Episode 22: Welcome to FaceCoin

Chaining the Unchained

Meltem Demirors
Jul 2, 2019 · 6 min read

What do you get when you put together a consortium of private members issuing a currency that is aimed at world domination? First, the Federal Reserve. And then, 100 years later, Facebook’s Libra! In this episode, we untangle why Facebook needs FaceCoin, how digital money in a digital world is changing the role of banks, and what does and doesn’t make sense when it comes to tech companies issuing their own tender.

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Show notes and links for the episode 👇🏽 below

First, there was FedCoin

Have you ever heard of a consortium of private members issuing a currency that is aimed at world domination? Believe it or not, Facebook’s Libra was not the first. You might be surprised to find the Federal Reserve aka THE FED figured it out long ago!

According to the board of governors of the Federal Reserve, “is not ‘owned’ by anyone and is ‘not a private, profit-making institution’. Instead, it is an independent entity within the government, having both public purposes and private aspects.”

The Fed is actually owned by its 3400 member banks, who are different classes of stakeholders who contribute capital to help stability the federal reserve banks around the country.

The U.S. Government does not own shares in the Federal Reserve System or its component banks, but does receive all of the system’s annual profits after a statutory dividend of 6% on their capital investment is paid to member banks and a capital account surplus is maintained. The government also exercises some control over the Federal Reserve by appointing and setting the salaries of the system’s highest-level employees.

What do Banks Do

Banks started, quite simply, as a place to put money. They then evolved into institutions that extended the money supply and resolved some of the timing mismatch around when people receive money and when people need money. We’ve covered this extensively in our Season 1 episodes on credit (Episode 8 and Episode 9)

Commercial banks make money lending. They use retail deposits to make these loans. Unfortunately, in this digital age, they no longer have the best information set about these retail depositors. The social media companies do. Facebook arguably has the richest data about consumers of any company in the World. Ergo — next step — become a bank!

The finance function, or banking function, no longer belongs to banks. Consumer credit of all types has been disintermediated, just look at:

  • Lending Club for personal loans, SoFi and Lending Club for student loans, Klarna and Affirm for point of sale / layaway lending
  • Factoring is being disintermediated
  • Corporate credit will be disintermediated

It’s starting at the edges in places where banks aren’t too concerned, but it’s rapidly moving and it should scare every bank.

What’s also important to note is that in many parts of the world, finance is already 100% digitized and consumer finance, in particular, is already owned by non-banks aka tech companies that ended up becoming banks because they owned the end consumer.

BY THE WAY — Facebook’s non-US competitors have already done this. What Libra describes its intentions to be with its “foundation” is something that its competitors in China, Korea, and Japan already do. The future described in the Libra white paper is already possible in most places in the world. Facebook just added the veneer of “blockchain” and “decentralization”.

So Why This

Facebook is company in crisis (Here’s my take on “why” Libra is happening). Facebook is facing a capital crunch:

  • Social Capital: Reeling from PR crisis, political punching bag that both parties can agree on
  • Financial Capital: Stock price stagnating, business model not growing outside US, and ad revenue challenged by political pressure and fines
  • Human Capital: High level departures, co-founders calling for breakup, morale when stock price is tanking
  • Political Capital: Shifting political tides — EU, US, election season, and no one has forgotten Cambridge Analytica

What it Means

Libra is basically creating a new banking function, and the instrument they’re issuing — this stablecoin basket — is basically an ETF where the yield goes to the backers of the project, in the words of BitMEX. And I quote, from their commentary, which you can find here.

Libra is a stablecoin backed by a basket of fiat currencies. The fiat currencies sit in a dumb regulated commercial bank. Libra allows a privileged few the ability to create and redeem Libra at its Net Asset Value (NAV). Libra rides on a blockchain where certain parties operate permissioned nodes. These parties included VC firms, technology companies, retail merchants, cryptocurrency exchanges, and most importantly commercial banks and credit card processors.

So, let’s all agree on one thing. Libra is NOT a cryptocurrency. It doesn’t need a blockchain. And that’s ok!

In the words of David Gerard, writing for “Foreign Policy”

Libra has certainly demonstrated one of the main characteristics of blockchain projects — grandiose claims and egregious nonsense…

Absolutely everything Facebook described in its press conference on Libra last Tuesday could have been done on a conventional financial computer network system — and better.

So What’s the Real Deal?

If you read the white paper, one of the principles of Libra was to “(give) people an inherent right to control the fruit of their LEGAL labor.” If you’re keeping all of the interest on the underlying basket of assets you’re buying with someone else’s money, how is that good?

Mind you, the Swiss Foundation structure that Facebook borrowed from, oh, basically every ICO, is not a non profit.

Facebook’s language around Libra is very vague and hand-wavy, and is heavily focused on “banking the unbanked” - a phrase that really grinds our gears, and its a popular claim for many shitcoin projects. Facebook’s attempts to conflate poverty (effect) with access to loans, pay day lending and loan sharking, and technology not being fast enough or cheap enough (causes) seem a bit simplistic. But, we all know the “unbanked” is not something that can be solved with technology alone. It requires changes in policy, infrastructure, and a host of other decidedly non-blockchain factors.

So What Happens Next

  • Every bank and corporation will look at issuing a digital currency, or doing something with a permissioned, centrally managed but “decentralized” digital currency. Note Goldman’s “cool” CEO said issuing a Goldman coin was not off the table shortly after Facebook’s week in the sun.
  • Banks are under pressure, and continue to be eroded by smaller, nimbler, and hyper-specialized players
  • Central banks under pressure — bitcoin introduced state-less money, now everyone is riffing on that since it has proven it can work. Doesn’t everyone want to be their own emperor king?
  • Really, Libra is a competitor to Alipay and WeChat (well not really since it won’t be in China)… but it’s trying to provide that service. It is not trying to be bitcoin.
  • Evolution from physical realm into digital realm continues — panopticon money is coming, and you bet your ass you can’t escape it. (See Episode 10: Big Brother Loves Bitcoin)

Mostly — Facebook has a lot to figure out before the launch of Libra, but with their resources, lobbyists, and army of world class engineers, our money is on them figuring it out.

What Grinds My Gears

Welcome to What Grinds My Gears, a podcast about the world of cryptocurrency. Each week, we delve into one big idea, and examine through a broader financial, political, and cultural lens to learn from the past, understand the present, and explore the future.

Meltem Demirors

Written by

making benevolent mischief. investing @coinshares.

What Grinds My Gears

Welcome to What Grinds My Gears, a podcast about the world of cryptocurrency. Each week, we delve into one big idea, and examine through a broader financial, political, and cultural lens to learn from the past, understand the present, and explore the future.

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