In the Law of Libra, we sketched (1) Libra’s geopolitical posture & challenges; (2) Libra’s legal challenges.
Here, we turn to: (3) what Libra’s really up to & its potential; (4) what crypto must do to defeat Libra.
But first, let’s recall some shorthand.
- L = Libra-the-currency
- Libra = Libra-the-project (inclusive of Calibra, Libra Association, etc.)
- Cartel = Libra Association (including current members, and future members)
- Libraneers (Libders) = Libra engineers (Libra builders)
- Lusers = Libra users (sorry, not sorry; the acronym writes itself; explanation follows)
- OL = Open Libra
- OLT = OL-the-token
1. Libra’s Launch & Potential
There are a few possible scenarios for Libra:
- Libra fails to launch;
- L used solely as internal medium of exchange [including some intra-Cartel L-denominated settlements];
- Libra/L as tool for fractional lending (Libra-as-Bank);
- L as global unit of account [“for-profit currency of currencies”];
- L as [crypto] USGCoin/WallCoin/WestCoin (combining 2 to 4, above);
- L as commodity-backed money.
11.1 Will Libra Launch?
Libra will launch and will scale very quickly because of L’s unique product-market fit and unique technical capabilities, as set forth below.
11.2 What’s L’s Ideal Scaled Outcome?
While most analysts focus on the composition of L’s basket of fiat currency reserves (the “high-quality” fiats that will get L’s back), everyone in crypto knows that there’s actually no need for Libra to have a basket of fiat reserves.
The biggest jackpot for Libra lies in capitalizing on the core crypto insight that one can create valuable currency without any backing whatsoever, other than the artificial appearance of scarcity.
For now, however, Libraneers know that adding the promise of fiat-backing gives Lusers more faith in the stability of L. Pitching L as a sort-of stablecoin is also meant to assure buy-in from the governments who sell the fiat that L will supposedly be pegged to, and converted back to.
But L as a stablecoin seems to be a transition step, merely a way of getting through initial regulatory constraints. These constraints are the initial gates the Libra horse will likely pass through in early 2020.
After that, Libra’s ideal scaling outcome seems to be a progression through these 4 steps:
- Scaling to 1B+ user economies ASAP (P2P transactions in L; gaming; etc.);
- Libra-based B2B economy where firms (including Libra cartel members) settle accounts in L;
- Through use & operation of time, establish L as a commodity-backed store of value;
- Because of demonstrable efficiency gains in (1) & (3), scale user rates from 2B to 51% of the world population, becoming the de facto global currency for the 21st century.
To reach these scaling goals, Libra’s core value proposition to Lusers will be that Libra offers the cheapest, easiest, and most equitable way to earn L and put food on the table. Libra’s “killer use” cases will be those that focus on “economic empowerment,” “marketizing the previously unmarketizable,” “monetizing the previously unmonetizable,” etc.
Given global economic realities and outlooks, the L-earning value proposition will be a necessity for billions of Lusers, especially if there are no comparable crypto earning opportunities elsewhere.
Let’s take a moment to assess how Libra might actually reach these scales.
11.3 Libra’s Product + Market Fit
As outlined in the Libra WP, the long-term business model for the Cartel is the creation of a third-party developer ecosystem.
“The association will work to foster the development of the Move language and determine a path for third parties to create smart contracts once language development has stabilized — after the launch of the Libra ecosystem.”
Essentially, the Cartel is trying to create a marketplace for markets. Analogizing to existing third-party developer schemes (iOS, Android, AmazonROS, etc.), the basic idea is to allow third parties to build out L-based services and markets.
At scale, the Cartel would operate as a meta-market-maker for other aspiring smaller market-makers. The Cartel ultimately controls the market-of-markets via internal policy-setting and governance mechanisms.
In terms of functionality, the Cartel does not need to promise anything that, say, Ethereum or other permissionless blockchains don’t already offer or plan to offer. The Cartel’s biggest carrot to developers is preferential access to a juicy market of billions of users.
- Permissionless blockchain developer ecosystems have the vision, the tooling, and human resources necessary to build even larger networks-of-networks and markets-of-markets — at multi-scale. But today’s open blockchain ecosystems seem to suffer from: (1) misalignment in allocation of capital/incentives (especially, though not exclusively, w/r to compensating developers); (2) lack of community convergence around a user-adoption driver [no “killer app”]; (3) due to #1 & #2, slow user adoption rates.
- Permissioned schemes like Libra are largely status quo maximizing (Marcus: “[Libra] allows the Free World of the Western nations to preserve the influence that in my opinion is necessary to maintain a good balance in the world.”) (emphasis added)). But they pay developers really well, and offer fastest pathways to 2B+ user scales and global impact.
Notwithstanding the important economic considerations above, the Cartel’s chief competitive advantage relative to blockchain incumbents is legal: (1) the ability to pursue multilateral regulatory arbitrage opportunities; (2) the ability to sustain substantial tactical losses ($B+ fines/sanctions); (3) effective externalization of legal risk back onto 3rd-party developers.
Incidentally, the chief competitive advantage of permissionless blockchains relative to permissioned blockchains is also legal, but in a more fundamental informational sense. See eg, #EthLaw; #PutLawOnChain.
11.4 What is Libra’s Core Market?
The power dynamic above gives a clearer view of Libra’s core “market” for purposes of product + market analysis. It reminds us, yet again, that Libra’s competition isn’t Ethereum or Cosmos or Polkadot, but rather Amazon, Tencent, Google, and Goldman Sachs.
Moving beyond the market for 3rd party developer ecosystems, we can finally define the Cartel’s core market as a global market for goods and services, eg, the real economy.
As a temporary step, leaving out finance is helpful for a few reasons.
- First, to establish L as a “stable digital currency,” the Cartel will necessarily limit opportunities for atomic swaps, direct arbitrage, financialization, etc. that could in any way jeopardize L’s peg to its basket. This is a huge bridge/pass-through market opportunity for OL and other Libra bridges.
- Second, putting aside L-based DeFi (or LiFi?) allows us to assess the most immediate market need for, and potential of, L. It allows us to explore how actual folks will be using L in day-to-day economic transactions.
Is Libra a player in global financial, securities, and monetary markets too? Of course, which is why we considered SEC and broader geopolitical implications in Law of Libra.
But because Libra’s ambition is far bigger and far more radical than just global financial markets, we have to take a moment to sketch out what an L-based real economy might look like.
11.5 Cartelization & Market Sharing: 2020–2025
The Cartel gives itself a 5-year permissioned buffer period (~2020–2025) from the launch of the ecosystem to the start of the transition to a hoped-for permissionless ecosystem. What can we expect in this first 5-year plan?
We’ve already narrowed the Cartel’s core market to the global real economy, populated by cartel members who offer thousands of unique goods and services markets (eBay Motors vis UberEats etc.). For ease of analysis, now let’s focus on FB’s core user base.
FB’s core asset is a network of 2B+ users hooked to the network through games, personal relationships, communities, etc. Right now, FB’s primary market is a global advertising/data market that monetizes information about these users and networks. For present purposes, we can think of the ad market as a largely mature one (though advances in AI, VR/AR open up lots of new revenue opportunities for FB’s core business unit).
From FB’s perspective, the biggest growth opportunities lie in expanded goods markets (FB Marketplace, Buy & Sell Groups), and services markets (Uber/AirBnB-killers/etc.). FB faces stiff competition in these markets from incumbents (Amazon, eBay, Alibaba,etc.). Furthermore, many incumbents in these markets are already in the Cartel (eg, Uber, Lyft, eBay). Thus, FB is unlikely to directly compete in these markets in 2020–2025.
However, the persistent market threat from Amazon, Alibaba, and others means that any number of interesting marketplace mergers and spinoffs is possible at any time (eg, eBay buying out FB’s market-making business units to reduce antitrust pressure on FB, among other things).
11.6 Novel Real Cartel Economies: 2020–2025
Because of the volatile political climate, heightened antitrust scrutiny, respect for fellow Cartel-members’ toes, and need to protect and expand existing fiat-denominated revenue streams, the Cartel is likely to coalesce around several novel use cases and applications for L, especially various #EarnCrypto and #EarnL opportunities that are complementary to core fiat-revenue streams.
- For instance, the Cartel could choose to pilot relatively discrete use cases, like Spotify (a Cartel member) L-based artist rewards, tipping/subscription models, copyright/royalty tracking, etc.
- For narrative control (to emphasize how Libra “creates jobs, businesses, and opportunities”) the Cartel will need to quickly produce several new Libracorns (with easy-to-justify $1B+ valuations). Existing and expanded sharing-economy use cases seem like a strong fit here (eg, Omni).
- Cartel members will also likely invest in numerous ‘niche’ global markets with unproven valuations in dozens of currently underserved spaces. Parallel investment in traditional for-profit, non-profit, and hybrid use cases will give the Cartel maximum narrative freedom to tout the transformative and disruptive potential of Libracorns, even if many eventually fail. (Applying L to unproven markets and use cases also allows Libra to problematize and pluralize L-based valuation methodologies, from inception. This would give the Cartel more deniability in subsequent antitrust/taxation inquiries.)
If/when these pilot markets produce fruit, Cartel members may compete with one another to cross-invest, or buy especially lucrative Lapps outright. At that point, it is reasonable to expect a second wave of antitrust scrutiny (focusing on cross-ownership, interrelationship of operations, coordination & effective control between Cartel members, etc).
11.7 Formal Diversification as Risk Mitigation
Depending on the legal and operational structure of the Cartel following the first wave of antitrust scrutiny (2020–2022) and potential second wave of antitrust actions (2023–2025), we might see the Cartel take meaningful steps to diversify investment opportunities beyond Cartel members. In 2020–2025, this might including potential direct buy-in opportunities for individuals (unlikely) or select institutional investors (eg, elite university endowments, more likely than individual buy-in, though overall likelihood is still less than 50% in this time period)).
For legal risk mitigation purposes, it is reasonable to infer that any structural changes to intra-Cartel governance processes would likely be accompanied by any number of other formal “democratization” and “flattening” moves/gestures, as that would materially incentivize greater public/stakeholder/regulatory buy-in. There is no reason to speculate on those potential formal moves, except to say that recent reports of potential departures of Cartel members (including PayPal’s potential departure on October 4, and reports about IBM’s potential interest in joining) underscore the need for clear formal on-ramps & off-ramps.
For instance, the Cartel could formalize new tokenized securitization schemes (and making these [ECOs = External Cartel Offerings] available to the broader public under any number of euphemisms [EOT = Equal Opportunity Tokens] and channels [airdropped to Calibra, or to one’s WhatsApp inbox]). The key point here is the Cartel is directly incentivized to:
- incubate several Libracorns;
- support those Libracorns’ experiments with new forms tokenization/securitization;
- underwrite a newsworthy amount of trickle-down gain that will flow to early individual investors.
The Cartel will be able to easily sell this boom narrative of innovation and new value-creation. This is admittedly speculative analysis, but it’s precedent-based (90s IPO boom; VC raise-exit cycle; ICOs; Binance lottery; etc.).
Another likely regulatory vector in this time period will be taxation. Unlike antitrust inquiries, we can expect a far more pragmatic framework of engagement between the Cartel and global tax authorities.
It is reasonable to expect the Cartel to externalize political contests on taxes back onto public authorities (Libra: “Hey China, EU, US, Florida, San Francisco, you fight amongst yourselves regarding global, regional, local fiscal and taxation coordination and keep working on multilateral taxation treaties like you’ve been doing for decades, and we’ll keep eating our Double Dutch Sandwiches and Irish Inversion Pies. kbye!”).
These antitrust/taxation realities present opportunities for crypto, which are discussed below.
11.8 Case Study of an L-Based Real Economy
What would a Libracorn look like to give the Cartel the narrative upper hand?
As a thought experiment, let’s introduce Legan — a Libra-based vegan economy.
Now let’s consider Legan as a L-earning platform from the perspective of a seller. Will a poor grandmother in East LA sell her vegan burritos in exchange for L?
If Legan gives her instant access to a huge base of potential buyers and if her granddaughter can use L to buy shoes at a neighboring store, the answer is yes. Even if over the longer term this means effectively squeezing out fiat-earning and crypto-native competitors like VeganNation (resulting in fewer choices and higher prices for those vegan burritos) a grandmother will do what a grandma’s gotta do.
Zooming out now, here’s where we stand.
Though few people really trust FB/Calibra/Libra’s statements regarding privacy, compartmentalization (independence from FB), or political neutrality, realistically many people will use these services because they will make it easier for poor people (FB’s base; aka the global economic base) to earn money (selling goods/services on FB marketplaces, bypassing existing gatekeepers, points of friction).
The privacy v. food-on-the-table tradeoff will always lean in favor of food-on-the-table. Because folks can live without privacy, but they cannot live without food.
When we combine (A) torrents of real-time data that FB has on us as market participants, (B) FB’s unilateral ability to control information & price to seize market share (a la Uber); (c) FB’s formidable and highly-creative army of Libraneers/Libders, it is easy to see the Cartel spinning up dozens of these types of Libracorn markets (P2P delivery services; gig economy; creative economies; recycling; carbon credits; orchard-to-table food; etc.) — cheaper, faster, and with the promise of less regulatory and taxation hassle than fiat OR native crypto.
That seems to be Libra’s core value proposition for developers and users.
11.9 Libra as Full/Fractional Reserve Bank
Beyond its role as a global real economy market-maker, the Cartel will also be able to use use regulatory arbitrage to operate a de facto fractional reserve bank.
Given FB’s track record of aggressive legal innovation, the Cartel would not feel it necessary to establish itself as full reserve bank prior to allowing 3rd party developers to launch limited-purpose LiFi financial products.
For instance, the Cartel could create de facto insurance schemes to cover losses. If the Cartel indemnifies financial losses on the network for the first several years, it can effectively elide regulation through the typical BigTech hybrid strategy of lobbying, negotiated rulemaking, tactical impact litigation (eg, FB has one of the best in-house legal departments in SV), etc.
A 3rd party dev approach gives Cartel members what they need (data/control/profits), while effectively serving as a primary liability shield for the Cartel from Lusers, and a deflector for subsequent regulatory scrutiny.
- “You cannot shut down the Cartel because our 3rd party dev ecosystem has created 3,259,024 new jobs in the US alone, 4,512,502 jobs in the EU, and 19,004,294 jobs outside of these markets.”
- “We are too big to fail; we are too important to regulate; we give too much value to scrutinize.”
11.10 Likelihood of Scaling to Global UoA
Some analysts give L a 10% or less chance of becoming a global unit of account (eg, L usage in interbank lending external to any Facebook App). That estimate seems low.
As unlikely as it seems today, L has a 51% of becoming a global unit of account by 2030.
11.11 L as Commodity-Backed Money?
The ultimate success scenario for L is as commodity-backed money. Quite literally, this means L as a commodity-backed store of value (SoV), medium of exchange (MoE), and unit of account (UoA). A sketch of this argument is available here.
This may seem like a highly implausible scenario at first, but Libraneers and crypto token engineers are complex systems thinkers and data scientists who are literally rewriting the rules on complex economic modeling.
Looking over this crypto-economic tabula rasa, several points become clear:
- There is no rational or economic reason for FB to stop Libra development at a peg to some artificially stable fiat basket.
- The only reasons why FB/Cartel would stop Libra development at a peg to a fiat basket are political.
Now let us imagine that the political hurdles can be somehow overcome.
At this point, we see that the difficult problem of connecting labor value to commodity value (and the even more difficult economic problem of valuation itself) is really just a complex information/coordination problem.
It is extremely difficult to model these complex market dynamics in systemic terms, especially if we think about matching markets in, say, ‘high-value-added service’ or knowledge-production settings.
But if go back to our thought experiments of global burrito markets and raw material resource markets, it becomes much easier to see how the Cartel could actually harmonize and rationalize entire economic sectors and global material supply/removal chains.
If in 2028, a kilo of recyclable aluminum costs .78L in Shenzhen, and .78L in Moscow, and .78L in Los Angeles, and .78L in Rio de Jainero because a third-party Uber-of-Trash has succeeded in optimizing the global aluminium market on Calibra, L isn’t just more ‘liquid’ as a result, L is effectively ‘redeemable’ in aluminium as a result.
L’s core value proposition as a commodity-backed currency (& SoV) does NOT stem from the fact that it serves as, say, the default MoE for aluminum transactions on Libra.
L’s core store of value proposition stems from the fact that aluminum buyers go to Calibra to buy their aluminum because it offers the objectively lowest and most stable price for that commodity, globally.
With time, the Cartel will likely succeed in harmonizing several distinct global commodity markets, allowing Libra to slowly transition away from a basket of “safe currencies” to a basket of “safer commodities” (think post-consumer metals; plastics; paper; etc.).
The argument may appear circular, but the only way to prove or disprove it will be over multiple iterations of future market cycles, at ever-larger global scales.
11.12 L as Fiat Commodity-Backed Money
The important point here is that irrespective of whether serious economists will think of Libra as a commodity-backed currency, the Cartel will be able to sell L as a potential, burgeoning, emerging SoV to justify ever-greater global scaling aims (commensurate with FB’s need to justify expansion into new ‘under-developed’ markets). See David Marcus, September 19, 2019 (Libra could be an “instrument of development which allows the Free World of Western nations to preserve the[ir] influence[.]”).
Because Libraneers control information flows to billions of people — the most valuable processes of all — they have the power to define money on their own terms, including private fiat-type commodity-backed moneys. Ultimately, the Cartel can create demand for whatever type of money it wants to supply.
This may be an unorthodox way of thinking about commodity-backed money, but we should consider it here for the simple reason that FB economists are doubtlessly thinking of these and similar ways to maximize gains.
At the same time, FB/Cartel lawyers are hard at work developing the most accessible and least controversial visions of global economic development to pass regulatory scrutiny. Libra’s easiest path forward is to reduce the complex geopolitical considerations above to their constituent material resource base forms.
This may seem like an unlikely high-risk strategy for the Cartel. But high risks = high rewards.
Please note that this view of L as a commodity-backed currency also allows the Cartel to reframe the narrative away from L as money and Libra as primarily a financial infrastructure, towards L as “gas” and Libra as a data and economic development engine (eg, the core Eth/Ethereum utility value proposition that received approval from the SEC precisely because it … actually … unlocks … new … forms … of … material … value, and blocking/restricting those novel value capture mechanisms is easy to expose as economically irrational).
12. Crypto Opposition to Libra
In one of crypto’s greatest paradoxes to date, Libra received its warmest reception from crypto, even though Libra has the potential to be an outright crypto-killer.
Everyone in crypto knows that FB is not to be trusted; but a common sentiment is that if we can accomplish our scaling objectives together, we will still be able to differentiate ourselves in the future.
To be sure, there is a growing stream of analysis looking at the many existing and potential negative effects of Libra. A few more data points in this vein:
- Libra/FB censorship: David Marcus claims Libra is “politically neutral” but “gave a disturbing answer over whether individuals banned from Facebook will be allowed to use the digital currency, while also claiming that the Libra Association will remain politically neutral[:]” → “I don’t know yet.” (translation, “No.”)
- L = USGCoin (?) — David Marcus: “fundamentally, the US and others don’t have the ability to impose sanctions that are respected by financial systems, that creates geopolitical problems with huge consequences for the world.” See also Law of Libra §§ 4, 8.
For these and other reasons, Ethereans like Vlad Zamfir are absolutely right to mistrust the Trojan Horse that is Libra’s legal structure. So are other analysts:
Libra as defined may be the single largest scale ‘trojan horse’ in human history.
The Trojan Horse analogy is even more relevant to projects like Open Libra because OL is designed as a literal bridge between Libra and public blockchains like Ethereum:
Beyond the optics (like the name, Open Libra), OL seems like crypto’s single most controversial move because it amounts to extending an operational good-will handshake to known cheaters.
If OL is grounded in instrumentalist/pragmatic logic that the enemy of my enemy is my ally (a la Allies v. Axis alignments in WWII), then OL + L appears to be a Molotov-Ribbentrop Pact.
The relationship may work, until such time as the Cartel repudiates OL because OL no longer serves Cartel functions.
13. Legal Frameworks for Libra + OL?
An OL narrative of economic-interest-alignment is suboptimal because it comes across as opportunistic (‘selling out core values’).
Instead, the most favorable narrative/posture seems to be economic-alignment plus technology transfer and/or strategic alignment around particular pilot use cases. For instance:
- OL expressly conditioned on cooperation with Libraneers/Libders who can help solve yet unsolved narrowly-defined technical and scaling problems;
- OL expressly conditioned on FB/Libra/Cartel’s (& all associated entities) express waiver of offensive patent rights (a la Tesla’s All Our Patent Are Belong To You) and/or creation of a novel patent pool structure that provides meaningful protections across the blockchain space;
- OL expressly conditioned on Libra investment in OSS/FS blockchain development efforts and/or non-profit research collaboratories like Stanford’s Center for Blockchain Research, COALA, etc. (so long as this provides public-facing assurances regarding mandatory open licensing and/or tech transfer, else it seems like rent-seeking);
- OL expressly conditioned on collaboration on one or several non-profit pilot adoption drivers that demonstrably benefit the Cartel, the broader blockchain ecosystem (trust-building in the form of access to FB’s user base), and society as a whole;
In hindsight, the Molotov-Ribbentrop Pact might look like a sham treaty. But even if between enemies, it was a formal treaty nonetheless.
There are several potential lessons here:
- it is important to understand the formal and informal structure of the Cartel and any Libra + OL relations;
- irrespective of how public or transparent the mutual non-aggression pact will be, allies will always have reason to wonder if there isn’t a secret protocol that’s trying to carve out bloodlands into respective “spheres of influence;”
- unless it is an existential need, collaboration with a regime bent on world domination hasn’t played out well historically (translation: Libra offers many opportunities, but it is not clear why projects like OL are an existential need).
In light of the above, there appear to be only two related strategies by which crypto can wage and win a prolonged war against Libra (and/or GoogLibra and/or LibraZon and/or WeChat-ibra):
- put the world’s law on chain, including blockchain-based doctrinal maps, jdxn maps, select dispute resolution processes (this may reduce, though not eliminate, opponents’ use of regulatory arbitrage; would likely raise crypto legitimacy; may align regulators with crypto, as opposed to aligning crypto with compliance objectives of regulators; etc.);
- make it as easy as possible to earn crypto for doing socially-useful material work.
When the grandma is choosing whether to sell her vegan burritos for L-coin or Eth-coin, why should she choose Eth-based markets? That should be the core question of market design for crypto-economists.
Anything else (like the liberal dream of burrito-markets denominated in L, Eth, and OLT) is an intellectual luxury that crypto simply cannot afford, no matter how many tokens it mints.
Crypto must embrace and optimize material markets, or crypto will get stomped out by bigger and more ambitious competitors. On these big questions of global political economy, there is no middle path.