Basis - A Central Bank that's not a Bank, nor in Banking - Confused?

Bitcoin and Ethereum rising overnight to $8,245 and $534 respectively and most of the top altcoins looking positive with the notable exception of Verge which, at the time of writing, appears to be bouncing after an epic drop on the announcement of its partnership with PornHub as reported yesterday.

Yesterday saw the announcement of what (at this point) I can only describe as the most desperate attempt yet by the “old-money world” to bamboozle the masses with financial mumbo-jumbo in a bid to create a cryptocurrency that can be shoe-horned into their existing ideals under which the current financial system runs.

Before the rant begins on the potential issues with what I am about to explain, this is a case where I sincerely hope I am wrong about my understanding of this particular announcement and, if anyone can concisely explain how, where and why I am wrong I am interested to hear about it.

The announcement concerns – formerly known as Basecoin – and is making headlines after raising $133 million USD through a private placement (essentially the equivalent of a closed ICO presale for institutions only). Contributors include top names from the institutional banking world such as billionaire Stanley Druckenmiller, Andreessen Horowitz and GV (venture capital arm of Alphabet/Google) and even a former Federal Reserve chairman contender Kevin Warsh.

Running with the headlineIntroducing Basis, a Stable Cryptocurrency with an Algorithmic Central Bank*” (note the asterisk which we'll get to shortly) the intention of Basis is to create a cryptocurrency where the supply is controlled using an algorithm as opposed to being of finite supply (like Bitcoin). The idea being in theory to eliminate volatility by dynamically controlling the supply based on exchange rate – similar to how “pegging” works when currencies are fixed to a dollar value. The reasoning being that with a finite supply of currency if demand increases sharply – the value rises also – hence volatility occurs. Having what they term as an “elastic supply” that can be adjusted up or down to counteract rise or fall in demand – the volatility is removed.

Now whilst this might not sound such a bad idea at first, the underlying issues this idea is basically disguising what we currently know in the traditional financial world as “quantitative easing” or “helicopter money”.

Wind the clock back a few years to the creation of Bitcoin in the first place – one of the key premises in the first place was to create a controlled, finite monetary system that could not be adjusted or manipulated by anyone – including central banks, governments and so on.

Granted, Bitcoin is currently not and unlikely to ever become a global single currency anytime soon due to the inability to process a sufficiently high volume of transactions at speed – however there are solutions for that in the pipeline, and let’s not forget that Bitcoin is divisible – one Satoshi = one hundred millionth of a Bitcoin – theoretically if the transaction processing issues were solved (perfectly possible when quantum computing rolls out) Bitcoin or a derivative of it could be perfectly serviceable for the job.

The concept of controlling supply algorithmically initially sounds positive, yet when you consider the current state of FIAT in general – it’s no longer backed by gold for a start. After the decoupling of many financial mechanisms in the ‘80s under the Regan/Thatcher administrations that previously forced banks and mortgage providers to underwrite their own lending books, ultimately leading to the financial crisis in 2008 due to irresponsible mortgage lending, leading to the collapse of many significant financial institutions.

This past activity has proved very clearly the institutional world of banking had lost control and didn’t know what they were doing – their solution? Just print some more cash!

The asterisk in the headline of the announcement is clarified in a footnote on the article as “*Basis is not a bank or engaged in banking business” which raises the following questions:

  • If you’re not a bank or engaged in banking business, what are you actually doing?
  • Is the statement a regulatory issue and an attempt to absolve yourselves of responsibility if it all goes wrong?
  • What is the point of taking a system that has already proved unreliable and fallible and essentially apply the same unreliable and fallible points to a system that doesn’t need them?

Basis go on to elaborate on several previous attempts to create stable cryptocurrencies and labours the points where they have failed – no issues with that, remember we are still very much in the early days of crypto when the bigger picture is taken into account. Stevenson’s Rocket didn’t immediately spawn the bullet train or maglev technology the day after it was wheeled out – the concept needed to adopt, adapt and evolve. The same applies to a truly decentralized financial system.

Reading the basis whitepaper there is no mention yet of any ICO and contains significant use of terms such a “believe” and “think” – not terms that inspire confidence when someone is proposing a new global monetary system. Personally I am more interested in what you know - anyone can believe or think what they like – reality and facts are what’s needed.

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Created: Thursday, April 19, 2018

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