Facebook has announced its own Cryptocurrency. It's called Libra, and it's backed by a large amount of large names in the financial technology space - including a few really big names: Mastercard, Visa, Paypal, eBay, Spotify and Uber.
I usually refrain from personal commentary on the 'Technical Things' part of the Damn Amsterdam blog - there's already a lot of opinionated people on the Internet, after all - but in Libra's case I really want to touch on a couple points which I believe to be sorely lacking in the current conversation.
Before we get there, a disclaimer: I am not a Crypto expert by any means, and I don't particularly feel like I could become one anyways: the whole sector eludes my understanding, so please bear with me. I am however strongly connected to three items from the Libra mission:
global currency: I have a double master in research economics with a focus on monetary and development macroeconomics, which I never get to use short of ranting at family dinners.
empowering billions of people: I have lived in the developing world and have both paid and been paid using the 'unbanked' system.
financial infrastructure: I work in the core payments team at one of the big fintech companies. We do see a lot of people throwing their money around, and I often get to see 'how the sausage is made'.
Because of these three points, I felt the need to jot down a few thoughts on this shiny new thing Facebook just launched. Without further ado:
Libra's monetary economics
Most of the current analysis around Libra is focused on the main whitepaper, which mostly covers their mission and cardinal points, in a surprisingly high-level way. Companion papers have also been released, with the one concerning the Libra Reserve being by far the most informative.
The goals which this policy paper outlines are superficially in line with those of most monetary autorities around the world. Libra is positioned as what the crypto market calls a 'Stablecoin' and what economists have dubbed a pegged, fully backed or fully convertible currency.
In a nutshell, to ensure consumer trust (widespread adoption) and protect it from inflationary or deflationary pressures (value preservation), the Libra currency will be backed by a Libra Reserve. This Reserve is a basket of financial assets, spread geographically and held in their most liquid form.
In layman terms, for each Libra that a customer or investor whishes to purchase, the customer needs to hand over some local fiat currency to authorized resellers. These resellers would then transfer this money to the Libra association, which would use it to purchase low-risk assets and currencies. Should the customer want its local currency back in exchange for Libra, for instance to spend it at the local mom and pop shop, the reverse flow would happen. This mirrors the current monetary system, where local banks are the authorized resellers - converting 'credit card money' into local currency - and the central bank fulfills the role of the Libra association.
There's two big economic advantages the paper is trying to peddle here. First of all, unlike existing financial systems, the Libra framework would always hold a 1:1 ratio of Libra to other currencies - something which has prompted even reputable news sources to throw the term narrow banking around. Secondly, these currencies and assets would be highly distributed and inherit monetary policy from the underlying central banks.
But both are untrue.
The narrow banking claim, which contrasts the Libra resellers and Libra Reserve with regional banking systems and their central banks, is superficial and misleading. It is true that the current banking system uses a fractional reserve banking model, in which banks are allowed to use deposit money to finance speculative activities, and are not required to hold reserves covering the total amount of deposits from customers.
However, that does not make Libra's model a narrow banking model. In most regulated markets, banks are not only strongly regulated (for instance under Basel II and III in Europe) and regularly stress tested by external authorities, but are also mandated to reinsure deposit money (what Facebook would call 'low risk') up to a certain amount.
Libra and the Libra Association are under none of these obligations. The 1:1 reserve claim only covers the relationship of Libra to underlying currencies: it offers no guarantee on what Facebook and the Libra Association subsequently do with funds denominated in Libra. Whether it's peer-to-peer lending, local financing schemes, cash-in-advance models, small business loans, derivatives, or even a Libra Stock Exchange, the reality is: you wouldn't know.
Once the money is denominated in Libra it escapes regulation and oversight, and enters a new dimension where the bank is the money. That is not narrow banking - in fact, it's the wildest form of grey market capitalism: and what Facebook calls a "commitment to strong consumer protection" is a call to regulation that only covers the exit nodes - Libra calls those exchanges "endpoints". For all other intent and purposes, the Libra ecosystem is an unregulated distributed monetary authority - the furthest you could be from a narrow bank.
As for the inheritance of monetary policy, I could buy this argument for large nations with strong regulatory power, large technical departments and huge currency reserves. But for smaller players - think about the central bank of a developing country - this whole project feels like a play from Facebook to have additional leverage: a concern that, to my surprise, I have failed to see anywhere in the current analysis of Libra.
Libra's focus on banking the unbanked clearly betrays a focus on developing economies - which is where the need for liquid, safe, and stable money is the biggest. But that's a double-edged sword: imagine Libra becoming a successful product, in, say, Myanmar. People would get paid for their services in the local currency, the Kyat. Due to its superior stability and ease of cross-border transfer, the Libra would be a better solution to hold savings. But as citizens spend Kyats to get Libras, the Libra Reserve would slowly fill up with the Myanmar currency.
The mandate of the Libra Association, in that case, would be to re-balance the Reserve's currency basket. But for developing countries such as Myanmar, the amount of foreign reserves held is usually low (for Myanmar, a few billion of dollars). Re-balancing the basket from the Reserve would mean flooding the market with Kyat for a value similar or superior to what the Burmese central bank can exchange would cause runaway inflation and cripple the government in its ability to function.
Giving this type of power to companies such as the Libra Founding Members is something that deeply worries me. 'Banking the unbanked' is a development project that should not be taken lightly: financial ecosystems are difficult to work with, even more so in fragile, developing markets; and Libra's monetary paper fails to address any of the concerns that would arise in the minds of any reasonable economist.
For the reasons stated above, I would judge the claims that the 1:1 backing of Libra-to-currencies make the Libra Association a positively regulated player, safer than the current banking system, and subject to external monetary authorities as naive and misleading - and I would expect monetary and financial authorities around the world to do the same.
Libra as development vehicle
One of the major selling points Facebook is presenting to the world for Libra is that it will 'bank the unbanked'.
The story goes like this: around 30% of the world has no access to financial services, but they all have mobile phones and internet. So why would you force these poor souls to carry wads of cash along some dusty road in the middle of nowhere to get their agricultural supplies, when they could just hit that Like button on their iPhone and have them delivered at their doorstep like we do in the US?
It's a compelling story - especially because it's one we, the rich world, desperately want to believe. But it fails to take into account the reason why the 'Unbanked' are cut out of the global financial system.
You see, people in developing economies have money - usually more than you would expect - and they would probably like to buy goods and services online. The major issue they have is not in fact their lack of access to the global financial system. It is lack of access to the local interfaces. People in developing countries have a very limited array of options to move their Paper money into the Internet dimension. To use a metaphor, the problem is not that they can't travel by plane: it's there's no landing strip. Building yet another plane - or another wallet, in this case - will not help at all.
Libra has been compared in some circles to M-Pesa, the phone-based wallet active in some Subsaharan countries. So how does M-pesa solve this local access problems? Lo and behold, here's my local bank from back when I was living in Africa:
Which one is the bank you ask? Well, all of them: the shop with the 'Wakala' sign (literally, 'agency') is the one carrying official mandates from the financial network to act as an ATM. But almost every other brightly colored door houses at least one financial endpoint - and in fact, even the guy on the motorcycle on the right can act, in some cases, as an ATM on wheels.
Financial endpoints like the one in the picture have unclear availability of financial services, open and close at seemingly random hours, and have incredibly steep conversion fees (to the tune of 5-10% of transaction value) when bridging the gap between the digital and the tangible world. Which is the problem at hand: all the financial optimization, fancy Blockchain and beautiful UX will not help one bit if the interface between Internet Money and Real Money is this shoddy.
Facebook and the Libra Association have been unable to provide a clear answer on how they plan to achieve their lofty goals in financially underserved regions. I have no doubt they can be infinitely more successful in the digital domain than any other digital wallet in the space - which is where the fight with their investors is played. But the other battle - the one that really matters, the one to bank the unbanked plays out on a different terrain, one which you cannot even reach from your shiny offices in Menlo Park or Geneva.
Which is why I'm unable to buy the idea of Libra as a legitimate bridge between the Unbanked and the digital world. Unless the Libra Association manages to crack the puzzle and think concretely about how to roll out a gigantic capillary network of local agents in the developing world - a strategy which is incompatible with their goal of low fees, money liquidity and strong regulation - the goal of 'banking the unbanked' will just remain a nice-sounding PR buzzword.
Paying with Libra
A final point worth considering is the one about Libra's main purpose: as a payment method.
In my day-to-day job I get to see a lot of the intricacies being built to allow people to pay everywhere, no matter what. A Taiwanese tourist going through a London Metro turnstile with a single swipe of its Visa card might not make headlines - but it is an incredible technical achievement when you consider the amount of machinery that is present just to process a few pennies.
In recent years, existing ways of paying have become more and more interesting (and complicated), and on top of that entirely new frameworks have appeared. Libra, and the Colibra wallet, are clearly inspired by two incredible innovations in the Payment space: the rise of Aggregator Apps, and that of P2P payments.
Aggregator apps (also called super-apps) are something that the average Western consumer would not be familiar with. They are, on the other hand, incredibly popular in many markets where the whole e-commerce ecosystem was sorely lacking: Aggregator Apps changed that.
The whole idea behind an AA is that the app itself serves as a sort of 'embedded app-store', which allows you to do many things at once, without having to install any additional software. Customers get ease of use, a single interface style, and a bunch of interconnected applications with shared accounts and a single wallet.
Indeed, most of these apps (AliPay, WeChat, Meituan Dianping, Go-Jek, Grab, Rappi) started as or include at least rudimentary wallet functionality. But beware of comparing them to Paypal: they are a completely different beast. On one of these Aggregator Apps you could find a date, find the best restaurant, book a table for two, have a friend rate your look, order a cab and plan the whole night without pressing the 'home' button once.
Aggregator Apps are something that is really hard to understand from our cultural point of view, where information, goods and service are readily available. For other type of economies, they are a revolution.
I'm sure Facebook is looking very closely at different success models in other markets. And they are not alone - but with Libra, and partnering with some of the potential competitors, they are definitely looking to be the trailblazer in the Western economy.
P2P payments have been around forever (Western Union anyone?), but have ultimately seen widespread adoption only recently, thanks to the rise of borderless shopping, travel, and personal finance. There's basically two ways of making money transfer work financially: you either create economies of scale and networks large enough that the money basically never needs to leave your system (Venmo, Swish, Paypal.me), or you work very closely with existing entities to bring down fees by negotiating partnerships (Visa Direct, Mastercard Send).
The problem with either approaches is obviously that the more parties are involved in the whole transfer chain, the more parties need to share the pie - and therefore the higher the fees to make the whole thing financially viable.
This is why, despite the large number of Libra Founding Members, I would expect Facebook to aim for the first type of P2P wallet: one that is fully integrated in the Facebook ecosystem, but more importantly - one in which your money never exits the Libra system. And I would expect the model to expand to include companies as the second Peer, effectively cutting out the middleman in C2B payments.
This of course creates an interesting tension in the Libra Founding Charter: half of the companies represented are net recipients of revenue generated by global payments, and the other half are the ones that need to cough up the money. It sure feels like the entities that bought a seat at the table have wildly different motives to do so - and it remains to be seen how that will impact the project going forward.
The only party whose play here is clear, is Facebook's. From a payment perspective, they want to become the Western World's Aggregator App: offering access to money and services from a single hub, and owning their customers across all channels. After becoming the de-facto standard for communications, they want to do the same for money. But I'm unsure whether they'll be able to reach the scale needed to pull this off.
I think the interest towards Libra is very much justified, but for all the wrong reasons. Current commentary has focused on its Cryptocurrency aspect, and yet I've managed to cover most of what there is to say about Libra from both a payments and an economics perspective without mentioning 'Crypto' once.
On the other hand, the payments and econ perspectives are the ones that will determine Libra's fate in the market. Under the current regulatory environment, I would not expect Facebook to be able to become the West's first Aggregator App; let alone the first supra-national currency.
But even if they fail, there will be others. Libra's anthem pleads for a currency that is "safe, accessible, no matter who you are, or where you're from". That is an admirable goal, and one the industry should most definitely stand behind. I will be watching them - and their successors - with interest and curiosity, as we look for a world where money works for everyone.