By Eleanor Haas, blockchain/crypto columnist for Iconic Holding, advisor to ventures and Astia Angels and Director, Keiretsu Forum Mid-Atlantic.
The first I heard of Libra was in Fred Wilson’s newsletter:
“A new blockchain & cryptocurrency project, Libra, was announced today. Libra has been incubated by Facebook . USV (Union Square Ventures) will be one of the founding members of the governing body, the Libra Association. Libra is a stable, fiat-backed cryptocurrency that will launch inside some of the world’s largest consumer-facing applications.”
I had mixed emotions. Incubated by Facebook? Questionable credibility. USV a founding member of the governing body? Top credibility. A new cryptocurrency? Really? I read the rest of Fred’s newsletter. Then the Libra white paper. Wait — this is about plans for a complex new financial infrastructure as well as “a simple global currency”- an oxymoron if ever there was one — a currency that will one day trade on a global scale much like the U.S. dollar. Further, it’s more of a payment system than a cryptocurrency, a system designed to provide an easy way for Facebook users to send and receive money through its messaging services.
Libra vs. Cryptocurrency
Bitcoin, the first cryptocurrency, was intended to be digital cash, a decentralized means of exchange issued by a private source, not a government, which could solve the problem of hyperinflation. The inventor described it as “A peer-to-peer electronic cash system that is based on cryptographic proof instead of trust.”
Like Bitcoin, Libra uses cryptography and is intended to be digital cash issued by a private source. But its network is permissioned, not decentralized, and it replaces government control through banking & regulatory mechanisms with corporate control through technology.
Corporate control is by a not-for-profit organization — the Libra Association — but that, in turn is full of giant profit-making entities, as well as some not-for-profits and GMOs, all of whom make money from Libra users invisibly in the background! Doesn’t this sound a bit like the way Facebook makes money from Facebook information users?
Libra as a Stable Coin
To trade on a global scale like the US dollar, Libra can’t have Bitcoin’s volatility and will peg its value to a basket “of low-volatility assets, including bank deposits and government securities” in different fiat currencies. “As the value of Libra will be effectively linked to a basket of fiat currencies, from the point of view of any specific currency, there will be fluctuations in the value of Libra.” Might Libra displace sovereign fiat as more and more people use it to shop online and find their own sovereign fiat inconvenient?
Hmmm. Sounds like governments may have something to say about this. As a start, the upcoming G7 group will explore how to regulate cryptocurrencies to protect both consumers and the economy. According to Reuters, “France, which holds the rotating presidency of the Group of Seven nations, has said it does not oppose Facebook’s creating an instrument for financial transactions. But it adamantly opposes that instrument becoming a sovereign currency.”
In addition, Maxine Waters, the chairwoman of the House Financial Services Committee, has scheduled hearings to examine Libra and told Facebook to stop development of the project until big questions are answered.
The Libra Reserve
The assets backing Libra will be held by the Libra Reserve, created by deposits from Libra Association members — 27 so far, with 100 the goal — deposits of $10 million each. The reserve will be invested in low-risk assets that yield interest over time. Revenue from this interest will go first to support the Association’s operating expenses and then pay dividends to Association investors. However, according to The New York Times, no deposits have been made so far. Association members are waiting for more clarity on how Libra will work.
Chicago University Law School professor Eric Posner compares the Libra Reserve to a money market mutual fund with a floating net asset value . He writes: “When you buy a Libra, you’re buying a share of this mutual fund, which you can transfer to others over the internet, using Facebook’s social network among other platforms. If enough people buy in, Libra could work as a currency — where the currency value is simply the relevant fraction of the assets in the mutual fund (the ‘Reserve’).” Users receive no return from the reserve.
So everything about the Association and the Reserve is at odds with the concept of the token economy, where behavior is incentivized for the mutual benefit of all concerned in a decentralized ecosystem. Clearly, Facebook’s Libra ecosystem is structured for the benefit of the owners, i.e., the Association, including Facebook, not token users.
Libra and Digital Identity
When we first heard Facebook was working on blockchain technology, many of us hoped the company would accept the need to clean up its corrupt use of user identity and create a sovereign identity that could redeem Facebook’s reputation and transform the online world
Lo and behold, at the top of page 9 of the Libra white paper PDF are these two sentences: “An additional goal of the association is to develop and promote an open identity standard. We believe that decentralized and portable digital identity is a prerequisite to financial inclusion and competition.” That’s all there is. Not another word on the subject anywhere in the white paper. What does it mean? No way to tell at this point.
With more than 2 billion users worldwide, Facebook could do something hugely valuable here.
Most people commenting on Libra have not even mentioned this! Coindesk, is an exception, with an excellent discussion of the topic and a takeaway that “Some identity experts say this is even more important than the cryptocurrency, but others question how much control Libra would give users and find its approach overbearing.”
The Internet abounds with opinions of Libra. Nailing any reality is another story. The white paper is all sweetness and light generalities and good intentions about plans that will take a good five years to evolve. I share the idealism of many in the front lines of today’s blockchain and crypto about the potential for a new, more just and inclusive social, economic and cultural infrastructure. I admire USV’s commitment to supporting the development of blockchain and cryptocurrency. But I just can’t trust Mark Zuckerberg or Facebook.
I have to agree with what Eric Posner says in The Atlantic. Facebook, one of the world’s most distrusted companies, wants us to trust its new Libra cryptocurrency, which, it hopes, will be used by billions of people around the world. We shouldn’t. Libra will almost exactly replicate all the problems generated by Facebook’s social network. Those problems can, in turn, be traced to the central paradox of Big Tech: The technological innovation that is supposed to liberate us from government ends up subjugating us to a handful of corporations.”