I've blogged a few times about Facebook planning to launch a currency ...
... and the fact that most regulators won't like it. In fact, there are already questions being asked in US Gov about their plans, and calls for action. That took less than 24 hours to happen. Meantime I'm already yawning, as I blogged about it before, so my good friend Simon Taylor - yes the Holy Clan Leader of all Blockchurch developments at 11FS - wrote a nice summary of what this means on the 11FS blog. Over to you Mr. Taylor ...
What is Facebook coin / Libra? Is this a game-changing moment and what should we do about it?
In case you missed it (how, exactly?), Facebook announced their much anticipated cryptocurrency spin-out project: Libra. It’s comprised of two new elements:
- The Calibra wallet. A wallet that uses the Libra coin and will be integrated to WhatsApp, Instagram and Messenger from 2020 to bring payments to the 1.7Bn people who don’t have bank accounts.
- Libra. A foundation comprised of some of the worlds largest companies including PayPal, Visa, Mastercard, Stripe, Spotify, eBay, Coinbase, Vodafone and key investors such as a16z and Union Square Ventures.
Libra has released their early source code and the plan is to go live in 2020. The Libra website has detailed technical documentation as well as working code examples.
So what are the 11 most interesting things about Libra?
- The companies involved make this a “holy sh*t” moment
Facebook doing this alone would be huge, but there’s some massive names in there. Whoever you are, wherever you are, that combination of names by itself backing this project would be huge regardless of the goal. You cannot ignore this project.
Spotify, PayPal, Lyft and eBay create really interesting access points to the end user and WhatsApp / Instagram also become a great place for an interoperable, easy to use payment to move between products customers use every day.
- There are no banks* in the foundation
*althoughPayPal is a licenced bank in Luxembourg
Have a look at that logo list. There are no banks at all. Rumours are that some were contacted, but banks take forever to do anything. Maybe some even wanted to be involved.
- This is a “stablecoin”
People often talk about the volatility of cryptocurrency being a reason why it wouldn’t be used by most people. Facebook are pegging the value of Libra tokens to a basket of real world assets (e.g. US Dollar, Pound Sterling, Euro etc.), in theory making it extremely stable in value, more so than the US Dollar. This concept has been around since the late 60s but hadn’t been done. This potentially puts Libra into competition with central banks.
- They used the word “Cryptocurrency” to describe it
This may seem small but given how much banks have avoided the word, this is a significant moment for the concept of a currency not backed by a central bank.
- It’s compatible with being “regulated” by FinCEN
Libra itself is not regulated, but the expectation is that wallet developers building on the Libra Blockchain will follow the rules and regulations.
- Facebook doesn’t own Libra
Libra is a new entity and Facebook, in time, will have equal membership to it that all of the members (e.g. Visa and Mastercard) do. This is, I suspect, to allay fears of Facebook using the coin to get more data and snoop on people. Libra is open source (Apache 2.0 licence) allowing developers to read, build and provide feedback. Libra is a registered non-profit in Geneva.
- Facebook competes with WeChat and Apple Pay
Payments are a massive use case for WeChat, there are over 100m users of Apple Pay and payments are a proven business model for big techs. A significant majority of Facebook’s growth and user base is in developing markets where financial infrastructure is limited. This gives Facebook a differentiated competitive positioning for WhatsApp and Messenger, and potentially a new revenue model.
- Facebook hasn’t been the friend of Nation States lately
Facebook has had a lot of bad press with the subject of disinformation and the spreading of “fake news” still a major talking point for governments and regulators, as was Mark Zuckerberg’s seeming ambivalence to show up for some of the invites governments offered. Does them promoting something that competes with central banks sit well, and is that why no banks are involved? Is there strength in numbers by teaming up with Visa, Mastercard, PayPal, Stripe, Lyft, Spotify, eBay and others?
- What does this mean for payments and banks?
Facebook have dabbled with payments for nearly a decade, and have yet to find a killer use case or mass adoption. Will pivoting to emerging markets give them an edge? What will the other Libra members do with a stable coin? The man running this at Facebook, former PayPal CEO David Marcus, has stated that the Internet needs its own money.
The flip side is that the more that Facebook and WeChat take away liquidity from retail banks and incumbent payment rails, the less important they become. The presence of Visa and Mastercard may be a really well thought-out strategy to transform their networks, but the value they offered was around managing when something goes wrong in a payment (e.g. refunds, chargebacks). Is that an opportunity?
What about things like SWIFT? The messaging standard and network between banks has historically handled very large transactions and the customer was a long way from the network. You could argue Libra is “SWIFT for everyone else”, allowing direct P2P of value internationally. WhatsApp is relied on by hundreds of millions of people who don't, and may never, have a bank account.
- How does the stablecoin work?
All transactions will be pseudo-anonymous (in other words, I can see what’s happening on the network but not who did it). All wallets that use the network have to perform KYC checks on their wallet users (have the identity of who’s using the wallet). While reserves “back” Libra (GBP, EUR, USD) it doesn’t have a fixed peg to those currencies, so the value of Libra would move up and down against those other currencies.
Libra is issuing security tokens (things you can buy as an investment) as a way to fund incentives to use the network and investment programmes. They will only be available to accredited investors, i.e. people qualified to make big investments and professional investors or companies. If you want to become a validator node, you need to pay $10m to the Libra foundation.
- It’s a closed blockchain, but the intent is to open it!
This could be a real competitor to Bitcoin but given the geopolitical tensions, will central banks allow Libra to gain traction? Given the concerted efforts to limit Bitcoin by global regulators, that seems unlikely.
Which begs the question: why didn’t Facebook use Bitcoin? You could argue Bitcoin is too slow, not stable enough (its price is very volatile) and the per-transaction costs are too high. Facebook chose to use their own blockchain (called Libra blockchain) which uses a BFT consensus, which was based on VMware’s HotStuff framework. This means it’s going to be fast and well supported.
Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal's Financial News. To learn more click here...