Facebook’s Entry Into Crypto is Bad News For Decentralization

Josh Lawler
Photo by Sean Pollock on Unsplash

(Not investment advice or legal advice)

From the depths of crypto-winter, forged by the Securities and Exchange Commission, enters the enterpization of distributed ledger technology. In 2019, at Blockchain conferences from New York City to Amsterdam, the number of developmental projects exhibiting is dwindling and corporate-enterprise salespersons are multiplying like tribbles.[1] They have names like IBM, Lenovo, and Accenture. Of course, Facebook Libra is the talk of the town.

The smaller exhibitors are almost all exchanges, wallets, and service providers. A few of them include issuing tokens as part of their business, but not as the primary part.

What we stand to lose

This is a real bummer. Adoption and operation of decentralized systems provides a chance at something new for this world; a reason for us all to get along. I’m not naïve enough to suggest that Bitcoin equals world peace. I will say that cryptocurrency[2] and publicly-available, decentralized ledgers foster an unprecedented level of collaboration across individual population demographics.[3] Never before has there been complete open access to uniform business information (a public ledger). Everyone involved is sharing. In a world of abundant resources, we share. Take away the open access (for instance, by restricting information to a ledger open only to select viewers (say a consortium) and we have the world of scarce resources. Scarce resources are a primary motivation for almost all conflict.

How we are going to lose it

Photo by Markus Spiske on Unsplash

Unfortunately, until everyone gets on the world- of-abundance bandwagon, there are all kinds of reasons that we need centralized features in our decentralized applications. KYC/AML[4] is important. Preservation of orderly markets in respect of investments and prevention of fraud is also important. Government regulation is necessary. Unfortunately, government regulation is imperfect and expensive. Virtually all decentralized projects are underfunded and unable to move quickly enough for established big business. In the face of regulatory uncertainty and unpredictable, developmental progress, large enterprises will turn to the established players (IBM, JP Morgan, Accenture, etc.) to build controlled systems.

The enterprise adoption of centralized systems likely takes a big bite out of the viability of many decentralized project applications. Most decentralized projects rely on supply and demand economics, a finite supply of tokens, and a growing demand for token utility. An enterprise that invests in its own permissioned system is much less likely to use a redundant permissionless system.[5] That’s one less enterprise user generating demand for a decentralized project’s tokens.[6] An in-mass adoption of centralized applications threatens the survival of similar decentralized projects.[7] In short, that means no traction to operate and no real chance of adoption. No sharing of an open blockchain, no net increase of global warm and fuzzy feelings.

What we can do about it — Decentralization finds its niche

Photo by Hasan Almasi on Unsplash

Don’t fight the power. There are certain business verticals where the big business legacy players will probably not be unseated. For instance, as much as I love the idea of eliminating unnecessary bank fees and broker-dealer commissions, I don’t see the financial community being left behind. Regulation is on their side, they have almost unfathomable capital to apply and they can obtain the best available strategy, advice, and execution. I expect they will hold the industry and use the new efficiency of permissioned blockchains to enhance their profit margins.

Fill the void. There are verticals that big business does not do well. For instance, the distribution of royalties to content creators has never been efficient and is not a place where big business wants to focus.[8] Likewise, worthwhile projects that can’t make a traditional profit (like construction of lower-income housing) can pencil out if financed by way of tokens that appreciate in value based on use rather than sales.[9] Identity is another such use case. Then, there is currency.

Currency is special. Big business is not the competition — government is. In some ways, the government has a conflict of interest. Government by economics is far more effective than government by force or any other means. At the same time, I can’t see a practical way (at least in the Western World) in which government can prevent people from bartering (which is effectively what happens when people agree that something other than fiat currency has a sufficiently stable value).

There was one project in Amsterdam that bucked the trend towards enterprise — Ravencoin.[10] Funded independently and having raised no money through a token sale, it is not concerned about whether their tokens are considered securities.[11] The project is more or less an online marketplace with a native token running via a bitcoin cloned proof-of-work algorithm. Simple. No traditional profit motive, but their tokens are certainly rising in value. The project has a striking amount of international community participation. Hope for us yet?


[1] Star Trek reference to small furry creatures that multiply exponentially. It’s a 70’s thing.

[2] Possibly music in extreme cases, but I don’t believe it is truly global and the artists that achieve that level of popularity are rare and don’t remain that popular for very long.

[3] To be sure, we have the United Nations, untold collaborations in respect of the fight against disease and many non-profit aid organizations, but none of these operate on the individual common person level.

[4] Know your customer/anti-money laundering.

[5] A single enterprise would not automatically gain the benefits of distributed ledger technology, however, many permissioned chain applications are coordinated by consortia of industry players. They still get some benefit in having an open ledger for the members of the consortia, and they also have tighter control over the project.

[6] Not investment advice, but one way to judge a decentralized project might be to ask whether the use case requires enterprise adoption. If so, think twice.

[7] Without the potential for increased token value, (i) there would not be as much token liquidity and (ii) attracting operators of the validation nodes and other entities required to support a decentralized blockchain would be virtually impossible.

[8] Quite the opposite; movie studio accounting to generate losses and avoid royalty payments is legendary.

[9] This model addresses use cases for which you might ordinarily use a government subsidy or charitable donation. Imagine financing creation of power and water infrastructure in developing countries by way of consumptive use tokens.

[10] While I don’t endorse projects, I am very impressed with Ravencoin. They deserve the attention they are receiving.

[11] Participating as a node or validator in the Ravencoin blockchain is the only way to receive a newly minted Ravencoin. There is no selling issuer.

Josh Lawler, a partner at Zuber Lawler, is an experienced attorney with concentrations in M&A, finance, intellectual property, and general commercial transactions.

Josh Lawler

Written by

Josh Lawler is a partner at Zuber Lawler whose practice focuses on mergers & acquisitions, securities law and technology transactions.

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