In part 1 of this blog we saw that the Libra Association is a collection of organizations that all maintain a copy of the Libra database. This database contains the Libra accounts of all Libra users world-wide, and a trace of all Libra transactions. If a user sends libras to another user, all Association members check the transaction on financial validity, update the users’ accounts and add the transaction to the database in sync.
The Association has a second role, namely managing a Reserve of assets to keep the value of the Libra as stable as possible. If I change a libra into euros, I should get the same value for it tomorrow as I get for it today. In this blog I explain the role of Reserve, list the current members of the Association, and spell out how they plan to make decisions.
The Libra Reserve
The Libra will be pegged to a reserve of stable and liquid assets, including bank deposits and government securities (government debt) in currencies from “stable and reputable central banks” (The Libra Reserve, page 2).
Stability is promoted by investing in debt from several governments. This means that the value of the Libra with respect to any particular fiat currency may fluctuate a bit. The Association intends to reduce the probability of severe fluctuations.
However, the Libra aims to empower billions of people, so this is a game of big numbers. What if billions of people sell the Libra at the same time? What if government of countries with a weak currency start buying libras on a large scale? A private entity such as the Association has no means to stabilize a global currency in all circumstances. They have no access to unlimited stores of the unpegged currencies. To combat instability, as a last resort a public bailout of a privately managed currency would be needed. This is extremely undesirable. It is time to list the companies who think they are so powerful.
The members of the Libra Association are the organizations that run the validator nodes of the Libra network. The following companies have expressed the intention to become a member (and hence to validate Libra transactions (An Introduction to Libra, page 4):
- Investment: Andreessen Horowitz, Thrive Capital, Ribbit Capital, Breakthrough Initiatives, Union Square Ventures.
- Payment industry: Mastercard, PayU, PayPal, Stripe, Visa, Xapo
- Blockchain: Coinbase, Bison Trails, Anchorage
- Social Media: Facebook, Calibra.
- Telecommunications: Iliad, Vodafone.
- E-commerce: Farfetch, Ebay, Mercado libre.
- Ride-sharing: Uber, Lyft.
- Music: Spotify.
- Travel: Booking Holdings.
- Nonprofit, multilateral and academic: Women’s World Banking, Kiva, Mercy Corps, Creative Destruction Lab.
This is quite a dazzling list of companies to manage your money. The group has a lot of economic power.
An established business can become a member if it satisfies at least two of the following criteria (How to Become a Founding Member, page 3):
- Have more than $1 billion USD in market value or greater than $500 million USD customer balances;
- Reach more than 20 million people a year, multinationally;
- Be recognized as a top-100 industry leader by a third party sector-specific association or media company.
Businesses in newly emerging industries and nonprofits are subject to less stringent criteria. Nevertheless, or because of that, the Association centralizes power over the Libra network in a few rich companies.
And it contains conflicts of interest. During the Libra hearings for the U.S. Congress, representative Rashida Tlaib wondered whether this is a “crypto mafia.” She observed that one of the members, Anchorage, recently raised funding from another member, Visa and that Ben Horowitz, of Andreessen Horowitz, sits on the board of Lyft. In addition, USV is an investor in Coinbase. This creates a collusion of interests among some members of the Association. Can we expect the Association to always act in the interests of the billions of people who Facebook says will be empowered by the Libra? Matt Stoller of the Open Market Institute thinks the Association members are not independent and speaks of the Libra Cartel rather than the Libra Association.
The aim of the Association is to launch the Libra early 2020 and to have approximately 100 members by then. Before that, the charter of the association will be completed. Organizations that become members before the charter is completed are “Founding Members” (How to Become a Founding Member, page 1). Organizations who join later are ordinary members. Founding Members all have an investment in a Libra Investment Tokens.
Libra Investment Tokens
A Founding Member other than the nonprofits must invest at least $ 10M by purchasing Libra Investment Tokens. They pay for this with fiat currency, which will enter the Reserve. A Libra Investment Token gives right to dividends from the assets stored in the Reserve.
Libra Investment Tokens can also be bought by investors who do not operate a validator node. This suggests the possibility for trade in these Tokens.
Now, the Reserve is filled with assets in two ways: When an investor buys Libra Investment Tokens, and when a user buys libras. In both cases, fiat money enters the reserve. Users do not get interest on the Reserve, but investors in Libra Investment Tokens do.
The Association will use the interest generated by the Reserve to cover operating expenses of the Association and to fund social impact projects. The remainder will be paid as dividend to investors. This can result in a handsome return on investment. Depending on the number of Libra users, the return can range from about 20% to 600% or more. More on this in part 4 of this blog. Clearly, this is an important incentive for a business to join the Association as a Founding Member.
Because the assets in the Reserve are low-risk and low-yield, Founding Members are incentivized to make the Reserve grow substantially (The Libra Reserve, page 2). The larger the number of people who will be “empowered” by the Libra, the bigger the return on investment for the Founding Members.
The governing body of the Association is the Council. There will be an executive team responsible for day-to-day operations, and a Libra Association Board, which provides operational guidance to the executive team on behalf of the Council. The Council can veto or make decisions on behalf of the Board, so that the Council is the sole decision-making power in the Association.
Each $10 million investment in Libra Investment Tokens buys you voting power in the Council, but with a voting cap: The voting power of a member must not be larger than 1 percent of the number of total votes in the Council, with a maximum of 1 vote (The Libra Association, page 4).
If the number of members of the Association decreases, or if a business buys more Tokens, a member could get voting power that exceeds the cap. The excess votes are then made available to the Board, who can them delegate them to social impact partners, or distribute them among the Founding members. Remember that the Board’s decisions can be overridden by the Council, which contains a representative of each member. This means that by buying additional Tokens, Founding members can protect their voting power with respect to latecomers.
Remember from part 1 that each Association members runs a validator node, and validators vote about the financial correctness of each Libra transaction. The voting weight of a validator node equals its voting weight in the Council. This makes it possible to automate at least some of the decisions of the Council, and move them to the Libra network. Libra governance can be partly automated.
The Libra Association registered as a nonprofit organization in the land of banks and blockchains, Switzerland. According to ComputerWeekly.com, Facebook claimed that the Swiss Federal data Protection and Information Commissioner would oversee privacy protection for the Libra transaction database. This raises more questions than it answers.
Sure, the Association should respect privacy laws. But how can this be combined with the visibility of the Libra database to everyone? The Libra database will be publicly accessible (The Libra Reserve, page 3). And why only register with a privacy watchdog? Is the Association an investment fund and should it be regulated as such?
Furthermore, what laws are applicable to Association members? Could we have a member joining from China? Could members validate transactions performed in North Korea?
And then there is the apparent inconsistency between registering as a nonprofit and paying a handsome dividend on investments to its members. During the Libra Hearings, Senator Toomey pointed out this inconsistency but got no clear answer.
Given these and other uncertainties, do we trust the Association members to govern the network? What interests do the venture capitalists in the Association have? Do we trust these companies to govern a global currency in the common interest?
The validator nodes of the Libra network maintain the global database of Libra account and check all Libra transactions. They form the Libra Association, which manages a Reserve of assets in order to stabilize the exchange rate of the Libra against a number of stable fiat currencies. Founding Members, who join the Association before its charter is completed, buy Libra Investment Tokens for $10 million. This gives them voting power plus the right to a yearly dividend from the Reserve.
The Association centralizes power over the Libra network in the hands of a few rich companies. As a private entity it cannot stabilize the value of the Libra in all circumstances. Regulation of the Association is very limited, and its status as a nonprofit seems to conflict with the dividend that it pays to its Founding Members. I see no reason to trust that these companies will manage the Reserve in the interest of the billions of unbanked. The story so far suggests an empowerment of a few rich companies rather than of the billions of unbanked.
Some of the regulatory uncertainties may be cleared up if Calibra, the Facebook subsidiary which develops a Libra wallet, registers as a bank. However, Calibra introduces more problems and loopholes, as we will see in part 3 of this blog.