Readers, I confess that I have not followed the blockchain/cryptocurrency universe for awhile; at one time, I followed CoinDesk but sadly, I was not able to distinguish actual news from breathless evangelism, not to say calculated propaganda, so I gave up the unequal struggle. However, now that Facebook has announced Libra[1], which is a blockchain cryptocurrency at least for marketing purposes[2], I’ve brushed up on the topic enough do this round-up. Bloomberg summarizes Libra:
Facebook Inc. unveiled plans for a new, global financial system with a broad group of partners from Visa Inc. to Uber Technologies Inc. on board to create a cryptocurrency it expects will one day trade much like the U.S. dollar and inject a new source of revenue. Called Libra, the new currency will launch as soon as next year and be what’s known as a stablecoin–a digital currency that’s supported by established [fiat] government-backed currencies and securities [see Reuters on stablecoins here]. The goal is to avoid massive fluctuations in value so Libra can be used for everyday transactions across Facebook in a way that more volatile cryptocurrencies, like Bitcoin, haven’t been. To come anywhere close to matching the U.S. dollar for utility and acceptance, Libra will need to be widely trusted.
As we shall see below, trust issues are key to the entire venture. Friend-of-the-blog Matt Stoller has an Op-Ed in the New York Times that you should all read; he expands on how the “partnership” may work:
As far as I can tell, Facebook aims to build a new payments and currency system using blockchain technology. Facebook is starting a subsidiary, Calibra, to “provide financial services” to individuals and businesses, including saving, spending and sending money. The actual standards for the currency will be managed by a nonprofit in Switzerland called the Libra Association. The currency will have its own central bank known as the Libra Reserve, and the board will be the committee of corporations that helped set it up.
Needless to say, a privatized Central Bank will take some time to set up (Bloomberg also says the Libra Association’s Charter is not yet written). Facebook COO Sheryl Sandberg:
We announced this early. We know this is a heavy, heavily regulated space. We need to talk to people, meet with people and that’s what we’re doing and we are then going to launch.
More trust issues. Here is the optimistic, evangelistic view of the venture:
Libra will introduce more users to Bitcoin than any other coin before.
2.6 bullion that are one step closer to learning about, buying, and understanding $BTC.
Thanks Zuck! https://t.co/TcuX7TgodY
— Luke Martin (@VentureCoinist) June 17, 2019
And the view of Libra’s marketing team:
Why we think stable coin $libra will be big
1. No 3% merchant fee saves companies billions of USD/Yr
2. Instant secure settlement vs stolen cards/fraud saves billions
3. $Libra will be run by a consortium of 100 including facebook, stripe, uber, PayPal, MasterCard and Visa ? pic.twitter.com/lCQq2wIGxC— Libra News (@LibraCoin_) June 17, 2019
(I have to say I’m given pause by seeing Kiva, whose business model has been characterized as “controversial,” besides “predatory” and a “farce,” positioned as a top partner; see Thomas Frank for the virtue signaling zeitgeist of the microloans universe.)
Others are more skeptical. One rattlesnakedave (via):
Finally, a cryptocurrency with the ethics of Uber, the censorship resistance of PayPal, and the centralization of Visa, all tied together under the proven privacy of Facebook. Just what I’ve been waiting for.
As Hyman Minksy famously said: “Everyone can create money; the problem is to get it accepted.” That places — absent force majeure — trust, and lack of trust, at the center of the Libra effort. Libra’s trust issues sort themselves into three buckets: User, Technical, and Regulatory. I will look at each of these topics in turn, and conclude by considering (as Stoller does) whether Libra is a sovereign (wannabe or not).
User Trust
Should users trust Libra? The Financial Times poses the question concisely:
The final question concerns how widespread usage will be. Consumer privacy concerns mean users are already revoking Facebook permissions. If they do not trust Mr Zuckerberg’s company with their phone number why would they trust it with their money?
One reason to answer no is that Facebook CEO Zuckerberg is a vicious and unrepentant crook and con-man, and has been since his days at Harvard. Famously, this chat session:
ZUCK: yea so if you ever need info about anyone at harvard
ZUCK: just ask
ZUCK: i have over 4000 emails, pictures, addresses, sns
FRIEND: what!? how’d you manage that one?
ZUCK: people just submitted it
ZUCK: i don’t know why
ZUCK: they “trust me”
ZUCK: dumb fucks
When someone shows you who they are, believe them the first time.
Further, in a world where the rule of law applied to Silicon Valley oligarchs, Facebook would already be a criminal enterprise. Bloomberg, “Facebook Wants to Know If You’d Trust It With Your Money“:
Regulatory pressure on Facebook has never been greater. The Federal Trade Commission is finalizing an investigation into its privacy practices, which the company has said could lead to a fine up to $5 billion. Presidential hopefuls Elizabeth Warren (D-Mass.) and Bernie Sanders (I-Vt.) have called for investigations into the big tech companies and the power they wield over Americans’ lives. Facebook co-founder Chris Hughes has said the social network should be broken up. Reacting to the Libra announcement, Ohio Senator Sherrod Brown, the top Democrat on the U.S. Senate Committee on Banking, Housing, and Urban Affairs, said, “We cannot allow Facebook to run a risky new cryptocurrency out of a Swiss bank account without oversight. I’m calling on our financial watchdogs to scrutinize this closely to ensure users are protected.”
We don’t let the Mafia print its own money, so why Facebook? Of course, to a corporation of Facebook’s scale, $5 billion is just a cost of doing business. And Facebook’s scale may neutralize its user trust issues in the privileged West. As Vox says, “Facebook may have too many users for its cryptocurrency to fail — even if you don’t trust it“:
[M]ost people I’ve spoken with in recent days believe Libra can be successful, largely because of Facebook’s enormous scale. They’ve posited that the platform’s unprecedented user base is the only global population that’s big enough to organize around a single currency.
One obvious initial use case for a “global population” — “Facebook and its family of apps, which have more monthly active users than the populations of China and the US combined” — would be remittances. From the Financial Times:
Creating a “stablecoin” digital currency pegged to a basket of assets and a digital wallet that can hold it is well suited to the international remittance market.
And remittances are a nice little business to be in. From the World Bank:
In 2019, remittance flows to low- and middle-income countries are expected to reach $550 billion, to become their largest source of external financing…. The global average cost of sending $200 remained high, at around 7 percent in the first quarter of 2019, according to the World Bank’s Remittance Prices Worldwide database.
7% is a pretty big cut if you’re a “helper” in Hong Kong sending money back to the Philippines, so the remittance market would indeed seem ripe for disruption.
However, it’s important to understand that Libra’s architecture — very much unlike the original cryptocurrency, Bitcoin — requires users to trust Libra, the central issuing authority:
Bitcoin’s digital gold, but Facebook’s Libra is the digital dollar—here’s why that matters
[Bitcoin bull Brian Kelly], founder and CEO of BKCM and resident bitcoin expert on CNBC’s “Fast Money,” said there are some crucial differences between Libra and a cryptocurrency like bitcoin. With Libra, Facebook users will be able to exchange their dollars for Libra tokens, thus entrusting Facebook and its fellow backers with building a reliable ledger of all transactions, Kelly said.
“You have to trust Facebook that they’re going to hold onto those dollars, they’re going to keep track of the ledger, and that your token’s going to be worth something. You go out, you buy your goods and services on the Facebook platform, whoever else is using it. Maybe Uber somehow is involved. And then you’re left with the Libra tokens that are left over,” he said.
That trust defines the main difference between cryptocurrencies like bitcoin and Libra, Kelly said. Bitcoin buyers don’t need to entrust a third party with their money or information, whereas Libra users will have to trust the company that has perhaps been most plagued by issues around trust and privacy: Facebook.
“This is about that trusted third party and, to me, that’s the revolution of crypto, is that it is peer-to-peer. You disintermediate financial services,” Kelly said. “So, when you talk about the differences between this and something like bitcoin, bitcoin is trustless. You don’t need to believe that anybody’s going to check that ledger; you can do it yourself.”
That distinction may not matter to the Hong Kong helper; it may matter very much to users in the United States or the European Union. The pink paper’s question remains salient: “If they do not trust Mr Zuckerberg’s company with their phone number why would they trust it with their money?”
Technical Trust
Libra is not only a group of partners, a governance structure, and a currency: It is software that delivers financial services in that currency. Bloomberg’s Joe Weisenthal offers perspective:
I think Facebook is aspiring to be to Libra what Google is to the Android operating system. In other words, if successful, the right way to think about this is not as a coin or a cryptocurrency, but rather an open-source platform for building money-moving applications. Unlike traditional open source software, which anyone can in theory fork, modify or develop for their own needs, a monetary system must maintain some consensus on things. What is the unit of account? Who has the money? Who is allowed to issue it? And so unlike a normal piece of software, an open-source money system needs all kinds of governance mechanisms. But in theory, if Libra launched and gained momentum, you could imagine it as a platform in which anyone anywhere could write an app that moves money to anyone else in a fashion they please. Right now, there are numerous closed payment applications, but they’re not interoperable. A person using Venmo can’t send money to someone using Zelle or WeChat. The potential with Libra is that they could.
But should we trust the application developers? From TechCrunch, “The real risk of Facebook’s Libra coin is crooked developers”:
Facebook naturally has a huge target on its back for hackers. Not just because Libra could hold so much value to steal, but because plenty of trolls would get off on screwing up Facebook’s currency. That’s why Facebook open-sourced the Libra Blockchain and is offering a prototype in a pre-launch testnet. This developer beta plus a bug bounty program run in partnership with HackerOne is meant to surface all the flaws and vulnerabilities before Libra goes live with real money connected.
Yet that leaves one giant vector for abuse of Libra: the developer platform.
“Essential to the spirit of Libra . . . 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,” Facebook explained in its white paper and Libra launch documents. It’s even building a whole coding language called Move for making Libra apps.
Yet the Libra Blockchain itself is irreversible. Outside of custodial wallets like Calibra, there’s no getting your stolen or mis-sent money back. There’s likely no customer support. And there are plenty of crooked crypto developers happy to prey on the inexperienced. Indeed, $1.7 billion in cryptocurrency was stolen last year alone, according to CypherTrace via CNBC.
Of course, all financial systems enable fraud to some extent; the question is whether Libra enables fraud at scale; and one answer is that if enough developers are crooked, it will. But there’s another reason for concern, more basic to the nature of computing.
Ken Thompson, the designer and original implementor of Unix (now at Google) embedded a Trojan Horse into his own C compiler undetectably (“the cutest program I ever wrote”), and so could log in as root to any system compiled with it. He concludes his classic paper “Reflections on Trusting Trust” as follows:
The moral is obvious. You can’t trust code that you did not totally create yourself. (Especially code from companies that employ people like me.) No amount of source-level verification or scrutiny will protect you from using untrusted code. In demonstrating the possibility of this kind of attack, I picked on the C compiler. I could have picked on any program-handling program such as an assembler, a loader, or even hardware microcode. As the level of program gets lower, these bugs will be harder and harder to detect. A well-installed microcode bug will be almost impossible to detect.
At this point, we note that Move, the language in which Libra apps are written, has, if not a compiler per se, a bytecode verifier and a bytecode interpreter. Of course, I could have unknowingly slipped over the line into paranoid fantasy. However, consider that a Trojan Horse backdoor into the transactions of two billion people would be an asset of almost inestimable value to Zuckerberg and his posse as a form of primitive accumulation. And if you view the Libra ecosystem as a phishing equilibrium, if fraud can happen, it has already happened.
Regulatory Trust
Regulators, even in these benighted times, at the very least insist that regulatory forms be obeyed. Here I will consider, in the United States, the states, Congress, and most importantly, the IRS. Finally, I will consider the reaction international regulators.
I have heard that at the state level, the price of regulatory forbearance is a steak dinner. Certainly Uber has done very well for itself. And Libra is making progress:
Another tidbit on the regulatory side of Facebook's new #crypto project #Libracoin: Calibra has 7 state money transmitter licenses so far, the earliest from mid-April.
FB says it's working to get licenses in states that treat crypto as $$ equivalent (for licensing) pic.twitter.com/I1t0sMsy2k
— Lydia Beyoud (@ElleBeyoud) June 19, 2019
Congress has bestirred itself, though we will see what the outcome is. MarketWatch, “Senate banking committee sets July date to hold hearing on Facebook Libra coin“:
The Senate Banking committee on Wednesday set July 16 as the date to hold a hearing centered on Facebook Inc.’s Libra coin. House Financial Services Committee head Maxine Waters on Tuesday said Facebook “is continuing its unchecked expansion and extending its reach into the lives of its users.”
And Waters in the Financial Times:
“The cryptocurrency market currently lacks a clear regulatory framework to provide strong protections for investors, consumers, and the economy,” Ms Waters said in a statement on Tuesday, as she called on regulators to “get serious”.
As for the IRS, Lawfare writes in “Facebook’s Cryptocurrency: Stop It Before It Starts“:
A true cryptocurrency such as Bitcoin or Libra is considered property by the Internal Revenue Service. That means a gain of $1 due to volatility between when the cryptocurrency is acquired and when it is transferred to someone else is a $1 taxable event. And since any integration into Facebook Messenger or WhatsApp is under the control of Facebook, Facebook should probably file income tax documents and keep track of the otherwise difficult cost-basis math on behalf of Facebook’s customers, like other investment brokerages do. The IRS needs to remind both Facebook and the public of these implications and requirements. Of course this would make Libra completely useless in the U.S. by increasing the cost of using it beyond any utility.
(See also this useful thread on Twitter and this white paper.)
And finally, the international reaction. From the Financial Times, “Facebook’s Libra currency draws instant response from regulators“:
The G7 working group will also consider how to ensure proper controls against money-laundering, according to a letter from Bruno Le Maire, the French finance minister, and François Villeroy de Galhau, the governor of the Banque de France. The French hold the rotating presidency of the G7.
Central banks and the International Monetary Fund will also participate, according to the letter, which was seen by the Financial Times.
(The surprisingly quotable Le Maire’s initial reaction: “‘It is out of question’ that Libra ‘become a sovereign currency. It can’t and it must not happen.”) The concern, quite naturally, is money laundering. Again from the Financial Times, “Four big questions facing Facebook’s Libra coin”
[A]t the top of the list is money laundering. Before traditional lenders open accounts for customers, they must undertake rigorous background checks to ensure funds are not ill-gotten gains.
Facebook’s plans allow for “pseudonymous” users able to create multiple accounts not based on their real-life identity.
“This approach is familiar to many users, developers, and regulators,” its official documents read.
One UK official remarked: “This is particularly weasel-worded. We may be familiar with it but that doesn’t make us comfortable with it.”
Trust once more.
Sovereigns and Sovereignty
Stoller, in his Op-Ed, raises the question whether Facebook is heading toward some form of sovereignty (real, not metaphorical):
A permissionless currency system based on a consensus of large private actors across open protocols sounds nice, but it’s not democracy. Today, American bank regulators and central bankers are hired and fired by publicly elected leaders. Libra payments regulators would be hired and fired by a self-selected council of corporations. There are ways to characterize such a system, but democratic is not one of them.
Years ago, Mark Zuckerberg made it clear that he doesn’t think Facebook is a business. “In a lot of ways, Facebook is more like a government than a traditional company,” said Mr. Zuckerberg. “We’re really setting policies.” He has acted consistently as a would-be sovereign power. For example, he is attempting to set up a Supreme Court-style independent tribunal to handle content moderation. And now he is setting up a global currency.
The way we structure money and payments is a question for democratic institutions. Any company big enough to start its own currency is just too big.
While Zuckerberg’s “”Move fast and break things” does seem uncomfortable like an American-style version of fascist legal theorist Carl Schmitt’s “Sovereign is he who decides on the exception,” I’m not sure how Facebook, absent the coercive powers of a typical state, can be said to be sovereign. Also, Facebook relies on fiat currency created by states; it’s not (at this point) seeking to challenge their respective national monopolies with its own global fiat currency. However, it does seem that as the liberal rules-based international order breaks down, various entities are attempting to fill the power vacuum (the ISDS system does this implicitly, just like Zuckerberg’s “independent tribunal”) and perhaps Facebook is morphing into one such entity. Would — say — the denial of Facebook financial services coerce a Hong Kong helper in the same way that the Hong Kong police would? Doubtful, but the future lies ahead.
Conclusion
Facebook however is committing to integrating Libra as the payment channel into its applications, bypassing the opportunity to integrate a more conventional solution similar to Venmo, M-pesa, Zelle, or ApplePay. Given a conventional solution would probably result in a payment channel rivaling PayPal’s $2 billion a year in net income, this represents a huge opportunity cost. It only makes sense for Facebook as a moral crusade rather than a business decision: it seems intended to be exempt from any government’s controls.
I find it unlikely that Facebook is engaged in a moral crusade of any sort. And I don’t see how Facebook can exempt itself “from any government’s controls” when the Libra is “backed by” fiat currencies minted by those same governments. Perhaps Facebook is taking the long view, and would prefer not to give Venmo et al. a cut. (But then why are they Facebook’s partners? Friends close, enemies closer?) Perhaps Facebook is willing to accept the opportunity cost because it is in quest for some other very great advantage as yet unseen; the transaction data of two billion users would seem of sufficient scale (see the discussion of Trojan Horses above). The future, again, lies ahead.
NOTES
[1] On Libra the astrological sign, Wikipedia: “The symbol of the scales is based on the Scales of Justice held by Themis, the Greek personification of divine law and custom…. The Moon was said to be in Libra when Rome was founded.” A cursory Internet search shows that depending on his actual date of birth (disputed) the Roman Emperor Augustus has been said to be a Libra, which might have personal resonance with Facebook CEO Zuckerberg.
[2] FT Alphaville has a fine discussion of whether Libra is really a blockchain or not (no). “This is just one of a series of Alphaville posts on Libra coin, which we are calling Breaking the Zuck Buck, in which we will seek to show how nonsensical, pointless, stupid, risky, badly thought-out and blockchainless the whole thing is.”
60 comments
Comments are closed.
I think Facebook is becoming the state. Our federal state and local governments are becoming the vassals. The issue isn’t trust. It’s power and coercion. Facebook can install its own regulators and make it so we have no choice but to use this rent-extraction scheme to carry on with our lives.
> The issue isn’t trust. It’s power and coercion.
As I wrote: “I’m not sure how Facebook, absent the coercive powers of a typical state, can be said to be sovereign.” Buying regulators ins’t the same as becoming the State, obviously.
Yes, but the IT Oligarchs have proven to be masterful hypnotists, their 1s and 0s reducing skeptical regulators to credulous enablers.
The question seems to be whether one of them can seize a physical state with its’ apparatus of coercion in tact before the trance is broken.
Maybe that’s why HQ2 of the Bezosphere landed in Virginia.
“masterful hypnotists…”
Only because in the 80’s and 90’s politicians believed the talk that anti-trust enforcement could be eliminated because, they were told, the new digital technologies would automatically breakup or prevent monopolies forming, (think “disruption”).
Today, it’s pretty clear to even politicians that silicon valley has produced new price-gouging, too powerful monopolies. When even Peggy Noonan calls for tighter regulations on the too big tech powers, calls for their break-up into smaller companies, you know something has changed. The hypnotism has worn off. My 2¢.
Step 1 is to have Libra backed by fiat currencies, a basket of 6 supposedly. This gives them some regulatory cover to get launched.
Step 2 of course is to abandon this pretense.
Kongbucks. I need a samurai sword and a fast motorcycle.
Facebook has jumped the shark with this endeavor. The company who has as a business model, stealing your data and selling it, has now decided that instead of fixing that and making the one thing that was the original attraction to facebook, the feed, relevant again, the company is yesterdays news. If you use facebook you already know this.
Thanks for the links on Kiva. I had no idea. I thought they were doing good.
Not mentioned in the “technical trust” section, but I think more likely than back doors, Trojan horses, hacking or direct theft, is the possibility/probability that the platform developers could devise a way to create these crypto bucks outside the official bookkeeping for their own personal enrichment. Virtual counterfeiting.
Good idea!
M.I.T.’s Blockchain Newsletter isn’t coming across as enthusiastic, either
https://go.technologyreview.com/150-libra-coin-vs.-the-state
Thanks, thats a really good artiicle.
O Brother Bezos, where art thou?
(With thine own far better positioned vampire squid currency)
#WhatATimeToBeAlive
Zuck missed the bitcoin parade by 5 years at least.
He’s deep in his own echo chamber if he thinks users will give him their money. There is just no reason to.
People use Facebook to look at silly pictures of cats and organize ethnic cleansings, not buy groceries.
Doesn’t this just make Facebook a bank? You make a deposit, but instead of getting a check book, you get libra bucks. You transfer some libra bucks to your mistress in Berlin, and she exchanges them for Euro. So Facebook, like a bank, is essentially settling financial transactions. But what happens if there aren’t enough Euro in stock?
Zuck as a Soverign. He’s not reaching much is he? Back by thr good faith and credit of who excatly?
Especially the “good faith” bit.
What laws apply? Banking?
There was a time in the UK when “bank notes” were privatly issued.
If there was a run on the Libra, how would the currency’s value be maintained?
> If there was a run on the Libra, how would the currency’s value be maintained?
I would say the governments who control fiat would step in….
Why should it be “maintained”?
If that crap fails that should be a wrap for Zuck and all the fools who got in it.
Why do I say that?
Because the plan is to cause a crisis with all the other currencies and it be the only one standing.
Company script at the company store, that’s what this sounds like. But instead of the company workers it’s everyone else who is subjected to the company script. Spending your own money to buy their money to spend it then at their store, it sounds like it’s straight out of the gilded age. And when the customer doesn’t like what they bought for whatever reason the refund will always be in the funny money. I’m guessing that if you put your money in that sort of system, you can never really cash out. I know that with video games for example people already do essentially the same thing. But now we might be talking about tangible goods, which puts an interesting spin on it. All and all Libra sounds like a finely turned money pit.
Good example. Maybe a way to think of Libra then is as video game money, except more fungible. Yay? [I remember seeing the word fungible somewhere in connection with Libra so that seems to be the paradigm.]
In which case, how far can you stretch this? Matt Stoller sees the need to have some limits, e.g. for cross-border regulatory oversight, e.g. when it comes to sanctioning countries, maybe capital controls, etc. But what about “ordinary” stuff, the stuff that people engage in that they don’t necessarily want to have gov eyes or facebook eyes seeing, e.g. transactions “off the books”. Until that’s possible I don’t see Libra becoming a lingua franca that displaces cash. Who knows, once facebook gets people exposed to Libra, they’ll start to seek out other crypto-currency eco-systems that are more private. Maybe?
Of course that’s the same issue with conventional banking / credit card usage. But I don’t mind them at least having eyes to my transactions that are “on the books”. But I would certainly have qualms about letting facebook having visibility to even that.
Edit: but then I wouldn’t be surprised if “off the book” transactions are already being done via video-game currencies, just masking them to look legit.
Good roundup, thanks Lambert. It’s the “absent the coercive powers of a typical state” part that really feels ominous to me, though. They already extract taxes from digital citizens in the form of human data/information, is it really so hard for them to develop a physical enforcement arm or co-opt an existing one?
The other scary thing is that I think people will actually use it and not think about it much until all their tokens disappear. I mean, imagine what happens if they run this for a few years and decide it wasn’t such a great idea after all (RIP Google Reader)? Blockchain never really bothered me much because it was something people were largely doing as a hobby or speculation. But if people who *really can’t afford to lose any money* (i.e. remittance-senders) buy tokens and those tokens become worthless, that is a much bigger deal.
Maybe Zuck should test this first in Russia.
?
Libra. Are they claiming to have named it after the Scales in the Zodiac?
Libra = lira, which is a common name for currencies still in use. This is going to get, deliberately, confusing. Or are these peeps just that un-original?
Stealing from Wikipedia:
“The term originates from the value of a troy pound (Latin libra) of high purity silver. The libra was the basis of the monetary system of the Roman Empire. When Europe resumed a monetary system, during the Carolingian Empire, the Roman system was adopted, the so-called £sd (librae, solidi, denarii).”
I note three countries, especially Turkey, that use a lira. And in some languages, lira is the word for the English pound (currency), because a libra was a weight, as Wiki tells us above.
> Libra. Are they claiming to have named it after the Scales in the Zodiac?
Quartz:
See note [1]. I thought the coincidence was interesting.
The new programming language seems interesting, as for the rest then I have many doubts.
https://hackernoon.com/move-programming-language-the-highlight-of-libra-122a910d6e0f
So as often happens, consultants who knows (or can pretend to know) the new language might find well paying gigs. Or not.
Having read some of the critiques of this (Stoller’s in particular) I can’t help but feel that this is an attempt by Facebook to morph into a TBTF bank and benefit from the associated risk reduction to increase margins on leveraged tech adventurism of all kinds, in much the same way that Wall Street does for predatory derivative products and casino capitalism. If it was set up as described it would feature Facebook and the other validators operating as low risk/low margin infrastructure providers along with their decidedly not low risk/margin core business, which as we’ve seen before is a scenario ripe for abuse. I have not yet seen any mention of mitigation mechanisms for this, such as financial/business ring fencing arrangements like the ones that apply to telcos that own their own physical networks. Figuring out whether or not this is a real thing to worry about is above my pay grade – another question is whether this would end up being a full or fractional reserve system in relation to the fiat currency backing – but I think it’s what Stoller is getting at.
Regulators are already promising to look closely at this. It’s unclear to me whether this represents a genuine attempt to look out for the interests of the public or Wall Street protecting its patch. At present the two would seem to be pretty nearly congruent, so it might not be possible to tell for a while.
This jumped out at me from: https://www.nytimes.com/2019/06/18/technology/how-libra-would-work-for-you.html
With this as the next sentence
First have to laugh at the idea of the second bit, as if that’s the profit model, as opposed to charging for transaction fees between users, and whatever other eco-system synergies they get up to.
Not to say there isn’t profit in the interest on the dollars. But if they’re going to generate interest on the dollars in reserve, then those dollars aren’t in reserve anymore. They’re loaned out. What if there’s another GFC like in 2008/2009 and everybody wants to exit their “positions” and get their dollars back, will Facebook (or whoever the reserve is) be able to meet the redemption? A la https://www.investopedia.com/articles/economics/09/money-market-reserve-fund-meltdown.asp Seems to me that they’re still at risk of correlation with the underlying.
There’s a comment over at FTalphaville that goes deeper: https://on.ft.com/2x7rdYw
Looks like a good series of articles by the way from what I’ve read so far.
Matthew Slater is a developer of Mutual Credit currencies which is sorta a community organizer currency. Here’s his take on Libra: http://matslats.net/libracoin-conquer-world
Thanks for that link.
Looking at the marketing
I can understand the value to companies. But my understanding is that MC and Visa have agreements with companies that consumers pay the same regardless of whether they use credit cards vs cash. That said, I could imagine Visa and MC removing this policy when it comes to Libra transactions, so that the merchant as able to pass some of the 3% savings onto the consumer that uses Libra instead of credit card. So they would cannibalize one side of their business to capture it on the other side. Maybe?
I can see that having some appeal to my wife. Somehow she’s always having problems with credit card fraud on her cards.
But then Matt Stoller brings up an excellent point in his article
The issue here is a trust issue as well. But not whether the consumer trusts facebook. It’s whether the rest of the eco-system players trust facebook, to not compete with them. And maybe not to privilege some eco-system players over others – would there be a “net neutrality” regulatory apparatus?
Still a walled garden at the end of the day. Hey Lambert, going to set up NC to accept tips in Libra?
It will be interesting to see if somebody’s already anticipated a “hype cycle” diagram for this. For instance, what happens after the “trough of despair”? At that point it’s less exciting to the point of being boring. And it’s at that point where non-true-believers eventually capitulate because it’s easier to capitulate than stay a hold out. I expect to be the last of the hold outs. Maybe when NC accepts tips in Libra, LoL.
Instant settlement is terrible for buyers. This is one of the huge defects of crypto that hypesters try to depict as an advantage. If you buy something with a credit card, you can later dispute the transaction if there was a problem, like the shipment was wrong and the merchant wouldn’t correct his mistake. You have zero recourse with final settlement save going to court.
Hi Yves, your post is giving me thought. At the end of the day, facebook would be the court. No different than how ebay, paypal and Amazon are the “court” for transactions which occur under their services. Basically if you want to continue doing business with ebay, paypal and Amazon, you have to abide their governance (and court decisions).
I could see facebook having a significant advantage though compared to ebay, paypal and Amazon. Presumably facebook will be a larger marketplace. Even when compared against Amazon, because Amazon is limited to physical goods and presumably facebook’s transactions go beyond that.
And this has some interesting potential. Facebook can position themselves as the defacto ledger for consumers, their wallet and receipts all-in-one. Yes, ultimately people can see their banking account as their ultimate ledger, but they can’t do conflict resolution of transactions through their bank. Same thing with their credit card as a ledger – the credit card company is not the final arbitrator when it comes to transactions effected through ebay or paypal or Amazon, etc. But as facebook displaces ebay, paypal and Amazon such that more and more transactions occur through facebook, then facebook becomes the final arbitrator. And once that happens, facebook wins the other side of that leg as well, it becomes the defacto ledger for most consumers. Again, their wallet and receipts, all-in-one.
All facebook needs to do is stand up the governance needed to resolve conflicts between consumers and merchants. And that should be a no brainer. Even facebook can be trusted by both sides when it comes to resolving conflicts in transactions.
“I followed CoinDesk but sadly, I was not able to distinguish actual news from breathless evangelism, not to say calculated propaganda”
Oh that’s easy. Everything in crypto is propaganda for scams.
Nouriel Roubini weighs in:
Edit: no pun intended w.r.t. “weighing in” on the scales of Libra ;)
“Facebook is becoming the state?”
“Busboy Nation” then.
Around here, San Francisco Bay Area, educated people don’t admit to using Facebook, and certainly no longer trust it with their real secrets. Are gullible people an ethnic group?
Can you ever confide in someone who hangs the details of their life out on the social gibbet?
https://allthatsinteresting.com/gibbet
I believe that Facebook is going to become a social marker, like smoking, picking your nose in public or taking trips to Las Vegas. Just because lots of people do it, doesn’t mean you should.
There are two kinds of people in the world: Those that use Facebook and those who refuse to.
The first of the “Breaking the Zuch Buck” articles was an interesting read: https://ftalphaville.ft.com/2019/06/19/1560920406000/Facebook-s-Libra-will-not-help-the-unbanked/
I was looking to see what the Fed Gov does in this space for welfare payments and found this https://fiscal.treasury.gov/GoDirect/social-security-federal-benefits-direct-deposit/directexpress/index.html . So they seem to be on the ball. You can even use it to get cash back from merchants. In which case, why can’t the private sector hop on this same “bus”?
Anyways, if I’m Facebook, I would campaign for companies (small, medium, big) to pay their employees in Libra. Then it would automatically go right into the bank-of-facebook.
And if I can get the Fed Gov on top of that to payout in Libra, than it would be game over. Facebook wins. It wouldn’t require the Fed Gov to adopt Libra as a fungible currency either. Presumably facebook would act as a gateway, accepting payout by the Fed Gov in dollars and converting that to Libras on behalf of those receiving the payment. Vice versa, presumably facebook could be the gateway to the Fed Gov for payment of taxes in the same way.
And as the winners that hoover up Libra want to swap their Libra holdings for US treasuries (so they can hoard that instead) presumably they would go through facebook as gateway as well.
If facebook can pull this off, it has a currency that parallels the dollar in the most meaningful ways for the main street economy.
Great post, Lambert. Thanks.
De nada.
> Technical Trust
> He concludes his classic paper “Reflections on Trusting Trust”
A tremendous paper. Thanks for reminding me of this classic 1984 piece.
We should be reminded that it applies to *all* code (Android, iOS, Linux, Windows, …) that we use (“trust”) every day.
In fact, speaking from experience, I would argue that one cannot even trust one’s own code (the phenomenon of “accidental correctness”).
Given that, I am not sure this effort is remarkable in that regard. I already “trust” the programmers at Bank of America, Chase, Citi, Wells Fargo, and perhaps more disturbingly, several small credit unions.
I guess that makes me a risk taker.
> Given that, I am not sure this effort is remarkable in that regard. I already “trust” the programmers at Bank of America, Chase, Citi, Wells Fargo, and perhaps more disturbingly, several small credit unions.
But here, we create an enormous single point of failure* that is, moreover, owned by criminals whose business model is and has been stealing and reselling data from “dumb fucks.”
NOTE * Or success, depending on your point of view.
> owned by criminals whose business model is and has been stealing
Forgive me, but your comment reminds me of Wells Fargo (WRT $, if not data).
BTW – I am not saying I like (no pun intended) Facebook. I emphatically do not.
Indeed, that is a tremendous paper! See also: quine and Bobby Quine.
It seems to me there’s a very important difference between someone saying “trust me” and someone saying “I cannot be trusted”.
I think that in order to analyze the implications of what Facebook is trying to do you need to have a theory of money.
Bitcoin’s theory of money is straight out of Econ 101’s “barter to gold” story, which is demonstrably false and therefore bitcoin is doomed to fail as money. It is instead an electronic commodity which mimics gold; an asset which is no one’s liability.
On the other hand, If one combines Christine Desan’s work with Perry Mehrling’s use of balance sheets to help with analysis, then I think one can see money as a simply a particular type of debt.
Specifically, a creditor (e.g. the state) that has a very large pool of debtors is in a position to issue its own debt in exchange for real goods and services, if that debt has at least two characteristics:
1. The debt issued by the creditor will be available to settle claims which the creditor has against its pool of debtors.
2. The debt issued by the creditor is freely transferable and therefore any holder of the debt can use it to satisfy the holder’s obligations to the issuer.
So, money is debt issued by a “500 pound gorilla” capable of imposing obligations on a large pool of people.
Government qualifies as this type of player and sits at the top of the money/debt hierarchy because it has the power to declare its own debt as the means of final settlement of all financial claims.
The banking system, seen as a whole, qualifies (loans create deposits, deposits = bank money)
Facebook in its current iteration does not. Facebook’s own liabilities won’t work as money because it doesn’t have a large pool of debtors who are obligated to it.
Instead, Facebook is setting up at least two banks. One is the “independent” entity governed by outsiders which is issuing bank debt/money (Libra) which it promises to convert into government debt/money.
The second bank which Facebook is setting up, IMO, is Calibra, which is where Facebook expects most (all?) participants to park their Libra.
So, Calibra’s balance sheet will have claims on the independent bank on its asset side and deposits due to consumers and others on its liability side. The deposits on Calibra’s liability side are not Libra. They are promises to pay Libra.
Calibra is a subsidiary of Facebook.
One question is what powers Calibra will have (other than as a place to park Libra and process the transfer of its Libra deposits from one user to another). Will Calibra, for example, have the power (now or in the future) to make loans denominated in Libra?
Also, will there be other entities possible which are like Calibra, or will Facebook monopolize that function?
If more than one “Calibra” is possible, then it seems to me that it is inevitable that some of those other “Calibra’s” are going to start making Libra denominated loans, which will expand the total amount of Libra denominated claims and, because there is the underlying promise to convert Libra into government money, a Libra banking crisis will also be inevitable.
This is all in addition to how the independent bank which will be taking in government money in exchange for Libra will:
1. Maintain something like parity between Libra and the pool of government money which “backs” it (thus the title of the FT series “Breaking the Zuck Buck”; and
2. Generate sufficient income from the “safe” investments it will make using the government money it has to cover operating expenses and return something to its original investors.
So, all in all Facebook seems to be out of its depth here.
Now Amazon, on the other hand…
Still waiting for the snarky rebranding. FaceBucks seems not to have made it. My own suggestion, “the Mark,” has gotten no traction at all.
I’ll say it again…
(Family blogger)bux
Probably hits too close to home, LS…
Everyone has an idea what “Marks” are to this little scheme…
Nice play on the name, though, props.
So, what about a country, for example France, just declaring it banned for all of its citizens? Outright refusing it to be used within its borders, or by its citizens, or et cetera. Could a government by convinced of the need, and could it be possible to enforce?
How about China? Facebook is already blocked there and at least according to my sources there isn’t much of a “payments gap” in the Middle Kingdom.
Something else to factor in when considering whether facebook may be able to achieve domination in this space. Have they achieved domination in other forms of human interexchange which come close to transactions, e.g. voice calling or even messaging / chatting for that matter?
I believe facebook can be used to place calls to people. But how much do people really do their calling through facebook? Why hasn’t that become the dominant form of calling? Even ignoring voice calling, what about messaging / chat? Does facebook dominate that?
If not, what’s been holding them back? I don’t know because I don’t use facebook, and I suspect that’s part of the answer :-). But ignore people like me. What about people who are already on facebook? I suspect part of the problem is that since facebook is optimized to be a publishing platform it isn’t the right context for communication. And it’s not even the right context for “closing the deal” on transactions in contrast say to ebay and Amazon.
But even then ebay had its dalliance with voice calling if I remember right and that was a failure. So go figure. But I think facebook will need to solve that where ebay could afford not to. Since ebay was limiting itself to merchant transactions and I think facebook will be going beyond that.
Anyways, something to think about. Whatever the answer to that is, what’s holding them back with respect to dominating these other domains, I suspect the same will be true for Libra.
By the way, with alipay in China I have the impression that people use it more for “brick and mortar” transactions. I.e. scanning QR codes at a physical point-of-sale. Maybe it got more traction in PC-based transactions afterwards? I don’t know.
And I believe alipay otherwise ties back to people’s bank accounts. There’s no new currency involved.
Can’t speak to wechat. But I believe even wechat has more of a smartphone pedigree (vice PC-based interactions). I’m assuming they don’t have a new currency either.
How empty Zuck’s world must be that he has to create and control money as well as selling (others’) data.
All that money. But does he have the capacity for intimate relations? People that like him and enjoy his company? Can he paint and sing and laugh? Go outside without his executive security detail watching every move? what’s life all about, anyway?
I think trust enters into it less than you might suppose. If Facebook and their consortium have enough power to dictate that all apps doing online money transactions with their platform must do so via Libra, and they make it easy for app developers to code and hard for them to code around; voila! Millions of Libra ‘customers’, not one asked if they trust it.
I would make the minor point that introducing a new programming language, on top of everything else, is another reason to suspect this endeavor will turn out badly.
Defining, specifying, developing tooling for, and supporting a computer language is a huge endeavor requiring extreme and rare expertise, a large ongoing staff, and years of patient hard work with thousands of bug fixes and dozens of releases before it is even close to right. Take a look at the effort that has gone into, say, Java, another fairly simple interpreted byte code language intended to run on multiple platforms; it’s been under development for two decades with what I assume is millions of man-hours of effort. And it’s still not that great.
The fact that this language will be devoted to financial applications means it will need to have absolutely no exploitable security problems from day one, a hard threshold to get over even for serious, experienced people and an impossible one for move-fast-and-break-things organizations like we are seeing here. I assume a big focus for hackers will be trying to find vulnerabilites in the Move compiler, bytecode, and interpreter; no doubt there will be thousands during the first years.
There is also the issue of educating and training prospective developers in the new language. This is a huge effort in its own right, with complex documentation and course materials that need to be published in many languages. Since no one knows a new language, the entire workforce will be newbies for the first few years, not a good prospect for success.
This. To elaborate, since Oracle took on Java in 2010, over 600 vulnerabilities have been found in the runtime environment. 2013 was a busy year, with 180 vulns discovered. As @XXYY says, tracking and crushing all of these problems is a big maintenance task atop a huge development effort. There will be bugs, some of which will involve users losing money.
Hope the VISA fraud department knows what they’re in for ;)
And when will the name infringement lawsuit be filed by Calibra Solutions (https://calibrasolutions.com/) and maybe the data governance firm Collibra (https://www.collibra.com/)?
The correct way to pronounce his name is ‘The Little Zucker’ by the way. Stop this disrespectful Zuck buisness. I’d like to see new standards of decorum here.
On the question of sovereignty, isn’t it conceivable that, after Libra takes off, Facebook would cease to rely on fiat currency created by states and just issue Libra à volonté, showcasing a perversion of MMT? Would it then make monetary policy, e.g. worry about inflation?