Still trying to understand what financial services should do in the wake of the Apple credit card? Well, hot on the heels is the detail we’ve been waiting for from Facebook about their cryptocurrency plans: Libra. This looks like the second serious move into financial services from GAFA and it’s a big statement.
Not only is this an ambitious project ripping apart the boundaries of Facebook’s business model, but it potentially represents the first mainstream application of blockchain technology. The second big move into the world of finance by GAFA is occupying plenty of column inches, but lets take a whistle stop tour over what it means for the world of finance, payments, and most importantly, consumers…
A global currency?
What will this really look like then? Well, Libra (the currency) is effectively going to be a stablecoin. For anyone not familiar… that’s a digital currency that is effectively tied to real world assets. Simple right? What this means is for every Libra, you can be sure there’s a basket of actual stuff that is real and is digitally hard wired to the Libra coin via the blockchain on which it runs. This should in theory eliminate the issue of price volatility that exists for other crypto currencies whose value is purely a function of supply and demand.
What’s fairly new about this approach is that the governing body (the Libra Alliance) will control the ‘basket’ of assets and therefore will have control over the true value of one Libra. The aim to keep the basket roughly equivalent to $1 per Libra, and every member of the Libra Alliance has already fronted up a wedge of cash to build up the reserve.
Libra isn’t the first to do this (check out Tether), but they are first to do so with a varied and scaled consortia of firms committed to The governance model, who are all invested. This is significant.
Stablecoins have long been touted as the most obvious way to introduce a blockchain based digital currency and this proves those assertions. Purists, however, will argue that stablecoins (particularly this one with its unique governance) allow the established incumbents to retain control along the traditional lines and therefore don’t push boundaries and challenge the status quo.
There is also the underlying concern from some that as long as it’s tied to real world stuff, you are probably exposed to the real world fluctuations that occur with financial crashes etc. We dont have all the detail on what the basket will fully look like yet, so we’ll just have to say time will tell for now.
Real-world Blockchain at last?
Blockchain technology is still on its way down the hype curve towards the trough of disillusionment following on from the burst of the crypto bubble in 2018. The long forgotten crypto craze has tarnished the view of what still remains a technology of much promise, but now companies are starting to realise the difficulty in delivering projects. Blockchain initiatives require firms to work across organisational boundaries, with new tech and fresh governance models – only then will blockchain help us achieve simpler inter-business processes and unlock value that can be passed onto consumers.
Bitcoin, other than as a speculative investment bet, is yet to gain traction as a genuine payment mechanism, and none of the many alt-coins that have followed have managed to achieve that mass adoption status either.
Why? Concerns persist over the security, scalability and therefore usefulness both within enterprise applications and the public applications for blockchain technology. Couple this with the significant lead in times to get these systems up and running and you have a pretty tough sell for any new adopters.
So, if Facebook and the rest of the Libra Alliance believe they have a technology solution that gets over those hurdles and have stumbled on an effective governance structure that helps achieve scale, then this is a big leap forward, and a big statement for Facebook!
Could this blockchain application go mainstream then?
Libra has unashamedly set out to make this all about scale. This is where blockchain and cyptocurrency has fallen down in the past. Every aspect of this is about scale, and the governance group (known as the Libra Alliance) is another example of this.
What’s really smart about the Alliance is the coverage of the organisations involved, they touch a huge part of people’s everyday lives with money. Other blockchain platforms are yet to launch any global applications that achieve scale, but it would seem that Facebook have this from day 1 and it’s baked this into the very purpose of their blockchain. It’s no surprise that some of the other big consortia have announced a type of consolidation effort in response.
So, how have they made this blockchain different that means it might work? Turns out its not what the purists would call a real blockchain! This is a permissioned blockchain (stay with me), which means the companies allowed to be involved have to be green-lighted. By controlling who plays in the blockchain (i.e. only those with permission can participate) less clever stuff is needed to verify everybody — which would need to be really smart if it was open to the public like the bitcoin network is. Less clever stuff means it can work quicker and in theory scale more easily. The trade off is that it cant be the open utopian vision that many want true blockchain systems to become.
This arrangement puts a special emphasis on the companies that are involved in the governance structure and have oversight of what’s going on: it’s those organisations that make up the Libra Alliance.
If you look at some of the names in the Libra Alliance, the reach of these firms gives the currency an unenviable access to consumers. You couldn’t ask for a much better starting point to create a global currency. Ride hailing apps, music platforms, card payments, communications networks, VCs… there’s the potential for these companies to employ Libra as a currency and payment option in huge swathes of everyday life. So if this is designed as a truly frictionless payment mechanism we could see seamless exchanging of digital money on a global scale.
Also important is who is not in the alliance…
1. there are no other GAFA players, none of the big Chinese tech firms like Ant Financial or WeChat. This appears to be a direct rival to the big payment apps of the west (AliPay and WeChat) and a response to the success BigTech have had themselves (GooglePay, ApplePay)
2. No institutional banks. No central banks. Facebook look to be aiming to disrupt, and they know the classic players wont play ball, so they’re cutting them out.
The changing face of Facebook
I’ve talked about the benefits of the consortia approach to gaining traction with users, but there’s another reason why Facebook may have pursued this strategy. Facebook is still suffering the effects of the Cambridge Analytica scandal and the result of this has been a massive loss of trust amongst its users. How comfortable would the world’s financial network been with a new global payment rails being owned by the same company? Not very…
So Facebook have looked to open up. The consortia helps to lessen the association with Facebook as an organisation and creates a governance structure that is more diverse and appears to be more trustworthy.
They have also chosen to base it in Switzerland. Why there? Not only are the Swiss at the forefront of blockchain development but they are famously neutral. This, coupled with the emphasis Libra have put on the security is directly aimed at addressing this worry.
Speaking of Facebook tech, regardless of your current impression of Facebook and their privacy issues over the last couple of years, they have ingrained their products into the daily lives of millions of people. They are also great at getting the user experience of their products sport on — you cant get the adoption that they have without it.
The ecosystem Facebook have around social interaction means there are many touch points now WhatsApp and Instagram are part of the Facebook family. WhatsApp would seem like the most obvious day-to-day application for introducing payments and using blockchain technology could help Facebook introduce a common mechanism across the ecosystem that works between boarders, users and the various apps.
This mobile-first payments approach is what AliPay and WeChat have succeeded with in Asia, where the use of QR codes and payments through apps far outweigh the use of card payments and cash. You need only look at the size and success of Ant Financial to understand the rewards on offer to a company getting this right, and no one has yet introduced a true version of this approach that works in the west.
Now all this sounds like a good thing, but one of the reasons this has been so successful for companies in China is the looser regulatory framework. Facebook will have more regulations to comply with, however their track record with privacy is not great. Do we want a company like Facebook getting greater access to a person’s financial situation? Something that they will have to now build is an appropriate way to accurate identify their users — ensuring someone is who they say they are. This requires access to more personal info and potentially sensitive documents.
If you and I want to buy Libra, you’ll be able to so through the Calibra wallet, and Facebook will be introducing this to their users. Calibra is where this identifying work will be done. Calibra will likely include other cryptocurrencies as part of a ‘digital exchange’ — potentially introducing Bitcoin to a global network. Potentially a good move for Facebook, as they will get yet more data, but do we want them in this space?
What does this mean for finance and the future of money?
It’s early days, but the potential is there for this to be the first true digital currency solution with global reach. It will no doubt occupy board room agendas within finance. Simply because of the players involved, it shouldn’t be underestimated.
It sounds like by meeting with a number of large financial institutions (which reportedly includes the BoE) they are recognising the broad impact that this could have on the payments rails and looking to get support. The BoE have previously looked into using blockchain to support digital currency and they will no doubt be monitoring any progress closely.
If Facebook does prove that blockchain technology can efficiently provide the rails for a new payment mechanism at scale, this will have huge ramifications. Expect central banks to eventually look again at blockchain and then respond through both regulation and modernising their own rails. In the shorter term, keep an eye out for some push back in the form of regulators blocking moves without more reassurances.
One of the key issues here is actually going to be who does regulate it given the system’s reach will be global. It will likely be tricky to mould the entire blockchain network to the specific demands of various jurisdictions. This is the contradiction of a boarderless system and might be the biggest reason for getting Visa and Mastercard involved in the Alliance.
Stablecoins are the logical first step to bring blockchain to the masses… but where does it go from here? Will we see this become a permissionless arrangement that looks far more ‘crypto’ like in the future once the problems have been solved? Libra say they will look to eventually build this out into a wider public version, but this is likely to be incredibly complex.
Ultimately, there is a potential to bring benefits to consumers and Facebook have the right track in delivering user friendly solutions the people like. However, it’s track record in handling personal data is not so great and therefore it is important that this is scrutinised to ensure that the mechanisms are trustworthy.