Why Facebook's Libra Cryptocurrency Is Both More Interesting Than Expected And Less Interesting Than I Hoped

from the well,-it's-something dept

After lots and lots of speculation, Facebook finally officially announced its cryptocurrency project last week, with a big event and a white paper that loosely describes the plans for the cryptocurrency called Libra. There was a lot to discuss, so in the spirit of slow news, I wanted to take some time to actually digest the plans before opining on it more thoroughly. Nearly all of the immediate reaction to the plan that I saw was not just negative, but mockingly so. Lots of jokes about "ZuckBucks" and the most common line of all: "who would actually trust Facebook with your money."

Having spent time actually reading the white paper, as well as much of the commentary around it, as well as talking to a bunch of different people -- some who are supportive of the program, some who are not at all supportive, and one very knowledgeable friend who basically rated the whole program as a big "meh" -- my initial take is that the effort is in many ways a lot more interesting than I expected, but a lot less interesting than I hoped, and I don't think anyone can really have much of a sense of what will become of it until we learn more.

More Interesting Than Expected

So, let's start with why it's a lot more interesting than I expected. And I'll note that, in addition to reading the white paper, I also highly recommend John Constine's writeup about Libra at TechCrunch, which is by far the most thorough and detailed analysis of the program. So what made Libra more interesting than I expected is that you can tell that a massive amount of effort and thought went into dealing with a single giant question: no one's going to trust this, because no one trusts Facebook. The people designing this clearly knew that their biggest challenge was the fact that there's massive global distrust of Facebook, and really bent over backwards to respond to that. I had kind of expected -- like many big companies -- that the koolaid inside would lead them to pretend that the distrust and hatred directed towards the company wasn't that big of a deal. But, no, it's clear that from the start, this was designed to answer many of the questions raised by "the... but why would anyone trust Facebook" question.

Indeed, in a big Wired "behind the scenes" profile of the Libra project, Libra creator Dave Marcus more or less says exactly that:

Marcus, then head of Facebook Messenger, thought he had an answer. He texted his boss and told him it was time to talk about Facebook creating a cryptocurrency, saying that he had a clear view of how to do it, in a way that would earn trust even from those skeptical of Facebook. Marcus spent the next few days writing a memo that laid out his ideas.

Later, the article notes:

Libra’s greatest hurdle may well be overcoming the tarnished reputation of its creator. Marcus knows this, and thinks that the key is making sure that Libra is not synonymous with Facebook.

And you can see that in many, many elements of the design. Over and over again you see decisions that effectively take Facebook's vision out of the equation. It's set up an outside non-profit, the Libra Association, which will oversee the project. It's recruiting "founding members" who will (mostly) pay $10 million to become a validator node, and Facebook itself will just be a single member with a single vote. In effect, while Facebook is building the initial scaffolding, it's setting the project free from its own direct control. The code is open sourced and can be audited. While Facebook has also set up a separate subsidiary, Calibra, that has built a wallet product that will integrate with various Facebook messaging products, it has isolated Libra information from the rest of the data it collects on you, so this isn't going into the big data bank of info that you already don't trust Facebook to keep private.

If you're actually concerned about trusting Facebook, Facebook has made a rather Herculean effort to make it clear that to use Libra you don't actually have to trust Facebook. But, that's only true with two big caveats. First, you have to concern yourself enough to read the details. Not many people are going to do that. Second, you do still need to trust all the other validator node operators, which right now make up a rather motley mix of big organizations.

Because unlike most cryptocurrencies where anyone can effectively become a node in the open ledger, Libra made the choice to, at least initially, limit that to a bunch of founding members who will act as nodes. The reasoning behind this design choice is pretty obvious. For one, you can set it up in a way that doesn't have the scaling/energy concerns of a Bitcoin. Also, doing it this way can be seen as less chaotic and subject to questionable behavior as a fully distributed/trustless setup of Bitcoin or Ethereum, but you still have a bunch of large, mostly "respected" organizations acting as validator nodes, meaning that for something to go horribly wrong, a bunch of those big organizations would have to all agree to do something really, really bad. And that seems... unlikely. Not impossible. But unlikely.

The initial members are an interesting, and slightly eclectic, mix:

Payments: Mastercard, PayPal, PayU (Naspers’ fintech arm), Stripe, Visa

Technology and marketplaces: Booking Holdings, eBay, Facebook/Calibra, Farfetch, Lyft, Mercado Pago, Spotify AB, Uber Technologies, Inc.

Telecommunications: Iliad, Vodafone Group

Blockchain: Anchorage, Bison Trails, Coinbase, Inc., Xapo Holdings Limited

Venture Capital: Andreessen Horowitz, Breakthrough Initiatives, Ribbit Capital, Thrive Capital, Union Square Ventures

Nonprofit and multilateral organizations, and academic institutions: Creative Destruction Lab, Kiva, Mercy Corps, Women’s World Banking

The non-profits don't have to pay the $10 million entry fee. The others do, if they decide to buy in, though the Wired piece notes in passing that this initial list has not actually committed to buying in yet:

Actually, all of those are provisional partners. At this point, their participation in the association doesn’t mean they’ve committed to paying $10 million to become a Libra node. The partners seem motivated by curiosity, FOMO, and a shared dream with Facebook that the effort could be both a boon to their ambitions in underserved economies and a milestone in the evolution of digital currency. But they have varying degrees of enthusiasm.

As Joshua Gans of the University of Toronto’s Creative Destruction Lab, one of the launch partners, puts it, the members have thus far been invited to a kind of constitutional convention. “It’s entirely possible not everyone stays part of the union after that,” he says.

Wired also notes that many of these organizations agreed to this in just the last few weeks. And, Facebook has made it clear that its goal is to have 100 members by the actual launch in 2020. In short, the partner list could change a lot. And, as many people have pointed out, that even if they recognize that you don't need to trust Facebook to make use of Libra, they don't trust a lot of those participants. There also aren't any banks. Or any of the other really big tech companies (most of the tech partners are a tier down). How this all shakes out in the long run is going to be very, very important.

The other interesting tidbit is that it's clear that the Libra team wanted to deal with the other big issue with many cryptocurrencies: that the volatility makes it mostly useless as a currency, since everyone is using it as a speculative vehicle. Libra is set up so that the currency will be fully backed by a reserve of real assets to make it stable. There are a few other "stablecoins" out there, but they're not all that popular and, in some cases, such as with Tether, it's long been accused of being a scam and not actually backed by dollars as promised (accusations that gained more credibility recently). However, given the players backing Libra, and the setup of the program, many of those kinds of concerns can be dealt with.

I've seen multiple reports saying that rather than thinking of Libra as another cryptocurrency, it's probably best thought of as another Paypal or Venmo. Indeed, you could say that the only time the cryptocurrency/blockchain part matters is for getting the currency out of Facebook's ecosystem. That is, if you use Calibra inside of a Facebook service, it's really little more than an internal currency. What's partly interesting, is that if you want to then move it out of Facebook's control, then the blockchain aspect takes over and you get to extract yourself. That's good.

But, to me, the better comparison, rather than Paypal or Venmo, is really WeChat in China. The whole Libra setup (as well as Calibra) seems like a fairly obvious attempt to recreate what WeChat has done. If you're not familiar with it, WeChat is not just like the Facebook of China, it's the everything China. People pay for nearly everything directly within WeChat. Without WeChat in China you basically can't do anything. It seems pretty clear that Libra is an attempt to try to build that kind of functionality into Facebook, and to do it in a way that the currency aspect flows smoothly, without too much friction. That's interesting in a lot of ways, because there's been a lot of innovation coming out of WeChat, and showing what can be done when you integrate connectivity with currency.

Less Interesting Than Hoped

However, that last point is also why this whole thing is a lot less interesting than I hoped. Recreating what WeChat has done in China, and doing so in a way that is more open, and with less control by Facebook is interesting -- and if it's actually adopted could lead to some new innovations. But it's not nearly as far as I had hoped Facebook might go. I've been talking about this protocols instead of platforms concept for a while now -- and one element that could make that work is a better cryptocurrency or tokenization system that would open up new business models that don't rely on advertising. And I had hoped that Facebook's foray into cryptocurrency might include that element. But it clearly does not.

While part of Libra is the new Move programming language that will let people develop on top of the Libra blockchain, this does not seem designed for a world of protocols instead of platforms. It's very much about integrating money into existing platforms. That's understandable, but disappointing.

That's not to say Libra isn't ambitious and couldn't lead to more interesting things down the road, but on the Clayton Christensen spectrum of sustaining to disruptive innovations, this looks like it hues much more towards a sustaining innovation. It's a platform to add new features into existing systems, rather than a new way of organizing the world. It could still have a big impact. But it could have done a lot more.

And, frankly, as I'll discuss in the next section, I think the failure to go this far has the greatest chance of holding Libra back in the long run. Since so much of Libra is about layering on payments to what's out there already that just opens up Facebook to lots of criticism and potential regulatory hurdles. If Facebook had, instead, tried to restart its own setup as a cryptocurrency-based protocol, focused much more on the protocol service building, rather than the currency, the regulatory response likely would have been quite different. Indeed, turning its platform into a protocol would have been, in effect, Facebook breaking itself up. While Facebook took a bold approach with Libra in effectively taking its own power out of the equation to empower all the Libra Association Members, it's only doing that for this payments layer -- not for its underlying structure.

Lots of reasons to be skeptical:

In the end, while this is an interesting and ambitious project, there are plenty of reasons to be skeptical. While Facebook did bend over backwards to try to pre-answer the "but who would ever trust Facebook with money" question, how many people are actually going to take the time to understand that? At least based on the initial reactions I saw online, the answer is: not many.

And, of course the bigger threat are regulators. New York Magazine noted that, in the end, this seems to be Facebook trying to compete with the US dollar to become the global reserve currency. And governments sure aren't going to like that. And they're already pissed off about Facebook in general. So the idea that grandstanding politicians are going to take the time to understand that Facebook has mostly taken its own trust issues out of the equation is likely a non-starter. European regulators are already flipping out and the US Congress is already setting up hearings. The whole effort may be crushed by regulators before it even really begins.

And then, of course, there's the distinct possibility that even if this does get off the ground, no one might actually use it. Yes, Facebook has a massive base to start with. Yes, there's lots of publicity and I'm sure Calibra can pull lots of tricks to incentivize usage. But, getting people to buy into new payments is something of a crapshoot. Sometimes it works, sometimes it doesn't. And the biggest platform doesn't always win. People may not remember, but PayPal's initial success was facilitating payments on eBay. eBay then came up with its own competitor to PayPal, and you might think that, given its own dominance and platform that it would take over -- but that didn't happen. eBay ended up having to buy PayPal because its own competitor flopped.

The other big challenge is actually getting however many members of the Libra Association actually on the same page. It's not hard to see how different visions and in-fighting could mess up the entire project as well.

So while there are plenty of interesting things here, there's plenty that could go wrong. And, frankly, I'm disappointed that the project's ambition wasn't nearly as disruptive as it could have been.

Of course, you never know what the future might hold. And, at least one person is already trying to setup their own version of the Libra blockchain that doesn't involve the Libra Association, but is actually fully distributed and "privacy oriented." Wouldn't it be fascinating if Libra actually took off by a forked version that does an end-run around all those giant companies?

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Filed Under: cryptocurrency, decentralization, libre, payments, trust
Companies: calibra, facebook