Why building a new protocol for money is the only way to truly change the game for people
As I’ve been traveling around the world meeting with key stakeholders, it became clear to me that the advantages of digital currency transmitted over a blockchain — notably when it comes to broadening access and lowering costs of financial services — weren’t as evident to others as I assumed they were. I’m often asked why we didn’t take a more traditional route of building a payment system on top of existing rails, instead of the more ambitious route we’ve chosen. I tried to find a good concise write-up about the advantages of a new core network to move money around, and couldn’t find one, so I thought it would be a good idea to take a stab at it.
First, let’s look into the limitations of the current system. The existing “money networks” are closed and are not well interconnected. There are regional payment networks (ACH, European Payments Council,…), inter-bank networks (SWIFT, RT1, …), central banks/bank networks, and many more. Some of these systems were built in the 1960s and 70s, and while they’ve received upgrades since then, they often live on top of legacy, fragmented infrastructure.
Second, if we look at current payment services and wallets, they also have limitations because of the underlying infrastructure that they are dependent on. For example, while you can send and receive money from within one wallet, you typically cannot send and receive between wallets from different companies. These are siloed systems, which in turn limits the reach of each of these networks. To make a helpful analogy, it’s a bit like if you couldn’t send emails from Gmail to Yahoo! Mail, and were forced to communicate only with people on your own mail system because there was no open standard to support interoperability (aka SMTP for email).
Third, moving value from one individual in one country using a specific wallet/bank account, to another requires much more than what meets the eye. Depending on the setup, moving money from point A to point B requires a number of intermediaries to be involved, and often demands liquidity pools to be readily available at point B for consumers to get their money out in a timely fashion. This means delays, and added cost at every step of the way.
Now for the sake of illustrating key differences, let’s imagine a world where two Libra Association members would want to build on the existing rails, and would want to build an interoperability layer between wallets.
Take a transaction flow between the Calibra wallet and the Mercado Pago wallet. This is what it would look like on existing rails. Alice wants to send $100 from her Calibra account to Bob on his Mercado Pago wallet. Alice lives in the US, Bob lives in Argentina. Provided Alice has a balance in her Calibra wallet, she initiates the payment. Calibra would have to use a custodian bank (or multiple banks) to secure customer funds. Now begins the journey of moving that $100 from a US bank account to the bank that Mercado Pago uses for its Argentine customers. This might require correspondent bank transfers or intermediaries. Even in the case both banks are using SWIFT, it could cost about $45-$50 to complete that transaction. Because of these costs and complications, the right way to implement this would be to enter a net settlement deal between Calibra and Mercado Pago, whereby at the end of a given period one entity net settles the balance to the other entity. But this would mean a flurry of bilateral deals between each entity wanting to be part of this scheme, liquidity issues to manage among other costly operational constraints and requirements, and a high level of trust between the parties to avoid an entity not settling their balance at the end of said period.
Long story short, building on top of existing rails and across disconnected payment networks won’t reduce cost, open up the market to more innovation, nor lower the barrier of access to modern financial services as much as building a new infrastructure with a very stable, high quality global medium of exchange supporting it.
Compare this to the design of the Libra project, that will enable wallets, merchants and services from all over the world to move value around at an incredibly low cost. There would be near real-time settlement, and no need to even think about liquidity pools of various currencies at the ready across banks around the world. Just like SMTP allowed any email provider to interoperate with other email providers, Libra can be the “protocol” that will enable fast, cheap, and stable money movement across service providers, institutions, and people all around the world. This would in turn massively reduce costs by eliminating the need for so many intermediaries, and operational complexity and overhead, thus increasing innovation and access. People would benefit from more ease when they want to send and receive money, and the barrier of access to modern digital money and financial services would be greatly lowered — enabling billions to have access to these essential services and to the world’s economy.
This is why we’ve decided to take the more ambitious route, and why we’re so committed to seeing it through. Because people all around the world deserve better, and it’s about time for a change.