Libra Co-creator Explains, Defends Facebook’s Cryptocurrency
Watch video of the conversation with MIT Professor Christian Catalini
By Beth Stackpole, MIT Sloan
As an increasingly embattled Facebook fends off mounting criticism about its data-handling practices, the social network giant is trying to rally the industry around another major initiative: its Libra cryptocurrency and Calibra wallet.
Facebook bills Libra as “a simple global currency and infrastructure,” designed to bring financial inclusion to the 1.7 billion people around the globe who have access to the Internet and a mobile phone but remain on the fringes of traditional financial systems.
Speaking as part of the MIT Sloan Experts Series of online live conversations, Libra co-creator Christian Catalini said the distributed governance, open access, and security provided by the blockchain technology behind Libra can address many of the longstanding accessibility and trustworthiness problems associated with standard financial services, helping to create low-cost channels for responsibly moving money around the globe.
Yet, responsibility and positive societal impact aren’t terms currently associated with Facebook. The tech titan has been roiled in controversy over how it treats user data, its potential role in the 2016 election, and most recently, its decision to allow misleading political ads to remain on the social network.
Just last month, Facebook CEO Mark Zuckerberg was grilled by U.S. lawmakers on the Libra project, where bipartisan concerns were raised about the company’s potential role in cryptocurrencies, including how it would handle Facebook data associated with Libra users.
While acknowledging the skepticism about its next high-profile effort, Catalini, a professor on leave at the MIT Sloan School and an expert in blockchain, said he came to Facebook Libra because he was increasingly frustrated by the slow progress of cryptocurrencies’ potential to democratize access to payments and financial services.
“There were interesting experiments, but for solving the problems people had, there were big gaps,” said Catalini, who is also head economist at Calibra, the Facebook subsidiary developing a Libra wallet. “I thought a company with the engineering talent, reach, and scale of Facebook could have transformative impact on the globe.”
Here’s how Catalini explained Libra’s key differentiators and provided context for the some of the controversies surrounding privacy and security:
How is Libra different from other cryptocurrencies?
While Libra exists entirely in digital form and records transactions on a blockchain like other cryptocurrencies, Libra will be backed by a “ basket “ of established global currencies, and these assets will be managed, governed, and controlled by central banks that have a history of low inflation and high independence.
This is important to users, Catalini explained, because Libra wouldn’t be subject to the massive swings in valuation associated with other cryptocurrencies like Bitcoin and Ethereum.
“Libra is not an investment vehicle. It’s something that allows you to send remittances at a much faster speed, more reliably, with lower friction and cost than what is available today,” Catalini explained. “Libra is fully backed — for every coin to ever be minted, the equivalent value has to be put in the basket. This is different than parts of the current financial ecosystem where you have fractional reserves.”
What role does Facebook play in Libra?
While Facebook is the “brains” behind Libra, Catalini said, the cryptocurrency will be governed by the Libra Association, an independent, nonprofit organization headquartered in Geneva. The association, of which Facebook is now one of 21 initial founding members, is tasked with coordinating and providing a governance framework for Libra.
Facebook will maintain a leadership role in the association through the remainder of this year, and then it will serve as any other founding member, according to the Libra Association’s charter.
The Libra Association is important to the cryptocurrency’s success, Catalini said. Member companies will add utility to the platform, help scale the ecosystem, and provide distributed governance. “The reason why cryptopayments have been so ineffective is that there are separate solutions that don’t talk to each other, which adds friction and cost,” he explained. “Having founding members around table will make the network useful from the beginning.”
Facebook is already in the crosshairs over privacy and trust — how do we know it will do right thing with financial data?
At the same time, Facebook is developing Calibra, a digital wallet for the Libra cryptocurrency.
Having a separate nonprofit association serve as a steward for Libra is designed to alleviate concerns, but many in the industry are skeptical about Facebook’s role. Just last month, the Libra Association took a hit as several of its key founding members — most notably, eBay, Stripe, PayPal, and MasterCard — exited, concerned that scrutiny of Facebook could extend to their businesses as well.
Catalini downplayed the departures. “We’ve heard the criticism from different voices, we’ve absorbed it, and are iterating on the design,” he said.
Perhaps most important, Catalini promised that Facebook is committed to keeping financial and social data separate and will put measures such as encryption and access controls in place to ensure the two aren’t linked.
“People want a separation between their financial and their social data. There’s many reasons why companies may want to connect the two, but at Calibra we believe that data should be separate,” he said. What’s more, the Calibra wallet will be a new business model for the company. “From a Facebook perspective, the idea here is not to use the data to show more ads,” but rather to compete on features, he said.
Catalini also stressed that Libra is an open environment, so Calibra will have to compete on capabilities, data privacy being one, with other wallets. “This is not a walled garden — from day one access [to Libra] is the same for any one,” he said. “Even Calibra will have to compete on all sorts of dimensions, from price to features to privacy, which is where customers will win.”
Questions remain
Michael Cusumano,professor of management at MIT Sloan, supports the idea of Libra as an open platform, but has questions. “What does ‘open’ really mean here?” he asked. “It really does seem that Facebook will control this. Facebook is orchestrating all these different players, it’s building the technology, and it does seem to be a Facebook enterprise.”
What’s more, “feelings of trust or good will towards Facebook are pretty low right now,” Cusumano said. “The government and users don’t trust Facebook to have very detailed transaction data on what they’re purchasing or where they’re saving money,” he said. “Facebook has to convince people that it won’t misuse that data or sell it to advertisers.”
Click here to view the entire conversation with Catalini.
Further reading: The risks and unintended consequences of blockchain
Originally published at https://mitsloan.mit.edu on December 9, 2019.
