Facebook – Liberation.

Facebook takes a shot at the banking sector.   

• Facebook has launched a digital currency platform that it hopes will succeed thanks to its pervasive network of 2.2bn users into which it can embed its payment system making it much easier to access and use.
• This is much the same strategy that Apple successfully used with Apple Music where every iPhone had it installed natively, making it much more likely that users would sign up.
• The most important features of the Libra cryptocurrency are:
  • Blockchain: will be the backbone of the currency enabling instant secure transactions and record keeping.
  • Asset-backed: the currency will be backed by bank deposits, government securities in stable currencies from reputable central banks.
  • This will massively reduce the volatility of Libra against regular currencies, as there will always be the arbitrage trade against its underlying assets to keep it in line.
  • The volatility of traditional cryptocurrencies is something that makes them unsuitable for use in consumer transactions.
  • Fully fungible: meaning that trading in and out of Libra will be simple and stable with significant liquidity.
  • Pseudonymous: which means that while users can hold one or more accounts that are not linked to their real-world identity, regulators and law enforcement will have the same visibility of the Libra blockchain as they do for regular currency and transactions.
  • While this enrages the cryptocurrency purists, it will make it much less likely that the Libra blockchain will be used for illicit purposes which is a big reason why cryptocurrencies have failed to really take off in the mainstream.
• It is important to note that while Facebook is the creator, it will not control the Libra blockchain although it will have a seat at the table.
• Control of the Libra blockchain has been designated to the Libra Association which is a consortium based in Switzerland.
• Founding members include Mastercard, Visa, PayPal, Lyft, Uber, Spotify, Vodafone as well as a range of blockchain and VCs.
• Absent from this list are the banks as well as payment companies.
• This makes complete sense because if this takes off, then the banks will suffer a substantial loss of fees as well as volume.
• While this may also be seen as negative for Visa and Mastercard as they will lose transaction fees, as founder members, they will be important on and off ramps to the digital currency.
• I think that this is a much better choice for them rather than being completely left out in the cold.
• The currency is expected to launch in 2020 and Facebook will offer a wallet integrated into all of its ecosystem services.
• Any third party will also be able to offer a wallet, and because they are all based on the same blockchain, they will be fully interoperable with each other.
• I think that this is the most interesting attempt to digitise currency I have seen yet.
• This is because:
  • First, scale: Facebook’s ecosystem has achieved massive scale and is particularly strong in markets where banking penetration is low.
  • This gives it a good chance at getting plenty of consumers onto the platform which in turn will bring the merchants and so on.
  • This will be crucial to kick-starting the virtuous cycle where merchants attract consumers and vice-a-versa.
  • This will create the liquidity required to make this currency work.
  • Second, safety: Having regulatory oversight obviously reduces the freedoms of the currency, but in order to be suitable for regular consumers, it needs to be as safe as holding cash.
  • This is where the asset backing and the pseudonymity come into play which if it is set up right should provide that security.
• Facebook will have no access to the data generated by these transactions, but the hope is that it will have a thriving and highly cost-effective payment system to put into its apps and make them more appealing.
• However, this will not be a Facebook-only phenomenon as any third party such as Google, Amazon or even Apple could sign up to the Libra Association and create their own wallets for their digital life services if desired.
• Where Facebook is different from Apple Pay, Google Pay, WeChat Pay and AliPay is that it is not attached to any payment rail like Visa, Mastercard, China Union Pay or PayPal.
• This means it can work well in places where there is very low credit card and banking penetration although this would require physical infrastructure for the loading and offloading of the currency like M-PESA.
• I think that the fact that the established interests are heavily criticising the launch is a good sign as it implies that they are worried about what it might do to their business.
• Hence, I think this has a shot at being successful but as always execution will be the key and the track record of industry consortia set up in this manner is poor indeed.
• This is a net positive for Facebook as the first mover of the big ecosystems in this area but I am still looking for the right time to get involved as many of its other issues (see here) remain unresolved.
• I am holding off for now.