Why Libra, despite having so many by design success factors, has still a high probability of failing
On Tuesday, June 18th, Facebook and the Libra Association announced a new digital currency called Libra, a globally aimed currency and financial infrastructure supported by new in-house developed blockchain technology that will roll out in 2020.
Going public with the Libra project was not a major news event though, given that it was already known that in 2014 Facebook hired former PayPal president and Coinbase advisor David Marcus to run its Messenger App and later Facebook’s new blockchain group, and also that back in December of 2018 rumours had it that Facebook was working on some kind of WhatsApp stablecoin integration.
So going public with Libra and rolling out its testnet was something long-awaited by those that follow close the blockchain news. Aiming for a “global currency and financial infrastructure that empowers billions of people” is also something that has been pursued by other cryptocurrencies for many years, starting, off course, with Bitcoin.
So, why would Libra succeed in what so many other cryptocurrencies have failed, at least, so far?
What Facebook and Libra Association seams to be getting right…
Even after 10 years of its appearance, blockchain is still a very idealised and politicised terrain . For some people, anything less than 100% decentralized and permissionless blockchain is not a blockchain at all. The problem with decentralised permissionless blockchains is that, as of today, they don’t scale enough to globally support important use cases such as “global currency and financial infrastructure” capable of supporting billions of people. Beside not being nowadays properly engineered to scale to be a medium of exchange, cryptocurrencies like Bitcoin and Ethereum are also highly susceptible to price fluctuations, making it difficult for merchants to accept them as payment.
That’s why many others started to play with permissioned blockchain technology, but even that approach lacks real world mainstream use cases. Ripple and XRP is probably one of the best succeeding permissioned blockchain experiment in financial services, but even that experiment may perish in the effort of obtaining scale. Gaining scale and mainstream adoption is a fight for life game that any new platform has to play and the way it is done determines its success or failure.
Libra will be bootstrapped on top of very successful platforms such as Facebook, WhatsApp, eBay, Uber, Spotify, and probably on many others that will join the Libra Association by the time Libra launches in 2020. By using all these preexisting global distribution channels, Libra will be granted immediate access to billions of users all over the world. Facebook alone has more than 2,5 billion active users. We have seen a similar strategy been adopted before. PayPal gained its scale by bootstrapping on top of eBay back in the early days of the commercial web.
The second important success factor is the diversified ecosystem being built upfront instead of after Libra launches. This is of extreme value since users will be able to use libra coins in many different ways, for many different purposes, right from day one. Right now the Libra ecosystem includes corporations from the payments, social networks, shared economy, music industry and others, but the ecosystem will probably grow and diversify till Libra’s launch. And one should expect that the it will continue to grow because the Libra blockchain will be open source and anyone and any business will be able to use Libra blockchain to try its luck.
Of course going mainstream implies having a technology capable of supporting high demand, and that’s the reason why Libra will be a permissioned blockchain network run by the members of the Libra Association. It is expected that Libra’s blockchain will be able to conduct 1.000 transactions per second. This is much more than permissionless blockchain networks are capable of today.
The fourth reason for believing in Libra’s success is its stablecoin design. Having libra coin pegged to existing assets like the dollar or euro makes it less subject to the volatility that many cryptocurrencies like Bitcoin and Ethereum experience. The price stability that Libra coin may observe will facilitate its mainstream adoption as a medium of exchange.
The fifth and sixth reasons for believing in Libra’s success is usability and credibility. Libra will be embedded in the apps that billions of people already use today making its usage very user friendly easy enough for a mainstream audience, and the top companies backing Libra will lend it enough credibility making it easier for people to gain trust on Libra coin.
So, designing a price stable cryptocurrency with scalable blockchain technology and deploying it over preexisting distribution channels reaching billions off potencial users in a diversified ecosystem, and embedding its usage into user friendly interfaces already used worldwide, and having top companies from multiple economic sector backing all that seams to be a very good recipe for success. So good indeed that if left by its own, Libra could eventually become THE “global currency and financial infrastructure that empowers billions of people”.
…hum, but what does that actually mean?
You will only be able to use Libra coin if you buy it first with your fiat currency. That means that the adoption of Libra coin as a medium of exchange will deviate money from deposits in commercial banks into Libra Association. You may argue that that already happens with current cryptocurrencies when they are bought with fiat money and we don’t hear Banks complain, and that is true, but it happens at a negligble scale, a scale that until now has had no impact on Banks’ bottom line.
But Libra’s success factors mentioned earlier may create a disrupting environment and change the game. The large mainstream adoption of Libra may very well position this new cryptocurrency as a global currency, maybe even the main currency, and that poses a real threat to commercial banks. So it is expected to begin seeing commercial banks appealing to regulators.
But that is not the big obstacle nor the stronger one that Libra will face.
If Libra were to become THE global main currency, central banks like the Federal Reserve and the European Central Bank would actually be prevented to do their jobs. Central Banks have a mandate to manage price stability, and some even economic growth, through the execution of monetary polices. They do that by managing the quantity and price (interest rates) of money circulating in economies. If people stoped using their money and began using Libra, central bank’s monetary policies would be ineffective and their existence threatened.
Being a stablecoin pegged to a basket of fiat currencies will make Libra mostly immune to individual central bank’s monetary policies and remember that it is up to Libra Association to determine how much Libra coin exists at any given moment. It’s also likely that Libra will be lent with its interest rates being determined by Libra Association also.
So what letting Libra become THE “global currency and financial infrastructure that empowers billions of people” really means is ending central bank’s sovereignty on behalf of Libra Association, a private association that would become THE world’s central bank.
Facing this probable scenario, central banks and politicians will start asking what could happen to their economies and societies if the rules of their money were to be determined by the individual interests of a few external multi national commercial companies. Those who control the rules of the money control the game, they will say. Who would prevent these companies from playing a profitable unfair game and how could it be done once they reached that kind of power, will they ask. Libra Association could actually become so powerful that would end up ruling the world, they will conclued.
This is why it is very unlikely that governments and central banks will leave Libra by its own. On the contrary, they will do everything they can to prevent Libra from even seeing its first day of existence.
In fact, it took just a few hours to have a first glimpse of what we may expect in the near future. France has already called for Central Bank review of Libra cryptocurrency, and Bruno Le Maire, the French Finance Minister, said in an interview on Europe 1 radio,
“This instrument for transactions will allow Facebook to collect millions and millions of data, which strengthens my conviction that there is a need to regulate the digital giants”
“It is out of the question [that Libra will] become a sovereign currency. It cannot and it must not happen”
We should not be surprised if we start seeing an even closer scrutiny of Facebook over matters related to privacy, fiscal and antitrust. And as soon as governments realise that going after Facebook is not enough because the shark here is the Libra Association, other companies will be in the line of fire too.
This also introduces a dilemma with geopolitical consequewnces because it is most likely that the members of the Libra Association will be companies from Americas and Europe. Going after these companies and weakening them may end up reducing the west capacity of competing with rising countries like China.
Libra is not just a cryptocurrency after all but a clash between the world as we know it and a new order that will emerge. It’s going to be quite a fight!
