Published

13

Sep

2019

Commentary

Facebook Libra - An Unthinkable Coup d'Etat

In recent weeks, the media have highlighted Facebook’s attempts to launch a truly decentralized payment platform based on blockchain[1].  What looked like a tech giant reinvigorating the blockchain community has turned out to be something more interesting and dramatic. 

Facebook Libra - An Unthinkable Coup d'Etat

 There are several pressing questions:

  • What does this Facebook initiative mean for us?
  • Is this constellation of partners and type of distributed ledger finally a crypto model that works at scale?
  • Are there any business threats and opportunities?
  • Why is the regulatory backlash[2] so strong?
  • Why is Facebook considering launching the platform without regulatory approvals[3]?
  • Should you join the Libra Association?

To answer these questions, we must understand what Libra does, its strengths and weaknesses, and how the scenarios could play out.

What Facebook got right

In payments, there is not much room for service innovation – if the purpose is always to move money from person A to person B, the beginning and end states are well known, and practically the only competitive advantage is to be faster and more efficient.  Innovation happens, but it is hidden behind the contract.  New payment systems that do what previous systems did, but a bit faster, rarely get consumers’ attention. 

Which brings us to an important observation: if only the results matter, if only the recipient getting the money is important, who cares who performs the service – Facebook or traditional banks?

This is what Facebook got right.  It covered potential barriers to adoption – including availability, exchangeability, ease of use (e.g. Calibra), reliability (as a store of value), trustworthiness and lower cost – by bringing a variety of trusted partners into the Libra Association:

  • Payments companies such as PayPal, Visa and Swipe can easily adopt a new way of sending money without customers noticing a switch of currency.
  • Currency exchange offices will ensure that if you actually need Fiat currency, you can get it. The underlying cryptocurrency will remain mostly invisible to consumers.
  • Potential adopters such as Booking.com, eBay and Uber can encourage their customers to use Libra.
  • Companies with deep technological knowledge will create the infrastructure and remove the dependency on a single provider.


To maximize availability, Libra’s intended scale is unprecedented:

Libra’s mission is to enable a simple global currency and financial infrastructure that empowers billions of people …
… large swaths of the world's population are still left behind — 1.7 billion adults globally remain outside of the financial system with no access to a traditional bank, even though one billion have a mobile phone and nearly half a billion have internet access.[4]

if we are cynical about these claims, Libra could well deliver robust technical solutions integrated well with existing solutions, with huge exposure to potential customers, offering tangible benefits to them.

This is a state-of-the-art service launch.  Moreover, Facebook did a lot to distance itself from Libra.  It lets the association members validate transactions, but it also lets them have a one percent vote in deciding where the association should go.  And there is only a hundred of vacates.  Many Facebook partners can’t really say “No” to Libra, because they risk being left out of a potentially major and efficient payment ecosystem.

Can YOU ignore it?

Ask yourself: What will be the impact of increased payment efficiency on my industry?  Will Libra enable micropayments and smart contracts?  Is this happening right now?  How should I prepare[5]?

What Facebook did okay-ish

Most people immediately point out Facebook’s trust problems, specifically privacy issues.  Facebook, being the biggest social network, knows a lot about us, and seems to be constantly testing the boundaries of what we (and our regulators) will tolerate.  This approach seems to work well for the company, and even when it backfires and upsets people[6], Facebook has managed to limit the damage to its business, so far.

While many of us see no significant harm in sharing our personal data, we are much more reluctant to share our finances with non-financial institutions like Facebook.  (The reverse model has been successful in China – the Chinese payments apps WeChat and Alipay both entered the social space.  This is probably a reason why Facebook’s attempts to fight WeChat and Alipay have failed, so far.)  Facebook’s Payments initiative is not very successful[7], and there was no public mention of Facebook considering acquiring Azimo[8], a FinTech company that has facilitated money transfers over Facebook’s own Messenger for some time.

So, instead of building its own complete solution and convincing the general audience to use it, Facebook is taking a far simpler, much smarter route.  It is focusing on building an Intra organization, cross-country, distributed network capable of sending money, and inviting existing financial organizations to use it instead of existing bank-based infrastructure (such as SWIFT[9]

This extensive partnering approach not only leverages the trust of customers in existing financial companies but also delegates a lot of regulatory burden to those third-party companies, so the Libra network itself should stay out of the spotlight.  Know Your Customer, Anti Money Laundering and other obligations will be handled by the companies that use Libra, not by Libra itself.

Libra’s willingness to accept partners with little verification is a feature that could attract the under-banked population, open new markets and transform existing ones. 

It is also what attracted the attention of various regulators.  This point requires deeper analysis, as Libra seems to be not only a response to the Chinese apps and a threat to existing banking infrastructure but also a gauntlet thrown down to governments. 

Where Facebook could be wrong

Facebook could be wrong about the scale and speed of regulatory pushback.  To analyze this, we have to understand the role banks play in our economic systems.  Banks have reserved rights to create money and control money transfers, which is often used by governments to control both internal (e.g. inflation, growth, fighting crime) and external (e.g. sanctions) environments.  The importance of this integration of traditional financial and government systems can’t be underestimated: it is deep, has evolved for decades, and both sides gain significant benefits from it – the government gets control over currency and the banks are near-monopolies under regulations that deter new entrants.

It is apparent that Libra aims to change the status quo in the financial world and knock banks off their pedestal across the globe.

Note the ‘currency’ in ‘cryptocurrency’.  Some people argue it behaves like money, some would say it is money, and some would say it plays the role of money.  A government can declare any cryptocurrency illegal and ban it overnight on the basis that it violates the country’s reserved right to produce money.  The more threatened the national currency, the stronger the response will be, and some countries that show more situational awareness cryptocurrency bans are not that uncommon[10] [11].

China, notably, is working on its own cryptocurrency solutions that will be free of foreign influence, and, potentially, deeply integrated with its governance frameworks.  However, governments that do not react may wake up to find a cryptocurrency is the standard currency in use in their country, which means losing a powerful mechanism of political control to a private company.

The picture we get right now is almost impossible to believe: Facebook seems to be challenging some governments around the world for power, which is a truly audacious move.

Add to this that Libra is not actually a cryptocurrency in the purest meaning – it is a share in an asset portfolio maintained by the Libra Association with the purpose of achieving stability[12].  In some countries with unstable economies, this will be a significant incentive for ordinary people to start using it.

Facebook could also be wrong about the power of its brand.  Facebook’s motto “making the world more open and connected” now seems ill-fated.  It seems willing to give away far too much to third parties.  Even though Libra’s brand is separate from Facebook’s, the media and governments will continually connect the two over the next few years.  In a deglobalizing, nationalizing world, the global tech company called Facebook is an easy political target.

Lastly, Facebook could be wrong about the costs of Libra.  While it is challenging to build a cost model of an endeavour of this complexity, many of the line items are well understood.  Less well understood are the costs of compliance in target markets – the variation in those could scare off investors.

The right questions

There is a good reason why Facebook is being so audacious.  The scale and the construction of Libra give the Association unprecedented reach and attraction, and the race is on to become indispensable in markets before governments abreact.  To be successful, Facebook needs to be fast and must build critical mass as soon as possible.  Building a minimum viable Libra without waiting for regulatory approval everywhere is the right strategy, as with every user acquired, the Libra proposition to partners and users becomes stronger through direct and indirect network effects – platform economics.

Dollars behind the Libra Association suggest that the question of whether Libra will be successful is a wrong one. 

The proper questions are WHERE it will be successful, HOW the currently unbanked population will influence markets, and WHAT else will be built on the top of the Libra platform (IoT micro-payments, smart contracts, etc).

The fact that some of the Libra Association members are much more prone to regulatory pushback than Facebook itself complicates the situation even further[13].  Some companies, before risking their good standing with regulators, are very like to wait and see whether Facebook is powerful enough to force its version of reality and will jump on only if there is no chance of failure.

We recommend that you look at this area and try to imagine a post-Libra world.  It is too early to say if it is the right time to join the Libra Association – unless you are a financial organization, in which case you need to act now and either embrace it or neutralize it.

For everyone else, it is a matter of looking closely into how the situation develops, what markets will be enabled and how your user’s needs can better be met.

LEF will be following this story, so stay tuned!

[1] https://newsroom.fb.com/news/2019/06/coming-in-2020-calibra/

[2] https://www.bbc.com/news/technology-48688359

[3] https://www.bbc.com/news/technology-49092713 

[4]https://libra.org/en-US/white-paper/#introduction

[5]Even if Facebook loses that battle if your company has anything to do with blockchain, IoT or any decentralized initiative, it is worth analyzing your situation and checking how things may change when efficient payments finally appear, because if Facebook does not succeed, some other company will, and soon.

[6] https://www.engadget.com/2019/07/24/facebook-will-pay-5-billion-fine-for-cambridge-analytica-data-b/

[7] https://walkthechat.com/facebook-payment-failing/

[8] https://azimo.com

[9] https://www.swift.com/

[10] https://cointelegraph.com/news/govt-bans-only-make-citizens-want-crypto-more-binance-ceo

[11] https://cointelegraph.com/news/bitcoin-is-property-chinese-court-rules-no-crypto-ban-contradiction

[12] https://libra.org/en-US/white-paper/#the-libra-currency-and-reserve

[13] https://www.businessinsider.com/libra-association-members-refuse-public-support-facebook-cryptocurrency-plan-2019-8?r=US&IR=T


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