In part 1 and part 2 of this blog we saw that the members of the Libra Association all keep a copy of the database of Libra accounts and execute Libra transactions world-wide. The Association manages a Reserve of stable and liquid assets to support the value of the Libra. Part 3 explained the central role that Facebook and Calibra play in this. In part 4 we saw that users pay storage rent and transaction fees to the Association, and exchange fees to Resellers. Libra investors like Facebook and Calibra get a handsome, and possibly outrageous, dividend from the user deposits in the Libra Reserve.

What has been the strategic moves of Facebook and Calibra been so far to sell this busiess model? What have been the responses? How should the uncertainties about the Libras be resolved? In this last part of my blog I discuss these strategic questions. I will describe a set of three moves by Facebook and Calibra, and a set of in total seven responses of observers and regulators to these moves.

The opening move: Empowering the unbanked

The opening move frames the Libra initiative in Facebook’s narrative of making the world more open and connected. In his 2018 New Year’s address Zuckerberg talked about the need to “take power from centralized systems and putting it back in people’s hands” — a feel-good statement devoid of operational meaning.

About a year and a half later he announced the start of the Libra Association. This is a bit more concrete: Libra’s mission is “to create a simple global financial infrastructure that empowers billions of people around the world.”

This statement has been communicated consistently by the Libra Association in their defining document and White Paper. David Marcus, head of Calibra, put it as follows in his blog:

“With Libra, anyone with a $40 smartphone and connectivity will have the ability to securely safeguard their assets, access the world economy, transact at a much lower cost, and over time access a whole range of financial services. We firmly believe that if Libra is successful, it can be a non-linear step change for billions of people who need it the most.”

Response 1: Empowering the unbanked, really?

A look at the business model shown in part 4 shows that empowering the unbanked is simply not a business motivation of the key players, except of the social impact partners. We saw that investors in the Libra Reserve may have an ROI of 16%, which is very good. With large-scale adoption of the Libra, ROI may increase to 7000%, which is insane. Facebook and Calibra, each stand to earn this ROI. If they were truly concerned with the plight of the unbanked, Founding Members should donate this to the World Bank.

Founding Members like Facebook and Calibra are not only investors, they are also validators who store the account database and perform Libra transactions. They get paid transaction fees and storage rents and have inside information about and influence on Libra governance. Resellers earn money by buying cheap from users and selling dear to them.

None of this points to an altruistic motive for joining the Association.

Registration of the Libra Association as a non-profit is consistent with the frame of empowering the unbanked. But as pointed out by senator Toomey in the recent Libra hearings, it is inconsistent with the payment of dividend to its members.

In short, it is hard to believe that empowering the unbanked is the reason why these companies started the Libra initiative. But there is more that casts doubt on the empowerment frame.

Response 2: Low fees, really?

The Association promises to charge low transaction fees (White Paper, page 7). This requires a stretch of imagination. Consider this:

According to the Word Bank, migrant workers pay about 7% transaction fee for sending $200 to their family. The World Bank’s aim is to reduce this to 3% by 2030. Now compare this with the commission that some of the Association’s members charge their users. Uber charges 20% and Spotify takes percentages in the range of 15-30%. Ebay charges fees up to 12%. Asking low transaction fees is not in the genes of Association members.

The Association will not only charge transaction fees but also storage rents. It has made no promises about the size of the rent (The blockchain paper, page 16). Transaction fees will be low during “normal” operation (The blockchain paper, page 8) but there is no explanation of what they consider to be normal.

The promises about low fees are too shaky to rely on. Submitting this to regulatory discipline by a democratically elected government would be more credible.

Response 3: Privacy, really?

According to its customer commitment, Calibra will share account information with Facebook or third parties, without asking for customer consent, when this is needed

  • – to provide basic functionality,
  • – to keep people safe, or
  • – to comply with the law.

The other way around, Facebook will share its customer information data with Calibra, without asking for customer consent,

  • – to secure customers’ accounts,
  • – to mitigate risk,
  • – to prevent criminal activity, and
  • – to comply with the law.

These commitments will give Facebook and Calibra an information position on citizens that would make some nondemocratic governments jealous. And Facebook and Calibra will share their data with government if the government asks them to do so or if they think it is needed for functionality, safety and security. Which government? Will they also share it with nondemocratic governments? The prospect of getting access to billions of users may be irresistible.

 U.S. Senators express no trust in Facebook’s and Calibra’s promises to keep user information private and I don’t blame them for that. Only strict privacy laws enforced by a powerful state actor, that can be democratically controlled, could raise trust in privacy.

Response 4: Safe, really?

Anyone will be allowed to develop Libra wallets. The Libra Association will not verify or examine these third-party developer wallets. This can be dangerous as it opens the possibility for crooked developers to not only steal your data (as happened, for example, with Cambridge Analytica) but also your money.

However, vetting every developer and the applications they create would be extremely expensive for the Libra Association. A private organization such as the Association simply does not have the resources to protect the consumer against fraudulent or faulty wallets. Already, fake Facebook accounts offer to sell non-existent libras.

Response 5: Regulation? Which regulation?

All of these responses call for regulation of the Libra. But how? The Association manages a Reserve to keep a currency stable and liquid. This makes it similar to a currency board, such as the Hong Kong Monetary Authority.

Or is it a bank? Facebook states that the Libra is a digital currency, but it can also be viewed as an investment. Buying libras from an entity that guarantees stable value is an investment compared to keeping it in a bank account where interest is charged.

However, the composition of the Reserve as a basket of low-risk assets makes it look like a security. So another analog is the IMF, which has created Special Drawing Rights as an international reserve currency, similar to the Libra.

David Marcus promised that “Facebook will not offer the Libra digital currency until we have fully addressed regulatory concerns and received appropriate approvals.” But then again: How? Federal Reserve Chair Jerome Powell said that “There isn’t any one agency that can stand up and have oversight over this.” Clearly there is a lot of work to do, and Facebook will not do this alone.

The second move: The lean startup frame

The Libra initiative seems to follow Lean Startup principles. Don’t develop your product, develop your customers! Build a minimal viable product, bring it to the market and debug it together with your lead users. In his blog David Marcus said the following.

“We are looking forward to continuing to engage with the various communities and stakeholders. We want to hear your feedback, and we are committed to taking the time to get this right. This was the whole reason for sharing our plans early, and opening up Libra’s codebase to the world. The time between now and launch is designed to be a collaborative, open process.”

There is no indication that Marcus plans on getting feedback from the 1.7 billion unbanked, let alone to collaborate with them, the Workd Bank or the IMF to develop a global currency. His expressed intention is to collect feedback and free contributions from developers and to collaborate with regulators who would otherwise block the Libra initiative.

Some regulators are sensitive to the innovation frame. “Washington must not be the place that technology goes to die,” U.S Representative Patrick McHenry said. This bypasses the point that the goal of innovation is not innovation. The goal of innovation should be to create value. And what we have seen so far is that the Libra creates a lot of value for the Association, but not for its users. For the public, it creates a payment system with costs that are not transparent to everyone, and it opens the risk of global financial instability, as we will see next.

Response 6: Financial instability

Lean startup may be a good approach for developing games, but when lives and livelihoods are at stake, it is too risky.

End users may sell their Libra all at once, which by the rules of the Libra Reserve will lead to a mass sale of assets. This creates a risk of global financial instability. But unlike a state, a private party like the Libra Association must operate within their means, and cannot unilaterally impose financial obligations on others as needed. They cannot rescue themselves. If worst comes to worst, they must either be bailed out by states or else be allowed to fail. Both of these two possibilities are very unattractive. And which states should bail out the Libra?

Response 7 : Global money is U.S. politics

U.S. debt. The U.S. government has a total of $16 trillion in debt (called “treasuries”). Foreign governments hold about 39% of this debt. Myles Milston points out that it if foreign governments would buy less U.S. debt, for example because they decide to buy Libra instead, the U.S. deficit will spin out of control. He shows that this could in the extreme case lead to a default of the U.S. government or a devaluation of the U.S. dollar. This in turn would motivate foreign governments to buy less U.S. dollar treasuries, leading to a negative spiral. This makes the Libra a political risk for the U.S.

International sanctions. A political problem is that the Libra would undercut the role of the dollar in imposing international sanctions by the U.S. government. The U.S. government can impose sanctions because the U.S. dollar is the means of international payment. If international trade could be conducted in Libra, countries like North Korea could avoid U.S. sanctions and the U.S.A. government would be powerless to enforce any sanctions.

This problems turns on the validators as well. Validators could be liable if they add a transaction to the ledger that violates U.S. sanctions.

It is also an open question what would happen if a state-owned company from a nondemocratic country, that satisfies the criteria set by the Association, would want to join the Association. What if the government that owns the company is subject of a trade sanction, or engaged in a trade war with the U.S.? When asked in the Libra hearings, David Marcus gave no clear answer. Yet, the admission rules for the Libra Association allow any company from China, Russia or Iran that satisfies criteria to join the Association.

All of these responses make clear that a lean startup frame is not appropriate for the Libra. Debugging must take place before introduction.

Given all these problems, wouldn’t it be better to call off the initiative? Marcus thinks that regulation will solve all these problems.  Moreover, he offered a third frame, which adds a sense of urgency.

The third move: Global politics

“If we fail to act, we could soon see a digital currency controlled by others whose values are dramatically different from ours,” Marcus said in the Libra hearings. In other words, if the U.S. does not do it, China will.

This is not a hypothetical scenario. Huawei’s CEO Ren Zhengfei has been quoted as saying that “Even China is able to issue such currencies, why wait for libra? The strength of a state is greater than that of an Internet company.”  The People’s Bank of China is considering to introduce an officially sanctioned cryptocurrency. WeChat already contains payment functionality in Yuan and could extend this to a cryptocurrency.

This ties in nicely with Facebook’s business considerations to become more like Alipay and WeChat, to become the world’s app “for everything”

However, the choice offered by Marcus is not between the U.S. and China, but between the Facebook and China. He says that if Facebook does not introduce a global cryptocurrency, China will do it. This shows a breathtaking arrogance.

Response 7: Facebook as a country

Mark Zuckerberg has acknowledged that he runs a nation-state. USV, one of the Association members, says that “in some ways, the initial Association resembles a constitutional convention, where the main goal is to draft the long-term governance mechanisms themselves.” If we take these views literally, the Association should become a member of the IMF and submit to its regulations.

More seriously, some observers have proposed that the IMF takes over the Libra initiative. This would prevent competition between two cryptocurrencies, one backed by China and the other by a U.S. company. And it could meet the doubts and uncertainties reviewed in this blog.

The future, as usual, is uncertain. We need new frameworks to design and control our digital future. Our business model (part 4) shows that businesses are well able to bridge the gap between technology and commerce, and make lots of money from this. But our strategic discussion in this part shows that regulators still need to do so, in the interest of the public. This blog shows that value-based ecosystem analysis can at least contribute to an alignment between commercial, technical and regulatory goals.

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