Issue 64

Why Libra failed

I might be jumping the gun a bit here (Libra  hasn't even launched yet!) but the writing is on the wall. Eight  founding institutions have now withdrawn from Facebook's Libra  Association, with the Financial Times running an article last week detailing why Mastercard officially pulled out (for those unfamiliar with Libra, see our previous issues here, here and here):

Concerns  about data integrity help explain why Mastercard pulled out of Libra,  the Facebook-led digital currency project that was unveiled last year.  Mr Banga likes the idea of a global currency and joined the association  of companies backing Libra, but concerns over compliance and the  business model led him to withdraw.

The association’s key members  would not give a hard commitment to “not do anything that is not fully  compliant with local law”. He points to due diligence considerations  such as know your client, anti money laundering, data management, “all  that . . . every time you talked to the main proponents of Libra, I said  ‘Would you put that in writing?’ They wouldn’t.”

He also did not  see how Libra would make money, and “when you don’t understand how  money gets made, it gets made in ways you don’t like”. Finally, he was  alarmed that Facebook had positioned Libra as a financial inclusion tool  but then proposed linking it to a proprietary digital wallet, Calibra.

“It  went from this altruistic idea into their own wallet. I’m like: ‘this  doesn’t sound right’ . . . For financial inclusion, the government has  got to pay you in this [currency], you’ve got to receive it as an  instrument you can understand, and you have to be able to use it to buy  rice and cycles. If you get paid in Libra [coin] . . . which go into  Calibras, which go back into pounds to buy rice, I don’t understand how  that works.”

Arguably, Mr Banga also has self-serving reasons for  pulling back from Libra. Lisa Ellis, payments analyst at  MoffettNathanson, thinks that it is possible that a blockchain-based  payments system could, years in the future, grow into a real-time global  payments network — posing an “existential threat” to private networks  such as Mastercard.

Mastercard joins Visa, eBay,  Stripe, Vodafone, PayPal, Booking Holdings and Mercado Pago in quitting  the Libra Association within a year of its formation, mostly due to "regulatory expectations":

With  the exception of eBay [and Vodafone], they’re all payment processors,  which means they have specific regulatory requirements dealing with  fraud, money laundering and sanctions enforcement. Governments were  starting to realize that Libra might make it hard to meet those  requirements — and payment processors in particular would end up on the  hook.

Fair enough. When your very profitable  business model depends on keeping the regulators at bay, which is  exactly where Mastercard has positioned itself, Libra is not a good  look.

The  exit of payment providers should be a positive for Libra. It allows the  Libra Association to push the limits a bit - actually do what Mr Banga  has accused it of doing - which is, after all, why it was created.

But it won't.

No, the real problem is the Libra Association and its masters at Facebook, which have shown no sign that they're willing to push any boundaries:

The  success of this venture depends on its trusted and safe integration  with the existing financial system. The world’s governments,  specifically regulatory and law enforcement authorities, are essential  partners in this endeavor.

The Libra Association intends to work  with policymakers as the ecosystem is developed and operationalized, and  as regulations adapt to address innovation and other changes in the  market.

In other words, Libra's ability to disrupt  the traditional financial system has been severely muted by... the Libra  Foundation. Conforming to the world's financial regulations means  resembling an existing financial institution. The only way Libra might  have worked is with an Uber-style approach: launch first and have the  regulators re-rewite the existing rules around you. If Uber had tried to  'integrate with the existing taxi system', it would have amounted to  nothing more than an app that made ordering an artificially scarce taxi  slightly less inconvenient.

The benefits to Mastercard - and  all the other payment providers that have quit - of being a part of an  association that's doomed to fail due to the inherent conflict in its  approach are now virtually non-existent, but the costs of aggravating  its regulatory masters are significant. Of course it was going to jump  ship.

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

— Justin

Other bits of interest

The left is the right

Both want the government to control the means of production, albeit for different reasons:

U.S.  Attorney General William Barr said on Thursday the United States and  its allies should consider the highly unusual step of taking a  “controlling stake” in Finland’s Nokia and Sweden’s Ericsson to counter  China-based Huawei’s dominance in next-generation 5G wireless  technology.

In a remarkable statement underscoring how far the  United States may be willing to go to counter Huawei Technologies Co,  Barr disclosed in a speech at a conference on Chinese economic espionage  that there had been proposals to meet the concerns “by the United  States aligning itself with Nokia and/or Ericsson.”

Barr said the  alignment could take place “through American ownership of a controlling  stake, either directly or through a consortium of private American and  allied companies.”

Bernie and Trump only differ in their motivations. The end result will be similar.

Learn more:

The Huawei backdoor

Apparently Huawei built a backdoor into its HiSilicon chips:

In  a detailed technical rundown that Yarmak published on Habr earlier  today, the security researcher says the backdoor mechanism is a mash-up  of four older security bugs/backdoors that were initially discovered and  made public in March 2013, March 2017, July 2017, and September 2017 --  and which the vendor failed to adequately fix.

I  don't for a second believe this was deliberate. It was poorly  implemented, not very well hidden and the incentives make no sense.  Occam's razor applies: the simplest solution is most likely the right  one. In this case, it's human error.

Learn more:

China is creepy AF

Note that this is a separate issue to whether or not Huawei is a security risk:

All  across the country, despite China’s vast surveillance network with its  facial recognition systems and high-end cameras that is increasingly  used to track its 1.4 billion people, the government has turned to  familiar authoritarian techniques — like setting up dragnets and asking  neighbors to inform on one another — as it tries to contain the  outbreak.

It took the authorities about five days to contact  Harmo Tang, a college student studying in Wuhan, after he returned to  his hometown, Linhai, in eastern Zhejiang Province. Mr. Tang said he had  already been under self-imposed isolation when local officials asked  for his personal information, including name, address, phone number,  identity card number and the date he returned from Wuhan. Within days,  the information began to spread online, along with a list of others who  returned to Linhai from Wuhan.

Learn more:

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Issue 64: Why Libra failed was compiled by Justin Pyvis and delivered on 11 February 2020. Feel free to send feedback, suggestions for future issues, ideas, insults, or pretty much anything that crosses your mind to their Keybase or account.