What if Cryptos Succeed Only After the US has Locked Itself Out?

What if Cryptos Succeed Only After the US has Locked Itself Out?

Recent developments in cryptocurrency have brought new currencies and more uncertainty about them and some of the underlying investments in this brave new world.

Anthony Pompliano, a founder and partner at Morgan Creek Digital, tackles these issues and more relating to the cryptocurrency universe in his blog, Off the Chain.

On Oct. 8, two Senators wrote to the CEOs of the credit card giants, Mastercard and Visa, as well as to the CEO of a prominent payment processing company, Stripe, to “share [their] deep concerns” about cryptocurrencies, and especially about Facebook’s recent venture into that terrain with its Libra.

What the Senators Said

The Senators, Brian Schatz (D – Hi) and Sherrod Brown (D – Ohio) said that the three companies might face serious legal jeopardy arising from their participation in the program. From less august and impeachable persons, the letter might even have been considered threatening. Schatz and Brown write that Facebook has not provided “a clear plan for how it will prevent Libra from facilitating criminal and terrorist financing” and other very bad things, and they caution that their companies would be in the line of fire, since “Facebook deflects the responsibility of addressing these risks onto potential Libra Association members, such as your companies…any weaknesses in Facebook’s risk management systems will become weaknesses in your systems that you may not be able to effectively mitigate.”

The letter, received by Patrick Collison for Stripe, Ajaypal Singh Banga for Mastercard, and Alfred F. Kelly Jr. for Visa, had the desired effect. All three companies had backed off of participation in the Libra Association before its first planned meeting on Oct. 14.

Even without having received such a direct communication, eBay, Mercado Page, and PayPal have also dropped out of the Libra Association.

What it Might Mean for US businesses and equities

Pressures of the sort represented by the letter might keep all US-based companies out of that association, yet without derailing Facebook’s plans. The globe is a big place with a lot of running-room for a new currency without the approval of Senators Schatz and Brown. What such pressure might mean, though, is that no American companies would benefit were Libra to prove successful.

In this connection, one should keep in mind a widely shared premise, one expressed clearly for example by the Dutch Central Bank, that there will be changes away from nation-state fiat currencies in the coming years (not decades—years will be quite sufficient to mark the changes). Such a transformation may come about the hard way, if the existing system where every currency in principal “floats” against every other, should experience a marked breakdown.  Or it may come about the easier (though not easy) way, through the gradual adoption of an alternative, as for example by the success of Bitcoin, or Libra.

At any rate, if a new system proves successful, it will be a great hit to companies based in the United States if the policy makers in the US have written that country out of the picture through legislative or regulatory pressure. Any asset manager investing on a global scale should take note of that possibility.

The Nature of the Hostility

We should take note here, too, that what bothers Schatz and Brown about Libra isn’t unique to Libra. It is not merely the fact that a corporation the size of Facebook is getting behind the movement toward cryptocurrencies. The hostility is toward that movement as a whole. As Pompliano puts it, “regulators and lawmakers almost always cite concerns with anti-money laundering, KYC, or other preventative regulations when talking about digital currencies.”

The truth, though, he continues, is that the “legacy system” involving the state-issued money “is not nearly as effective as these regulators and lawmakers want to believe,”—or as they want the rest of us to believe.

Another line of thought

Although Schatz and Brown want to scare service providers away from the crypto market in the US, there are some legislators who take the opposite view: “We can’t beat them with the US dollar: so we should join them.” There are proposals that would “tokenize” the dollar, by creating a government-sanctioned blockchain protocol for a digital currency backed by the Federal Reserve. The idea would be to preserve the central role of the US dollar in the world by broadening what the word “dollar” means.

Advocates of tokenization include Rep. Warren Davidson (R – Ohio) and Rep. French Hill (R – Ark.). What effect might they have upon the investable quality of such assets involved, should they prevail? That is difficult to say. Hedge fund rocket scientists might want to get to work on it, though.

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