it's currently structured, in that it's a contractual instrument, which is backed by other instruments and it's conceivable that people will buy it as a kind of inflation hedge or as an investment long-term, particularly in the negative interest rate environment. So I mean, in my view, it could certainly be a security, which is why I thought they would initially go with a USD replacement, because that is just USD, it's just currency, it's not classified as that. But what they propose instead looks a lot more like an ETF, which has different implications.

Jake Chervinsky: Yeah, so I think there are a lot of legal issues around how we categorize what it is that they're creating. But in terms of whether it's a payment system, I do think that's what they intend it to be. It's just that it doesn't seem like a more interesting payments system than the ones that we already have from centralized companies like PayPal or Venmo, like Preston just said.

The thing is, you actually can't really bank the unbanked with PayPal, because PayPal is a US company subject to US regulations and legal requirements, which prevent PayPal from providing services to a lot of people around the world, which are the same types of people who when we talk about banking the unbanked, those are the people we want to get financial services to.

So if Facebook is creating a system that's subject to all of those same requirements and restrictions, it's no more interesting than the centralized payment systems we already have and probably is worse than them, given all of these underlying mechanics where they have to be balancing a basket of different currencies and all these other issues that they're unnecessarily introducing into the system.

Peter McCormack: So interestingly you said there Preston, "it could become a hedge." So whilst we are seeing them talk about a payment tool for users of Facebook, WhatsApp, Instagram and people properly buying a few dollars, a couple hundred dollars, in a rare case maybe thousands, can you see a scenario where certain institutions, investors, I don't know, even governments would consider buying significant amounts of Libra?

Preston Byrne: Sure! If you want exposure to the underlying asset, then you're going to buy the instrument that gets you that exposure, yeah!

Peter McCormack: And is there any way of them not being classed a security here? How does this play out?

Preston Byrne: So one thing that Facebook has done very successfully with the Libra launch is they've been deliberately vague about how all of it is going to work. That ranges from the way that they say privacy is going to work, to how they say that data is going to be shared, to how it's going to be regulated and all the rest of it.

So nothing is set in stone. They went and put this proposal before the world and the American people and they got rebuked quite sternly by Congress on behalf of the American people, saying "listen, we have all these concerns about this." So they may go back to the drawing board and they may say, "you know what, it might be simpler for us at the end of the day to just have a dollar based system, rather than something which is reserved backed."

Peter McCormack: Yeah, well I'm just wondering if it is reserved backed, is there any scenario where it isn't a security or is it quite cut and dry that it is?

Preston Byrne: It depends, is the answer. It depends.

Jake Chervinsky: Yeah and it depends for the same reason that all of these other tokens we've been analyzing for the last few years depend on what the SEC says they are. So the thing about Libra, is that it looks a lot like a security when you look at it just from a high level broad overview, because you have people investing or putting in their own fiat currency, either dollars or euros or yen or pounds and then they're being exposed to a basket of other financial instruments that are going to fluctuate in value compared to what they put in and they're trusting that this centralized group of companies is going to, or the Libra Association itself, is going to manage that basket of currencies in a way that will at least preserve their value.

Now when we talk about investment contracts, we're usually talking about an expectation of profit, but you have to understand if the SEC wants to interpret that element of the Howey Test broadly, they can. Profit doesn't necessarily mean that you are making more money on what you've put in. Profit, in terms of how the SEC would interpret it, could just be that you are maintaining your value. I mean we have securities that have negative interest rates, that doesn't mean that they're not securities.

So just like the SEC has said, "the investment of money prong, doesn't actually require any investment of real money." It could be other things like efforts or marketing or something like that. I think the SEC could say, "look, we don't care if there's going to be actual profit. We still have something that looks fundamentally like a security, because you have these investors relying on the managerial efforts of a third party, in preserving the value that they've put in." 

Now what type of security that makes it, I think is an open question and Preston said it could be an ETF, I think that's a fair assessment. It also could look like an investment fund or an investment company under the 1940 act. So I think it's unclear right now how exactly you categorize this as a security, but the path is definitely there if the SEC wants to take a critical view.

Peter McCormack: So it almost feels like Calibra will be negotiating with the SEC before they make any decisions. This all has to be resolved first right?

Preston Byrne: So this is the other thing that's kind of funky about it. So David Marcus was asked a lot of questions before Congress about what the policies of this scheme are going to be. So for example, one of the Congressman said, "will Milo Yiannopoulos be able to use Libra? Will Alex Jones be able to use Libra?" These are two individuals who've been deplatformed by Facebook and just about all of the other sort of wishy-washy leftist companies based in the Bay area and he said, "well, we don't know, that's a Libra policy."

So one thing they've done, is they've set up this Libra Association, which is notionally a non-profit. The purpose of the non-profit is to administer the Libra chain and the relations among the, up to 100 members of the Libra Association, which is responsible for managing it. Then Facebook will be simply one of those members with access to the system, presumably they would have lent some technical help to the system. I look at that and firstly, there are a lot of crypto non-profits based in Switzerland.

I seriously question, at least for US purposes, whether those would be considered "non-profit entities", because I think that managing a cryptocurrency is fundamentally a for profit enterprise. First. Second, the accountability problem comes to the fore, I'm sure it'll be independent, but I would struggle to think that organizations like Facebook who founded the organization, aren't going to populate it with their own people and have everybody sort of Ad Idem, as to what the plan is going to be, before they go and proceed with it.

There's a lot of copping out here saying, "well we're not quite sure." It's kind of amorphous, we don't know where this is going to go, there's notionally an independent entity. That kind of makes the hairs on the back of my neck stand up.

Jake Chervinsky: Yeah, the ambiguity and the vagueness of their plan is a little bit painful. I mean, you would expect them to have sort of a more thought through strategy on how they're going to launch and how they think that they should be regulated. But let me say the first positive thing about Libra that I think any of us have said so far on this podcast, as a matter of government relations, speaking as someone who has lived in Washington DC for a long time and seen how things work on Capitol Hill for a while, this might be the right strategy for them, which is Facebook had to know that this was going to be really hard to get done.

Facebook has a huge trust deficit in Washington DC. Basically it is the perfect political target for politicians on both sides of the aisle. So David Marcus had to know when he got called in for two back-to-back hearings, it was going to be really rough and it may be that the strategy is, take your licks, have the politicians score their points by beating up on Facebook on TV and having everyone watching, everyone writing articles about it and then after that, start doing the real work on the Hill of talking to the regulators and doing all the lobbying that we know Facebook has tons of money to do and then figure out how to get this through.

So I think that while we can sit here and talk about all these securities issues, it is true that Facebook is going to spend a lot of time talking to the SEC and I think it would be a little bit foolish to underestimate their ability to negotiate some way of launching this product.

Peter McCormack: Okay, so I've got a couple of points there. Firstly, just me as an outsider, I'm really starting to find it interesting the way US politics works. Actually, I think it's really interesting. I still don't fundamentally understand the difference between the House and the Senate, but I don't need to at the moment, just watching the political theater and the way people get their five minutes each to ask their question.

What I've noticed is a significant difference, some people want to use it to ask questions and I think they're interesting. Some people seem to use their five minutes to make a statement, which feels sometimes very career based. Is it AOC? That lady who always seems to be in the press, the one Trump's falling out with? Hers seem to be very much about political statements. So I find it very interesting.

Preston Byrne: Not during the Libra hearing though, i'll tell you that much. Her Libra hearing was fantastic!

Peter McCormack: Some people I thought were utterly brilliant and some people absolutely morons. Brad Sherman, I thought it was a fucking disgrace comparing this to 9/11 and I had down Patrick McHenry, who seems to just understand Bitcoin, which I thought was really interesting. But like I say, following the whole process is really interesting and one of the things I've heard about them being vague again, I don't think Facebook makes huge mistakes about being vague. I think if they're vague, it's for a plan.

I think probably what they wanted to do is get as much out there and see where the debate goes, understand where they're going to be questioned or where there's pushback, so they know where to focus. Otherwise if they come up with their fully fleshed out plans and everything has to change, it's kind of a big waste of time.

Jake Chervinsky: Yeah, I think that's right. You can almost think of it like Murphy's Law, no plan survives first contact with the enemy. Well often no plan survives first contact with Congress! So it would be a mistake to come in with a perfect plan that you think is going to pass every test that Congress is going to throw at you, without leaving some room to negotiate after the fact. So I think that this is probably the right strategy. It's not surprising, as Facebook has been dealing with Washington DC for quite a long time. Sure, they get punished a fair amount

Peter McCormack: Are they a scapegoat?

Jake Chervinsky: For what?

Peter McCormack: Are they a scapegoat for elections?

Jake Chervinsky: Yeah, I mean I think I'd be really curious what Preston thinks, because I think that he and I come at politics from a different perspective, but my sense is Facebook is a perfect target for both political parties for different reasons. I think that the Democrats and Republicans both have separate reasons why beating up on Facebook looks good to their base and that puts Facebook in a very tough position.

Peter McCormack: They've pissed off both sides!

Preston Byrne: If Facebook didn't exist, then it would be inevitable that someone would have invented it by now. So Facebook simply finds itself in the position of being that that representative of the current state of technology, which is that they're the big boy on the block. In the era when data is oil, they're the biggest one of the biggest boys in the block. Google's another big one. So I think they are in a sense, a structural villain, just the fact that they sit where they do, that will necessarily lead to people throwing rocks at them.

I think they could be doing things better. They could for example, pull back from foreign operations, based themselves in the United States and protect their users' free speech rights, which they don't do, because they put profits ahead of other things. Profit is their primary motivation. So similarly with Libra, I would expect that profit is going to be the primary motivation there and that's going to inform their decisions.

Peter McCormack: Well okay, it depends how you look at it, because Libra is very separate from Facebook.

Preston Byrne: Except David Marcus was the guy they sent! Their employee went to Congress and explained how it worked and the other employee who they're putting forward is Morgan Beller ex-Andreesen Horowitz. So everyone behind this scheme is Facebook! Then they're saying, "yes, we're setting up a non-profit so it's not us", but they're clearly leading the initiative and they clearly have an interest in its success.

So I don't think we can really say this is separate from Facebook, they have come up with it. They figured out a way that they can structure incentives so it works for a bunch of other companies that also get to share... I'll bet there are a lot of companies in Silicon Valley who have Connectivity with Facebook, "log into my app through your Facebook account", but they don't share the data that Facebook gets. So my guess and Uber would be one of them, Tinder, all those kinds of apps.

So this way you can link up some financial information with the Facebook login, with the destination app, who is ultimately servicing the user and suddenly they get access to the same dataset Facebook does with regard to that user. So this is a very cosy commercial relationship that they're setting up. I don't buy that it's separate and it's for the common good and or that it is a non-profit enterprise.

Peter McCormack: Okay. One of the things I took a note on earlier is that Jake, you said you don't believe it's a cryptocurrency because it's not permissionless, it's not really decentralized. So one of the things I was talking to Bill about and his view was that this is a 5 to 10 year play. He said when Bitcoin first launched, there was only one miner, which was Satoshi, and then there was Hal, and over time, more miners came on and the network grew and the nodes grew.

Okay, so it was very early on and it wasn't very decentralized. I'm trying to remember his exact point, but he was saying to me that his belief is that this will eventually move to a truly decentralized permissionless system, but it starts now with a hundred nodes because it's almost like they've got to build out the network, they've got to build up the scaling, there's a bunch of regulatory things to go through, but eventually this will become a truly trustless, permissionless, decentralized cryptocurrency. You don't believe that?

Jake Chervinsky: No, not for a second and I'll give you a couple of reasons why. I think the first and main reason is, corporations are not well known for seeding control of properties that make them money. I agree with Preston entirely that Libra is Facebook and Facebook is Libra, full stop. I don't see why Facebook would want to expand this network any further than they've already proposed it to these 100 companies.

The other reason that I sort of don't buy this story about decentralization, is as the network is designed now, which is all we can compare our analysis too, we don't know what they might decide to do in 10 years and frankly I don't want to trust them to decide in 10 years that they're going to really turn this into a public good, because I just don't think that's how this works. At the moment, it seems like the majority of the corporations that will be running nodes, would be subject to the same jurisdiction of governments that could command them to operate in a certain way.

So if you have 51 of the 100 nodes subject to the jurisdiction of the government of the United States and the government of the United States says, "we do not want you to allow a certain person on this network" or "we want to require you to change the network in a certain way", then the US government can make that happen. That's why I think having a set number of nodes and a set number of nodes controlled by major corporations that are established in particular jurisdictions, is basically the opposite of having a decentralized system.

Preston Byrne: Also, I mean it doesn't make any sense that the system would become decentralized and the principle risk... I mean you have a ledger and then assuming that Libra is going to function the way that they've marketed it so far, you will have a reserve of assets which will be held somewhere by a custodian in an account. It's owned by somebody. It's not just going to be out there in the ether.

So you're going to hold onto your coin and you're going to want to, presumably someone, at some point in time, would want to get their coin redeemed for value from the reserve of assets and that's what makes it worth holding. So from my standpoint, that I think, renders it never decentralizible, because it doesn't make sense. It's a non-sequitur to say that I want to decentralize my bank account.

Well, it's a bank account, it's held in a bank! So why do I not want the bank to hold onto my money? First and second what Jake said, I don't see a way that you can have a system that complies with US money laundering rules and at the same time is decentralized.

Peter McCormack: Okay, who do you trust more with the management of money, the government or Facebook? I tell you why I asked the question. So I was with Alex Gladstein the other day and he said there's three types of money now, there's government money, there's corporate money like Facebook and there's decentralized money like Bitcoin.

I'm not going to answer for him, but I think he said he trusts Facebook money more than he trusts government money and I kind of agree. So I'm getting a very kind of negative feeling from both of you? You're both coming off quite cynical about it, but at the same time I'm saying, "well, it might be better than government money."

Jake Chervinsky: I don't think there's a distinction, I think it's the same. I think that Facebook money is government money. First of all, just the fact that the money underlying the Libra token is all fiat currency. So the Libra token is inherently subject to whatever those governments want to do with the underlying fiat reserves. So I don't really see a big difference there.

Peter McCormack: Isn't it a shame that Bitcoin isn't in the basket?

Jake Chervinsky: I guess, but at the same time, if Bitcoin is going to be in the basket, why not just use Bitcoin? What's the point?

Peter McCormack: I don't know, I can't answer that. I'm assuming the volatility is a problem?

Jake Chervinsky: Well, sure. So then you can think about having stablecoin systems, which I guess currently are mostly running on Ethereum, but there's no reason why someone couldn't design a stablecoin just as popular and widely used as Tether or USDC and put that on the Bitcoin Blockchain. The technology is already there to do that. So if what we want is a non-volatile asset, that is a synthetic US dollar or Euro or pound, we can do that without having to hand the system over to a group of corporations to do it for us.

Preston Byrne: The thing about government money is that we can fire the government. We can fire the government every two years in the case of Congress, we can fire the government every four years in the case of the president. The thing is, we can't fire Mark Zuckerberg, we can't fire Sheryl Sandberg, no one can. You can opt out, but what happens if they've suddenly... Let's suppose they achieved their objective of starting to knock out small currency systems in countries all around the world. What can Botswana do if all of its people start using Facebook, just like in Kenya, everybody uses M-Pesa?

All of a sudden the government loses control over monetary policy and that's a very big deal. So with the government, first we can fire the government, at least in the United States, we're allowed to fire our governments. Secondly again, at least in the United States, there are things that the government can't do to us, that Facebook can. The government can't discriminate against you, the 14th amendment says they can't. The government can't shut you up, the First amendment says you can't. Government can't prevent you from buying a gun, that's the second amendment.

Government can't search your house and search your documents and your effects, that's the fourth amendment. Facebook can prevent you from buying a gun if they wanted to, if they ran a payment system. There's some payment processors who do this, they say, "we don't want gun business, so we're not going to process payments for them." They can shut you up, they can ban you from the platform for any reason they wish.

Peter McCormack: We've seen this with a lot of the liberal left Silicon Valley behemoths.

Preston Byrne: Oh, they're in charge and now they want things to look... When they were rebels, it was one thing, but now they're in charge and they want to tailor the world to meet their needs and expectations.

Peter McCormack: Counterpoint though, so I talked to Caitlin Long about this and she said that one of the good things about Libra, it will require, or enforce ill-disciplined central banks of developing countries to show a little more financial discipline because they face currency competition with Libra.

Preston Byrne: You've got to burn down the village to save it. That's basically what that argument is!

Jake Chervinsky: Yeah, it's an interesting point and I listened to your discussion with Caitlin and I thought she articulated it very well. I guess I just don't see why Libra has that effect more than Bitcoin does or more than some other system that doesn't require trust in a group of 100 corporations to run the system.

Peter McCormack: I think it comes down to the fact that Bitcoin really isn't a great medium of exchange right now despite people trying to and wanting it to be, it just isn't. It doesn't have the user experience, the volatility's too high, whereas something like Libra is going to have a great UX and it's going to be very easy from day one for people to be able to send Libra to each other. You're going to have accounts already created. You're not going to have to learn about things like private keys and all the stuff with Bitcoin, all the stuff that we know is important, but they'll just make it easier to use.

Jake Chervinsky: Right, but it always comes back to the same question, why do you need a Blockchain for this? We've been asking this question about everything basically other than Bitcoin for a long time. Why do you need a Blockchain for this? If for example, Twitter wanted to incorporate some type of payment system into Twitter, they could just use Cash app.

Jack Dorsey could just link the two up and then you would be able to transact in both US dollars and also Bitcoin through Twitter. Why does Facebook need a Blockchain, when all they're doing is allowing people to transact in basically fiat currency, although a basket of four different ones and they're only letting people do that when they've passed KYC. It just doesn't make a lot of sense to me why this is the right system.

Preston Byrne: Regulators I think is the honest answer. If you go in and you say the word "Blockchain", your regulators are going to look at it and go, "oh, this is advanced." If you go in and say, "well, we're doing all of this and by the way it's on Postgres", they're going to turn around and throw the book at you. But at least here they have an innovation shield that they've raised, so that if someone throws some criticism at it, they can say, "what are you anti-innovation? Do you want jobs to move overseas?"

Jake Chervinsky: I couldn't agree more and this really gets to the first thing that I said when we started talking about this, which is that Facebook was trying to hide themselves behind the shield, I think that's a really good word for it. The shield of cryptocurrency. Then what happened was our entire industry had to spend a whole lot of time and effort arguing why they should not be able to hide under that shield and thank goodness for Meltem Demirors, who did a phenomenal job, in addition to everyone at Coin Center, Peter van Valkenburgh, Jerry Brito and the Blockchain Association, in explaining why it is not right to give Facebook the protection that we should be giving to systems that are actually decentralized like Bitcoin.

Peter McCormack: One of the points that David Marcus made is that essentially there is now a crypto arms race and I think he kind of put out a veiled threat that if you regulate Facebook in a way that they can't create Libra, you're just going to push competition into other markets. I've already had people asking me to pay them on WeChat. I don't even have WeChat, but I've already had that happen a couple of times, I don't know if you've had that experience. So I think he was trying to create the threat of an arms race to give leverage back to Facebook.

Preston Byrne: I mean, WeChat is not a Blockchain based application, it's just the most popular app in China and people use it to pay for everything. So I think that if the US government is thinking WeChat is a threat, I think it probably is a threat, but I think it's a threat in the sense that it's a very convenient tool that could be used to surveil American citizens and the American economy, because the entire thing is run out of China. I do not think there's any technological risks there because we have all the tools.

There's no reason Stripe couldn't go and build one of these apps tomorrow and couldn't integrate Bitcoin payments into it or something like that. So I don't buy that argument. Certainly there is a lot of crypto talent moving overseas to places like Switzerland, particularly Southeast Asia, Singapore, places like that, because of the US regulatory environment. But again, we have some of the best teams in the world here.

We've got the Lightning network, we've got a whole bunch of Bitcoin start-ups here in the States. Just because people can't trade it, doesn't mean that it's not a good place to do business, base your team and go build things. It just means that certain types of financial transactions are going to be regulated a little more strictly.

Peter McCormack: Does the US market overregulate things? Again, just referring back to my interview with Bill yesterday, I was like, "which markets are the hardest to operate in?" He said, "undoubtedly the US" and he doesn't even know what the number two is, because it's so much harder.

Jake Chervinsky: It's a tough balance. I don't think there's one good answer to the question whether there are too many regulations or the regulations are too onerous. There are pros and cons to having regulations. The US is definitely one of the hardest markets to operate in. It's also one of the most trusted markets in the world for the very reason that we typically don't have the type of poor services and problems and services that you see in other countries, that don't have those kinds of tight regulations.

It's a really hard balance to strike and that's why I'm thankful that we have people like Hester Peirce, the commissioner at the SEC who I know you, also did a podcast with, who really understands the balance between encouraging innovation, while also making sure that things are done in a fairly safe manner. Not necessarily protecting people from losing money, but making sure that we don't have fraud and misconduct running rampant in the country. I think that's really important and that's what makes the markets in the US so strong.

Peter McCormack: Yeah I think Brian Quintenz who I met with recently is similar as well. I think across the CFTC and the SEC, I think people are quite pro. I think they do recognize the risk of pushing regulation abroad. I also find this very interesting because hasn't crossed my mind where both of you seem to be thinking that Facebook is co-opting the work of the cryptocurrency industry for their benefit and they're not really a cryptocurrency, it just hadn't crossed my mind. Is that a feeling you and all the lawyers have?

Jake Chervinsky: I don't know and also it's hard to define the term cryptocurrency, what does that mean? It could mean something different to you or me or David Marcus. The word itself, I mean crypto, cryptography, currency, I guess a medium of exchange or something like that. So in theory it's okay to say the word cryptocurrency. That's probably the explanation that David Marcus would give.

Peter McCormack: It's very different from the permissionless Blockchains...

Preston Byrne: I thought we were talking about cryptozoology, this is the wrong interview!

Jake Chervinsky: Yeah it goes to the question you asked a little bit earlier, David Marcus gets in front of Congress and basically makes the argument, "if you don't let us move forward, then other people are going to, who are going to be worse for your interests." It's either going to be outside of the US, which means the US loses the value of that innovation or it's going to be a system that you cannot control, the way that you have been able to control the global financial system for the last century.

He doesn't go so far as to say, "you should be worried about Bitcoin", because Bitcoin is that system that I think in theory, some Congress people might not want to take the place in the world that we think that it might, because it's not a system that lends itself to KYC or to control or censorship or to the government deciding who can use it or who can't. David Marcus is in sort of an awkward situation where he's saying, "we promise that if you let us build our system, we will KYC everyone. We will make sure that there are no terrorists or money launderers on our system.

You can trust us," and what he's leaving out, but what he's implying is that you cannot trust a system like Bitcoin. That's why I took a lot of the Libra strategy as actually an assault and an attack on the crypto industry and I was so glad that we did such a good job of persuading enough Congress people that this system isn't the one that we should go with, to at least have a fairly reasonable result from the hearings.

Peter McCormack: Okay, I'm terrible at flip-flopping, but now you're making me think this is absolutely awful, Facebook are terrible, they're trying to destroy Bitcoin, fuck Facebook!

Jake Chervinsky: Well look, here was my initial concern going into the hearings and when I saw the Libra white paper. What I thought was Congress might look at Libra as the "good crypto" because it's a crypto that they can control and that they can, like Preston said, a panopticon. Bitcoin is the "bad crypto" because Bitcoin is the crypto that all the people they don't want to have access to financial services can use. I was glad that that was not the result.

I think I underestimated how much hatred there is, frankly, for Facebook in Washington DC. But still, this raised a really serious concern for me, which is a lot of the attacks on Libra from the Congress people was about having to trust Facebook and this Libra Association being set up in Switzerland and all of these things, which I agree with those criticisms, but a big part of the criticism was, how is Facebook going to ensure that only people who go through a KYC process are able to access this system?

David Marcus was able to say over and over again, "don't worry! At Calibra, we're going to KYC everyone. We at Calibra are going to make sure that everyone has government identification and we know exactly who they are and they're authenticated before they get on the system." The fact that that is an argument that in theory makes Congress people happier and more comfortable with cryptocurrency, is an issue for us, because we're not going to make that argument for Bitcoin.

We're going to make a very different argument, which is that an open, permissionless system is inherently better than a controlled permissioned system, even though we cannot control who gets access to it. It's a harder conversation to have, but it's the one that we need to have.

Peter McCormack: Well Eric Wall wrote the article that Facebook Libra is essentially exploiting a loophole whereby the KYC/AML work is often pushed on to the exchanges or the wallet providers.

Preston Byrne: I don't see that being a loophole here.

Peter McCormack: Well you can't push it on to Bitcoin, that's the point.

Preston Byrne: We can't push it onto Bitcoin, because you don't have anyone responsible. Here you have the Libra Association, I think it's 18 US code 1960, there's a crime in the US of operating all or part of a unlicensed money transmission system. So here you have a money transmission system and presumably someone's license is going to have to cover the entire system to the extent that that system affects interstate commerce in the United States, which it very likely will, as long as it has so much as a single US user.

So from that standpoint, I look at the... Facebook made a lot of promises, and this is the thing that really bothered me about the Libra white paper, was that they think we're stupid, they think we're dumb! They think we were born yesterday, but in fact they're the neophytes, they're the newbies, they just showed up and this is our house. So they turned around and they said, "in Calibra we're going to allow anonymous transactions", okay, you're going to allow anonymous transactions. Then they turn around and say, "well, we're going to KYC everybody", make up your mind!

Your design decisions are going to... You make one choice, those are mutually exclusive choices. Similarly, they mentioned privacy in the white paper once, in the context of developing privacy enhancing features and then in the hearing they mentioned it a bunch as well. They said, "well, we're thinking about privacy, we're considering user privacy", okay fine.

But you've also said that you're going to put this on a Blockchain, all of the data is going to be stored forever, and every single transaction is going to be viewable by anyone who's running a node, one of these hundred supernode operators, which means they're going to be able to see anyone's transactions at any time! Furthermore, you're spreading out that data among a hundred different nodes, which means that if any one of them has a security breach, then all of them have a security breach because the Blockchain ledger has been replicated, when furthermore, governments everywhere around the world are going to be able to get access to this information, in most cases, anywhere outside of the United States.

It'll probably be without a subpoena or a search warrant and they'll be able to see the whole thing! So they're saying all of this stuff, you can't have privacy if you have a Blockchain that isn't totally encrypted like Monero and even then, it's just a question of waiting for the cryptography to be broken. You can't have a system which has anonymous transactions and KYC's people.

So they then went and said to us, "well, it does all these things. Here's the list of promises we need to make to the government and here's the list of promises we need to make to the nerds" and then of course the nerds look at it and go, "well, you can't promise those two things at the same time, they're mutually exclusive" and that's what annoyed me most.

Jake Chervinsky: Yeah, I totally agree. I would also point out that when David Marcus is discussing privacy, mostly what he's talking about is, will the Libra Association share transaction data with Facebook, so that Facebook can monetize it? He kind of said no, but he wouldn't even really say no. His answer was something like, "well, we don't have any plans to do that right now" and then the question arises, "well then how are you monetizing this system? Are we really to believe that Facebook is in the business of creating public goods for the entire world?" 

His answer is, 'well, we have all these small businesses using Facebook to sell their goods and we think that Libra will help them because it'll reduce friction in their sales, so we'll attract more people to Facebook and so somehow down the road we're going to be able to monetize it that way."

That's fine, but I think we have to remember one of the reasons that Facebook is so disliked in Washington DC, is because it is a company that has created an entire business around demonetizing our personal data without telling us the truth about what they're doing. So when David Marcus says, "well we don't plan to do that right now", that has to raise a red flag for us.

Peter McCormack: What could they have done differently? Could they have done anything where they release any version of a product where you would say, "okay, this is interesting. I like this, I trust them." Or is it the fact that you are mixing Facebook with currency itself, is inherently something that is quite scary?

Preston Byrne: I think Facebook really is not... Facebook is looking for growth opportunities. We all know it. Instagram is stagnating Facebook itself, facebook.com is stagnating, soon there'll be more dead people on Facebook than living. So they're looking to the future and they're asking themselves, "how do we grow? What's the next step for us?" And I don't think they can get any larger. So I think the answer is that they have to go deeper and they've tried this in other contexts, chiefly with internet.org, which is providing internet for the global poor, where they basically control telecommunications pipes for half the world, which has to go through Facebook in order to get access to the internet.

Similarly, this effort is a way to go deeper in our lives and they're saying, "well, we want to control the financial pipes." How they're going to get that to happen with what is essentially a prepaid card, is a really interesting question. I think with something like Bitcoin, some people have criticized it, as a prepaid card of sorts, but Tim Swanson calls it "the degenerate put." He says there's always going to be someone willing to speculate on this stuff. So that is the ultimate floor for Bitcoin's price and we haven't seen that with... It's why ICO tokens where the ICO doesn't have any value and it's redeemable at par, it's why they don't sell.

There's a positive for the crypto community here, to the extent that crypto development becomes more commonplace and cryptographic primitives become easier to work with, that are in common between Facebook and the rest of what we do. That is something where we will benefit and Facebook presumably will benefit as well. But then in terms of the currency itself, I don't see what the proposition is there.

Peter McCormack: They're becoming almost like infrastructure if you think about it. So the ad performance is in decline, some guy came out today, it's up on Medium saying that Facebook's in decline. Anyway, users are in decline, engagement is dropping. I think they lost about 20% of their users in the US, but I'll have to check that, it could be wrong. I know just myself and everyone I speak to, everyone's kind of using it less and now with Instagram, you say it's stagnating, I thought it was in steady growth?

Preston Byrne: My kid sister tells me Instagram's dead.

Peter McCormack: But at the same time with Instagram, with Messenger, with Facebook, now with Libra, essentially a lot of it feels like internet infrastructure of a kind, telecommunications infrastructure, payments infrastructure,

Preston Byrne: It's not really telecommunications, because it's not regulated like telecommunications. This is interactive computer services.

Jake Chervinsky: I guess it’s public payments infrastructure. I mean it's the same way that Peter van Valkenburgh describes Bitcoin. Look, it makes perfect sense what they're trying to do. I agree their business has basically run its course.

Peter McCormack: The novelty has worn off.

Jake Chervinsky: The advertisements aren't going to make as much money as they did. You have some major candidates for the nomination for the presidency, talking about breaking Facebook up and like any large corporation with a lot of money, but a lot of risk based on a very small number of products, they're trying to diversify and it's the oldest story in the Silicon Valley book, they're pivoting.

They're pivoting to financial services because they see this opportunity. It's just that they're trying to own the opportunity, as opposed to contribute to the opportunity. So you asked what could Facebook have done better and my answer is, build on Bitcoin!

Peter McCormack: Look at Cash app.

Jake Chervinsky: I mean to me, the story of the corporate response to Bitcoin was basically in 2013, "Bitcoin is pointless. There's no value in this whatsoever." In 2015, "Blockchain's really interesting, but not Bitcoin. Blockchain, not Bitcoin. We don't really know Blockchain is for, but Bitcoin is not interesting, Blockchain is." 2017, "well, maybe this Blockchain stuff is good for money, but definitely not Bitcoin. It's going to be some other type of money."

Now we're seeing these corporations trying to own the value proposition of a decentralized, permissionless system. I don't think that's possible by nature. So I think that the way Facebook could have made this work better was to do exactly what Square is doing and build on Bitcoin.

Peter McCormack: But that's not their MO, their history has always been, buy, copy or steal.

Preston Byrne: But this is the thing. Why didn't they just turn around and buy PayPal or something like that? That's what I don't understand. If the objective is to get more information and develop a payments ecosystem, the easiest way to do that is to just go acquire someone with distribution and then juice the distribution like crazy, until you own the space.

Now PayPal has its own issues, because it's getting beat up by WeChat Pay and AliPay all around the world, but conceivably with a company like Facebook attached to it, you could really change the equation there in a very significant way. Instead, Facebook has elected to do this crypto thing and I'm not quite sure for them it's the fastest way to get to market. I don't see what the real advantage is, if you want to own payments of doing a cryptocurrency, unless within the company internally, they've decided that their ambition is to kill money itself and to replace money.

Peter McCormack: Totally self-aware of their own reputation and this was a way that they believed... I don't know, we don't know how these meetings happen. People sit around the table, but maybe they are under the belief that, "well, if we create something that's governed by other companies and it's not just governed by Facebook, people will trust us more." I certainly trust this model more than Facebook just creating a currency on their own, which is their own currency.

Jake Chervinsky: I mean another possibility is another tried and true regulatory strategy and political strategy in DC, which is propose something that makes people very uncomfortable, so that you can create room for yourself to do something that otherwise you probably couldn't do, but because it's a less than the first thing you proposed, you get away with it.

Peter McCormack: Bring back the stable coin!

Jake Chervinsky: So it may be that this was the long shot and now they're going to back away down from what their initial proposal was. I think it's fair to say that they're not going to get their initial proposal through the entire regulatory process. There's just too many people coming out in positions of power who are saying, "we don't want this thing to happen", that they're going to have to change the model in some way. Maybe that's what they're going to do, they're going to end up changing it to a more traditional FinTech type model.

Peter McCormack: So they'll come back perhaps with a Venmo competitor or a dollar stable coin, something a lot simpler?

Jake Chervinsky: Maybe and then Congress says, "well at least it's not Libra, so I guess we'll let them do it." Look, I don't know, but that is a legitimate strategy in DC if you want to get stuff done. So that could be what this is.

Preston Byrne: Give access to the data to FinCEN?

Jake Chervinsky: Right.

Preston Byrne: Can you do that automatically? Legally, I don't think you can.

Peter McCormack: Isn't it payments over a certain amount that have to go to FinCEN?

Jake Chervinsky: Well you can give FinCEN whatever you can want. You can file suspicious activity reports on transactions at any dollar value.

Preston Byrne: I'm just trying to think, but from like a store communications perspective, there's different regulations there. So it depends. If you want to hand someone's Facebook profile to the FBI, you can't do that unless the FBI has a court order where it's a life threatening emergency. So again, FinCEN is different ball game, but I suppose it depends on which regulatory regime will apply. I don't think there'll be running a node, let me put it that way.

I would think that'd be a very bad move for the US government to be running a node on this thing! I think the obligation is if we've got something suspicious, then we report it, but not, we just hand it all over to the government and let them kind of supervise. Not that they'd know what to do with it anyway. They just call up Jony Levin over at Chainalysis and ask him to make sense of it anyway.

Peter McCormack: Could they just pay the 10 million and get their node? Could Facebook decline them?

Jake Chervinsky: Who knows!

Peter McCormack: I actually thought the performance of David Marcus was quite impressive for six and a half hours in a chair with the onslaught of attacks and questions and the amount of stuff he was being held accountable for, which he wasn't really responsible for during his tenure at Facebook. I actually thought he did a pretty solid job.

Jake Chervinsky: Yeah, I agree. He was the sacrificial lamb for Facebook, he bore the brunt of all of the politicians complaints about everything Facebook has done and he just had to sit there and take it, while they scored their political points. I thought that he did as well as could be expected given the situation that he was put in and don't forget, he didn't ask to go to Washington and sit through all those hearings.

He had maybe two and a half weeks’ notice and I'm sure spent a lot of time preparing how he would answer all of the very difficult questions. I think that he did a pretty good job given some of the tensions between the story that he's trying to sell and the reality of the system that Facebook is trying to stand up. But yeah, I have nothing negative to say about David Marcus. I respect the work he did.

Preston Byrne: I don't like what he was saying but yeah, I agree with you. He did a great job.

Peter McCormack: Which parts did you not? Was there anything specific or have we already covered this?

Preston Byrne: I think we've already covered this and sort of the talking points that... I mean apart from the proposal itself, which I'm very uncomfortable with, the fact that the talking points seem to be self-contradictory in certain areas, so the privacy trade off question, the KYC anonymity issues, stuff like that, which was then being said to Congress, "listen, we can make everybody happy here." You can't because that's not how software works. You make choices and there are consequences that follow necessarily from those choices.

Peter McCormack: What do you make of the decision to base themselves or base the Association in Switzerland? That was the only area where I felt like I wasn't being given the complete honest answer.

Preston Byrne: So I think I know the answer to that. Firstly if it's in Crypto Valley in Zug, that's just kind of trendy. You go there and hang out.

Jake Chervinsky: I think they're in Geneva.

Preston Byrne: Okay, but anyway Switzerland has been quite friendly. But there was a recent ruling that came out by the IRS, which said that foundation activity in support of a cryptocurrency is a disqualifying factor when determining whether an organization is 501(c)(3) non-profit, so tax exempt non-profit. So in the United States, what the Libra Association would be doing, would be considered a for-profit enterprise. In Switzerland, it probably isn't.

Peter McCormack: Interesting! Overall, what was your impression of the representatives in the Senate and the House? Overall I thought they did a pretty good job. I was quite impressed with the level of knowledge people had. How did you find it?

Jake Chervinsky: I was pretty happy with it. I think that we're seeing very slow but very sure progress forward in terms of the senators and the representatives understanding, of not just cryptocurrencies, but also the financial system more broadly. I think that thanks to Facebook in a way, we are starting to think and talk about money and what it is and how it works, in a way that we haven't done in a very long time. Having watched a number of these hearings over time with multi-month breaks in between them, I would say that it seemed like the politicians understand better how this whole world works.

At the same time, we still need to get to those stickier, thorny or tougher issues of what kind of financial system do we want? Do we want this wall to garden, panopticon system, where all information is reported to law enforcement and as a byproduct of that, a very large number of people are excluded from the system or do we want to move to something that is more open? I don't think that there's been a lot of progress there yet, but honestly it doesn't worry me, because I think that that will take a very long time for us to get to and so far I think good progress is being made.

Peter McCormack: Interesting, because I find everything is moving much more towards an Orwellian future. I spent some time with Alex Gladstein the other day doing the first episode for my new podcast Defiance and we were talking about money, financial surveillance and I think our only hope in all of this was Bitcoin. Actually I felt... At first with Libra, I felt it brought the regulatory lens back onto Bitcoin in a way it hadn't been on it before and I came out of it feeling that Bitcoin is even stronger and even more bullish about Bitcoin, because there wasn't a testimony hearing about Bitcoin. You can't have that.

Jake Chervinsky: Yeah there's an interesting tension I think between open versus closed systems and the issue of privacy, right? So a lot of questions were about, how will the Libra Association ensure the privacy of its users. How will Libra make sure that that information, the transaction data for how people are spending their money, which really cuts to the core of who we are, how we spend our money says more than almost anything else about who we are, how is Facebook and Libra going to make sure that that information stays private, except from the government.

So the government wants Facebook and Libra to keep all that information private from any third parties or any other corporations that might monetize it through advertisements or any other way, but also share all of that information with law enforcement. So there's some tension there and I think that we will have to, if we want Bitcoin to succeed... Well if we want the government to get on board with Bitcoin as it sort of inevitably succeeds, then we're going to have to make that argument, why we should have a system that is less transparent in some ways to government surveillance.

Preston Byrne: I mean, if what Libra is proposing or what Facebook is proposing to do with Libra is true, which is that they're going to have an immutable record of all data, it is absurd to speak of privacy at all. It is absurd to speak of privacy on Bitcoin. So if you have Bitcoin and you use it for illicit purposes, the FBI will find you when you try to cash out on Coinbase, as happened last week with a Silk Road drug dealer earlier this week.

There was a guy who was dealing drugs in the original Silk Road back in 2011. He decided he wanted to cash out on Coinbase, the transaction was intercepted, he was arrested and charged with money laundering and I believe some drug offenses. So Bitcoin's not private.

Imagine how not private it's going to be, when you have a register or a table populated with everybody who uses the system, their names, their addresses, their phone numbers, their social security numbers, EINs if it's a corporation, all of that information is going to need to be in that database in order for any of this to work from a regulatory perspective and it's going to need to track or will track, assuming you can see all the transactions, you're going to be able to track those transactions all the way back to their point of origin, to the point when someone paid Facebook money in order to get Libra issued to that person

So I think it's ridiculous to speak of privacy and Libra in the same breath, it's just not going to happen.

Jake Chervinsky: I agree with you about Libra, I disagree to a point about Bitcoin. I think you've accurately described Bitcoin as it stands in 2019, which is that almost all transactions are conducted on the base layer and therefore are public and I think we all essentially agree that the base layer on Bitcoin must stay public for a lot of technical reasons, completely aside from whether we want privacy in our financial transactions.

Peter McCormack: Primarily, if it has an inflation bug, we want to know if there's 21 million Bitcoin, that's what we want.

Jake Chervinsky: Exactly! Which is impossible in Zcash or Monero and other crypto networks that have privacy at the base layer. However, we are already seeing a lot of privacy technologies built on top of Bitcoin. The Lightning network offers a lot of privacy features that base layer transactions don't. We're seeing solutions like Wasabi, that are using mixers and tumblers, Coin Join things like this to gain privacy.

Peter McCormack: As a business attorney, I'm not sure how I feel about tumblers!

Jake Chervinsky: I hear you.

Peter McCormack: I mean as a Bitcoiner I love them, as somebody sat across from an attorney, I wonder how much life these have.

Jake Chervinsky: I would tell you that it's not as safe as you might think it is and that the government can track coins through multiple Coin Joins more than you might expect and that if you really need to ensure your privacy, Coin Join might not be optimal for you. But I think that as we get past 2019, to 2020 and 2021 and beyond, there will be reliable and trustworthy privacy solutions on Bitcoin that will change this equation and will require us to have this conversation with politicians about whether a system like this is for the greater good or not and that's a tough conversation.

It's one that the Libra hearings did not help with, because David Marcus is trying to sell the Libra system in the opposite way of how we will need to explain the Bitcoin system.

Peter McCormack: So what are the next steps? What do you think is going to happen now? Obviously the Libra team are going to be taking everything in from what's happened in Washington, obviously there are key points, lots of meetings and discussions. But what realistically do you think is going to happen? Do you think they are going to be working around all the different regulators and talking to them or do you think they're going to go and change their plan? How do you think this plays out now?

Preston Byrne: I probably would do all of the above. I think they'll take on board the criticism, whether they change it, is a matter for them. I think Facebook has sufficient, shall we put it, over confidence in its powers, that it's conceivable that they would not adjust the plan in any way, shape or form and would simply proceed as described in the initial white paper. Equally it is possible that they decided that maybe they've done a little bit of overreach and they're going to modify it somewhat and come up with something that's a little more traditional, rather than saying...

I mean it's a huge undertaking to say, "I'm going to have a globally accessible payment system where anyone in the world can be KYC'ed to American standards, so they can transact with American persons at all times, 24/7, 365 days a year, in any country." That's an enormous undertaking. So maybe they'll say, "well, maybe given that we've got this enormous undertaking we've just created, maybe we won't also create this Libra cryptocurrency at the same time."

Good question. I mean they seem to be all in, but they certainly have the ability to remarket and say, "actually we're going to start with something a little more basic, get the system up and running", but then again they might not, it's totally up to them.

Jake Chervinsky: I would say underestimate Facebook at your own risk. This was their opening salvo, they announced Libra and put up a white paper and very quickly had to explain the entire system in a very public way, where they were being challenged and criticized very openly by politicians. The hearings are probably the moment in this process that looks the worst for Facebook, but this work gets done behind closed doors in DC. The work doesn't get done before the hearings, it gets done after.

So I think that we will hear very little about Libra for a while, but there will be a lot of discussions between Facebook and other members of the Libra Association who want to push this forward and regulators and politicians in DC and around the world. We've been of course very focused on the US since that's where we are and that's where Preston and I are lawyers, but there are people in power all over the world who have expressed displeasure at Facebook's plans.

I think Facebook will spend a lot of time and probably a lot of money figuring out how to get some system that provides the functionality that Libra would provide based on the white paper, through whatever regulatory hoops they have to. So I think we'll probably hear about this again in a couple of months, maybe longer, and it'll look a lot better for Facebook then, than it does now.

Peter McCormack: Do you think it will launch?

Jake Chervinsky: I think that something will launch. Facebook, to me, has to find some other kind of business model and they seem to have committed to financial services in one way or another. It's probably the right way to go. There is a lot of money in financial services and if they can get it right, I think that it could yield massive profit for them. So something will launch, but I think it's impossible to predict exactly what it is and even whether it will be called Libra or by that time, it'll be called something else.

Preston Byrne: I agree, something will launch, but there's no guarantee that what they launch will succeed. They are asking ordinary people to prepay for things, which people don't like doing. I don't like prepaying for anything. To prepay for a currency which is volatile, which has no immediate market and in a context where everybody in the world uses different currencies to do things. If they nail this, money's dead. If they nail this completely 100%, money dies and Facebook rules our lives and a thousand years of darkness covers the earth! Woe are we. But anyway, so that's option A and then at the opposite extreme, they come out and they say, "Libra" and people look at that and are like, "well, I want to get this coffee and it's not priced in Libra, it's priced in USD and the merchant's taxes are payable in USD."

Bitcoin has the same problem, to be honest with you. You could talk to a guy like Saifedean and he'll be like, "oh no, Bitcoin's not for coffee, it's the new digital gold standard of money." But ultimately Bitcoin is based on speculation, to a very large degree or rather its popularity is based on speculation and Libra is presumably going to try to make this thing as vanilla as an Amazon gift card, which means it doesn't have that going for it. Potentially it does, maybe there's some trader somewhere.

I'm sure there's a trader somewhere who can figure out how to make money from this thing, but it's not first and foremost aimed at achieving that. So it'll be interesting to see whether people actually take it up, because they don't have much... They'll probably do it through discounts or something within members of the Libra network. But again, that's another separate can of worms from a legal standpoint.

Peter McCormack: Well not many people have raised this point that you've just made there, is will people use this? I mean there is a UX hurdle here in terms of understanding another currency.

Preston Byrne: So that's the thing. Facebook hasn't told anyone why people would use it either and I think that's kind of the secret sauce.

Peter McCormack: Well I think they have in terms of touching on sending money back home, international remittances.

Preston Byrne: People do that anyway.

Peter McCormack: Yeah, but it's like do I pay my 8% with Western union or do I pay 0% with Libra? Is there an on/off ramp in each country and can I do it just as easy as Western union, but pay 8% less? That's the one thing that I think they have pushed and if you go onto the Libra website, you do see lots of pictures of people in kind of developing countries and…

Preston Byrne: It's very cute and cuddly, but I don't think it's realistic.

Peter McCormack: But that is what it's marketed towards. I think that's step one. That's where I think they really know usage is going to be, is international remittance. I think that's only natural. Again, going back to Bill yesterday, he was saying the thing about Western Union is that just despite everything, despite the fees, you trust them. They've got decades of experience. You know you can send money with Western Union and it's going to get to where you want it to get to. If Facebook can create the on/off ramp in each country, then they'll have the trust and that 8% lower cost is worth it.

So I think that use case is proven. I don't think the use case is proven that I'm on Instagram and I see somebody in some swimming shorts and I think I want those, I'm going to use my Libra to pay for it, because if Libra is the only option, they're going to have a lower conversion rate, than they would with all options. If I can use my credit card or I can use PayPal at the same time, I'm more likely just use my credit card because it's in pounds.

Preston Byrne: So Facebook has one advantage over everybody else, which is distribution. But they also have a disadvantage with the plan as currently described and that disadvantage is, they're asking everybody to accept something completely new and different, rather than just use USD. I mean Ripple has done this. I don't like saying nice things about Ripple, but I will. They've done this with a thing called xRapid. This is not anything which is new or special. So with Facebook, they're asking the same question all over again. They have much better distribution than Ripple does, but fundamentally not a lot of people are using Ripple for that use.

Peter McCormack: So Ripple have proved that you can create something that nobody uses?

Preston Byrne: Ripple have proven that you can take a lot of time and energy and effort with vast quantities of money raised on the public crypto markets and you can create something that nobody uses except for speculators. So with Facebook's situation, there's no guarantee and I don't understand the Libra thing, because I see that as the Achilles heel.

Peter McCormack: Well yeah, I mean you can also look at Facebook and Google and say, "how many products have they created to great fanfare that have come to nothing?"

Preston Byrne: Google+!

Peter McCormack: Google Wave, Facebook did their OS didn't they, for the phones. This could be created and it just doesn't take off!

Jake Chervinsky: It's also interesting that you are making the argument for remittances, when that is not the argument that Libra is making. David Marcus says that this is a payment system, but we all recognize the inherent problem with having a payment system, denominated in a currency that nobody else actually uses. We think in US dollars. I'm not going to make a payment in Libra any more than I think I would make a payment in Bitcoin. It's volatile against the currency that, just in my brain, I think through when I'm making payments.

Peter McCormack: Well, the only thing I'd give you there is that I think you guys are at a disadvantage being based in the US, because I think for the rest of the world, I can make payments in pounds, but I'm also happy to do it in dollars, because we always understand that because it is the global currency.

Jake Chervinsky: It's true and we have to convert less and this is probably the kind of thing where if you don't do it growing up, it just doesn't make a lot of sense to you. But the point is, if you need to make a payment that requires less friction across borders, then to me you would use Bitcoin. This is where in my mind the benefits of an open system will always beat the closed permissioned system.

So is it possible that Facebook has set up basically its own entire global infrastructure, where they're going to create the on ramps and off ramps in all of these countries, while also making sure that the people using those on and off ramps are properly KYC'ed. A lot of these countries we're talking about, it's really hard to get the type of government identification and authentication that Facebook would need to have.

Preston Byrne: How do you get proof of address? I spent six months in Rwanda and there were no addresses. There were roads. How do you get approval?! Even in the middle of the city, in the nice diplomatic district, people didn't have addresses. You couldn't send mail to somebody, so how do you deal with that?

Jake Chervinsky: So if you're talking about remittances and you're going to do remittances in a monetary good, that is volatile against your local currency, to me you do it in Bitcoin, you do it in the open permissionless system, not the one that Facebook has created.

Peter McCormack: I think it's going to be a dollar stable coin, I really do.

Preston Byrne: Yeah, I agree. I think at end of the day they're going to knock Libra out because it doesn't... So if Libra becomes a thing, I think this is the thing they haven't said and why they have all these other tech companies involved, is they want to bring people into the ecosystem and they'll probably offer a very steep discount for paying in whatever the underlying unit is. So Uber or Lyft on your phone, Lyft I think has joined the consortium, they go, "hey, tell you what, you can use your Coinbase account to go buy Libra and when you go take your next Lyft ride, it'll be 25% off" and Facebook will do what Uber has been doing for years and someone will subsidize that.

They'll do that to get you hooked into the system, drag people in and maybe they could do that. They say, "listen, we've got two prices here, we've got your US dollar price, and we've got your Libra price for this digital service. So if you pay in Libra, then it will be really super seamless and you get 25% off" and who doesn't want to save money?

Peter McCormack: Yeah and whether or not we agree it's a cryptocurrency or not, one of the advantages of being a cryptocurrency of sorts is the fact that they will maybe get integrated into the other parts of the cryptocurrency ecosystem. So it will sit naturally on Coinbase, it will go onto a Ledger or a Trezor or you will be buying one crypto with another. So you might buy Libra with Bitcoin. I think that's probably the argument for why they've created a cryptocurrency, whether it is or not.

Jake Chervinsky: Possible, it makes some sense. I just think that in the end, everything flows back to whatever is the most secure crypto network and right now that's Bitcoin. You can take the example of Tether. Tether had its own Blockchain, Omni and basically all Tether now have migrated to Ethereum because it's faster and cheaper to use Ethereum than this other Blockchain that Omni was having to run on its own.

So sure, we could end up with a Libra that's its own Blockchain, run by a hundred corporations, each with one node and it could just be a US dollar stable coin or a Euro stable coin or what have you, but why have your own Blockchain? Why not just do it on Bitcoin or on Ethereum, if Ethereum succeeds or some other crypto network that is open and succeeds.

Peter McCormack: Can that just come down to company culture? You look at what... I always basket Square, Cash app and Twitter together just because it's Jack Dorsey, but you look at the culture of that company and the way they create products, the way they have adopted Bitcoin into Cash app, the way they are now looking to even sponsor open source development, culturally, that's where that company is. Culturally where Facebook is, is always been to buy, steal or copy. I never imagined they would ever come out and say, "oh, we're just going to build Bitcoin." Whilst we think they should, that's not culturally where Facebook is.

Jake Chervinsky: Yeah, that sounds right to me. I do think that ultimately it's all about control for them. I respect Jack Dorsey a lot for the fact that he didn't try to create his own cryptocurrency or his own payment system, that he understands the value that he can accrue to Square and maybe someday Twitter by building on Bitcoin. Square Crypto, he launched his own non-profit I think, division of Square, that's just going to contribute to the Bitcoin ecosystem.

To me, I think probably if Facebook thought a little bit harder, they could and should end up more where Square is, realizing that just because you don't control the system doesn't mean you can't monetize the system. You can still get most of the benefits if not more of what they want by building on an open permissionless Blockchain, instead of trying to stand up their own.

Peter McCormack: But I don't think Jack Dorsey would ever want to be the most powerful person in the world, would ever want to be a politician, would ever want to be the richest person in the world, but I couldn't say the same about Mark Zuckerberg.

Jake Chervinsky: So it's the ego of Mark Zuckerberg that leads to Libra that's here...

Peter McCormack: Potentially or the history of control. He originally had the shareholder agreement, remind me it was set up so he could never be out voted, something like that. So he's always retained control. I think he enjoys control, but I mean, I don't want to profile him, I've never met the guy. Rather than profile him, I just want to look at the history of the company, how it's operated previously, it does seem to be about them controlling everything and they can't control Bitcoin.

Jake Chervinsky: Yeah, that's fair.

Preston Byrne: I mean all these companies are in a sort of struggle to the death with one another for the best data and the best advertising targeting.

Peter McCormack: I think not so much anymore. So interestingly, I've started to look at Facebook and Twitter as the classic hare and the tortoise race. Facebook grew really quickly, they turned up the ad dial, so much where we got to the point where you go into Facebook and all you would see were ads or certain content that will keep you on the platform, like addictive content that will keep you on the platform, so they could distribute more ads. That became a very profitable strategy, but the novelty wore out. Whereas you look at something like Twitter, you don't see that many ads. They could allow for more, but they focus very much on the user experience and actually,

Preston Byrne: And as a result, they did that absolutely baleful horrendous UI change last week!

Peter McCormack: I like it!

Preston Byrne: It makes it unusable!

Jake Chervinsky: Well, I have to admit that I deleted my Facebook account maybe eight years ago and I haven't regretted it ever since. So I don't know anything about what it looks like now.

Peter McCormack: So I distribute content there, that's the only reason I've not got rid of it and occasionally I put stuff up for my dad, like of the kids, but the experience itself was killed. The novelty wore off, it used to be fun and now it wasn't. Let's go back a week, imagine the update hasn't happened so we don't have to debate that now, but Twitter is very much focused on user experience.

Preston Byrne: They still have their own problems though. Their monthly active users are off. So now they've stopped reporting them. They've kind of created their own measure for how they define a monthly active user and they stopped reporting it, I think on a monthly basis. So yeah, all of the big platforms are having problems and that their markets are saturated. So it's interesting. What are they doing as a consequence?

This is a classic disruption cycle, where they're starting to target high value, high profit, high margin users, and they're ignoring the fact that what put them where they are, are stupid memes of cats and people yelling at each other in a sort of unruly way. So I think that what we're seeing is sort of... Is it peak Facebook? I don't know. But what we are seeing is these companies changing their positioning, which I think leaves them vulnerable to new challengers, which eventually will happen, as no company lasts forever.

Peter McCormack: Do you think it's also that we're all becoming a little bit more self-aware of how much content we're consuming and the impact on us? I can get up in the morning, especially when I'm traveling, because most of my contacts are in the UK, so I'll wake up, I've got WhatsApp messages, I've got Signal messages, I've got Telegram messages, I've got emails, I've got Tweets, I've got Facebook updates, it's relentless just going through them all in the morning, just like, "fuck, how do you get through all this shit!"

Jake Chervinsky: Yeah, that's right. I mean Twitter is as much as I can keep up with. I think a lot of people use Facebook for different reasons that just don't speak to me. So I don't have kids so I'm not putting up pictures for anyone to look at, I'm not terribly interested in looking at pictures of other people's kids, no offense! I don't want to get my news from Facebook, I have other sources where I get my news. So to me it's just not an attractive platform. Similarly, Instagram, I think Instagram is fantastic, but I don't personally use it, just because communicating through pictures just isn't how I operate. I'm a lawyer, I like to write, so Twitter for me is all the social media that I need.

Preston Byrne: I personally paint all of my opinions in watercolor.

Jake Chervinsky: I'm not surprised!

Preston Byrne: And then I delivery them to the client by way of interpretive dance!

Peter McCormack: Do you know what, just slightly off topic because it was in my mind, have either of you listened to the podcast "Reply all"?

Preston Byrne: No.

Jake Chervinsky: I listened to only the episode about Paul Le Roux, the new contender for Satoshi Nakamoto, it's the only episode I've heard.

Peter McCormack: Well, we're not going to get into that subject, but I listened to my first one the other day because somebody recommended it to me and there's an Instagram for doctors. The Instagram for doctors is pictures of every kind of injury. It could be somebody who's come in and had their leg eaten by a rat or have their face shot off. So yeah, I don't know where I'm going with this!

Jake Chervinsky: I mean that's grim, but also look, it's phenomenal. Doctors have access to more information than they've had ever before, so that's wonderful.

Preston Byrne: We have Westlaw, that's kind of like Instagram for lawyers.

Peter McCormack: Westlaw?

Preston Byrne: Yeah, so you look up a template... I love doing that, just scrolling through the templates and seeing what's up! You can then go and say, "oh, well this is a really interesting deed! Oh wow, look at that."

Jake Chervinsky: We don't actually do that.

Peter McCormack: So you motherfuckers charge us thousands and you're just copying and pasting templates?

Preston Byrne: Well it takes time to copy and paste the template and to adapt it to your specific needs.

Peter McCormack: Fucking lawyers! All right, well look, I guess it's a case of seeing how this all plays out. We don't really know what's going to happen next, we've got our expectations. I think it will become a stable coin, you've got your own perspectives. I guess we're just going to wait and see and get together and talk about it when the next round happens.

Jake Chervinsky: Awesome!

Peter McCormack: All right guys, thanks for coming on guys.

Jake Chervinsky: Thanks for having us!

Peter McCormack: Do you want to promote what you're doing or not? How to get hold of you?

Jake Chervinsky: Yeah, sure. So I recently took a new position as General Counsel at an open finance company called Compound. You can find me on Twitter, feel free to send me a DM, my DMs are open. I'm happy to hear from anyone.

Preston Byrne: I'm Preston Byrne, I'm a lawyer and I work for myself in a small office next to a dog park.

Peter McCormack: If you want some "legalling", get in touch with Preston Byrne and he will legal you and he'll get some templates copied! Thanks guys.

Jake Chervinsky: Alright, thank you!

Preston Byrne: Thank you!