What Is Facebook's Cryptocurrency and Why Does It Matter?

Reuters

What Is Facebook's Cryptocurrency and Why Does It Matter?

Facebook's "Libra" is not just an attempt to corner the global online payments market—it is a direct challenge to the authority of nation-states.

 

Mark Zuckerberg’s Master Plan to Take over the World

At face value, this all sounds like a net positive for humanity. Surely people everywhere would collectively benefit from a cheap, universal payment system and global currency, right?

 

Things are never so simple. Facebook is, after all, a corporate entity, with an obligation to shareholders to deliver a return on investment. A deeper analysis of its plans with Libra raises some questions worth considering.

For starters, there is the Geneva-based Libra Association, which is intended to be the independent organization that oversees Libra. This association will eventually be comprised of one hundred members, representing a variety of corporate and non-profit interests. Each one will control no more than 1 percent of the Libra network, and decisions will require a supermajority of a two-thirds vote. How are these members chosen? Aside from paying an upfront cost of $10 million and being able to run the hardware necessary for the Libra network to operate (estimated to cost around $280,000 per year), these entities must meet specific requirements. Businesses seeking to join must be worth more than $1 billion in market value or possess more than $500 million in customer balances, be able to reach 20 million per year, and be “recognized as a top-100 industry leader by a third-party sector-specific association or media company.” NGOs and nonprofits must have a proven record (greater than five years) of alleviating poverty, an operating budget of over $50 million, and possess a “top-100 ranking in Charity Navigator, Charity Navigator International, GuideStar, NGO Advisor, Devex, or GiveWell.” And finally, academic institutions seeking to participate must be a top-100 university according to QS World University Rankings and possess a top-100 computer science department as measured by CSRankings.

In other words, the Libra Association would be composed of “publicly trusted” but otherwise rather unaccountable corporate entities and nonprofits. Some critics would describe this as an oligarchical plutocracy that is out to enrich themselves at the expense of the public—not exactly the sort of consortium that regular people are ready to trust with the future of money.

Then there are the benefits that Libra Association members (including Facebook) receive. Aside from playing an active role in creating and managing the Libra, as well as “being eligible for new user incentives and transaction rebates,” members would receive the dividends that come from holding “Libra Investment Tokens.” These are essentially equity shares of the network, entitling holders to dividends from the interest generated by the collateral that make up Libra’s reserves. This interest could be significant—if Libra’s reserves were greater than $1 trillion (not an entirely unrealistic amount when one considers that there are currently around 1.7 trillion physical U.S. dollars in circulation), then a mere 1 annual percentage rate would generate Libra Investment Token holders $10 billion in income. Divide this evenly for Association members, and a single company/nonprofit would see an annual return of $100 million for doing little other than maintaining some computer hardware and attending a few meetings a year in Geneva.

These are only the official benefits though. The unofficial benefits to being a Libra Association member are arguably even greater. For example, there is the fact that the Libra blockchain could be used to create an entirely new universe of financial tools—the “internet of value” that is often touted by Silicon Valley types and attendees of the World Economic Forum.

Some background knowledge is necessary here. Since cryptocurrencies such as Bitcoin serve as programmable money, this means that they are also technology platforms. Just like how a developer can build an application on Facebook’s platform (for example, the video game FarmVille), so too can developers build applications on top of Bitcoin, Zilliqa, and other blockchains. Libra would also offer this option. In fact, their whitepaper specifically states that, in time, the

Libra Blockchain will be open to everyone: any consumer, developer, or business can use the Libra network, build products on top of it, and add value through their services. Open access ensures low barriers to entry and innovation and encourages healthy competition that benefits consumers. This is foundational to the goal of building more inclusive financial options for the world.

This goes to show how lofty Facebook’s ambitions are: they wish to replicate Google’s success with its open-source Android mobile operating system, but instead of taking over the mobile phone market, they wish to control the entire consumer financial infrastructure of the world of tomorrow. The next generation of financial applications and products would be built on Facebook’s financial platform and presumably be accessible from its social media platform. In the future, an individual could receive birthday money from grandma in the form of Libra, then immediately invest it into Facebook stock via an application built on the Libra blockchain. Better yet, instead of investing in Facebook, why not invest in an individual, securitized, self-driving delivery truck that serves your own high-traffic neighborhood? (That particular example may sound rather silly, but boosters of blockchain technology contend that it is entirely possible in the future, given sufficient advancements.).

From a certain perspective though, this move by Facebook to create a new “internet of value” is essentially an attempt at a sort of monopoly. Libra’s sheer starting size (a potential 2.8 billion Facebook users, and then some) and incentives to build on it would put most other blockchain platforms out of business overnight. It would be a highly profitable monopoly too, since Facebook would financially benefit from all of these applications and tools being built on a platform it and its partners control a share of. And all this presumes that Facebook and its partners themselves don’t start building and developing applications—which is precisely what they likely wish to do. In an interview with The Australian Financial Review, David Marcus, the former president of PayPal and the current lead at Calibra, indicated that Facebook wants “to use the data generated by Calibra to move into lending.”

This brings us to the final, and possibly the greatest benefit that Facebook and the Libra Association would attain if everything goes according to plan. By being one of the network’s validators, a member of the Libra Association would conceivably have access to Libra’s entire database of transactions. And while Facebook claims that the Libra is “pseudonymous and allows users to hold one or more addresses that are not linked to their real-world identity,” like Bitcoin, this pseudonymity loses value if these addresses are tied to real identities at transaction end points. This will likely be obligatory, as people will be interested in trading their libras for dollars, euros, pounds, and so forth, as well as paying for things such as rent, utilities and more.

In other words, for the Libra Association, the Libra is a bottomless source of that most valuable prize of them all, the digital equivalent of oil: data. Facebook and any other corporate members would have access to the entirety of an individual’s financial history so long as the libra is used as a medium of exchange. This data would be invaluable in determining the financial habits of individuals and offering them customized advertising, deals and so forth.

Can a self-governing, self-policing association with strong corporate representation and no external oversight really be trusted with this treasure trove of data? Facebook alone, after all, is under fire for being inconsiderate of its user’s privacy, to put it lightly. A recent court debate concerning how users’ personal data was shared—without consent—with the now infamous consultancy Cambridge Analytica is revealing. A transcript of the proceedings was published by Law360, and it demonstrates Facebook’s point of view when put under the gun. Representing Facebook before U.S. district judge was Orin Snyder from Gibson Dunn & Crutcher. He argued before this judge that, when it comes to Facebook:

There is no privacy interest, because by sharing with a hundred friends on a social media platform, which is an affirmative social act to publish, to disclose, to share ostensibly private information with a hundred people, you have just, under centuries of common law, under the judgment of Congress, under the SCA, negated any reasonable expectation of privacy.

In other words, Facebook’s legal argument is that the simple act of even using Facebook negates any expectation of privacy. This is not exactly what someone would want to hear from the company now proposing that it wants to help handle a good chunk of the world’s financial transactions.

Breaking the Bank

Can Facebook and the Libra Association, with all its audacity, really pull this off? Maybe, but not without facing significant challenges.

For one, the banking industry will be beside itself at the audacity of Facebook and the Libra Association. This scheme of theirs is tantamount to a declaration of war. They will argue, with some merit, that the Libra Association (and its intent to expand into the realm of financial products) is a direct competitor to its traditional lines of business, particularly payments. Shouldn’t the Libra Association be brought under existing banking regulation? Shouldn’t they too be subject to central bank regulation, bank holding company acts, taxation rules, depositor insurance schemes, and so forth? Shouldn’t the Libra Association also have to answer to FINRA, the CFTC, the FDIC, the UK Office of the Comptroller of the Currency, the French Autorité des marchés financiers (Financial Markets Authority), the German Bundesanstalt für Finanzdienstleistungsaufsicht (Federal Financial Supervisory Authority), and so on and so on and so on?