Meet Libra, Facebook's disrupter

Issue 29/2019

Last week Facebook confirmed the worst kept secret in the tech world and announced its new cryptocurrency, Libra. You can read the full white paper here, or bear with me as I attempt to break it down.

You might think that given how critical I have been of Facebook in the past, this post would involve me tearing it to shreds. But if you did, you'd be wrong; I actually kind of like Libra, with a number of caveats of course. Really, it's about time one of Silicon Valley's unicorns decided to take on the banking sector and the legions that suckle its sweet, sweet nectar. I had hoped that Apple's earlier foray into banking would have involved blockchain, but alas it opted for a lousy credit card (a classic Apple not-so-innovative "innovation").

What is Libra?

Libra is essentially what has been dubbed a 'stablecoin', in that it's pegged - linked - to the value of a particular fiat currency. In Libra's case, it will actually be pegged to a basket of fiat currencies, much like a special drawing rights (SDR) facility. Although unlike an SDR, Libra will be 100% backed by a reserve of low-volatility assets. That means that every Libra coin ever created will be backed by a real, "safe" asset (US Treasuries, for example). The white paper even references the gold standard, under which many fiat currencies used to be based:

"Libra is designed to be a stable digital cryptocurrency that will be fully backed by a reserve of real assets — the Libra Reserve — and supported by a competitive network of exchanges buying and selling Libra. That means anyone with Libra has a high degree of assurance they can convert their digital currency into local fiat currency based on an exchange rate, just like exchanging one currency for another when travelling. This approach is similar to how other currencies were introduced in the past: to help instil trust in a new currency and gain widespread adoption during its infancy, it was guaranteed that a country’s notes could be traded in for real assets, such as gold. Instead of backing Libra with gold, though, it will be backed by a collection of low-volatility assets, such as bank deposits and short-term government securities in currencies from stable and reputable central banks."

It makes sense that Facebook would want a stablecoin, as it removes a major problem faced by cryptocurrencies that purport to be a medium of exchange: that prices can be relatively easily distorted by speculators, making them more akin to assets than currencies.

There is also none of the excessive computation required by proof-of-work cryptos such as Bitcoin (although the Lightning Network helps solve that), with dozens of "validators" (28, initially) operating the proprietary Libra network. In that sense, Libra's blockchain looks a lot like a delegated proof-of-stake network, more akin to say EOS than Bitcoin. It's not decentralised and it's not permissionless, and although the white paper states that "an important objective of the Libra Association is to move toward increasing decentralization over time", we all know Facebook well enough by now not to be fooled by that.

Overcoming the vested interests

In terms of what Libra means for the status quo, the Financial Times provided a helpful infographic that shows how Libra might disrupt the traditional payments system:

https://finelybalanced.com/images/ft-libra-model.png

While there's nothing new about Libra from a technological point of view, Facebook has something its competitors can only dream of: over 2 billion users already on its network, first mover advantage and an army of lawyers that may just be able to convince regulators to let it happen (or bypass them altogether).

That will be important, as the establishment was quick to react to the latest threat to its gravy train. Bank of England Governor Mark Carney, for instance, noted that for him to accept Libra "we, the Fed, all the major global central banks and supervisors, would have direct regulatory [oversight of Libra]." The United States Senate has already called Facebook to a panel that "will explore the project". France’s finance minister said he had asked central bank heads from G7 countries to write a report on the project by the middle of July.

Importantly, not a single bank has signed up to be a part of Libra so you can be sure that they, their political allies (large recipients of financial sector donations) and their central bank enablers will fight it tooth and nail. These stakeholders are far more powerful than the taxi lobby, so Facebook will have a mighty fight on its hands.

Monetising Libra

The final question is if Facebook can get past the vested interests, how will it monetise this thing? A clue was provided in the form of the simultaneous announcement of a purpose-built wallet - "Calibra" - within which users may store funds and conduct transactions. This, and presumably plenty of other services it (and others) will build on top of the Libra network, is where Facebook will collect user data to monetise.

While the technology underpinning the Libra network will be open source and its governance ceded to the Switzerland-based "Libra Association", Facebook's apps will work better than its competitors' apps (at least initially, when there may not even be any competing apps given that Facebook has invented its own programming language for smart contracts on the network, "Move"), meaning that to use the network you're going to need to consent to Facebook's terms.

For an example of the network effect, take Facebook Messenger. More than a billion people use that app despite it being inferior to many competitors, and that's a mature space these days and Facebook was by no means a first mover. That means Calibra, the first payment app available on its very own purpose-built network with its own coding language will almost certainly capture enormous market share, dominating the Libra financial transaction space indefinitely.

The future is bright

To be clear, I had hoped for virtually any company other than Facebook to have made this move (Amazon is amazingly placed to compete in this space). However, if any company was going to successfully take crypto mainstream and disrupt the financial sector - to break the ice for better alternatives down the road - Facebook's size and reach leave it as well placed as any. I like Libra not for Libra itself, but for the new markets that it will enable in the not-so-distant future. Good luck, Zuck.

Enjoy the rest of this week's issue. Cheers,

— Justin


The bits


This is why Facebook must succeed

From the article linked below:

"The Financial Industry Regulatory Authority (FINRA), Wall Street’s self-regulatory organization (SRO), has sat for months on some 40 applications from companies that touch cryptocurrencies, numerous people who deal with the agency told CoinDesk."

What those applicants don't have is size and influence, something Facebook has in spades. It's easy for regulators to stonewall small players, but good luck doing that to Facebook. I probably won't use Libra but I'm excited by what it will enable and the inefficiencies it will relegate to the history books.

Learn more:


Where to now for China

Huawei is on the naughty list, but for how long? Trump and Xi are due to meet in Japan at the end of this week, with a decent chance that the trade dispute is paused for a significant period of time. Will Huawei be a part of that pause? Perhaps: we previously noted that a Huawei phone had mysteriously reappeared on Google's Android Q beta program and now its laptops are back in the Microsoft store. However, in terms of global supply chains it won't matter much, with US companies opting to open factories outside of China where possible.

Learn more:



Image of the week

View source

Current or Calibra?

There is nothing innovative about Libra other than Facebook's capacity to execute it. Even its logo was pinched from elsewhere, with Current, an online-only bank, noting similarities in their logos. Worse, Libra's logo was even developed by the same San Francisco-based design firm. Hmmm...


This week's data breaches



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Issue 29/2019: Meet Libra, Facebook's disrupter was compiled by Dr Justin Pyvis and delivered on 25 June, 2019. Feel free to send feedback, suggestions for future issues, ideas, insults, or pretty much anything that crosses your mind to his Keybase or Twitter account.