Note: I originally published this on 22 June 2019 for Premium members of Exponential View. I opened it to the public on 12 Oct 2019 as the Libra coalition began to unwind.

Happy Saturday!

The regular Sunday newsletter will be in your inbox in less than 24 hours, but in the meantime, I couldn’t help but send out an essay outlining my thinking on Facebook’s efforts to create a global digital currency.

Tldr; the goal is worthy of a mixed praise, but there is a number of issues which make me question Facebook’s ability to pull it off. Trust is only one of them. Read on.

What is Libra?

Facebook intends to create a simple global digital currency. It is impossible to avoid analysing this so I will. Bear with me. Some of this gets complicated. To help us get through this, metaphors will be mixed with insouciance, abandon and a muddle of whimsy.

Libra will be a so-called stablecoin backed by a basket of real currencies, A stablecoin won’t suffer the volatility of many other cryptocurrencies and could be useful for most normal folk. Libra will be governed by the Libra Association, a Swiss-based foundation which will ultimately have 100 governing members. Around thirty have been announced so far. Libra’s code will also be open-sourced.

Additionally, Facebook announced Calibra, a subsidiary, to be run by highly-regarded Facebook exec and former PayPal president, David Marcus. Calibra will be Facebook's digital wallet for storing Libra coins. It will be a standalone app, and also be available in WhatsApp and Facebook Messenger. Users will need to use a government ID to sign up.

Combining Facebook’s user experience skills, and massive reach, with a stable currency, could be the mix needed to trigger widespread adoption of crptocurrencies. Estimates suggest that about 36m cryptocurrency wallets have been created so far. The number of actual users will be far lower. (I myself have created at least half-a-dozen wallets as I have battled with the intricacies of setting them up.)

Moving Libra between Facebook users with Calibra wallets will not involve the Libra blockchain. Transactions will only occur on the blockchain when a Calibra user wants to transfer Libra outside of the Calibra system. In other words, Facebook is to some extent handing away control of Libra to the Libra Association, but it’s keeping a pretty tight hold on Calibra. As Wired points out:

Ceding control of the Libra Association thus sets up a potential win-win for Facebook. With Calibra, the company gets its mostly walled garden: a way to internally handle things like cross-border payments between friends and family, micropayments within Facebook applications, and transactions on Facebook’s marketplace and with small-businesses—and potentially other financial services as Libra’s technology matures. With the Libra Association, it gets the benefits of an open-source ecosystem, along with an external group to manage the complex financial aspects of the coin and messy global regulations. Subsequent non-Facebook tools and applications built for the Libra blockchain, as well as the wide network of customers and merchants brought in by partners, stand to increase the utility of Libra for Facebook’s users.

Structurally, this setup – with an outside foundation, which Facebook is strictly limited to 1% control of – is a way of de-Zucking Libra once it gets off the ground. Theoretically, it can’t be turned into another one of his vampire squid networks sucking our dignity, agency and civility for a few more dollars.

In reality, trust levels with Facebook are so low, it is hard to imagine any serious developer working with a cryptocurrency run by Facebook alone. Nor could one imagine Facebook escaping regulatory scrutiny if it hosted a cryptocurrency on its own. This structure—relinquishing control--may have arisen as a result of necessity rather than design.

With me so far?

So why would Facebook do this?

First, it is naturally seeking to expand its market. Like any platform firm, it has a series of key assets that can help it expand it into new markets. Even if Facebook only ultimately holds 1% governance rights of Libra, the global financial market is huge. China alone sees more than $17trn in person-to-person payments. There is close to $8trn in cash in circulation globally. The global revenues from payments will exceed $3trn per annum by 2022 according to McKinsey. In addition, Facebook is a natural home for merchants advertising to its captive users. Libra creates optionality for new classes of payments on the platform including peer-to-peer payments, especially in Facebook Marketplace, its Craigslist competitor.

This could give rise to more data, especially in transactions that take place on the Calibra wallet. In addition, Facebook and its partners could start to offer discounts if you pay with Libra. Have a £10 Uber bill? Pay only £9.50 for it using Libra. (See Axia Lab’s discussion on the economics of this.)

Second, Facebook says they want to serve close to 2 billion  people without access to bank accounts. Banking these unbanked is a critical part of enabling them to participate in the future economy.

EV reader, Seyi Taylor, tells me such a stable cryptocurrency will help in African markets, like Nigeria. He observes that it is hard for locals to work with global digital platforms, state-backed fiat currency is volatile and depreciative, and physical security for cash is problematic. The basic things that we take for granted in developed markets, like ATM, are a matter of hopes and prayers in Nigeria.

In the developing world, a lot of commerce is informal and handled peer-to-peer. Facebook has realised this, and invested in developing its groups and marketplace products, empowering millions of people around the world to provide small-scale value to people around them. One of the largest Facebook groups in the world - Fin - started as a women’s group in Nigeria, and marketplace groups are extremely popular across the continent to facilitate peer-to-peer trade.

Banking the unbanked is a noble effort.

A third rationale could be the China play. At some level, the Western internet, founded on advertising rather than transactions is broken. The trouble with advertising is that between me and what I wanted to do looms the advertiser who has other goals. The Chinese internet depends more heavily on transactional models leading to vibrant content markets. (At $7bn annually, the Chinese podcast market is about 23 times the size of the US podcast market.)

A fourth might simply be the strategic importance of having a position on every emerging platform. Facebook thinks in platforms. Facebook is a platform. WhatsApp is becoming a platform. Oculus is a VR platform. In this case, what is driving Facebook’s imperative is a desire to play in each part of the economy. In this case, this Libra is an option. The upside is to own part of the global currency for e-commerce. The downside? An immaterial financial risk to the firm in return for a tremendous amount of learning.

Can it succeed?

Facebook has a history of taking bold bets and betting on platforms approach. It succeeded with Facebook itself, the pivot to mobile, and the personalised newsfeed. It failed with Beacon, Facebook Credits and Facebook M, the intelligent bot service which David Marcus previously ran.

There is precedent for non-financial firms entering finance markets with gusto. Kakaotalk, a Korean social network reaching 91% of the country, launched KakaoBank in April 2017. Within 18 months, it had secured 6.8m customers, or about 25% of Korea’s economically active population. Libra has tremendous on-ramps via Facebook and its partners. But Libra is a more more knotty, multifactor product based on a blockchain architecture that is yet to release a testnet (or prototyping sandbox) and has several multi-jurisdictional regulatory issues to unpick.

The project launch seems like a rush job for such a complex problem a global currency seeking to upend the global payments networks. The technology is unproven at this scale. And apart from Bitcoin, Ethereum and a handful of others, few cryptocurrencies have developed active ecosystems. Hardly any have demonstrated utility beyond speculative tropes.

Ronit Ghose, a friend of EV, whipped over to the registered office of the Libra Foundation and sent some photos. The Libra Foundation, like many a shonky cryptocurrency, is in a serviced-office shared by dozens of other firms. The foundation itself was only legally incorporated in May this year.

Some projects based on distributed governance have succeeded. Consider the operating system, Linux. Or Matt Mullenwegg’s Wordpress content management project. But these started with a strong vision, strong technical proof, and a insistent founder who controlled the direction. Most successful startups find product-market fit before they scale out and bring partners on  board.

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?

A global currency also steps on to the sovereign turf of the nation-states. These social networks already have more users than many nations have citizens. They certainly have the ability directly, or indirectly, to control messaging, culture and information in many states. And they have capabilities upon which host nations must rely to meet core obligations to their citizens. It is highly likely that we will see currencies backed by something other than sovereign guarantees, but are we comfortable that Facebook is behind this?

This is where the partners come in.  They do, as EV reader Kevin Werbach argues, lend some trust to Facebook’s tarnished brand:

After so much misbehaviour, no one paying attention would take Facebook at its word. But that’s the whole point of a blockchain system: No one has to. Limits on Facebook’s power over Libra will be designed into its open-source software and governed by a growing collection of partners who can call Facebook out.

Facebook today talks a good game about privacy and combating abuse of its platform, but those words have time and again proven hollow. The novel trust architecture of cryptocurrency and blockchain could change that.

The partners are more than the proverbial baby attracting the unguent lips of the corrupt politician. But this group is a motley crew and I can’t understand how Uber, Spotify and Lyft are relevant to banking the unbanked. Uber, Spotify, Lyft, are all firms targeting the wealthy banked. Farfetch, another partner, is a luxury retail store which sells a pair of socks for £1,127. (Kiva, an organisation, involved in development, and Vodafone, which a decade ago launched M-Pesa in Kenya through subsidiaries, are the partners closest to economic development in the launch cohort.) In addition, the two top markets with the largest numbers of unbanked are China, where Facebook doesn’t operate, and India, where it doesn’t intend to launch Calibra for regulatory reasons.

There is an old joke about the pig and the chicken. Take a ham-and-egg sandwich. The chicken is only interested, but the pig is committed. In Libra, the partners are the chicken. Spending $10m play money to buy an option to sit at the helm of a new currency and commerce platform. But Facebook is not the committed pig in this set-up either. The success or failure of Libra is not existential to Facebook, it is purely upside. Who is truly, existentially, committed to this sandwich?

Consider the alternative for Facebook. It doesn’t endeavour to create a digital currency and someone else does it, creating a tollgate between Facebook, it’s users and their purchasing. That isn’t a happy situation for the firm, but it isn’t existential.

Given the learning and the potential upside, it is a no-brainer for all involved.

Should it succeed?

Perhaps this is the hardest question.

Chris Hughes, a co-founder of Facebook, has urged regulators to intervene because ‘[i]f even modestly successful, Libra would hand over much of the control of monetary policy from central banks to these private companies.’

One of the Libra coalition’s stated aims is ‘to shape a regulatory environment that encourages technological innovation while maintaining the highest standards of consumer protection’. That is brassy. But how brassy? New technologies have always shaped regulations. We didn’t have seatbelt laws before we had cars. We didn’t have rules about ‘three-person’ babies before we understood mitochondrial transfer was possible.

Money, nor the monetary system, should not be immune to innovation. And experiments in money need to take place if we are to figure out how to make it more appropriate to a changing world. I have misgivings with a bunch of Silicon Valley firms led by Facebook seeking to solve socioeconomic problems with technological solutions at ‘move fast and break things’ speed. The quantitative whizz-kids of Wall Street showed that financial innovation can be devastating when decoupled from the prudence the financial sector needs.

Would Libra be an even greater idea were Facebook not leading the project? Possibly. This is Facebook, a firm which lost our trust repeatedly and whose culture is seeded by a college kid who thought of his first users as ‘dumb fucks’. It is incumbent on Facebook to do more than it has so far to demonstrate that Libra will be insulated from the firm’s culture. It would be good to know that Facebook is putting some of its substantial anthropological, bottom-up, in-the-weeds user reseach capabilities to use in truly understanding what unbanked communities need to join the digital economy.

More cogently, I expect the loose affiliation of partners will struggle to come together and direct it with the vim it needs. A project like this needs strong, trusted leadership. And if Facebook can’t provide it, then who will?

See you on Sunday!

😎 Azeem

Further reading on Facebook & Libra:

• EV reader, Tim Bradshaw, has some good details for the Financial Times.

• Richard Titus, has been involved in cryptocurrencies for several years, was also involved in the formation of Libra. He is running an entrepreneurs programme with the Creative Destruction Lab around it.

• Read Seyi Taylor’s view from Africa here. (Presciently written a month before Libra was announced.)

• Good overview from Wired.

• KYC and AML for Libra.

• Facebook usage is actually dropping following all the privacy scandals

• EV reader, Fred Wilson, on why his venture firm, USV, is joining Libra.

• The FT’s Izabella Kaminska provides a cheat sheet to some of the banking and regulatory issues.

• Axia Labs has a good discussion on the incentive economics for partners in Libra.