Libra cryptocurrency: Could Zuck eat banker’s lunch?

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The quick answer is we don’t know yet. If I were a banker, I’d be concerned.

  • Digitally-native cryptocurrency but stable?

  • Decentralised and global?

  • Serving unbanked communities? (FT has some doubt about that one)

Facebook also launched a subsidiary, Calibra as the digital wallet of the proposed Libra crypto and an attempt to disconnect financial data with social data, for obvious reasons: scrutiny.

Facebook’s Libra proposal comes at a time that regulators are notoriously slow to tackle Facebook’s dramatic impact to society and the booming tech innovation in general. But many argue that this is the moment that will force regulators to toughen up. Many countries raised their concerns. A couple of days ago (July 2) Facebook execs received a letter from US House of Representatives asking them to freeze developments until the initiative and its potential impact are understood. Basically, wait until we catch up.

The advertised value prop in Libra’s announcement is a “democratic”, global and digitally-native currency to better serve the 21st century population including the 1.7bn unbanked community.

The obvious business incentive is to get a portion of the vast Facebook user base to buy stuff and move money using Libra. That would mean exploiting an opportunity to benefit their users with lower transaction fees while making great returns on top of that. Sounds like a win-win, and probably one of the reasons why Libra’s financial associates Mastercard, Visa, Paypal, Stripe, PayU, Mercado Pago happily pay a $10m ticket to participate.

Succeeding with their mission, would mean bringing crypto into the mainstream with unknown side effects for traditional finance. It could pose a direct threat to the incumbent financial system and reasonably the announcement attracted the attention of regulators, governments and central bankers. They are worried that Libra and Calibra could lead to a Facebook-controlled, closed, financial ecosystem, a monopoly in which only selected firms participate. Given the track record of Facebook with user privacy and data sold to third parties, they are right to be concerned.

 
Zuck. Illustration by Onkle Wanskicks

Zuck. Illustration by Onkle Wanskicks

The Libra proposition faces huge regulatory, technical and financial challenges which probably explains why there are no traditional banks in the association to date. The announcement however, points to the involvement of financial institutions in the consortium of selected companies that can grow from 28 to about 100. The Libra Association is a Geneva based non-profit, that will control Libra. Facebook has an equal vote to any other member but will be leading the initiative in 2019 aiming for a 2020 launch.

 

Helping the unbanked

The FT Alphaville’s Brendan Greeley isn’t buying Libra’s “helping the unbanked” mission statement. He throughs severe criticism at it, questioning if they are even serious about a statement that is backed by what seems to be “last minute googled data”. The article argues that a crypto is irrelevant to the situation of the unbanked communities. “People haven’t got enough money to justify a bank account”.

Privacy

After the recent scandals involving Facebook, financial data privacy evokes deep concerns. Does the world trust Facebook to play a major role in the future of money? What if that gives it the super-power to disrupt central banks, especially in developing countries?

 
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The Libra announcement clearly states that social data and financial data will not be linked. However, Calibra could incentivise the consent box ticking for encouraging users in linking the two. They could easily optimise the user experience for helping users to give permission (allow wallet on instagram for fast purchases anyone?). So many ways to trick user behaviour without serious scrutiny from regulators in place.

Linking social with financial data streams would allow Facebook to super-optimise its ad platform and sell products directly via ads in WhatsApp and instagram as well as providing thorough analysis on ROI ad spending to sellers.

Usability

Ari Juels, a computer science professor at Cornell University argues that the “Achilles heel of any crypto is usability around Key management”. It has been quite hard for users to manage their private keys, resulting in millions of dollars in value that has been lost or stolen.

“The only way to do this is to have users’ keys managed for them by some corporate entity, presumably” says Juels in the Wharton Podcast. One way this could be resolved would be Calibra to manage keys for users. But then the their decentralisation claim will begin to fall apart.

Facebook has proven it can deliver extraordinarily popular products and tackle usability problems at scale by testing in smaller segments of society. We should expect them to thrive in redefining the way cryptos are used but the challenge is how to do it within regulatory bounderies.

Trust

The initiative is facing headwinds from the distrust the tech giant has accumulated over the last two years. Then of course, there are fears for money laundering, competitiveness and all those big problems that can’t be addressed with Zuckebergs’s “move fast and break things” approach.

That said, Facebook has been designing the future of money for a year under the brilliantly conceived Libra brand. Whether it will be allowed to pursue its dream or not, we’re yet to see.

Before we know it, we might be living in a very different financial world. Unless of course, the regulator steps in fast and breaks things.

 

Further Reading

Breaking the Zuck Buck series FT Alphaville

How Facebook’s Libra Will Turbo-Charge Its Ad Empire

You can read into the details of Libra in their White Paper

David Marcus’ response to criticism

Banks are s*** themselves 🎧 Blockchain insider by 11:FS

Illustrations by Onkle Wanskicks