By Ria Bhutoria and Wilson Withiam
If you’re a close follower of the crypto industry, you’ve probably consumed a significant amount of content on Facebook’s announcement of its cryptocurrency and blockchain by the same name – Libra – that could go live as soon as 2020, the not-for-profit Geneva-based Libra Association created to govern the project (with over 25 of the targeted 100 members already announced), and Facebook’s new wholly owned and regulated subsidiary, Calibra. In case you haven’t had the chance to catch up, there are a plethora of articles and threads to help you get up to speed. Given the abundance of information on how it all works, we’d like to spend the next few paragraphs synthesizing this information into an old-fashioned SWOT analysis of the proposed new Libra coin and network.
It is tough to deny that Facebook and the greater coalition of founding members has forces working in their favor that could drive widespread adoption and uptake of Libra. One of the most obvious advantages is that Libra will likely be integrated into some of the world’s most prominent and entrenched consumer applications and payment service providers. Facebook and its founding members have massive distribution channels and user bases that span a multitude of users on both the supply and demand side of a transaction from merchants (PayPal, Visa, Mastercard, Stripe, eBay) and members of the gig economy (Uber, Lyft) to consumers – Facebook (which has over 2 billion monthly active users and over 90 million small businesses on its platforms) and its partners can leverage these channels to bootstrap adoption. Libra Association’s head of policy and communications, Dante Disparte, has said, “implied in this project is that wherever the Visa or Mastercard logo are accepted, Libra would follow suit.”
Another key strength is that not only is Libra designed with stability and low volatility in mind, it will also be backed by a basket of fiat currencies (as of now, USD, JPY, EUR, GBP) that limits exposure to a single currency, perhaps making it greater than the sum of its parts. As Erik Voorhees highlights, “Libra can arguably become a medium-term replacement to any single government fiat currency.” Further, the basket of assets backing it is not static – Libra Association has the flexibility to adjust the composition of reserves to include or replace assets should the need arise (i.e. “economic crises”).
Libra claims that it will facilitate fast and low-fee payments and remittances for its users (though we do not yet know what “low fee” entails) – in the current payment system, international payments can take multiple days to clear and, according to Facebook, migrants lose $25 billion in fees paid to remittance providers like Western Union. Libra also intends to be a global medium of exchange – users may be able to use the Libra they receive from friends and family abroad to transact in their home country and forgo currency conversion fees associated with cross border payments if it becomes widely accepted. William Quigley highlights that alone could result in significant cost savings, “probably 1.5 percent of global GDP is just eaten up in currency conversions.” In addition, it will likely be cheaper to use Libra as a medium of exchange relative to decentralized and permissionless networks because Libra will initially be permissioned and limited to one hundred validators (versus thousands of nodes on the Bitcoin and Ethereum networks).
Another asset specific to Facebook is the team of people it has curated to lead its blockchain efforts. David Marcus, the head of Facebook’s newly formed subsidiary, Calibra, was previously the president of PayPal (also a member of the consortium) and also built a mobile payments application which PayPal acquired. Kevin Weil is the VP of product of Facebook’s blockchain team and, prior, was VP of product at Instagram. The group’s VP of risk and operations, Tomer Barel held the role of EVP at PayPal. Core members of the team have a solid understanding of the payments ecosystem and the frictions inherent in consumer facing applications that enable commerce (i.e. Instagram, Messenger). To read up on other members of the team, scroll to the bottom of this piece by Ryan Todd at The Block.
Despite obvious strengths in distribution, talent and influence, Facebook and the Libra network also enter the payment services market with notable weaknesses. Perhaps the most prescient disadvantage is the growing distrust expressed by users regarding Facebook’s handling (or mishandling) of customer data. It is well understood Facebook shares user information in exchange for ad revenue, and as a result, data collected by the tech giant is far from private. The Cambridge Analytica hack in 2018 revealed the magnitude of information Facebook possesses and the lack of protection around this data. Even though Facebook’s voting power will be limited in the Libra Association, it intends to integrate the Calibra wallet into WhatsApp and Messenger, creating a potential link between users and their supposedly pseudonymous financial and transactional data. Facebook and Calibra claim that they will keep the financial data on Calibra separate from social data on Facebook’s family of social media applications, but makes the vague exception of limited cases in which it could share the data with regulators, payment service providers or Facebook to meet legal demands and to help provide “basic functionality” to Calibra. This precarious language along with Facebook’s history of leaking data makes it difficult to take what Facebook says at face value and may lead to skepticism around trusting Facebook to protect users’ more sensitive financial data. This sentiment was reflected in a Twitter survey conducted by Gabor Gurbacs, in which 79% of respondents said they would trust existing payment services provided by banks more than Facebook’s new coin.*
Another key weakness is that Libra is not truly a cryptocurrency. It is not entirely borderless or neutral, and is by no means decentralized or censorship resistant. The platform will be permissioned at launch – and for the foreseeable future – but Facebook claims it would like to eventually transition the protocol to be being permissionless. Centralized validator networks limit user and developer participation, carry the risk of validator collusion, and decrease the resistance to censorship – hence the Association’s commentary around transitioning to a permissionless platform in the long run. However, the path from permissioned to permissionless remains uncharted and will require Libra members to give up their position of privilege and dilute their revenue stream. Moreover, enabling non-Libra members to operate clients opens it up to chain analysis, creating an opportunity for entities other than Association members to link and exploit customer financial information. The association intends to extend historic transaction validation and auditing abilities to non-member nodes later this year.
Libra Association would also face the added challenge of decentralizing the management of assets backing the digital coin. As long as the reserves are held in a bank account, an aspect of centralization will always exist. A potential solution would be to move to a system that is fully backed by decentralized crypto assets held in a smart contract (similar to multi-collateral Dai model). An alternative move (also hinted at by Peter Todd) would be if Libra gains enough widespread adoption as tender, Libra Association could do away with the reserve and claim its coin has value because of its broad acceptance (similar to the removal of the Gold Standard). Pursuing the latter may lead to unintended consequences such as the debasement of Libra.
An additional disadvantage in Libra is UX issues related to the choice to use a basket of underlying fiat currencies and limitations on the addressable target market. While the basket of currencies backing Libra help stabilize its monetary value, the mixed composition will likely peg the digital asset to a different value than the individual currencies. This could create potential UX challenges with the exchange rate for customers in countries such as the U.S. where residents are used to seeing everything denominated in USD. However, Libra and Calibra’s target audience is the global unbanked population, who may be more receptive and accustomed to a currency whose exchange rate fluctuates versus local government currencies. But this target market is already limited as Calibra will not launch in U.S. sanctioned countries (North Korea, Iran), countries that have banned the use of cryptocurrencies (i.e. India), and areas where Facebook does not have a presence (i.e. China).
Given the frictions that Libra would like to address (e.g. facilitating low-fee payments and banking the unbanked) and the lack of effective solutions that target these frictions, there are opportunities that Libra, Facebook/Calibra, and other service providers can capitalize on and leverage to be successful. Further, Libra’s potential success (or even lack thereof) creates opportunities for greater awareness about the crypto industry and adoption of and access to crypto assets.
One opportunity for Facebook is the ability to use Calibra to launch new revenue streams to diversify and future proof existing revenue streams that are and will continue to come under pressure. Facebook generates a significant chunk of sales by monetizing and exploiting user data. Initially, David Marcus, the head of Calibra, claims that Libra and Calibra will help remove the frictions that Facebook’s 2.7 billion users and 90 million small businesses face in transacting with one another: “The easier it is for these businesses to drive sales on Facebook, the more likely they are to buy ads.” However, ad sales and data monetization have come under the scrutiny of regulators and are being further challenged by tech incumbents like Apple and Microsoft that are working on more private and decentralized identity solutions, respectively, that prevent the sharing of data with third-party developers and social media giants, which could impact the efficacy of targeted ads. Thus, it is shrewd of Facebook to acknowledge that its existing business model is threatened and look for a new way to make money. Along with providing a wallet to send and receive Libra, Calibra could also roll out additional, ancillary financial services such as lending, loyalty and rewards, and more aimed at “lowering the barrier and cost of access to capital,” though it does not plan to roll out these services in the near term.
One of the main opportunities that Libra creates for crypto is the potential to educate billions of consumers and millions of merchants about digital wallets, crypto exchanges, public key cryptography, pseudonymous and peer-to-peer payments, immutable ledgers (the list goes on) and challenge them to think about money in a new way (or to just think about how money works at all). In response to Peter McCormack’s What Bitcoin Did podcast episode with Caitlin Long, a fellow crypto twitter peer said, “Because she’s a Facebook user, my wife even listened to this episode… which she’s never done before with a Bitcoin podcast. I think that says a lot about the topic of raised awareness of cryptocurrency that Libra will bring about.” Anecdotally, this week, people outside the crypto industry were asking questions about not only the rise in crypto prices but also about how bitcoin, ether and other crypto assets work in relation to Libra, which we believe is a healthy and refreshing shift in questions people are asking about the space. Theoretically, the next step after awareness is adoption. Caitlin Long articulates, “Facebook will greatly accelerate the pace of teaching people about cryptocurrencies. And when this happens, more people will turn to bitcoin for one simple reason—bitcoin is scarce, while Facebook’s cryptocurrency is not.”
Another opportunity Libra could create for the crypto industry is an improvement in user experience, which is one of the main frictions that users face in interacting with dapps today. A key aspect of poor user experience is the lack of a seamless on-ramp in the developed but especially developing world. Many contend that Libra could present a more familiar and less frustrating way for users to on-ramp onto open finance and other dapps. Open finance applications built on smart contract platforms have the potential to democratize access to financial services that most people have been unwilling or unable to use. To-date, the majority of open finance users are crypto- and technically-savvy and are excited by the possibilities these dapps enable — they are the only ones that have been willing to go through the necessary hurdles (many of which revolve around the initial on-ramp) to experiment. Libra may provide a way for the users of Facebook, Calibra, and other parties to explore and interact with open finance and other applications more easily.
For the World
A more sinister opportunity that has been discussed is the idea that Libra and its consortium could create competition for retail and central banks that enforce monetary policy, which results in the devaluation of their national currency. Andreas Antonopoulos points out, “what happens in, say India, when they decide to apply monetary policy (devalue) and people have access to a “hard” Libra alternative. It undermines their power of monetary policy” — while it’s up for debate whether a coalition of tech, VC, and fintech companies should have the power to challenge central banks, if Libra is widely adopted and allows users globally to buy, sell, and use a relatively more stable currency with their smartphones, this kind of never before seen competition could make it increasingly difficult for banks to manage capital flight or inflation and be a blessing of sorts, especially to victims of wealth degradation in developing countries.
Libra’s ambitious mission to become a leading payments service and financial infrastructure provider backed by a small group of highly influential companies poses potential threats to data privacy rights, central bank authority and fiat currencies. As a result, the Libra announcement was met with pushback from regulators globally. French Finance Minister said Facebook’s new coin should not be seen as a replacement for traditional currencies and called on central bank governors to prepare a report on Libra citing privacy, money laundering, and terrorism finance as concerns. Markus Ferber, a German member of the European parliament, is concerned Facebook could become a shadow bank and that companies introducing virtual currencies “must not be allowed to operate in regulatory nirvana.” In the U.S., Rep Maxine Waters called for a halt in Facebook’s development of Libra, given the company’s controversial past surrounding its data policies, until Congress can gather enough information to rule on it.
How Libra will be regulated on a global scale is still a work in progress, but regulatory actions could not only threaten Libra’s functionality and adoption, but its ability to launch at all. For instance, if Libra is deemed a security in the U.S., its users will be required to have a U.S. brokerage account in order to spend it. However, Facebook has taken measures to reduce the risk that Libra is classified as a security by introducing a secondary security token called LIT. Holders of this security token will be compensated with leftover interest collected from the reserve that is not used by Libra to cover operational costs. Regarding data privacy policies, GDPR in Europe gives users of any system the right to send an erasure request to have their data removed from the controller’s database, which Preston Byrne says stands in direct opposition to the immutability of Libra’s proposed use of Merkle tree data structures. In a more extreme move, countries opposing the project could ban Libra’s use outright due to its centralized governance design. Some Libra Association members already highlighted these pending concerns, such as Mastercard’s Jorn Lambert who said Libra may not launch if it receives too much regulatory pushback. On a positive note for Libra, Bank of England governor Mark Carney sees potential in the new payments network to improve financial inclusion and lower the costs of domestic and cross-border payments. Carney later announced asset-backed stablecoin projects like Libra might soon be able to store reserves on deposit directly with the Bank of England.
An additional threat includes pushback from central banks. Some central banks may see Libra as a direct competitor to their issued currencies, particularly in countries experiencing exchange rate volatility or hyperinflation. If Libra succeeds and becomes more pervasive, the fear is that citizens in countries without a stable currency or monetary policy will start to adopt Libra as their base currency. Central banks looking to maintain their power and revenue stream (i.e. the ability to print money) could retaliate by claiming Libra should be held to banking standards, complicating legal matters for Facebook and the Libra Association and perhaps negatively impact the total addressable market and the ability to be truly global. And as Tyler Cowen points out, when have “banks ever lost a political battle of this kind?”
Further, critics have brought attention to Facebook’s customer data policy and history of leaking sensitive customer information. While Libra data is intended to be pseudonymous, the Calibra customer protection document states its may share data with Facebook in “limited” circumstances. In response, Maya Zehavi said that this implies financial and personal information will be aggregated and no users should assume their data will remain private. The general lack of trust in Facebook and rising concerns regarding customer data privacy could hinder Libra and Calibra adoption.
Also, at the end of the day, Libra will rely on the value of traditional fiat currencies (at least initially), which continue to see a gradual loss in spending power. While pegging Libra to a basket of stable currencies solves for price volatility, the digital currency will likely not be exempt from long-term devaluation if it maintains this reserve composition. And with interest rates on sovereign bonds crossing into negative territory, Kyle Samani argues, “the Libra reserve is going to have a hard time finding extremely conservative investments with an upside.” If (or when) Libra devalues relative to true hard money, usage could suffer if more people start to store their wealth in sound assets like bitcoin. In this case, a possible response could be the inclusion of assets with disinflationary monetary issuance into its reserve.
- Caitlin Long: “I salute @facebook for advancing that cause, bc billions of people will soon become #woke to the unfairness & instability of current monetary & payment systems. People are smart–they will figure out #Libra isn’t scarce & will migrate to #bitcoin & other true #crypto…”
- Jeremy Allaire: “It’s an extremely positive development for this broader movement towards decentralized platforms and open finance, and the ability to connect every person in the world to an entirely Internet-based financial system.”
- Soona Amhaz: “This is a brand game. it may not be you or your friends, but people trust facebook.”
- Ryan Selkis: “The nation of Facebook, if you will, is 2.7 billion people. Just their sheer reach and ability to coordinate as many parties as you saw from this announcement, is unrivaled, and I think this is the biggest development for the industry since the launch of Ethereum four years ago.”
- Ryan Todd: “One clear opportunity I see is for lenders to explore the ecosystem, whether that’s integrating directly into Calibra or another Libra wallet, and either offer loans at the PoS, or just facilitate loans denominated in Libra. Great opportunity to explore micro-financing in EM.”
- Elizabeth Warren: “Facebook has too much power and a terrible track record when it comes to protecting our private information. We need to hold them accountable—not give them the chance to access even more user data.”
- Rep. Maxine Waters: “It’s very important for them to stop right now what they’re doing so that we can get a handle on this. We’ve got to protect our consumers. We just can’t allow them to go to Switzerland with all of its associates and begin to compete with the dollar.”
- Maya Zehavi: “They are at least transparent about the fact they intend to share aggregate data With FB. That implies aggregate data about transactions, balance, etc. No privacy expectations from the get go.”
- What will be the on/off ramp look like? How will users without bank accounts acquire Libra?
- What will be the composition of the reserve assets (by percentage)?
- Will the underlying assets always operate at a 100% reserve?
- What happens if users get deplatformed? Will users be able to claim the funds left on the network?
- How will the network transition from permissioned to permissionless?
- Will Facebook receive special treatment, compared to other crypto startups, from government agencies? How will this impact regulator views on censorship resistant platforms?
- Has Facebook received any government approval prior to starting work on Libra?
All said and done, it’s clear that there are valid strengths and opportunities as well as weaknesses and threats that Libra, Facebook, and Calibra have working for and against them. But there are still many unanswered questions and we don’t have a crystal ball to guarantee that the initiative will even successfully launch. However, if it does deliver on its goals and stay true to the promises made, it could catalyze web3 to the next leg of greater mainstream awareness and adoption.
*Note that a significant percentage of survey respondents may have been already familiar with blockchain technology and cryptocurrencies.