Thoughts on Libra, or why you should be very skeptical of its success

I don’t hide that I was very puzzled by all the rumors around a decentralized cryptocurrency coming from a centralized Big Tech player.

After the announcement I’ve read a lot, and the best summary so far is this piece by Marcel Weiß:

I you understand german, go on and read it — if not, here’s my attempt to repeat the main theses.

  • Installing the Libra association is the perfect move — on one hand it signals that Facebook gives up ownership to let the currency bloom, on the other hand they still made sure having twice the representation as other companies.
  • By having known and trustworthy players on board right from the start, the initial distribution is secured (no chicken or egg-dilemma).
Partner network
  • The blockchain mechanism is only used when money is moved between one of the trusted partners. That enables fast transactions and low fees (problems which every crypto user is aware of).
  • By having low fees, micro payments get more efficient. (VC firms are eager to participate: They will pass on the access to Libra to their startups.)
  • Since crypto principles enter the mainstream, it will help all blockchain initiatives.
  • Libra will be the glue that links Facebook’s apps/services and will enable a whole new financial ecosystem akin to SuperApps like WeChat.
  • Regulation is preparing for Libra, but they can’t block the currency given its mighty partner network.
  • Libra will be the incarnation of a vision Thiel, Marcus and Zuckerberg had for some time. It’s the dream of a new all-embracing, worldwide and digital financial system. Scary, if you know that Zuckerberg already compares himself to Rome’s Augustus.

I have some questions:

Is this really a win for #Crypto in general?

I tried searching for an analogy for what Facebook is doing to Crypto, but it’s difficult. The best I came up with: Facebook is repeating what it did with the open web:

  • Centralizing an decentralized initiative with all its positive and negative sides
  • Enablement for millions of people who would’ve otherwise not joined the thing
  • Accelerating the exchange of stuff between its members by defining standards (likes, newsfeed etc.)
  • Giving everyone (the good and the bad actors) a platform to make more (good or bad) things with that stuff
  • Implementing its own policy on top of national law, overtaking governmental roles
  • Leaving less space for the open web to develop on its own (just take a look at the blogging culture)

In the technial term, suddenly billions of users will have a crypto wallet — it will be built-in with e.g. WhatsApp. But that on its own is meaningless, if nobody thinks of it in this way. Just because you understand how Libra works, doesn’t imply you know how a cryptocurrency works. In fact they differ a lot. Why should Facebook educate you how a crypto wallet works? In fact it’s their value-add to hide all of this complexity.

Not only does this not bring Crypto forward, furthermore it creates confusion what Crypto is and what its initial goals are. But if Libra fails, it will damage the reputation of Crypto (as means of payment system) for the foreseeable future.

Will regulators get behind?

Marcel thinks lobbying will ensure Libra’s success. I won’t be so sure. You can play politicians by making your issue a partisan debate. But taking away power from the government apparatus (the ability to print money via the respective central bank) is not such a thing. Politicians from all sides will be against it.

It gets worse in developing countries. Let’s say Libra will be successful and adopted by people in Venezuela or Argentina (countries with huge inflationary problems). Selling national currency for Libra would cause further devaluation. Why would a government tolerate that?

In contrary to Bitcoin which can only be banned legally, but never blocked technically, it would be easy to block the 100 nodes of Libra payment providers.

Was this the best way to set up the structure?

Marcel is praising the Association as the ideal structure. I think we are already seeing its shortcomings.

Facebook is (deserved or undeserved) the public scapegoat for all things wrong with the web. Why would you launch such an initiative as Facebook’s subsidiary? Granted, it’s better than under Facebook’s flag, but still, people are already accusing Facebook of data sharing between Libra payments and the ad targeting machine (which they officially said not to be doing). Frankly, I can’t really blame them after Zuckerberg lied about data sharing with WhatsApp.

Is this Facebook still living in its bubble? It seems so. VP of Common Sense strongly needed.

There would have been a better way: Set up Libra as personal side project of Marcus and Zuckerberg (like the personal side project of Jeff Bezos: The Washington Post). Zuckerberg would still hold two votes. The marketing as altruistic return from the wealthy to those millions of unbanked would be even stronger.

Or, when you are accused of data sharing anyway, why not do it transparently with a well though-out reasoning? Something like “Libra will be using Facebook’s identity data to verify customers and hand out loans. It’s the better KYC mechanism. These cost savings will be passed on to customers.”

Is user adoption really guaranteed?

Having the users to whom you can push a feature is very helpful, to say the least. But it’s not a guarantee Facebook will succeed. We have seen that again and again, where this company thought they could copy a competitor — yet they couldn’t (and buying was the easier path).

Silicon Valley knows that any new product must be 10x better than the competition. In no place is this more true than in Finance. Have you tried to reason with someone who still has a checkings account with fees? Never change a running system.

Going all-in with Libra not only means changing accounts and telling every friend or web shop about it, it means also thinking in a different currency. As a german who had to learn what a €uro is worth in Deutsche Mark I know the problem (despite the super simple conversion rate).

Americans are paying everything with credit card not because they want to drown in debt — it’s because of the cashback systems in place. Or think of PayPal bonuses in the beginning, they were burning money left and right. They had to do it to get a foot in the door despite it being the more comfortable service (I’m using PayPal only to not have to remember my IBAN.)

And of course PayPal learned that dealing with the messy reality of payments (chargebacks, fraud) has to be priced in. In comparison to other, permissionless coins, Libra could crack that nut with its centralized nature, but it’s still costly.

The main question remains: What is the 10x for Libra? Borderless payments are one thing (if I would work for TransferWise I would be scared), but for the western culture with its established payment system it’s something different altogether.

Remember the mentioned cost savings? I think you’ll need them to motivate users to switch. After all, if you incentivize customers strongly enough they will use a service, despite suffering ads or unresolved privacy questions.

I know, Facebook has money. But I wonder how many of it they are willing to bleed to bring Libra to the masses.

👨‍💻 Product Owner @fluidmobile. ✍️ Writes mostly about the intersection of Tech, UX & Business strategy.