Libra – Freedom for Whom, from What?

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It is gratifying just how quickly Facebook’s latest unicorn foal, an enhanced surveillance and data collection tool disguised as a remittance service / cryptocurrency, has gone lame. It’s testament to Facebook’s hubris that Libra was launched under its own name rather than being fronted by another company or white-labelled. From Washington to just about every European capital (plus a fair few in Asia and Australia, too), not only has the reaction been critical from the usual anti-Libertarian hold-outs, but politicians, regulators and central banks have poured deserved scorn on Libra.

As for political reaction, even Congress — in the form of the House Financial Services Committee’s hearing on Facebook’s “New” and “Improved” currency and money transmission lash-up — got in front of the mob and made out they were leading the protest march.

Alexandria Ocasio-Cortez sparkled and triumphed in the theatricals (for readers who’ve not seen the skirmish — Alexandria was nice and sceptically snarky with her “they call it scrip” (!) punchline — it’s worth watching just for entertainment value) although in concentrating on the governance of Libra (being private rather than public) Ocasio-Cortez allowed David Marcus, the co-creator of Libra who heads the social media and networking service’s Cryptocurrency Group, to channel CEO Zuckerberg with a “they can trust us!” riposte which isn’t a winning argument but moving the grounds to a matter of trust means it’s a subjective judgement rather than an objective measure.

Sorry Lambert, you’ll hate me, but Ocasio-Cortez needs to learn that you can’t play as though you’re in a K12 football championship when dealing with Joe Namath-like professional credentialed explainers in the form of David Marcus. But Ocasio-Cortez turned into politics’ most unlikely tag-team with her follow-on interrogator, stay tuned for more of that after we break for some wonkery.

One of the reasons why Facebook’s Marcus was able to wriggle out of so many attempts by congressmen to land a punch is that most users of financial services — even those in congress — are completely oblivious to the complexity of the underlying product. They write a check, get cash from an ATM, get married or divorced and need to tell their bank to redesignate their accounts, lose a card, move away and want to close their account — on and on and on, there’s dozens of use cases which no one ever thinks about. But these have to be catered for and delivered.

On the institution side, internationally enforced banking regulations require account quality checking (did what the customer told the institution when they opened their facility match how they then went on to use the facility, for example? someone claiming to be a high net worth individual but has only nickel and dime credits to the account — or a stated occupation of, say, high school teacher but they’re getting monthly credits of $25,000+ …), suspicious activity reporting (lots of high value or low value transactions, erratic incoming and outgoing funds…) and anti money laundering monitoring. Then there’s sanctioned countries, politically exposed persons (“PEPs”) — the latter being a huge catch-all category.

The US (of all people!) is giving serious, serious aggravation internationally — especially to its pet countries, sorry, “close allies” like the U.K. — to crack down big time on PEPs and rough up individuals, financially-speaking, who have earned Uncle Sam’s displeasure. This may be one explanation for the sudden interest by congress in Libra.

Then you’ve got non-standard situations which might not be commonplace but do still happen. Bereavement and beneficiaries (or legal representatives of an estate) who need access to funds. Blocks and liens (such as might be demanded by law enforcement or the IRS) which must be applied. Fraud and disputes. Customers who get into difficulties such as being unable to sign their name or produce a consistent signature (or no longer able to use a smart device). Vulnerable customers such as those with mental health issues whose families might want power of attorney to be applied. Court production orders (where a court issues instructions for the institution to provide information about a customer or their account activity). The list is seemingly endless.

No-one, certainly not Libra fanbois, stop to ever consider any of this. It is not optional. You can’t hide behind jurisdictional flags of convenience. So how are all the supporting systems going to be built out and how are they to be paid for? Who is going to do the servicing and to what standards? With what redress if things go wrong? You and I as ordinary Joe-Schmo customers can be railroaded, as even Yves found to her chagrin recently. But law enforcement, the courts, the security/surveillance services, international regulatory bodies and the like aren’t going to accept just any old crap from Libra when they come a’ calling, as they inevitably will have cause to. Even if Libra hopes to off-load this stuff to partners, this rarely works in practice. Financial institutions who have attempted to outsource their servicing problems away end up with a patchwork of multiple suppliers they still need to manage. And the buck, or zuckerbuck, stops with the institution, not the supplier or partner.

It’s a forlorn hope, but I’m holding onto it anyway, that when Facebook is subject to critical questioning by lawmakers, regulators or even just you and I, the interlocuters try to grasp a few of the above technical points and present the inevitable difficulties they create for Libra right back at them.

As promised earlier, returning to the congressional hearing, while Ocasio-Cortez might have chosen a more targeted line of enquiry to Facebook’s Marcus, Alexandria sufficiently ruffled Marcus’ feathers with her ribaldry and (fully justified) sneering. Her mic-drop at the end of her questioning about his supposed willingness to accept his salary in the form of Libra rattled him sufficiently that the next in line to question Marcus had the advantage that he’d had his demeanour unsettled.

And it was probably a better line of enquiry in terms of skewering Facebook which came from the following committee member, in the perhaps unlikely form of Rep. Kustoff (R, Tennessee) who asked directly why Facebook sought to base Libra in the Swiss legal jurisdiction and pointedly queried whether this was really in US citizens’ best interests. This forced Facebook’s David Marcus, in his testifying, to say with a straight face, or at least try to (he failed) “Switzerland has nothing to do with evading our responsibilities and oversight”.

Which, of course, is precisely why Facebook are doing it. Marcus ended up with an almost Freudian Slip — blurting out exactly what he didn’t want to say and what he knows to be the truth but can’t admit to.

We know, with the US dollar, precisely who is responsible for managing it, as a currency. We also know, if we bank with a US-domiciled financial services provider who regulates them (however woeful that regulation might be). None of the agencies are perfect, far from it. But at least there is — as the House Financial Services Committee’s hearing demonstrated — some vague semblance of democratic accountability. And there’s always the vague notion that lawmakers will give regulatory bodies some real teeth, someday. At least it’s theoretically possible.

You have to ask, with Libra’s private-sector governance and offshore jurisdiction-shopping, why would they go to such lengths to avoid even these tame beatings with wet noodles? Who is going to benefit, in what way?

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33 comments

  1. Ignacio

    I believe that Libra would be most damaging to the dollar itself. Michael Pettis argues that Libra, if succesfull, would be used mainly for capital flows between countries because there is where “frictionless exchanges” makes more sense from the point of view of the user. He offers an interesting analysis about the advantages/risks of Libra and the conclussions are very negative. I don’t think any central banker –except for ultra-libertarian inflitrates– would give Libra the smallest possibility for coming to existence. (Yep, probably badly written, my poor english skills are fading with each passing day)

    Reply
  2. HarrisonBergeron

    I don’t see how libra could be allowed to exist without swinging the doors back open to the pre-Federal Reserve era of free banking. The latter might not be such a bad think but the destruction it could reap on the current financial order won’t be allowed. If FB can pull this off it’s going to be a flop on par with the AOL-Time Warner Merger, for for b-school case studies. Lastly the timing is terrible for FB they’re peddling trust essentially when trust in their company is quite low and there are calls from all sides to have them broken up.

    Reply
  3. vlade

    “Switzerland has nothing to do with evading our responsibilities and oversigh”. True. They want to do it with or without it. Switzerland is just coincidental to it.

    Reply
    1. Summer

      Whoever has the money they want laundered isn’t going to give up. Imagine what slime they are going to now try to get into office or compromised slime already in office that they could work with. Or sabotage?

      Reply
    2. Clive

      Ha ! Yes, as you point out, what Marcus really said was “Switzerland has nothing to do with evading our responsibilities and oversight…” — I should probably go back and add those italics to the original post.

      Reply
  4. Summer

    Great breakdown.
    “Who benefits and in what way?”

    That last question makes me wonder how far they will go to get what they want. Knowing the answer to it is important.

    Reply
  5. WJ

    I am a financial naif.

    Can somebody explain to me in plain words the likely self-interested purpose or purposes behind Facebook’s creation of such a currency?

    The only two I see are the following:

    (a) Libra as shadow bank. It’s currency is purchased in and converted back to US dollars but between times is unregulated and can be used for any number of legally ambiguous investments, loans, and transactions. What does Facebook hope to get out of all this? A cut of the dirty profits?

    (b) Libra as monopolistic online currency. Facebook hopes somehow to force online purchases or transactions accessed through its various software platforms–Facebook, Instagram, What’s App–to be conducted in the currency of Libra. This would involve either the purchasing of Libra in advance by the buyer or–better for Facebook I would think–the automated conversion of $ to Libra during the transaction itself (such as when you buy a European Euro-priced item online using a US $ checking account.) The upside to this scam depends upon how successfully Facebook could impose it upon its users. I am highly skeptical this would work.

    What am I missing or getting wrong here?

    Reply
    1. Clive

      Facebook has been told to clean up its act with regards to surveillance (as in, overbearing and un-opted in surveillance — minor surveillance is apparently okay and users of Facebook really should by now be in no doubt what its business model is).

      So another motive is to overtly — with full consent of the user — obtain financial data. This is almost certainly a big part of the business case for developing it.

      Then you’ve got the ample opportunity for junk fees, overly-wide bid/offer spreads and other ways of hanging onto users’ money through hidden “gotchas” in the Libra Terms and Conditions.

      Plus to the gullible investor, it gives the appearance of a new possible revenue stream. Where stock valuation in concerned, for tech companies, it’s all about the pipeline. Whether that pipeline ever produces a trickle of real, verifiable income (let alone a gush) is immaterial. Being seen to be doing something “innovative” is all that matters. Gets everyone through the earnings call with a new talking point. Yes, it really is that cynical.

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    2. shinola

      I don’t think you’re wrong.

      Regarding (b): Considering the panoptic nature of the FB ’empire’, this would be Zuck’s wet dream. Although, personally, I would think it would be rather difficult to pull off, you have to remember Zuck’s rather low opinion of FB users (dumb f*cks). So he might believe he can lure enough suckers into the scheme (there’s hew a sucker born every minute).

      As for (a) in addition to normal criminal money laundering activity there’s the potential for gov’t spy/surveillance services to use Libra for funding activities they would rather keep off the books;
      and gov’t contracts can be quite lucrative.

      Reply
  6. fdr-fan

    If it’s based in Switzerland, it’s a foreign currency. It can therefore have a variable exchange rate, which can be driven up or down by forex traders or by US sanctions. The Swiss government can decide to cancel it at any time. Does Zuck own enough of Switzerland to prevent that?

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  7. Acacia

    Who is going to benefit, in what way?

    When the jackpot hits, Zuck and his FB executive cronies can “escape” to their offshore billionaire bunkers, and use Libra to take all their ill-gotten gains with them, evading any capital controls en route.

    Isn’t it that simple?

    Reply
  8. flora

    Thanks very much for this post. I learned a lot in the explanation section. Hope US Congress staffers read this and make notes for their politicians.

    Reply
  9. prodigalson

    I think you’re giving AOC too little credit and Marcus too much. For normal people she did land a punch, and Marcus was “lawyering.” For policy-wonks it matters that you “land a punch” rhetorically on ever item of rhetoric, but for everyone else you had the young lady accurately describe they’re trying to make a company scrip and him debating what the definition of “is” is, while representing a company that publicly spends all its time likewise trying to evade responsiblity by questioning what the definition of “is” is.

    Or a shorter version, AOC pointed out that the vampire squid was behaving like a vampire squid, and it’s reaction was to squirt a big cloud of ink.

    Reply
    1. Clive

      Yes, I did feel not a little churlish to Ocasio-Cortez. There’s no doubt whatsoever that her presence adds a bit of star power to a hearing and turns what could otherwise become a backwater event (it deserves to be treated in the exact opposite way given the importance) into, well, news.

      And her line of questioning wasn’t bad. Not at all. And the bon-mot, about what accepting Libra as salary is, was a treat.

      But if seasoned PR apparatchiks like Marcus are to have a genuine fear instilled into them, then a better approach, to me, is to pick a detailed, nitty-gritty aspect and keep hitting it harder and harder. It is very difficult in the constraints of a hearing (the time limit is ridiculous for the representatives) to get a scalp, but it might not hurt to try the approach I’m advocating.

      Reply
      1. prodigalson

        It’s funny you mentioned fear and the approach used by our betters. i was thinking this morning that the problem with elites is they NEVER take social upheaval seriously until the Bastille is being taken apart brick by brick and the fishwives are storming the palace.

        For Marcus and the 1% he represents no amount of rhetorical punches will dent their behaviour. It’s only after the volcano erupts that they’re willing to, grudgingly make some changes on the margins, but by then it’s too late.

        Consider the goalposts, we’re in 2019, Amercia has elected two change candidates back to back, party re-alignment is well underway, socialists are running for president, Tucker Carlson is questioning free market capitalism, and our esteemed corporate overlords look out on all this, slowly blink, and say “lets float the idea of company scrip!” They might as well be screaming “let them eat cake” to peasants building guillotines in the nearby field.

        This is not the option I want to see happen. I’m more wearily resigned than anything else, that our elites will keep this nonsense up, and increase the volume on it, at the exact same time they should be embracing an FDR approach.

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  10. Mike

    A more pertinent question might be what Trump’s administration will do to make the Dem-donors like Zuck come to heel, while allowing HIS donors a quick pass to heaven/Mar-a-Lago. After that, the IQ-poor Dems will follow the prescribed pattern, aping the “masters” while diverting graft to sycophants.

    Big Capital, able to transfer value and payments without much scrutiny already, has an international footprint. The Libra thing is another greased slide out of regulation, all to get more of their holdings to safe islands of monetary mutual masturbation. Who’s on the grave train already, and who’ll be allowed a ticket from now on?

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  11. PKMKII

    I recently asked someone high up in one of the “Payments” companies in the Libra consortium what his company’s angle was on getting in on it, and there were three big takeaways I got from it:

    Definitely about transactions, not assets. They dismissed the traditional cryptos like Bitcoin as being too volatile, too prone to manipulations, and too inefficient in terms of costs per transaction. Having Facebook & the consortium managing it would, in their opinion, keep it stable and optimized for transactions.

    Not 100% certain on it. This was more between the lines, but I got the impression that they weren’t completely convinced it was going to work out. More like, if it does, great, if not, use it as a test case of sorts going forward.

    And most important, the target audience is not the WEIRD consumer. They were explicit in stating that they didn’t see Libra as being for your silicon valley techbros, but rather the third world/global south consumers that have online access, but not dependable access to traditional banking and currencies. Essentially, use Libra as a way to bypass problematic currencies and banking environments in order to expand the consumer base, rather than giving monied Westerners another way to pay for things.

    Reply
    1. Acacia

      use Libra as a way to bypass problematic currencies and banking environments

      So… money laundering is an important use case?

      I mean, how often do “third world/global south consumers“ need to make international payments? And let’s not forget China and India. They represent a major chunk of the “unbanked”.

      Reply
      1. Synoia

        All these countries know they have unbanked.

        I liveed in ZA when the ATM was introduced. The ATM was a good answer to the unbanked, who continually faced violence on the trains home on Pay Day.

        The violence involved a bicycle spoke pushed into the back of one’s neck.

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  12. bruce

    Libra ain’t goin’ nowhere. I have in my pocket little pieces of paper with pictures on them, pictures of people like Ben Franklin and Andrew Jackson, just to name two, and these little pieces of paper are still honored with great respect among my local merchants. That’s the way it’s been for 64 years now. It would be a tough uphill climb to get me to exchange those little pieces of paper for Libra.

    Reply
    1. Prodigalson

      Ah, but what if the zuck can convince his employees it’s cool to pay them in libra, and he’ll hold on to the dead prez’s for “safekeeping.” that’s the ticket!

      Reply
      1. Yves Smith

        Using a credit or debit card does not expose you to IRS reporting, FX gains and losses, and FX fees (unless you are buying something in a foreign country).

        Reply
  13. Wukchumni

    Daily horrorscope…

    If people start to hassle you today or give you a hard time about your appearance, pay them no mind, Libra. You have the right to make money any way you want. If that means you want to go around the gated compound in the same shirt you’re always seen wearing, so be it. Be the person you want to be.

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  14. Susan the other`

    Thank you Clive. I kinda liked AOC’s performance. She thinks on her feet pretty well. I couldn’t read Marcus well enough to see that he was rattled in any way. He just maintained his innocent monotony throughout. No matter what question, he seemed impervious to reality. That reality in my mind is something nobody ever touched on, which is that any form of a digital medium of exchange that is independent of a controlling sovereign is not money and never will be. Somehow it has been accepted that money is anything that people agree to use and so no laws have been written to tame this stuff. But then it gets messy because if it’s not money by a higher standard, which it isn’t, but it is still “fungible” (Marcus used that word so lightly it was almost ethereal) is a big problem. How is it possible to exchange this stuff, this liberating medium of exchange, with an established, accountable system without completely corrupting the accountable system? It doesn’t matter how much people “trust” Zuck – that has nothing to do with it. It’s fake money. It’s in-your-face counterfeit.

    Reply
    1. Clive Post author

      Yes, with Marcus, his veneer never faltered, it’s just like watching a waxwork. What gave away his discomfort after AOC’s sublime jibe was his tendency to retreat into ever more baroque bafflegab and management-speak got worse and worse. By the time he ended up repeating the next questioner’s criticism but just adding “not” in front of it, he’d jumped the MBA-thesis-content shark.

      Reply
  15. Dick Swenson

    The members of Congress are technological and economic illiterates. They haven’t caught up to the late 2oth century, have obliterated the Office of Technology Assessment (OTA) and waffle when confronted with questions about debt and deficit and the ideas of Modern Monetary Theory (MMT).

    This shouldn’t be a surprise to anyone.

    I encourage everyone to learn something of the principles for which the economist James Buchanan won (1982?) his mis-named “Nobel prize” (a prize awarded by the Swedish Cent4ral Bank (their fed) and paid for by Swedish taxpayers, not the will of Alfred Nobel) whcih simply declared that all politicians are driven by their personal goals, not service to their electors.

    And so a question, what is the value and who gains it from FB’s Libra? As the old saying directs us, “Follow the money!”

    Reply
    1. flora

      It’s encouraging, to me, that newer members of Congress, both D and R, aren’t falling for the razzle-dazzled by tech companies claiming near god-like genius in the unfathomable digital realm. The newer Ds and Rs aren’t falling for the ‘I am the great and powerful Oz’ shtick from the tech monopolies anymore, imo. That’s a good thing. Reinstating the OTA would be good.

      Reply

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