Month: April 2021

This blog post makes a detailed and extraordinarily bearish argument against cryptocurrency:

He covers
~ The energy footprint of cryptocurrency
~ The purely speculative nature of cryptocurrency investments, calling it a ‘financial betting game’
~ As a result of this, the propensity of financially vulnerable people to invest in the hopes of a windfall, not unlike a lottery
~ Its increasing use as the currency in which ransom must be paid for hacks and other digital infrastructure attacks.
~ Related to this, its use in manipulating public funding of elections and, overseas, in evading sanctions

The writer makes the argument that in light of this, the US and its regulatory bodies should invest instead in upgrading their existing digital payments system, reducing the widespread use of cheques and cash.

Most interestingly for me, he understands the choke points of access to crypto: the points where fiat currency like USD is converted to cryptocurrency and back. It is these choke points that he suggests regulating closely.

There are counterarguments that have been made already to each of ̉his points, some strong, some not. Regardless, the post remains a strong, cogently argued bear case for crypto combined with a call for financial system digitisation.

Yesterday came news that the world’s largest custodian bank, Bank of New York Mellon Corp (BNY Mellon), had invested in the cryptocurrency custody company Fireblocks. That investment of USD 133 million, which other funds also participated in, nearly makes Fireblocks a unicorn.

BNY Mellon invests in cryptocurrency storage firm Fireblocks

Bank of New York Mellon Corp has invested in Fireblocks, a platform that allows banks and other financial institutes to store, move and issue …

Cryptocurrency custody is a whole sub-industry by itself.

Just like with an individual, when a company/institution buys cryptocurrency, it is responsible for storing it.

When you lose access to your crypto wallet – either because your wallet was hacked or because you lost your access key, there’s no central authority you can turn to, as we saw in a previous post on this channel:

As institutions hold large amounts of cryptocurrency, several players have gotten into the business of safekeeping and third-party access. Fireblocks is one of them. Other crypto players are also in the custody business, such as Coinbase and Gemini, both major exchanges.

Then there are specialist custody players: Anchorage, BitGo, Komainu, and, of course, Fireblocks. PayPal, whose bet on crypto we’ve seen a few times, also got into the space recently via the acquisition of the firm Curv.

Finally, traditional financial industry institutions also offer custody services, though these are few.

• Fidelity Asset Management was a major early entrant. It is now using its custody expertise to extend loans backed by bitcoin collateral.
• BNY Mellon, which we saw earlier on, is another entrant.
• Now Deutsche Bank, among the world’s largest financial institutions, announced plans for “a fully integrated custody platform for institutional clients” in a December report
• And Kingdom Trust, a regulated custodian of traditional assets like commodities, real estate and other alternative investments, also got into digital asset custody in a big way.

(ends)

I got a few questions yesterday about the nature of Paypal’s crypto checkout feature we saw yesterday.

One question was how Paypal planned to perform the crypto to dollar/other currency conversion for every single purchase. It’s a legitimate question. Bitcoin transaction fees are notoriously high. See this article from Feb this year:

A Guide to Saving on Bitcoin’s High Transaction Fees – CoinDesk

There are ways to cut down on high bitcoin transaction fees if you’re patient enough and know some of the right tools to use.

Since “the average bitcoin transaction fee has fluctuated between $24 and $31”, how could Paypal possibly do this economically? The answer lies in what your PayPal crypto holdings actually are:

Paypal’s crypto wallet is super-closed. In effect, you don’t hold actual crypto in your wallets – not in the way you would with blockchain.com (which we read about last week) or other wallets – you don’t own the private key (you don’t see your public key), and you can’t sweep it into a 3rd party wallet whose private key you do own.

When you buy say USD 1000 of bitcoin, it’s like Paypal gives you credit towards the number of bitcoins that USD 1000 would buy on that day. The value rises and falls according to the price of bitcoin.

If you sell it (back to Paypal; you can’t withdraw to another wallet at the moment), you’ll sell in USD. If you use it to buy things, your balance is debited for the corresponding amount of crypto and Paypal’s own balance is updated.

It’s all within Paypal’s books.

From their own terms and conditions:

PayPal Cryptocurrency Terms and Conditions – PayPal US

PayPal Cryptocurrency Terms and Conditions

You will not hold the digital Crypto Assets themselves in your Crypto Asset balance. All custody of and trading in Crypto Assets is performed for us by our licensed service provider, Paxos Trust Company, LLC (“Paxos”), or other appropriately licensed provider of trading and/or custody services that we identify from time to time..

And as for the limitations we discussed? This is also as clear as can be:

You currently are NOT able to send Crypto Assets to family or friends, or withdraw Crypto Assets from your Cryptocurrencies Hub to an external cryptocurrency wallet. You also CANNOT use Crypto Assets directly as currency to pay for goods or services. If you want to withdraw the value from your Cryptocurrencies Hub you will need to sell your Crypto Assets and withdraw the cash proceeds from their sale…

So, in conclusion, you hold a claim to bitcoin and other crypto within Paypal’s closed ecosystem. A friend described it as proxy crypto, which is not wrong.

In balance, I think personally that the benefits of bringing crypto to a large number of people outweigh the way in which Paypal has gone about this.

But there should be a time when people are educated about how cryptocurrency actually works, and what true ownership actually means.