Facebook’s Libra cryptocurrency – net positive for Bitcoin?

Following Libra’s mainnet release in 2020, the global remittance market, the global e-commerce market, fintech and the banking sector, the blockchain space, and even nation-state economies – all will be impacted.

The release of the Libra will mark an inflection point that represents the beginning of the ‘Blockchain Era’. If the project can be successfully launched, Facebook will soon begin onboarding its users into a digital currency ecosystem where they will learn to use digital wallets and the basics of blockchain technology. Cryptocurrency is about to go mainstream. Is this what adoption looks like?

Money is evolving

Imagine if cash became digital. Imagine if more people had more access to the global economy. Imagine a new global currency on a new global network. Imagine if you could send money as easily as you send a message or a photo. This is the pitch on Facebook’s slick new website for Calibra, the digital wallet designed for use with Libra, the digital currency. If the pitch sounds familiar, that’s because it is. Bank the unbanked. It’s the same pitch heard many times, for Bitcoin and for countless other digital currencies. Can Facebook achieve where crypto to date has failed?

As the world becomes increasingly digital, and the developing world comes online, money itself is evolving. The world is moving to a cashless society, where the lines between who controls and issues money are becoming increasingly fuzzy. Corporations, governments, and individuals now have the ability to create bespoke digital currencies. And Facebook wants in.

Facebook’s motivations

Facebook is both uniquely positioned and highly motivated to move into financial services. It has an existing two billion-strong user base and a massive market in the developing world that is woefully under-served by the current financial industry. By providing seamless payments and easy access to a global currency, Facebook could be a powerful force for positive economic change by giving millions of people access to new economic tools.

Facebook has made billions out of a ruthlessly effective and exploitative advertising model that is based on selling user data. With global concerns about data use and privacy growing, a shift to a more private internet is coming. Privacy is fast becoming a competitive advantage. Microsoft and Apple are working on decentralized identity products, and these may disrupt the user data/targeted advertising model. From this perspective, a Facebook pivot to a financial services model makes sense, as it provides a new revenue stream. Libra is Facebook’s path to monetizing its 2 billion user strong social media platform and encrypted messaging services.

The need for trust

The Libra project is headed by David Marcus. As the former head of PayPal, Marcus has been involved in the effort to build the internet of money from the very beginning. He is intimately familiar with the quest to provide the world’s citizens with a stateless, global, digital currency. In 2014, Marcus left PayPal and became Vice President of the Facebook Messenger product. He also joined the board of Coinbase. Combining the power of the Facebook ecosystem’s messenger products with cryptocurrency soon became an obsession for Marcus, and with Zuckerberg’s full support, and the vast resources of Facebook, Marcus began working on what he has described as “the most ambitious cryptocurrency product since Bitcoin.”

The balance between user privacy, data, trust, and safety is very nuanced when it comes to money, and Facebook’s track record when it comes to privacy (Cambridge Analytica) and safety (move fast and break things) is, to put it mildly, not great. The platform is aware of this. Mark Zuckerberg published a blog post in March, acknowledging the need for a more “privacy-focused communications platform.”

Even more explicitly, in a Tweet storm, marking today’s official announcement of Libra, Marcus said, “we’ve heard loud and clear that you don’t want social and financial data commingled. We understand we will have to earn your trust.”

The Libra Association

Facebook appears serious about the separation of social and financial data. Kevin Weil, vice president of product for Calibra, told The New York Times, “Your financial data will never be used to target ads on Facebook.” To foster trust in the Libra project, Facebook is putting some distance between itself and the Libra currency. The Libra will be governed by a nonprofit entity in Switzerland, called the Libra Association. All member companies of the association, including Facebook, will have equal voting rights. The Libra Association’s group of 28 founding members includes Visa, Mastercard, eBay, Stripe, Spotify, PayPal, Uber, Lyft, Coinbase, and Andreessen Horowitz. The intention is to grow the Libra Association to 100 founding members, each of which will invest $10 million to fund the association. Each member will have the right to operate a validator node and have a say on governance rights and code changes. Validator nodes secure the network and confirm transactions. To begin with only founding members can run validator nodes, but in the long term, membership in the association and the ability to run a node will be available to any holder of Libra.

The Libra Reserve

Libra is designed to function as a stable cryptocurrency that maintains a consistent value against fiat currencies and is not subject to the volatility that characterizes cryptocurrencies such as Bitcoin. To achieve this it will be backed by a reserve of real assets, called the Libra Reserve. The white paper describes these assets as “low-volatility assets, such as bank deposits and short term government securities in currencies from stable and reputable central banks.”

The value of the Libra will be pegged to a basket of established currencies such as the US dollar, the euro, the yen, and others.

From permissioned to permissionless

The crypto community has been at pains to point out the differences between Libra and a real cryptocurrency like Bitcoin. This argument is best expressed by Bitcoin advocate Andreas Antonopoulos who said in a YouTube Q&A this month, “What Facebook is proposing is not a cryptocurrency. It doesn’t have any of the fundamental characteristics of cryptocurrencies. It does not stand on the five pillars of open blockchains. A cryptocurrency is 1. Open, 2. Public, 3. Neutral, 4. Borderless and 5. Censorship resistant and these characteristics stem from the decentralization of control.”

Blockchains are either permissioned or permissionless in relation to their ability to participate as a validator node. The Libra whitepaper states, “In a ‘permissioned blockchain,’ access is granted to run a validator node. In a ‘permissionless blockchain,’ anyone who meets the technical requirements can run a validator node. In that sense, Libra will start as a permissioned blockchain. To ensure that Libra is truly open and always operates in the best interest of its users, our ambition is for the Libra network to become permissionless.”

As stated above, Facebook has made it clear that Libra will start as a permissioned (centralized) blockchain, but the intention is to move towards being a permissionless blockchain over time. The Libra whitepaper goes on to state, “The challenge today is we do not believe there is a proven solution that can deliver the scale, stability, and security needed to support billions of people and transactions across the globe through a permissionless network. One of the association’s directives will be to work with the community to research and implement this transition, which will begin within five years of the public launch of the Libra Blockchain and ecosystem.”

While it’s not stated explicitly, the implication is that Libra will start as a permissioned blockchain so that transaction speeds and costs will be fast and cheap enough to service millions of users. This would not yet be possible on a decentralized blockchain like Bitcoin. For Libra to move towards a permissionless, decentralized state, there are significant political and technical challenges to solve. It’s unclear as to whether these are solvable, which is why the team has given themselves a five-year window. They’ll likely need much longer.

How Facebook makes money

The Libra whitepaper talks up the project’s noble goals to provide a powerful public good that will give millions of people access to financial services and cheap capital. But the big tech company is profit driven and it has several possible paths to generate new income. Tiny blockchain transaction charges will be incurred, some by users, many absorbed by vendors. If the project gains traction, the Calibra wallet service is perfectly positioned to build a layer of financial services over the Libra blockchain. Lending, investing and remittance services would be highly profitable, and at scale could be offered at rates lower than the existing financial system.

To fast track adoption, it would make sense for the Libra Association to incentivize both merchants and users. Users could get free Libra for setting up a wallet or earn tiny amounts of Libra for creating, sharing or liking content, and merchants could get discounts on transactions for accepting Libra. For example, both Uber and Lyft are founding members of the Libra Association. One can imagine the benefits to customers, the ride-sharing apps and the Libra, if Libra was used to create a token ride-sharing economy.

Expect intense regulatory scrutiny

If the ambitious Libra project is to succeed, it will have to surmount intense scrutiny from regulators not just in the US, but around the world. There’s a chance the project won’t even make it to launch due to the complexities and pressures the project will have to hurdle. Facebook is already fighting multiple battles on multiple fronts. The US Federal Trade Commission is considering a record $5 billion dollar fine over repeated data privacy violations. Later this year, Facebook, along with Google and Amazon, is expected to face scrutiny over possible antitrust violations. Politicians on both sides of the political divide are calling for Facebook to be broken up, under the guise of the platform becoming too powerful. The US election in 2020 will bring further scrutiny to the platform, which is likely to be used as a political punching bag.

In fact, within hours of the official Libra announcement, regulators began to express concerns. Representative Maxine Waters, the chairwoman of the House Financial Services Committee, called on Facebook to stop the development of Libra until regulators could examine the potential risks. In a statement, Waters said, “with the announcement that it plans to create a cryptocurrency, Facebook is continuing its unchecked expansion and extending its reach into the lives of its users. There is no clear regulatory framework to provide strong protections for investors, consumers, and the economy.”

Meanwhile, in France, Bloomberg reports finance minister Bruno Le Maire is strongly against the Libra. He’s reported to have said that “the Libra can’t and must not happen. It is out of the question’’ for the cryptocurrency to “become a sovereign currency.”

What is Libra competing with? Bitcoin or the banks?

Libra is not decentralized or censorship-resistant and is therefore not a true cryptocurrency. However, Libra does appear to offer the promise of fast, cheap, borderless, peer to peer payments, and if one was to squint a little bit, the case could be made that Libra goes a long way to fulfilling some of the original use cases for Bitcoin, censorship resistance and immutability aside.

In 2019, however, Bitcoin’s dominant narrative has evolved. For now, at least, Bitcoin is less a medium of exchange, and more of a store of value as digital gold. As a store of value, Bitcoin is by most measures, quite successful. In fact, from an investment standpoint, Bitcoin has been one of the best-performing assets on the planet. Libra, as a stable coin with an essentially unlimited supply, poses no threat to the deflationary by design, fixed supply hard asset that is Bitcoin.

So while Libra doesn’t compete with permissionless, censorship-resistant, fixed supply cryptocurrencies such as Bitcoin or Monero, there’s a strong case to be made that Libra could compete with retail banks, central banks, credit card companies, money transmitters, fintech, payment focused crypto assets such as Ripple and Stellar, and even small nation states. Libra doesn’t compete with Bitcoin, but it does have the long term potential to disrupt the legacy financial system.

For large parts of the world, it will simply be easier to make payments through simple peer to peer messaging services such as WhatsApp or Messenger. Facebook can keep transaction costs to a tiny fraction of the charges that Visa or Western Union or PayPal rely on. Eventually, Libra could do the same for loans, remittance and more.

In countries like Venezuela, where inflation is rife and a large segment of the population does not have a bank account, the appeal of the Libra is obvious. What’s less obvious is how local citizens would exchange their local currency for the Libra in the first place, and whether they could then exchange Libra for something else again. There are problems to solve, but the possibilities are exciting.

Libra is probably bullish for bitcoin and crypto

The simple fact that Libra will be referred to as a blockchain based cryptocurrency in countless hours of media and online coverage will give crypto, blockchain and Bitcoin immense media visibility, eventually helping to further legitmize the space. If Libra goes ahead, as Ari Paul pointed out, if one in ten Libra users then develops an interest in Bitcoin, that alone doubles the number of Bitcoin users, increasing the pace of adoption, network effects and the value of the network. Libra will inevitably create a massive ecosystem of services and infrastructure, some of which will likely be accessible by permissionless cryptocurrencies. Users would soon notice that Libra’s value remains stable, while Bitcoin has the potential to increase. Many will want to own some Bitcoin alongside their Libra. If a rising tide lifts all boats, Libra could be the single most bullish event for mainstream crypto adoption.