Libra: Forking the Fed
Libra stands for Liberation. But for whom, exactly?
Defining Terms: The “3 Libras” in this article:
“Libra” will come to mean many different things. Here’s how I use them in this article.
- Libra Association: The group of companies, generally tech companies, that have come together to build out the Libra Network
- Libra Network: The blockchain platform that the Libra currency runs on
- Libra currency: The digital currency that is minted and distributed by the Libra Association. Also referred to as Libra Coin, or Libra cryptocurrency.
Facebook has announced their plans to build Libra, a new digital currency
On the surface, Libra seems to be Facebook’s new innovation and experimentation of new products. However after peeling back the layers, it’s clear that Libra has significant implications for the state of the world, and throws another curveball into the already chaotic political and technological climate we find ourselves in.
What Exactly Is Libra?
The headline “Facebook Announces Plans to Release New Cryptocurrency, Libra” doesn’t even begin to illustrate what is truly going on under the hood.
In this article, we go through the behind-the-scenes implications of Libra, the implications of the Libra monetary system, and hypothesize about the coming 3-way fight between governments, Libra, and cryptocurrencies.
The Libra Banner
Above is the image that lead the Libra announcement. Logos of the largest players in the Tech and Payments industries, surrounding a new entity and its logo: Libra, a word with close proximity to both ‘Liberate’, and ‘Libre’, which is Spanish for ‘at liberty’.
At first glance, Libre looks like a collective. An association of companies banding together to create some new good for the world. The reality is far more nefarious. Understanding the economics behind the Libra system, it becomes far more apparent what this image is actually is.
Libra is Big Tech’s Declaration of Independence from government controlled currency
The logos surrounding the Libra Declaration are actually the signatures of Libra’s founding fathers. The appending of these logos is Libra’s statement to all governmental bodies: “You have to fight all of us”, “We’re too big to stop”, and, the most strategic, “Forget anti-trust, because no single company operates Libra”. This is the flag that is planted by the sailors of the Mayflower, on the shores of the New World, after being freed from the tyranny of the British monarch.
The reality may be less hyperbolic that the metaphors above illustrate. No company that is signed on to Libra is beholden to the organization, except for Facebook. However, if Libra does become successful as an alternative currency, this is the story that will be depicted.
Big tech has always progressed further out of the grasp of government regulation, Facebook especially. This is the most recent, and perhaps most drastic step ever taken.
Cryptocurrencies Taught Facebook The Strategy
The last market cycle of cryptocurrencies was too big for Big Tech to ignore. Most tech companies are interested in blockchain technology in some aspect. Undoubtedly, their technologically savvy employees and the cryptocurrency community overlaps. Unlike the average person, tech company executives are more suited to be interested by, and comprehend, the complexities and implications of cryptocurrencies.
The narratives that have spawned by Bitcoin and Ethereum are clearly well understood by tech leadership.
- Governments no longer have a monopoly on money issuance
- There is a missing void for a single, global money system
- Decentralized networks are hard to stop
- Programmable money is cool
Libra is a collection of Big Tech companies who wish to capture the value that cryptocurrencies have proved can exist.
Libra Economics
In short, Libra is a new a central bank.
A central bank has two main components: Assets and Liabilities.
Assets are things that a bank has. Liabilities, or Debts, are things that a bank owes. Envision two columns: a positive (+) column, that adds to the total value of all assets, and a negative (-)column, which subtracts from the total value of all assets.
When you add all assets and liabilities together, you get the Equity of the bank, or company. While a central bank doesn’t have equity, Libra does. Shares of the Libra network can be bought and owned as property, to be added to the asset column of a company, like the ones shown in the flag.
In its documentation, Libra’s asset column is called its ‘reserve’. An excerpt from The Libra Reserve illustrates how Libra’s reserve (and therefore its equity) will grow.
Where is the money for the reserve coming from? The money in the reserve will come from two sources: investors in the separate Investment Token, and users of Libra. The association will pay out incentives in Libra coin to Founding Members to encourage adoption by users, merchants, and developers. The funds for the coins that will be distributed as incentives will come from a private placement to investors. On the user side, for new Libra coins to be created, there must be an equivalent purchase of Libra for fiat and transfer of that fiat to the reserve. Hence, the reserve will grow as users’ demand for Libra increases. In short, on both the investor and user side, there is only one way to create more Libra — by purchasing more Libra for fiat and growing the reserve.
Owning the Libra Network
Understanding this, we can clearly see how Libra will compete and scale against the Federal Reserve
- Libra’s equity grows by entities (like those companies with logos in the Libra flag) purchasing the Libra investment token, and by users/customers purchasing and using the Libra currency.
- Those with the Libra investment token (the equity token) receive their share of the interest of all currencies, and appreciation, of Libra’s assets
- Libra’s debts are the Libra coin, which the Libra Association has the ability to freely mint and distribute. Excerpt from the above paragraph:
The association will pay out incentives in Libra coin to Founding Members to encourage adoption by users, merchants, and developers.
- Here, it sounds like the Libra Association has the capacity to freely mint Libra coin in order to bootstrap the Libra network, and scale the growth of its asset column quickly.
The goal of Libra is to encourage the purchasing of Libra investment tokens (shares of Libra) by various companies. This does two things
- Adds money to Libra’s assets
- Incentivizes the company to provide its services to the Libra network
Libra’s assets are the main value proposition of Libra. The assets are the “funds in the bank” that back the Libra cryptocurrency. While the Libra cryptocurrency will generally stay stable in value, the appreciation of all Libra-held securities, and the interest generated by all Libra-held money (USD, Euro, Yuen…) adds to the value of Libra’s assets, without increasing the amount of it’s debt. Libra Assoication members, who hold the Libra investment tokens, (and therefore the equity of Libra) capture all the value of the growth of Libra’s investments, without having to “pay-out” to those that own the Libra cryptocurrency.
The second value proposition is financial services offered by the Libra cryptocurrency and the Libra network. As each company joins Libra, they add their goods and services to what the Libra network offers. Getting merchants like Visa, Mastercard, and PayPal onboard grants Libra the ability to scale payments far further than Bitcoin or Etheruem have yet been able to achieve, while also enabling Libra to be accepted in orders of magnitudes more locations. This increases the number of people that will likely hold the Libra cryptocurrency. The Libra cryptocurrency is the debt column of the Libra Central Bank, and having high demand for Libra’s debt is akin to Libra receiving an A+ credit rating, as Libra currency holders strongly believe in Libra’s ability to pay their debts.
Stealing the Fed’s Only Trick
The Federal Reserve is what it is because it can print USD, the de-facto currency of the world. Without this trick, it would just be another bank with debt, assets, and equity. Instead, it’s traded its equity (therefore removing its ability to be purchased or privately owned), for its ability to print money. This is the Faustian bargain of the Federal Reserve, granted by the United States Government. The U.S. Government says to the federal reserve: “You can print money, but you can’t be a company”…. for obvious f***ing reasons.
If you think Facebook vs. the Federal Reserve is going to end badly for Facebook, think again. If Facebook were a nation, at 2.4 billion people, it would be the largest nation on planet Earth. Libra doesn’t stop at Facebook, however, as joining the Libra Association (…the Libra Mutiny) is open to any company, so long as they add funds to the Libra asset column by purchasing a Libra investment token (basically, shares), and join the incentive to grow the Libra network (basically, company).
With the success of Libra, and global acceptance of the Libra currency, Facebook and the Libra Association have copied the Fed’s ability to print the money that the world uses. This is why U.S. regulators are in a frenzy about this topic. This is also why the cryptocurrency community does not deem Libra a threat to their success. U.S. regulators want to keep the reins on their ability to control the money supply, while cryptocurrency enthusiasts believe their protocol-controlled money issuance algorithms are the answer to the future of money.
Network Growth by Game Theory
Facebook has given a choice to all tech companies: Buy the Libra investment token, or risk missing out on owning a share of the single largest monetary network ever bootstrapped. The game presented by this ultimatum is genius. Joining the Libra network is relatively low cost, because supporting the network and accepting the currency doesnt add much risk to the individual companies that join. Regulators can’t restrict a company for validating transactions on blockchain network, or accepting the blockchain’s native currency.
Because joining the Libra network is relatively low risk, and missing out on the Libra network is high risk, companies might flock to join the Libra Association. This provides Facebook with the ability to claim that they are not steering the ship, and they are simply just another company helping grow the Libra network. Anti-trust averted.
Who is Libra Liberating?
Libra isn’t freedom for the individual. It’s a gigantic tech company giving the middle-finger to the United States Federal Reserve. It’s Facebook turning its nose to anti-trust laws, and saying “it’s too late” to the U.S. regulators.
Over the last decade, we have seen tech companies generate more and more dystopian revenue sources, as the unceasing march of software learns how to capture new streams of value. Facebook already has the most successful alternative to government ID: the “Login with Facebook” button.
The internet was once envisioned to be this nation-state agnostic cyber-territory, where Libertarianism ruled and the individual had no restrictions. As Big Tech took over the internet, it basically commercialized 90% of the webpages that people spend time on. The world of cryptocurrency proved that you can have an internet-native currency. Facebook, the leader in saying “F-You” to Congress, has taken the opportunity to spawn a new federal reserve, but this time with equity, and owned by Big Tech.
If successful, Libra could possibly be one of the largest stories of this century, as capitalism and tech move further out of the control of nation-states, and into their, internet-based, domain.
The Importance of True Cryptocurrencies
Let it be known that the Libra currency is not a true cryptocurrency. Cryptocurrencies are digital representations of value which gain their worth from an intrinsic value, not necessarily from being backed by an asset. The Libra currency gains its value from the assets in the Libra Associations asset column. Cryptocurrencies, like Bitcoin or Ether, have intrinsic value, rather than extrinsic value; they generate value by themselves, and have no tangible connection to the “real world”. Unlike Libra, Ether or Bitcoin don’t have assets that can be seized by government. While all these currencies exist in the same internet space, the Libra gains its value the old fashioned-way; real world assets outside the domain of the internet.
The other important feature about cryptocurrencies that is missing from Libra is that true cryptocurrencies allow for permissionless validation of the network. To validate the Bitcoin blockchain, you only need a computer than can run the SHA-256 algorithm. For Ethereum, you need a GPU in your computer (and Ethereum 2.0, you only need to own Ether). To validate the Libra network, you need to be allowed entrance to the Libra Association, with a $10 Million buy-in fee. A blood-sacrifice from a company, to ensure that the commitment to the Libra Mafia is strong.
The Three-Way War
Cryptocurrency taught the world that you don’t need a government to manage money.
Big Tech has shown that they are far more capable than a government to collect and interpret mass amounts of data about the individual.
Governments have floundered in their attempts to regulate both industries. Lead by Boomers, governments (especially the U.S. government) show a significant inability to truly comprehend what is being developed on the frontier of software and computer science.
This three-way tug-of-war over the capture of the people on planet Earth is only just getting started, and it’s not looking good for Nation States.
Want to hear more about this? Listen to the POV Crypto Episode, where David, the author, and Christian, unpack the Libra announcement, and talk about various concepts in this article.
POV Crypto Episode 59 — Libra: Forking the Fed
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