And so it began: Libra and the race to private sector digital currency — Part 1
Roop Singh, Al Tilooby, Benn Konsynski
This article originally appeared on IntuitFactory Blog
We presented this analysis at a TAG event in Atlanta recently
Video 2 Libra panel discussion
Executive Summary
- Cryptocurrencies come out of the shadow of niche communities, are now knocking on doors of mainstream consciousness.
- Libra launches an arms race of private companies and consortiums alternative crypto-based currencies for mainstream adoption.
- Central banks and sovereign governments globally now must respond after the initial shock.
- Libra established a clear threat to the dollar as a global reserve currency. Regardless of its short term success or failure, the aspiration to global private currencies now opens.
- Governments will issue blockchain-based cryptographically secured sovereign currencies in the near future intensifying the battle to establish a footprint.
- The race is on to establish the “stable” digital currencies for the Internet. It could be government or private currencies.
- Blockchain and Cryptocurrencies, have a shared past, linked trajectories yet distinct destinies.
- A new ecosystem of value exchange is emerging that offers some independence from the failings of the sovereign governance and current infrastructure that too slowly evolves for the rapid acceleration of change made possible by technologies.
- A wave of digital-native companies (likes of Facebook, Google, Apple, Amazon) investing in engines of value exchange that leverage their closeness to consumers and threaten the financial services incumbents.
- Disruptive forces transcend the boundary of one company. They are about fertile grounds for innovation, adoption of technology by public and private sectors, and American competitiveness in a game of geopolitical chess.
- The cost & technological barrier-to-entry to create cryptocurrencies have been lowered and will continue in that direction.
- We are moving from an era of Fintech, transfer of money on the Internet, to an era of Decentralized Finance, transfer of value on blockchain networks.
Corporate currency coin arms race intensified in 2019
Fortune magazine article reports,” China’s central bank may launch its own digital currency in the next 18 months amid strong endorsements of blockchain from the highest levels of government, signaling a desire for China to be self-reliant and globally competitive and adding another dimension to the growing U.S.-China tech rivalry. The People’s Bank of China (PBOC), the central bank, has been researching a digital currency since 2014 but recently accelerated its efforts in response to Facebook’s proposed digital currency Libra, a platform-based payment service backed by a basket of currencies weighted towards the U.S. dollar.”
And hence intensified the crypto coin arms race in 2019 to become the defacto choice. As we embark on 2020, we’ll look back upon the year gone by as a year of bombastic debates on sovereign control of monetary systems, emerging financial infrastructure and on the nature of money itself.
Blockchain and Cryptocurrencies, have a shared past, linked trajectories yet distinct destinies.
Libra blockchain network is an inflection point in the global blockchain’s & cryptocurrencies’ journey and its eventual destiny.
These developments are looked upon as favorable through the lens of the blockchain and cryptocurrency space if only for the reason that it makes these blossoming industries a household name. It induces the debate on cryptocurrencies & digital assets regulations on a global stage. More people now are curious about blockchain and crypto, it gets more in the public consciousness as discovered more towards the destination of mainstream adoption.
So much so that late-night host Trever Noah did a segment on it. Following the segment, John Oliver did on cryptocurrencies a year ago. If you are featured on late-night comedy you, have made it.
Libra’s quest to become the Internet’s de facto money. In this four-part article, let’s look at the 10 forces that can impact this journey. These are like waves, obstacles, or enablers rising in the ocean. If you time it just right, you may be able to surf the waves or you might crash into one.
1. The dire need to create a regulatory framework for the 21st century
‘The Red Flag Act’, as The Locomotive Act 1865 became known, required that self-propelled vehicles, or automobiles, must have a ‘crew’ of three people — one of which had to walk 60 yards in front waving a red flag (or carrying a lantern) to warn people that the automobile was coming.
The genesis of this project lies in the outdated US and global regulations.
Caitlin Long in her written testimony to congress makes an impassioned case for outdated regulation and inefficient incumbent.
She exclaimed, “The status quo payment system coddles inefficient incumbents while imposing costs on businesses to retain ‘comfort deposits’ in their bank accounts to fund their unsettled payments….
It makes zero sense that companies with a high cost of capital must trap their expensive capital in bank accounts, simply because cross-border payments take so long to settle.”
The way national and international regulators respond to the project remained a critical point. Initial reactions have been mostly negative.
As a consequence of greater regulatory scrutiny, the Libra Association recently saw several key members depart, including Visa, Mastercard, PayPal, and eBay, among others.
If we postulate that no new regulatory frameworks are created, then Facebook will have to abide by the current regime of money transfer, AML/KYC, data localization, international remittance laws like banks do globally.
Mark Zuckerberg recently said at the congressional hearings
Compliance is not the aspiration, it the entry point. Can Libra accomplish its stated goals without any shift is the regulatory framework? We doubt it.
So then does the project make sense anymore? Perhaps as an incremental improvement. It may become a technologically advanced and a new infrastructure for retail payments. Another version of PayPal perhaps.
We respect the much needed financial regulator’s generally established role to keep markets safe, consumer’s money secure, and operators accountable. The question here is can it adapt to technology evolution while protecting the consumers?
Libra’s full intent is challenging the practices that sufficed for the 20th century, but are not needed or relevant for the 21st.
These forces are beyond the boundary of one company. They are about fertile grounds for innovation, adoption of technology by public and private sectors and American competitiveness in a game of geopolitical chess. 5G is another technology shaping that very debate.
2. We The People
One of the main forces behind the French Revolution of 1787–1799 was the notion of self-determination. Inspired by the writings of intellectuals, the masses began to speak of ‘new enlightenment’
This enlightenment was spread among the educated classes by the many “societies of thought” that were founded at that time: masonic lodges, agricultural societies, and reading rooms.
The french adopted Declaration of the rights of man and citizen in 1789 which shares common influences with the United States Declaration of Independence, from the American revolution preceding it in 1776.
How we govern ourselves seems to be our human tribal need over the course of history. So much so that we have had revolutions over it. One of the hallmarks of blockchain’s & cryptos emergence is the innovation in governance models.
Let’s examine Libra’s governance through these lenses:
A. US Competitiveness
B. Voting powers
C. Decentralized vs Centralized
US Competitiveness
Innovation Hub
Did the United States lose this project to be set up in a more blockchain and crypto-friendly regime? In the article One country’s ban is another country’s boon by one of the authors, we observe that “companies have found greener pastures that offer ‘ease of doing business’ in the past. Plenty of research exists on national developments of Specialized Economic Zone (SEZs) for particular industry sectors.”
The Chinese Threat
In the fortune article “Chia’s Digital Currency is a wake-up call for US”, Li Chen, who researches China’s financial development and government regulation at the Chinese University of Hong Kong, says the Chinese government’s attitude toward blockchain-powered technology, especially digital currencies, can be characterized by a “two-pronged approach” of permissiveness and caution.
“On the one hand we have seen coordinated efforts in clamping down on private cryptocurrencies and exchanges, but on the other hand, we see a lot of commitment and initiatives trying to spearhead and encourage technological innovations in blockchain technologies,” Li says.
Libra’s setup in Zug valley in Switzerland, with multiple entities, it gives the feel of a multi-party United Nations like model.
As we evolve in the 21st century, the governance choices made make the adoption a welcomed amendment to value exchange or a threat to visibility and control?
In September 2019, US representatives French Hill and Bill Foster said the central bank should consider a US-backed cryptocurrency to remain competitive.
Voting Powers
Libra association member, venture capital firm Andreessen Horowitz made one thing clear: It will have just as much power as Facebook in overseeing the governance of the new digital currency. “One of the key factors in our decision to join was that we would in fact have — and all members would have — an equal vote,” Haun said.
“I think of it as a constitutional convention,” she said. “You have all these different states coming in trying to form this union.”
One of the tinderboxes for the French Revolution was the distribution of voting powers in the Estates-General amongst each of the three estates -clergy, nobility, and commoners.
Governance models, and embedded within its rights and obligations for managing a global currency. This is an innovation we haven’t seen too often in our global societies. With the first models likely to not succeed as we all get comfortable with grasping the impact of such instruments. We can be certain to see pressure from the existing governance regimes. Libra association has already had challenges with its membership base. Given the delicate global balance of power and the distributed nature of monetary policy, radical change of this scale will be gradual and not revolutionary.
Decentralized vs Centralized
In a popular The New York Times article titled “Beyond the Bitcoin bubble,” Steven Johson argues “The real promise of these new technologies, many of their evangelists believe, lies not in displacing our currencies but in replacing much of what we now think of as the Internet, while at the same time returning the online world to a more decentralized and egalitarian system. If you believe the evangelists, the blockchain is the future. But it is also a way of getting back to the Internet’s roots.”
The question to ponder here is about the degree of decentralization. It is a “Permission-based ledger” with consortium members acting as validator nodes. Their intention is to further decentralize it by adding more members, this claim is now being questioned.
We are growing an alternative blockchain-based financial infrastructure led by digital-native companies (as opposed to banks) with a goal of getting into your wallets, both metaphorically and literally or should we say both physically and digitally.
We’ll continue to examine forces 3–10 in subsequent parts.
