Facebook’s Diem stablecoin won’t allow leverage, unhosted wallets

Facebook’s Diem stablecoin won’t allow leverage, unhosted wallets

To protect consumers, not only will the Diem (formerly Libra) stablecoin have at least one-to-one reserve backing, but it won’t allow the digital currency to be fractionalized or leveraged elsewhere. Christian Catalini, Chief Economist at the Diem Association, explained how during an OMFIF webinar.

OMFIF is a central bank think tank, and given the audience, Catalini was positioning Diem as a highly regulated and conservative stablecoin compared to the others currently available.

“There’s a tremendous amount of innovation happening in spaces like DeFi decentralized finance, but when you think about payments, it’s especially important to think about what kind of risk does leverage in the system through all sorts of very complex smart contracts and financial assets introduce into a payments network,” said Catalini.

The Association will require any Value Added Service Provider (VASP) or wallet provider to ensure its liabilities are also backed one to one by stablecoins.

When you think about DeFi today and the free movement of tokens, it seems tricky to keep tabs on the assets. However, Catalini explained that there would be no unhosted wallets. Hence the control comes back to the VASPs. The wallet requirement is primarily to address potential financial crime, but the side effect is it will help prevent leverage.

Diem dollarization risk

One of the questions addressed to Catalini was about how Diem will deal with the potential impact on the sovereignty of national currencies, so-called dollarization. There is a two-pronged approach. If there is only a Diem dollar then some will use it out of convenience. So the first solution is to roll out digital versions of the local currency.

But the dollar might be attractive if viewed as more stable than the local currency. Here the hosted wallet restriction helps again. Because Diem will only work with locally regulated VASPs, currency controls can be imposed. For example, if someone receives a remittance from abroad, they may be required to convert it into local currency.

Keen for lift off

Catalini was certainly making a pitch for Diem to get a regulatory green light. He spoke about the opportunity costs to consumers of not having innovations, especially during times like COVID-19 when digital solutions are beneficial. And he was keen to encourage competition.

“Our view is that the public sector would probably be best served by essentially betting on multiple networks and encouraging multiple networks to emerge and compete with each other,” he said.

“In essence, that retains optionality in a phase that’s like the early days of the internet. There’s no such thing as a dominant design or a way to solve the problem of payments and financial services on digital assets.” Some would say that’s not entirely true. The primary ingredient of any successful payment system is a network effect. And there’s no bigger network than Facebook, which is precisely the issue that’s scared the living daylights out of central bankers.

Catalini continued, “And there’s a very big risk of picking winners or even trying to deploy a public sector solution that is one that’s going to be used for multiple decades.”

Rice-based stable coin is being launched in Indonesia

Bloomberg

(Bloomberg) – Stefan Qin was just 19 when he claimed to have the secret to cryptocurrency trading.Buoyed with youthful confidence, Qin, a self-proclaimed math prodigy from Australia, dropped out of college in 2016 to start a hedge fund in New York he called Virgil Capital. He told potential clients he had developed an algorithm called Tenjin to monitor cryptocurrency exchanges around the world to seize on price fluctuations. A little more than a year after it started, he bragged the fund had returned 500%, a claim that produced a flurry of new money from investors.He became so flush with cash, Qin signed a lease in September 2019 for a $23,000-a-month apartment in 50 West, a 64-story luxury condo building in the financial district with expansive views of lower Manhattan as well as a pool, sauna, steam room, hot tub and golf simulator.In reality, federal prosecutors said, the operation was a lie, essentially a Ponzi scheme that stole about $90 million from more than 100 investors to help pay for Qin’s lavish lifestyle and personal investments in such high-risk bets as initial coin offerings. At one point, facing client demands for their money, he variously blamed “poor cash flow management” and “loan sharks in China” for his troubles. Last week, Qin, now 24 and expressing remorse, pleaded guilty in federal court in Manhattan to a single count of securities fraud.“I knew that what I was doing was wrong and illegal,” he told U.S. District Judge Valerie E. Caproni, who could sentence him to more than 15 years in prison. “I deeply regret my actions and will spend the rest of my life atoning for what I did. I am profoundly sorry for the harm my selfish behavior has caused to my investors who trusted in me, my employees and my family.”Eager InvestorsThe case echoes similar cryptocurrency frauds, such as that of BitConnect, promising people double-and triple-digit returns and costing investors billions. Ponzi schemes like that show how investors eager to cash in on a hot market can easily be led astray by promises of large returns. Canadian exchange QuadrigaCX collapsed in 2019 as a result of fraud, causing at least $125 million in losses for 76,000 investors.While regulatory oversight of the cryptocurrency industry is tightening, the sector is littered with inexperienced participants. A number of the 800 or so crypto funds worldwide are run by people with no knowledge of Wall Street or finance, including some college students and recent graduates who launched funds a few years ago.Qin’s path started in college, too. He had been a math whiz who planned on becoming a physicist, he told a website, DigFin, in a profile published in December, just a week before regulators closed in on him. He described himself on his LinkedIn page as a “quant with a deep interest and understanding in blockchain technology.”In 2016, he won acceptance into a program for high-potential entrepreneurs at the University of New South Wales in Sydney with a proposal to use blockchain technology to speed up foreign exchange transactions. He also attended the Minerva Schools, a mostly online college based in San Francisco, from August 2016 through December 2017, the school confirmed.Crypto BugHe got the crypto bug after an internship with a firm in China, he told DigFin. His task had been to build a platform between two venues, one in China and the other in the U.S., to allow the firm to arbitrage cryptocurrencies.Convinced he had happened upon a business, Qin moved to New York to found Virgil Capital. His strategy, he told investors, would be to exploit the tendency of cryptocurrencies to trade at different prices at various exchanges. He would be “market-neutral,” meaning that the firm’s funds wouldn’t be exposed to price movements.And unlike other hedge funds, he told DigFin, Virgil wouldn’t charge management fees, taking only fees based on the firm’s performance. “We never try to make easy money,” Qin said.By his telling, Virgil got off to a fast start, claiming 500% returns in 2017, which brought in more investors eager to participate. A marketing brochure boasted of 10% monthly returns – or 2,811% over a three-year period ending in August 2019, legal filings show.His assets got an extra jolt after the Wall Street Journal profiled him in a February 2018 story that touted his skill at arbitraging cryptocurrency. Virgil “experienced substantial growth as new investors flocked to the fund,” prosecutors said.Missing AssetsThe first cracks appeared last summer. Some investors were becoming “increasingly upset” about missing assets and incomplete transfers, the former head of investor relations, Melissa Fox Murphy, said in a court declaration. (She left the firm in December.) The complaints grew.“It is now MID DECEMBER and my MILLION DOLLARS IS NOWHERE TO BE SEEN,” wrote one investor, whose name was blacked out in court documents. “It’s a disgrace the way you guys are treating one of your earliest and largest investors.”Around the same time, nine investors with $3.5 million in funds asked for redemptions from the firm’s flagship Virgil Sigma Fund LP, according to prosecutors. But there was no money to transfer. Qin had drained the Sigma Fund of its assets. The fund’s balances were fabricated.Instead of trading at 39 exchanges around the world, as he had claimed, Qin spent investor money on personal expenses and to invest in other undisclosed high-risk investments, including initial coin offerings, prosecutors said.So Qin tried to stall. He convinced investors instead to transfer their interests into his VQR Multistrategy Fund, another cryptocurrency fund he started in February 2020 that used a variety of trading strategies – and still had assets.‘Loan Sharks’He also sought to withdraw $1.7 million from the VQR fund, but that aroused suspicions from the head trader, Antonio Hallak. In a phone call Hallak recorded in December, Qin said he needed the money to repay “loan sharks in China” that he had borrowed from to start his business, according to court filings in a lawsuit filed by the Securities and Exchange Commission. He said the loan sharks “might do anything to collect on the debt” and that he had a “liquidity issue” that prevented him from repaying them.“I just had such poor cash flow management to be honest with you,” Qin told Hallak. “I don’t have money right now dude. It’s so sad.”When the trader balked at the withdrawal, Qin attempted to take over the reins of VQR’s accounts. But by now the SEC was involved. It got cryptocurrency exchanges to put a hold on VQR’s remaining assets and, a week later, filed suit.Asset RecoveryBy the end, Qin had drained virtually all of the money that was in the Sigma Fund. A court-appointed receiver who is overseeing the fund is looking to recover assets for investors, said Nicholas Biase, a spokesman for Manhattan U.S. Attorney Audrey Strauss. About $24 million in assets in the VQR fund was frozen and should be available to disperse, he said.“Stefan He Qin drained almost all of the assets from the $90 million cryptocurrency fund he owned, stealing investors’ money, spending it on indulgences and speculative personal investments, and lying to investors about the performance of the fund and what he had done with their money,” Strauss said in a statement.In South Korea when he learned of the probe, Qin agreed to fly back to the U.S., prosecutors said. He surrendered to authorities on Feb. 4, pleaded guilty the same day before Caproni, and was freed on a $50,000 bond pending his sentencing, scheduled for May 20. While the maximum statutory penalty calls for 20 years in prison, as part of a plea deal, prosecutors agreed that he should get 151 to 188 months behind bars under federal sentencing guidelines and a fine of up to $350,000.That fate is a far cry from the career his parents had envisioned for him – a physicist, he had told DigFin. “They weren’t too happy when I told them I had quit uni to do this crypto thing. Who knows, maybe someday I’ll complete my degree. But what I really want to do is trade crypto.”The case is U.S. v Qin, 21-cr-75, U.S. District Court, Southern District of New York (Manhattan)(Updates with comment from prosecutor and case caption)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2021 Bloomberg L.P.

How Mastercard’s crypto strategy is distinct from its new stablecoin plans

The crypto space lit up late Wednesday when news broke that Mastercard was expanding the scope of its digital currency support.

Mastercard said in a blog post that it was moving to enable its systems to facilitate payments in the form of stablecoins directly to merchants who choose to accept them. Such a service will complement Mastercard’s existing crypto card-focused offerings, through which consumers can spend their cryptocurrencies via an issuer’s card – though in the end, the transaction is settled outside of Mastercard and in the form of fiat currency like the U.S. dollar.

The payments firm’s chief financial officer, Sachin Mehra, discussed the expanded offerings during a virtual event hosted by Goldman Sachs on Wednesday, according to a published transcript obtained by The Block. But more broadly – and, perhaps, more importantly – Mehra provided a clear-cut break down of how Mastercard views what he termed “sub-categories” of digital currencies: cryptocurrencies, fiat-backed stablecoins and central bank digital currencies, or CBDCs.

Mehra called crypto “an asset class,” adding: “It’s not a payment vehicle as far as we’re concerned.” He spoke about Mastercard’s crypto card program and indicated that such efforts would continue and grow over time. “We’re seeing tremendous growth in that space,” said Mehra, saying later:

“So that’s kind of – and we’ve got numerous agreements in that regard, which are already in play. And we’ll continue to do more and more of those because people want to be able to use that asset class to make payments at the point of sale.”

On the subject of stablecoins, Mehra noted that “we have plans to enable those, regulation pending, across our network.”

Mehra continued:

“So in other words, the delivery of those stablecoins and to allow the settlement of those stablecoins with those merchants who wish to be settling in those stablecoins on a forward-going basis. So we are enabling our network to allow for that to happen yet this year.”

Lastly, Mehra discussed Mastercard’s work in the area of CBDCs, which is perhaps a bit more theoretical given that such currencies remain in their nascent stage. Yet payments firms big and small appear to be positioning themselves as possible service providers should they take off – PayPal being one of those, according to statements from the firm’s leadership – and it seems that Mastercard is no exception.

“We can bring the technology,” said Mehra. “We have – we’re the leader – one of the leaders in terms of the patents we have developed in terms of DLT. And how we can help [central banks] at the infrastructure level and/or the application and services level is something we remain engaged with on numerous [fronts] with several central banks.”

Mehra concluded his remarks by calling the broader crypto sphere “a space to keep an eye on.”

“I think it will ebb and flow depending on what the flavor of the day is as it relates to cryptos. We’ve seen run-ups in crypto prices in the past. But broadly speaking, the use of digital ledger technology is something we will remain focused on.”

One potential conclusion from Mehra’s comments is that whereas Mastercard is interested in capturing value around the interest in cryptocurrencies, the payments firm views stablecoins as worth the investments required to integrate them into its systems. And as for CBDCs, those remain on the horizon – albeit one that might one day constitute an entirely new business line.