The following are my assessments of the formative next steps in the evolution of Facebook’s Libra:
- I do believe that the US Congress will eventually approve legislation to promote the proliferation of digital currency, particularly the Libra variety which is a “stable coin” (meaning it finds its value against a real indicator, like fiat currency or other real assets). The US congress will not just allow Libra, but actively promote it when they come around it. This may sound difficult to comprehend right now, given the push back by media, US congress and regulators, but I believe that the consensus building is already taking place underneath the foam. It’s just the way public policy evolves in the US. The US legislators never say never to anything new, even if it seems that its what they are saying, they just use the process to wrap their minds around “what’s in it for me”. It may involve some compromises on the part of the promoters, but as soon as it is sanctioned, it moves fast.
- Despite claiming to be tied to a “basket of currencies”, Libra will be reduced to essentially become the US dollar in digital form even if its rhetoric suggests otherwise. The US has not figured this out yet, but a dominant stable coin that tracks the price of gold or the US dollar can extend the ballooning US debt into the digital age. The idea that a committee in Geneva will control the value of a stable coin in the post-world trade era and that the coin will become dominant is total humbug, a theoretical newspaper discussion that can go on and on to sell more newspapers, but was never part of the design.
- The same US government that arm-wrestled the global financial industry on banking liberalisation in the 1980s, money laundering, tax evasion and compliance in the 2000s will lobby all other countries to permit cross-border digital wallets using tokens like Libra. This will have the unintended effect of creating the backdoor for all other digital wallets to effectively become cross-border as well, including China’s Alipay and WeChat Pay, Korea’s KakaoBank, maybe Southeast Asia’s Grab Pay and so on, who will ride on the further liberalization in cross-border digital wallets and assets.
- However, all these developments do not necessarily guarantee the eventual success of Libra. Libra has the following limitations:
i. The Libra approach is designed to enable Facebook participate in global regulated payments without itself becoming regulated. All regulators who allow any form of digital payments to be accepted in their respective countries will also insist on the digital asset to be domiciled in the country, including setting up local servers. This is okay for Libra, but not okay for Facebook at all cost.
ii. Libra has too many legacy stakeholders of nearly 100 old-world institutions old world institutions trying to survive into the digital age. Any committee approach will result in only lowest common denominator holding them together. For global payments this is not a bad thing. It creates ubiquity. But it also creates a few setbacks:
- It will become a more, not less, expensive payment tool, as every institutional stakeholder is eyeing a piece of the ridiculous fees we see in payments today.
- This will set the stage for regional and local variations with more local functionalities that are sensitive to local needs to flood the market beforehand.
iii. Project Libra wants to solve all the problems in global payments all at once – from merchant acceptance to becoming an alternative fiat currency. I am not sure how much of this was intended by the promoters themselves, or if they are reactions by the media, but boy, there is a lot of fodder for global discussion right there. However, all the most successful ubiquitous payment models anywhere in the world are defined by their simplicity, not their complexity. So, Libra itself may or may not succeed on one of its most unintended simple features and not for the ones touted by its promoters. Ditto all the other digital boats rising with the tide.
iv. Libra is not designed to benefit domestic distributors. So while it has strong global distribution partners, the domestic players will boycott Libra and push their own local variations. Libra is too big business oligopolistic when seen from a domestic angle. So, look out for the simpler players in the local community who will ace Libra.
v. Also, do remember that the same Mark Zuckerberg announced Whatsapp Pay just a few weeks before. At best, Libra could be a red herring, getting the world to discuss a complex product when the easier one is rolled out under everybody else’s noses and benefit from the concessions given by the global regulators. For Facebook, it is vital for Whatsapp to also operate on the same principle as Libra – “regulate my payments but don’t regulate me”.
Libra is still the forerunner of the real digital global payments platform. It is a necessary step because:
i. the incumbent institutional players are best placed to negotiate with old-school regulators to pave the path.
ii. The technology for permissionless cryptocurrencies are still not fully developed yet. The permissioned Libra model does not require energy sapping and slow algorithm processing technologies and it promotes the interest of its powerful sponsors.
iii. Bitcoin and other cryptocurrencies are still tagged as too libertarian, just like cowry shells were in the days of barter trading, until nobody thought that way anymore.
Any caveats? Ironically, I happen to think that the weaker Facebook becomes, the more likely Libra will succeed. Weakness can be in the form of greater personalization of content platforms like Facebook with the advent of new technologies.
All of these developments will take us one step nearer, but not quite there, towards the eventual universal acceptance of true digital assets such as bitcoin and a flood of others. I am not really a fan of Libra or the idea that big business should dictate the future, but this is a necessary phase. The Libra project actually confirms that the day will come soon enough.