I have been relatively silent on Facebook’s plans for its game-changing Libra currency. In part due to summer holiday, but also because I wanted the dust to settle a bit before commenting.
Libra is certainly a massive undertaking and whether you like Facebook or not, you have to at least give them credit for thinking big. I would argue that the implications of Libra are so big that it is like the parable of the blind men and the elephant. Each man who touched the elephant described it differently. The one who touched the leg thought it was like a tree, the one who touched the side thought it was like a wall, the other who touched the trunk thought it was like a snake. So it is with Libra. Still, I’ll take a stab at outlining a few thoughts (although I admit from the onset that my efforts to describe a crypto-currency that has not yet been built may make blindly describing an elephant seem easy.)
Pinning down Libra is a bit like the parable about describing an elephant.
The blind men and the elephant
(wall relief in Northeast Thailand)
1) Utopian fintech dreams do not fuel Facebook’s desire for Libra, cash does.
“Owning” a currency like Libra is a license to make money even if the issuer is denied the opportunity to print currency at will, as governments do.
Libra is matched dollar-for-dollar with currency units that buy into it, a feature of most stable coinages. This is fine, but what will happen to the money that is held in reserve? This is where things get interesting.
The investors in Libra are actually getting a token that is linked to the returns on cash reserves. Facebook and investors hope that Libra’s success will create a massive pot of money. Libra’s white paper claims that the funds will be invested in “low risk” investments. You can bet that the definition of “low risk,” will be malleable given the Libra Association’s management structure and that this investment pool can produce some serious returns if Libra actually succeeds and pulls in billions.
This is clearly why Libra was so successful at signing up partners who paid $10million, chump change, for what they clearly hope would be billions in future profits. It all depends on how much Libra is sold, or even better, how much is lost or remains dormant, adding to cash reserves.
Now also take note that Tether stablecoin promised one-to-one dollar matching and despite accounting irregularities and loans which show around 74% dollar matching, the price of Tether is holding at $1. Incredible? Just wait till you see what investments are made with Libra proceeds. I am reminded that the asset-backed commercial paper conduits which were in part responsible for the Global Financial Crisis also took “low risk” AAA rated investments. Not that I wish to tar Libra with the same brush as these failed vehicles, but what is required is the realization that “low risk” does not mean that they won’t make investment returns that will make you envious.
Do you detect a disconnect? Facebook’s attorney Orin Snyder made it clear when defending the company over the the Cambridge Analytica scandal that the social media site’s users “Have no expectation of privacy.”
2) Believing that Libra will miraculously be private because it uses blockchain or because Facebook says so is foolish.
With Facebook, you are the product and will you will always be the product. The federal gov’ts in the EU and US already know where most of your cash goes. Don’t think for one moment that a private company will be “hands-off” with your data.
Blockchain unto itself does not guarantee that your transactions are private. Do not succumb to the propaganda that decentralized blockchain networks in crypto are completely private and untraceable, because they are not. More importantly, Libra is not a decentralized network. Facebook is behind Libra so you can guarantee that your transactions on Libra will be monetized. The smart people at Facebook, like the financial engineers before them that gave us the aforementioned asset backed commercial paper conduits, have invented ways to monetize your data that you have never dreamed of.
Facebook’s attorney Orin Snyder made it clear when defending the company over the Cambridge Analytica scandal that the social media site’s users “Have no expectation of privacy.” and “There is no invasion of privacy at all, because there is not privacy.” Now lets be honest, these are the same people who are bringing you Libra and you expect the same privacy you have with your bank?
3) That politicians are trying to block Libra development is to be expected.
They will not succeed. You cannot create a currency that seeks to supplant the dollar from within the least trusted tech company without politicians feigning outrage. Facebook could not have asked for better publicity than the current request by lawmakers that it pause development of Project Libra. If for no other reason than the politicians who condemn Facebook are probably liked even less by the general public than Facebook, implying that this must be a good idea on the part of the company.
Anyone who has followed fintech developments in the last 5-10 years knows that politicians and regulators have been clueless to the pace of development. They won’t be able to stop it here and now just because they write Facebook a strongly-worded letter. Facebook has deep enough pockets to buy a fleet of lobbyists that will reach out to politicians to provide counterbalanced opinions and smooth ruffled feathers. That Facebook has the resources to work with regulators so that they do not circumvent securities and other laws is a major plus for everyone.
80% of ICOs are Scams Source: Satis Group LLC
4) Facebook’s quagmire with politicians regulators and central banks will be to the benefit of Amazon and other tech company with competing ideas.
Clearly, Facebook will spend countless millions on legal teams that will help focus regulators and give everyone in the crypto space (even though Libra is not strictly speaking a crypto) better certainty as to where their token and coin sits in the spectrum of regulation.
This is fundamentally a good thing and may be one of the better things to come out of Libra regardless of whether or not it is a success. So go ahead regulators, give Facebook everything you’ve got, let them bleed money, but let’s hope that we will finally get some certainty in the regulatory greyness that surrounds the crypto-coin and token universe. This is important because billions have been stolen through fraudulent coin offerings and, as usual, no one goes to jail. Perhaps a little clarity will make for easier convictions of fraudsters. Or perhaps central banks and governments will loosen their grip on currency just a little and allow innovation to take its natural course, ignoring for a moment that the innovator is unpalatable.
The “race to zero” in the brokerage business is a model of disruption. From: robinhood.com
5) Whether Libra succeeds is irrelevant. Now that one big tech tried, the door is open for others.
Facebook has done the entire tech industry a service. In one swoop they have declared war on the financial establishment and every tech company large and small now has the financial system in their gun sights. This is actually in everyone’s interest as the efficiencies and inclusion brought by adoption of fintech are fundamentally good for everyone.
Watching trading commissions “race to zero” in the equities trading business in recent years is the best example of what happens when fintech makes markets more efficient and disrupts traditional business models. Whether it is Libra or some other product, who cares, but give me an easy way to send my cousins in Italy Euro100 from my US bank account and I’ll use it. Transferwise built a business on this starting from zero, such is the demand for these services.
Libra’s uses will closely match WeChat
6) Is Facebook Libra the next WeChat Pay?
WeChat Pay is China’s fastest growing payment network because it is attached to a social network, a natural platform for making payments. People send messages on WeChat much like they do on Facebook, and payments took off on WeChat because of this messaging function. Facebook has a real shot at copying WeChat’s success and it just might hold the keys to a better cashless system than Apple and Google pay, which have received a lukewarm response.
Facebook offers a platform that is technology-agnostic, with a staggering 2.38 Billion monthly users. That Facebook is using a blockchain is certainly a great feature, but this in and of itself is immaterial to the touted functions of “paying rent and buying coffee.”
In fact, the stated uses of Libra read much like a list of what people in China can do with WeChat today. Stable coin and/or blockchain isn’t critical to performing many of these tasks, even if it takes the headlines. Wechat and Alipay in China don’t use either and manage to pass $41.5 trillion in mobile payments in 2018. To put this in perspective, all debt and credit cards in the world handled around $368 billion in 2018. WeChat and Alipay also handle foreign exchange at wholesale rates for payments made by Chinese abroad.
So doing much of what Libra does without blockchain or a stable coin is certainly possible. I consent that the stable coin part of Libra may simplify international payments, and potentially disrupt banks, but it will also greatly complicate efforts to win regulatory and central bank approval. So while I confess to a personal bias of wishing to see a major blockchain network succeed, I am not sure if the lofty goals Libra is striving to attain using blockchain trump people’s immediate need for simplified payments. It is cliché to say that the use of stablecoin and blockchain will miraculously foster financial inclusion in the developing world, they will not.
What will make or break Libra is how easy it is to actually use. This is what WeChat and Alipay did so well. By using QR codes, which required no additional infrastructure or cost to use, they made the system accessible to the most humble of China’s population and attained many of Libra’s goals of financial inclusion. What would make Libra more compelling is if they touted a way of increasing usability above and beyond QR codes. Make it so easy to use that all fears of privacy will be forgiven, even if well founded. Just like with WeChat.
Libra is “game over” for banks regardless of its success.
7) Banks are already the biggest losers regardless of whether Libra is a success.
For banks this is their “Game Over” moment, not that they are all going to be replaced by Libra, but their role as the sole providers of financial services has officially ended.
Lets look at two potential scenarios to see what the impact on banking will be. If Libra launches and becomes even a moderate success, banks will have surrendered a portion of their market to Libra and will face competition on their rates for all payment and FX services. So banks lose and the “race to zero” for banking service fees begins in earnest as it did with equity trading.
Now on to the second scenario, Libra does not launch, or launches but fails. Banks still lose. Libra has become an overnight sensation showing banks that they no longer control the dialogue on retail banking, and big tech is at their heels. Libra’s failure will open the door for another tech giant to learn from Facebook’s mistakes and make a run at the market.
It should be blindingly clear even to bank CEOs living in the most advanced states of denial that big tech is their competition not other incumbents. Not surprisingly, China’s banks have already gone down this path and can show the way forward.
China’s banks were blindsided by Alipay and Wechat pay and have virtually surrendered the retail payment space. How did they survive the onslaught of big tech? By providing a safe place for money storage and increasingly partnering with big tech to use their platforms to sell products or to provide products that big tech cannot, as a survival strategy. What is interesting is despite the advanced mobile banking available here in China, most banks are doing just fine. It has not been “game over” for them in the sense that they have been replaced — more so that their roles are changing.
I like Libra, but not for the reasons you may think.
So let me be clear. I like Libra, not because I like Facebook or because I admire Libra as a concept, but because this project is going to drive fintech and fintech regulation forward. Maybe, just maybe this will get us all better and cheaper banking services. Living in China, I know that better service is possible and practical because I’ve got it, and so should you.
Now one final thought. Banks have been trying to build out sophisticated KYC [know your client] systems for clients for some years now. What if Facebook Libra’s “open identity standard” does it without them? Now that would be another gamechanger attributable to Libra — and maybe a reason to respect, or fear, this initiative even more.
Johannes Vermeer Woman Holding a Balance