The biggest technology news this week is arguably the Facebook announcement of Libra, its proposed global currency system, based on blockchain. This is big because of so many reasons — the heft of not just Facebook but also its group of stellar partners, the emerging mainstreaming of blockchain, and of course all the conjoint and conflicting issues around privacy as well as security.
Let’s look at the key points on Libra. Well summarised in this TechCrunch article, or laid out in depth in the Facebook white paper.
- Scheduled to launch in 2020.
- Facebook won’t control Libra — it will have one vote amongst a group of founding members of the ‘Libra Association’
- Facebook will use its Move programming platform, but the Libra Association will drive the development of the Libra Blockchain
- Calibra, a Facebook subsidiary will be set up to manage Libra — it is proposing to keep Calibra data completely separate from Facebook user data, so Facebook will never know about your transactions on Libra.
- The business case and need are based on 2 key areas, apparently. The first is the current high cost of international money transfers, up to 7%, which is a $50 bn annual cost. The other major area of focus is the unbanked, some 1.7 billion people, for whom this might be a path to financial inclusion.
- Users will be able to cash in local currencies into Libra coins and cash them back out as required and will be able to spend Libras on everyday expenses. They will be able to carry Libra coins in wallets created, amongst others, by Facebook, and also will be able to pay each other and vendors via WhatsApp messages.
- Facebook and the Libra Association will manage the supply of currency and also maintain the stability of the currency by pegging it to a basket of assets.
- The initial business model is built around interest generated in the currency users hold in reserve.
My position on crypto:
I have previously written about crypto and here’s my previous stance, in 4 bullets:
- Blockchain: clearly a game-changing technology which is working out a few technical issues before it can deliver on its potential
- Cryptocurrencies: a complicated space. Currencies need stability, universal acceptance, and a minimal size of users. (Did you know that of the 10 smallest countries in the world by population, only 1 has their own currency)? The popularity of many stems from speculative value.
- Bitcoin: nowhere near a proper currency thanks to its fundamental lack of stability, but also current lack of global acceptance. Ideal for dark markets, though, and largely popular as investment or asset, much like many other cryptos.
- ICOs: mostly Ponzi schemes and money making models for those who feel comfortable swimming with sharks.
So how has blockchain evolved? Well, one of the biggest areas of concern has been the scalability, also seen as the number and speed of transactions it can support. You wouldn’t want to wait 30 seconds for your coffee transaction to go through, much less a few minutes. The solutions to this have largely been driven by switching from proof of work to proof of stake. But also, through brute force. Every founding member will need to stump up $10m, and every node will need to use 40mbps connections, and 16TB hard drives, for Libra to hit its 1000 transactions per second speed.
At the recently concluded CogX, I saw a number of different models of scalability at play. Some involve a mix of blockchain with ‘off chain’ activities, some look to solve the proof of stake problem, others interconnect multiple coin systems, and all of them try to bend one of the 2 other nodes in the tyrannical triangle of blockchain, which includes scalability, security, and decentralisation. Mostly it’s the decentralisation that gets jigged for scale.
The Facebook effort is a very sincere effort to scale blockchain by making it global, web-scale and by getting serious players involved.
So let’s look at the positives. As I just summarised:
- They have serious players involved. This is not running out to eat Visa and Mastercard’s lunch. It’s getting them to sit at the same table and break bread with them. Visa, Master, Paypal, and Stripe are just some of the payments majors involved, as are tech players such as Uber, Lyft and Spotify. VCs such as Andreessen Horowitz and Telecom giants such as Vodafone will also be sitting around the table which will at full strength have a hundred partners.
- Facebook will not own this, they will have one of the 100 votes. They will have a subsidiary to manage transactions, a wallet for users to use in a competitive market, and open source the Move software used to write the code.
- If this does bring the unbanked into the financial system in some way, this would be a good thing, and if it brings down the cost of money transfers for migrant workers, there’s value there as well.
- Facebook seems committed to keeping the 2 businesses distinct. You won’t need a FB or WhatsApp account to own and use Libra coins. You won’t be served ads based on your Libra spends and your data will not be exposed unless it is to lawmakers.
- Any hacks or loss of coins will be reimbursed by Calibra (although I’m not sure if this applies only to users of the Calibra wallet).
Of course, there are other questions that remain:
- One of the immediate ones that pop up is about the misuse of this non-regulated and non-governmental currency. How will Libra prevent keeping the market for banned goods (guns & drugs, for example) to exploit the pseudonymity of the currency and the secrecy of the transactions? How will money laundering prevention work? And more importantly, who will do the checks?
- The reverse of this is of course for some regimes in the world, how will Facebook deal with repressive regime’s demands to know details of Libra spends. What if this is done via local wallet creators?
- Another unanswered question is around the money supply. Most central banks control the money supply in part to ensure that interest rates and exchange rates are stabilised. What kind of ‘Monetary Policy’ will the Libra coalition need to constitute to prevent black-market prices of Libra soaring, eradicate arbitrage opportunities across the world, and keep exchange rates broadly stable? Presumably, this will be discussed and revealed in due course. The current model seems to be based on policy at all, but dependent on the market. So the ‘Reserve’ will be the total value of Libra held by users at any point and will be an amount of fiat money held by the Libra Reserve against all the coins owned by users. So a higher demand will see the reserve grow and vice versa. It’s also designed to prevent ‘runs on banks’ as there will always be enough currency available to pay off all Libra coins. What is less clear is whether this will be effective in preventing local or short term imbalances, black markets, and other market distortions.
Bigger Themes — Beyond Nations
The lasting thought here though is a larger one. You could argue that going back in time, the root of societies and ultimately countries lies in common markets — be they towns on riversides or ports by the sea. That’s what united people in large groups and prevented them from permanently warring against each other in tribes. Single markets created single economies which were formalised into political units for governance and subject to conquest and rule by other kingdoms over time. Even the European Union, from which the UK is still seeking a messy divorce, had peace as one of its founding principles.
The last few years have given us an entirely new set of planetary problems that sovereign countries were ill-prepared to address. Most notably the climate change problem, the global population challenge, and thanks to the internet, even security. The global information system has proven to be a potent cocktail when combined with capitalism and choice, to create significant economic disparity, and nationalism has risen steadily as a response to that.
There is certainly a possibility that a successful global (crypto)currency at planet-scale will be a second destabilising impact on the nation-model, after the internet. On the one hand, it will erode or shift the role of central banks, and on the other hand, it will create a global financial and payments system that will fundamentally alter societies. This has the potential to be disruptive beyond our imagination. It also has the potential for rewards beyond our reach currently.
For one, if people of neighbouring countries like India and Pakistan, or Russia and Ukraine (or globally distant ones like the US and China) are freely trading and transacting on goods and services, there’s much less support for wars (real ones or trade ones). Besides, how would you apply a punitive customs duty on services that use a global cryptocurrency model?
Another huge potential positive is actually to go after those global goals such as climate change. If this system works at scale, it actually provides the Libra Coalition the opportunity to create incentives and disincentives at a global level. For example a 1% surcharge on environmentally unfriendly goods. Now, this is a long way away, and there is always a danger of confusing monetary policy with other incentives, and the unintended consequences therein. But as you can see with a globally united payments model, this is closer than we have ever been to a global financial system and a single point of incentives for common goals. Finally breaking from the tyranny of national interests.
Darker views of the future of Libra remain. But I’ll remain optimistic for now. After all, the name Libra is itself a play on the French word for freedom.
You may say I’m a dreamer…
(I work as the Digital Evangelist for Tata Consultancy Services, UK. All thoughts here are my own)