The reaction to Facebook’s announcement that it will launch its new Libra digital currency late in 2020 has been swift and slightly schizophrenic. Depending on what you read or hear, Libra is one or all of:
- a great act of enterprise social good that will change the lives of millions of people for the better;
- a nightmare for American and European regulators;
- a desperate attempt to rehabilitate the reputation and declining readership of Facebook and its increasingly unpopular CEO, Mark Zuckerberg; or
- a pipedream based on a shaky premise and a yet-to-be-built infrastructure that probably won’t be built.
According to its White Paper, Libra will allow users send money to almost anyone with a smartphone, as easily as a text message and at “low to no cost,” using Messenger, WhatsApp or a yet to be launched dedicated app. Libra’s co-creator and former PayPal CEO David Marcus said that it will comprise three components: a blockchain, a reserve-backed currency (the digital wallets will be locally regulated in each country), and a new programming language called Move.
The Libra team will be governed by a non-profit foundation called Calibra based in Switzerland. Facebook already has backing for the project from 27 organizations, including Uber, Visa, Spotify, Vodafone, Mastercard, and the nonprofit Women’s World Banking. Each of these partners has agreed to invest at least $10 million in the project.
But strictly speaking, Libra is not a digital currency as commonly understood because it is not decentralized. Instead, it is a stablecoin backed by real fiat currency. It is more like PayPal on blockchain than Bitcoin.
While Facebook insists that it will be one among many partners and will have no direct operational control over Calibra, lawmakers are likely to be skeptical. When things go wrong, as they inevitably will, the first organization that regulators and liability lawyers will look to is Facebook.
Finally, it is probably significant that not one of the partners announced so far is a bank and making the case for involvement by the likes of Uber, Lyft and Spotify is nonsensical, except to the extent that each of those organizations, like Facebook, controls a vast network of users.
The Social Good Stuff
Libra’s mission statement is noble enough (factoring in the usual corporate marketing hubris):
Reinvent money. Transform the global economy. So people everywhere can live better lives.
The stated goal is to bring financial services to the 1.7 billion people around the world who still don’t have access to bank accounts, although one billion do have a mobile phone and nearly half a billion have internet access, according to the Libra White Paper.
These are the people that financial services apparatchiks in New York and London refer to unartfully as the “unbanked.” The main reason cited for their remaining outside the banking system is high, unpredictable fees — an issue that Libra says it will address.
But…One thing that is unclear. How Facebook plans to make money on the transactions because it’s a solid bet that they’re going to want to monmetize this platform? The potential fee split is tempting but given Facebook's advertising-based model, you have to assume that the idea is to draw advertisers into believing that reaching fresh markets has value Facebook can facilitate.
Cue the Regulators
Lawmakers in Washington and Brussels have reacted with uncharacteristic speed and alarm to the news of Libra’s announcement.
Rep. Maxine Waters’ (D-Calif.), the Chair of the House Financial Services Committee, dispensed urgent requests that Facebook cease work on Libra until after hearings are held. European lawmakers made similar appeals( FT paywall). In a statement, Waters said:
With the announcement that it plans to create a cryptocurrency, Facebook is continuing its unchecked expansion and extending its reach into the lives of its users. The cryptocurrency market currently lacks a clear regulatory framework to provide strong protections for investors, consumers, and the economy. Regulators should see this as a wake-up call to get serious about the privacy and national security concerns, cybersecurity risks, and trading risks that are posed by cryptocurrencies.
Waters went on to say:
Given the company’s troubled past, I am requesting that Facebook agree to a moratorium on any movement forward on developing a cryptocurrency until Congress and regulators have the opportunity to examine these issues and take action. Facebook executives should also come before the Committee to provide testimony on these issues.
The Zuckerberg problem
Given the public uproar about Facebook’s privacy policies and the many serious lapses in handling its users’ data, this seems like a strange time for the company to be launching a new enterprise that depends largely on trust for its success. Within the tech industry, Zuckerberg is widely seen as stubborn, sneaky, and slow to react to crises. That is not a good reputation on which to enter the banking business.
The company’s declining reputation (and a loss of faith in its leadership) means that regulators are likely to take a long hard look at Libra before allowing it to go forward. The road forward is by no means assured.
One among many rude, but necessary, questions for the U.S., for example, is will the Federal Reserve really allow a very large quasi-currency ecosystem managed by a Facebook surrogate which it cannot influence through its traditional tools for managing the monetary system?
Most of the problems noted here would disappear if Libra were a real cryptocurrency operating through a decentralized, public, permissionless network. Independence from much government oversight is a strong appeal of Bitcoin and Ethereum. They can’t regulate you if they can’t find you.
David Marcus says eventually he wants Libra to be a fully decentralized network that allows anyone to validate transactions, similar to Bitcoin and Ethereum. The Libra plan, he says, is to transition to a more technically complicated mechanism for reaching agreements between the network’s nodes — a consensus mechanism called “proof of stake.”
Ethereum’s developers have been struggling for years to figure out a solution to this problem with no demonstrable success. Marcus acknowledges it won’t be easy and says getting to the final form will be a lengthy group effort:
We have much work to do with all of you to get the prototype we’re unveiling today to production. What we are presenting is only the beginning, and there is a lot to improve. We wanted to share early and work with you, rather than wait for perfection.
Given the regulatory, technical and PR challenges that lie ahead, that is surely an understatement.
But then perhaps this will all come to nothing. In one of his weekly email newsletters, Azeem Azhar, who has a longstanding interest in cryptocurrencies said this looks like a 'rushed job' warning:
Libra has the trappings of endeavour that have earnt their stripes and are scaling fast. Yet it is still at the white paper phase. This normally doesn’t bode well. Just ask the 200 IT, consumer electronics, music firms, record labels and authors who backed the Secure Digital Music Initiative which ended with a whimper before its third birthday in the summer of 2001. Camels are horses designed by committee. Will the output of the Libra committee be equine or camelid?
We shall see.