Facebook’s Libra Faceplant: Beware of CEO Bright Ideas

The Wall Street Journal tonight, in Inside Facebook’s Botched Attempt to Start a New Cryptocurrency, offers some additional details on how Facebook came up with the barmy idea of Libra, which it set forth in a short document that mouthed a whole bunch of finance and business gimmick-speak without showing much understanding of banking or a clear idea of why customers would change behavior and adopt what would amount to a foreign currency on a large scale.

Before we go much further, one of the obvious flaws in the Libra project is that Facebook (and too many members of the press) don’t understand the difference between a cryptocurrency and a payment system. Facebook seems to have naively believed if it could just launch a really big cryptocurrency, with its big customer base, they would easily be persuaded to trade it among themselves.

Ahem, aside from not having considered “Who want to have to trade a volatile foreign currency into what I need to use to pay my bills and incur FX transaction costs and tax issues every time I do so,” payment systems have to do a hell of a lot more things that just create a pile of something people might if you are lucky buy and sell. You need to provide recordkeeping and anti-fraud protections, adhere to Know Your Customer and anti-money laundering rules (unless you want to be a financial outlaw), and provide information to the tax man. That’s only a partial list; Clive can fill in the many points I skipped over.

One of the reason Facebook’s buzzword heavy concept document was treated far more seriously that it should have been was that the social media giant had signed up 27 partners, including, critically, payments systems heavyweights like Visa, Mastercard, PayPal, as well as Famous Big Companies You Heard of like eBay, Uber.

Paypal was first to depart, followed shortly by Visa, Mastercard, eBay, fintech startup Stripe, payments player Mercado Pago, and Booking Holdings. That means more than 1/4 of the original backers have dropped out. More important, virtually all the partners who knew anything about payments are gone (the only one left is European payments processor PayU, which has 1,500 employees versus Visa’s 20,000).

Oh, and Libra has also lost its product head.

Yeteven non-finance types could see through Libra, raising the question as to why big companies were willing to sign on in the first place. As reader bob from Syracuse speculated:

This has to be a Time Warner buys AOL top.

I’m just beginning to look at this scheme and am amazed at the lack of any details at all.

I would have liked to see the pitch meetings from Facebook to their foundation members. It’d be like watching a jackal being pitched by a rat- Sure, we’ll sign on. At the very least we’ll get to eat the rat and he might bring some friends.

Our Clive came to broadly similar conclusions, parsing an earlier Wall Street Journal article:

 I put on, dutifully, my yellow waders.
Let’s start at the top or nearabouts:

[the coin] … which will be pegged to a basket of government-issued currencies to avoid the wild swings that have dogged other cryptocurrencies…

So you can’t avoid currency carry risk. And how do you redeem your coin holding if you want out? Where, and what, is the market? In which jurisprudence and subject to what regulatory oversight? With how much liquidity?

Oh, and I don’t see any mention of FDIC insurance or any other deposit guarantee carrier. So what, if any, rights do you have for institution solvency protection, to what monetary amount? And who is paying for the fund to protect depositors? Or is it like Jack giving his mother’s cow to the guy with the magic beans?

Talks with some of the partners are ongoing, and the group’s eventual membership may change, the people added.

Okay, so this is “talks”. No contracts and not even a Memorandum of Understanding, by the sounds of it. Just a lot of unicorn farting.

Regulatory hurdles in the U.S. and elsewhere are high. Some members have expressed concerns that the token could be used to launder money and finance terrorist organizations, some of the people said, a persistent problem with bitcoin and other cryptocurrencies.

Youbetcha. So, they’ve not solved the old gremlins of Know Your Customer checks (who will do the screening for politically exposed persons, sanctioned entities or individuals and maintain the watchlist for suspicious activity?). Or Anti-money Laundering (how will source-of-funds be monitored and controlled?). Or fraud and loss control (by what rules will scammers, con artists, malicious or criminal activity be identified and blocked, plus rules for chargebacks to protect innocent victims of the aforementioned?). “Likes” on Facebook or a network of Facebook “friends” is not going to be sufficient.

Facebook won’t directly control the coin, nor will the individual members of the consortium—known as the Libra Association. Some of the members could serve as “nodes” along the system that verify transactions and maintain records of them, creating a brand-new payments network, according to people familiar with the setup.

Then, in which case, I’m missing where the revenue stream to pay for all this comes from.

Keeping the cryptocurrency network separate from Facebook’s platform gives the social-media company some cover with users and regulators should problems arise, a big advantage at a time when it is under pressure to address privacy shortcomings. Yet Facebook, as the developer of the underlying technology, could exert considerable influence over it.

The last time I saw that much handwaving was from the back of the State Landau when Prince Harry married Meghan Markle.

Still,

That poor little word had to do so much heavy lifting for this paragraph, it is seeking medical retirement…

the lure of Facebook’s nearly 2.4 billion monthly active users was too strong for many companies to pass up. Card companies have long fretted that a technology giant could muscle into their business, creating a payment option that cuts out card networks. Participating in Libra allows them to closely monitor Facebook’s payment ambitions while sharing in the upside should the project gain traction with consumers.

Corporate PR-speak for “let’s get them to waste a lot of time, resources and money in the vague hope this might amount to something and, if it does threaten to become a contender, we’ll make it wear some concrete boots and push it into the Hudson. Or off the Golden Gate Bridge, depending on where they headquartered it.

Back to the current post. In fact, from the very beginning, Libra has has all the hallmarks of a CEO project launched after he came back from a conference where he got his head filled by consultants selling The Next Hot Thing or fellow CEOs trying to talk sagely about their new forward-thinking initiatives. Smart managers who work in close proximity to the C-suite make a point of being out of town shortly after those sort of confabs, lest they be tasked to, or worse, asked to lead, one of these Hall of Hollow Mandates initiatives.

The fact that Libra asked for nothing from their “Association members” save the use of their name demonstrates how Libra was vaporware. Oh, except the Journal reveals they didn’t even agree to that:

Some companies thought Facebook overstated their involvement when it announced the project in June and resented being described as “founding members.”

As Clive correctly guessed, all the members did was sign a non-binding agreement that they’d commit $10 million each if the project actually started to get anywhere. $10 million is couch lint for these companies. In fact, the ones that signed on because they were worried they might somehow miss out on something big no doubt recognized that if they were asked to ante up that $10 million, it was way lower ticket than a lot of corporate vanity projects they’d had to bury quietly.

The current Wall Street Journal account confirms speculation I’ve heard, that Zuckerberg has surrounded himself with yes men, so no one had the nerve to tell him his Libra idea was silly. But why didn’t Sheryl Sandberg speak up? She’d worked at Treasury and ought to have known the idea was going to land like a lead balloon.

Initially, one might have thought Zuck didn’t care, as long as the stock got a pop for a while as he created the impression that a big new revenue stream was around the corner as Facebook was getting roughed up around the world for its bad practices plus was short on growth opportunities. But Facebook does appear to be trying to soldier on despite the early defection of essential players, plus plenty of wrath from central bankers and US Congresscritters.

The juicy details from the Journal, which oddly puts “Libra” in lower case. Is this a new Facebook affectation that the Journal is taking up, that Libra as a currency wanna-be, should be lower-case like “yen” and “pounds”?:

….the libra project is on life support…

Libra’s bumpy rollout is a big setback to Facebook’s efforts to reduce its near-total reliance on targeted advertising. It is also a warning to technology giants that are expanding into financial services. Apple Inc., Amazon.com Inc. and Google are each working on payments projects of their own, which could give them access to sensitive personal financial data at a time when public trust in Silicon Valley is eroding….

Facebook shows no signs of abandoning libra…

Goodie, we’ll have more opportunity to ridicule Facebook.

Even with ex-PayPal CEO David Marcus heading the project and Zuckerberg approving it, there has been visible internal skepticism:

Others had a less optimistic view. Finance chief David Wehner asked Mr. Marcus how libra would recoup its costs and make money. Staff at WhatsApp, a messaging service owned by Facebook, viewed integrating libra into the app as a low priority….

Tensions have grown within Facebook. Senior executives have asked Mr. Marcus why a new cryptocurrency—with all the baggage that comes along with one—is necessary to advance Facebook’s finance ambitions. Couldn’t the company work with dollars or bitcoin, they asked?

This part is priceless:

Around that time, representatives from several companies in the Libra Association hopped on a conference call to coordinate their responses to the growing backlash. A cacophony of voices drowned out potential solutions: A glitch in the call-organization software turned on many people’s microphones at once.

Efforts to find new jackals, um, friends, are not going well either:

Mr. Marcus, undeterred, has been reaching out to major U.S. banks about joining libra, according to people familiar with the matter, which could allow consumers to load money into their libra wallets from their checking accounts.

JPMorgan Chase & Co. and Goldman Sachs Group Inc., however, had rejected Facebook’s invitation back before the June announcement. Both declined in part because they worried a cryptocurrency could be used for criminal activities that would violate strict money-laundering and sanctions rules.

And Clive describes another big fly in the Libra ointment, in response to a barmy Business Insider article touting Libra as a potential US champion to contest China as a payments player for emerging economies:

The only reason China is even vaguely getting into a digital currency is as an extension to their Social Credit initiative. The last thing the Chinese government will want is an option to bypass a key information source in their surveillance (i.e. by using cash transactions) so it might make sense for them to foster a non-cash payment system which is also under domestic control.

But none of that augurs well for Libra. If China wants to enable a digital currency it will demand rigid ownership, policy and data access oversight. Unless Facebook is willing to cede that to the Chinese government, Libra will not be allowed to establish any domestic foothold in China.

The Journal story depicts Marcus as having developed the vision and key design elements of Libra. That calls his competence into serious question (was he lucky? did he fail upward? was he very good at finding and managing good subordinates and never really mastered detail?). Or is Facebook’s new PR strategy to pin Libra squarely on Marcus, so that if (meaning when) it goes splat, Zuckerberg has already been distanced from it?

That is not to say that Facebook won’t be able to launch a digital currency. But the main uses are overwhelming speculative trading and illicit transactions. The idea that Facebook can create a low-cost transfer system in an alien currency seems dodgy. Its direct competitors are with Western Union and international bank wire transfers. Western Union charges 2% and banks in the US levy fixed fees and have paperwork which make bank wires very costly and inconvenient. However, neither forces users to trade through an intermediate currency, which creates FX risk that could often exceed the Western Union charges.

In other words, if Facebook keeps throwing its resources at Libra, it can probably get something done. But don’t expect it to amount to much, particularly in terms of profit.

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19 comments

  1. Alain

    KYC?

    Why, of course!

    You need a Facebook account in order to use this glorious new “currency”. And you want to tell me that’s not sufficent to satisfy regulators? A Facebook account, after all, is much more reliable in identifying the customer than any due dilligence and on-boarding procedure, which those old dinasaurs – also referred to as banks – could ever undertake. We need to disrupt those old farts and shape the regulatory environment after all.

    It’s a Facebook account doncha know?

    The only bad thing may be that your funds go the way of the Dodo (or more precisely into Facebook’s coffers) if Facebook ever decides to nuke your account and refuses to even talk with you about it. But isn’t that a worthwhile price to pay for the new wonderful buzzword compliant fintech world?

    (I trust that NC readers are smart enough that a sarcasm tag is not required)

    Reply
    1. Joe Well

      The scary thing is that Facebook really does know more about its long time users than the government, the banks, or God, for that matter. The challenge internally for Facebook would be how to deal with people who have not had an account for years or were light users.

      Of course that doesn’t satisfy KYC rules, but from an internal risk perspective they are on solid footing evaluating individuals’ identities and even credit worthiness. In fact, FB already requires advertising accounts to be linked to real human accounts, so they are already using FB accounts for security.

      I always wondered if Libra was a backdoor way to try to use this data for finance products and get enormous commissions, not just ad revenue.

      Reply
  2. JIm A.

    The thing is, FB would seem to be fairly well placed to launch a payment system: Adoption is nigh universal, and their ad targeting would be even more precise if they had actual payment information to go by. Yes, they would need to bring in some real expertise to hurdle all the regulatory burdens, but at least there is some logic in it. But why complicate the whole exercise by adding a crypto currency? So instead of building a kit car, they’re making the engine from scratch.

    Reply
    1. Jon S

      Agreed. Just set up a FaceBook “Wallet” that you can deposit money into and make payments from, possibly at a discount with FB advertisers. You can even outsource the deposit and payment to a real bank, but have an agreement that FB has full visibility into the payment information.

      Reply
    2. Synoia

      Best for FB to buy a small Country’s banking system.

      Comes complete with a banking system and a central bank.

      One of the Non-Euro Slavic counties would be a possability.

      Reply
    3. Yves Smith Post author

      Ahem, please read the post. Facebook is not well positioned. There is absolutely tons of very exacting tech and customer service requirements which FB would have to build from the ground up.

      It’s also totally alien to their culture, and having done more consulting studies than I want to think about, culture really matters. They would be heavily regulated and regulatory compliance is not something you can fake. And regulators go into your underwear. That’s a huge shift. You may not have been able to read the full story, but there was a telling, in a very bad way, comment from Marcus, that he was interested in hearing only “profound concerns” from regulators. Such an open display of the wrong attitude is an invitation to get whacked by them.

      These tech giants can’t even be bothered to give any customer service. They’d have to have the polar opposite attitude. And the IT requirements (in terms of transaction volume and accuracy) are also an order of magnitude more daunting.

      And FB clearly expected Visa, Mastercard and Paypal to provide a lot of expertise and do considerable heavy lifting. There’s no one even dimly close to their league left. FB is left to flounder to try to hire people and cobble things together on their own. Good luck with that.

      It’s like saying “This grocery store has a lot of sick customers. It would be well positioned to start a hospital”. That is how big a leap this is.

      Reply
  3. Morgan

    This may be an incredibly naive perspective, but if FB are so cocksure about the success of Libra, why not give it away for free to their customers? Essentially v-bucks for social media. The more you use the platform the more ‘rewards’ you can get/redeem. Eventually a tipping point may be be reached where the f-bucks become worth something to the users as they trade them between each other for goods and services. Once you have established the use of the currency you could look at converting it to real world money (maybe with an exchange fee) and at that point the banks would see the viability in it. Not that I care particularly but FWIW I think the whole thing is a bad idea.

    After all this is a tactic employed by online betting companies. The lure of a free bet that may lead to greater rewards

    Reply
  4. H. Hovaness

    Facebook seems intent on repeating the blunders of the East India Company on the long and painful path toward understanding that a corporation is not a government. Nevertheless, the concept of a global currency immune to the political distortions of hegemonic states makes sense. The binding energy of global digital commerce will eventually overwhelm the tribalism that is currently resurgent because, ultimately, people prefer material benefits over ideological satisfactions. Thus something like Libra will emerge, but not as the product of a corporation like Facebook, but from some kind of public/private consortium.

    If Facebook survives, it will be as a heavily regulated utility. Once a digital platform becomes entangled with the private lives of billions of people, it should no longer be operated as a profit-seeking venture. Mr. Zuckerberg would be well advised to emulate Mr. Gates and retire to philanthropic pursuits before the sun sets on his accidental empire.

    Reply
      1. H Hovaness

        Do the Metric System or TCP/IP require “global hegemony?” Unfortunately, the conventional wisdom is that the evolution of global standards and conventions cannot extend to financial markets and legal systems. I believe that this is a profound error.

        The nation state system is a relative novelty in human political evolution. I don’t think it will last for another hundred years. Tribal and feudal systems lasted much longer. Global problems can’t be solved by a Babel tower of 200 parliaments.

        Reply
    1. Yves Smith Post author

      Huh? There has never been a place for a global currency because taxation is national and taxes must be paid in the national currency. Please study up on what gives a currency value and leads people to hold it.

      Reply
      1. H Hovaness

        The European Union is an assembly of nation states with a common currency, so there is no obstacle to nation states adopting or accepting trans-national currencies. Acceptance of multiple currencies for payment of taxes can be done with the stroke of a legislative pen. I believe that currencies develop as a result of natural selection. Enough people value and hold Bitcoin to sustain its existence. The future of cryptocurrencies will be determined by global marketplace outcomes, not by analysts and legislators.

        Reply
  5. Edmund Boys

    The part of this story I’ve rarely seen discussed is the curious timing. The Libra announcement came shortly after the Winklevoss twins started publicly hawking their Gemini cryptocurrency and payment scheme, including an appearance on CBS Sunday Morning. Gemini? Libra? Hmmm, was all this just the latest skirmish to undercut Zuckerberg’s long-time nemeses?

    https://www.cnbc.com/2019/06/18/winklevoss-on-libra-crypto-we-need-to-be-frenemies-with-facebook.html

    Reply
  6. Susan the other`

    What happens in a world that is cutting back due to lack of resources and pollution when all this ditzy global discretionary purchasing takes off? All the cut backs in manufacturing will create one huge bottleneck; then all the cutbacks in shipping, trucking and delivery will create more. While this congestion is going on, payments will be stopped and confused. And per JD Alt on reserves, Libra will have to have proven and convincing reserves to cover many costly delays and survive all of its own wonderful capitalist profiteering. But that’s OK, Facebook just announced that it doesn’t matter if it can’t get the go-ahead in the US and the EU – there’s always Africa. But I betcha those dodos will be gamed so fast in Africa they will be totally humiliated. I’d like to see that one.

    Reply
  7. ChrisAtRU

    ” … violate strict money-laundering and sanctions rules.”

    IMO … therein lies the reason Libra or any other attempt at a non-state/virtual-state/private global currency will fail – because any such effort challenges the current global currency hegemony. Tanks have been largely replaced by banks – except of course when the needs of the #MIC and #GlobalFinance dictate otherwise.

    Yes, FB bumbled in ignorance and hubris, but even if they had got it “right” from a functional and philosophical point of view, there would still be resistance. Our global #OriginalSin exploiters are going to be loth to have a new kid on the block grabbing a piece of their pie.

    Having said that, I still think Amazon has the best shot at getting this right, as horrid as that possibility is to me. Further on, I think within the heterodox econ community, there exists some real interesting work around community currencies that I hope to learn more about and work on at some point.

    Reply
  8. FreeMarketApologist

    And related to the point about profitability: Venmo, owned by PayPal, and with 40 million users (their claim, I didn’t verify it), doesn’t make money. As a ‘payment enabler’, making peer-to-peer payments (like FBLibra), it operates through Synchrony, thus they can offer bank-like services, and be FDIC insured.

    Venmo is looking to offer a credit card linked to their service, clearly deciding that the way to profitability is on the interest charges, rather than through processing fees (like other money transfer agents).

    Reply
  9. Anarcissie

    I seem to recall a moment long ago when Microsoft announced a plan to get into the credit card, payments transfer, and other financial services. At that time, Microsoft´s experience had been that merely announcing they were going to enter a field was enough to cause the other players to fall on their faces and die. However, in this case, the banks and credit card companies did not die; they stepped on Microsoft, there was a squishing sound, and that was the end of it.

    What concerned me at the time was that Microsoft was then effectively a monopoly, and as a systems software programmer I had to deal with their awful stuff and awful attitudes at miserable length. I did not want to be forced to use it otherwise. FB, which I don´t have anything to do with, worries me in this way too, although it does seem that they too are going to be stepped as well.

    Reply

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