Facebook’s (Too) Ambitious Project: Libra and Calibra
On October 23, 2019, Mark Zuckerberg, Facebook’s CEO, sat down for a six-hour-long hearing in front of the House Financial Services Committee regarding Facebook’s cryptocurrency project: Libra and its digital wallet Calibra.[1] In an attempt to provide some clarity and reassurance for the politicians’ suspicions surrounding Libra, Mr. Zuckerberg left the lawmakers “just as concerned” as they were before.[2] His testimony came after a previous attempt by David Marcus, head of Facebook’s new subsidiary Calibra, three months ago.[3]
A fair number of politicians shared the sentiment that there was nothing new here.[4] But in my own view, an important goal of this testimony was to try and deviate the thinking that has been rooted in the public’s mind since the announcement of Libra: that Libra equals Facebook. Creating this disconnect in politicians’ and regulators’ minds that when dealing with Libra, you are actually dealing with the Libra Association (the “Association”) and not Facebook in particular. As Representative Sylvia Garcia said in an interview after the hearing: “I’m not sure that we learned too much more new, except now that they’re calling the association an independent association.”[5]
In my opinion, creating such separation in the public’s mind is vital for Libra’s future existence and also, not less importantly, it paves the way for Facebook to “legitimately” and indirectly monetize Libra for Facebook’s own profit in the future. Legitimacy in this context has a couple of meanings. The first meaning is related to the public reception and acceptance of Libra, especially when presented by Facebook, considering Facebook’s shady history with privacy and data protection. It is even more urgent matter in this pre-launch level of the project. Second, the legitimacy of such profits in the eyes of the law, for that the regulators are concerned about the reserve that will be created when and if Libra ever launches.
The idea behind Libra is to provide a “solid foundation for financial services, including a new global currency, which could meet the daily financial needs of billions of people.”[6] Such cryptocurrency will have two main advantages. First, it will be a global currency not related to any country’s central bank, and it will enjoy the benefits of being easily transferable with much reduced costs.[7] Second, Libra will also enjoy the relative stability of the traditional money. In other words, it is a “stablecoin.” The stability of Libra is best achieved by pegging the cryptocurrency to fiat money, meaning that for each Libra held by a user, there will be an equivalent of it in dollar, euro, Chinese Yuan, or any other strong and well-accepted currency in the world.[8]
Stablecoins were not that popular until June 2019[9], which is around when Facebook announced Libra and its digital wallet Calibra. Ever since, stablecoins has gained more attention, and regulators from around the world— surprisingly enough—have been in consensus that such a project ought to be stopped[10], at least until regulators learn to address the potential financial ramification of such cryptocurrency, especially when it is being introduced by Facebook.[11]
Libra is based on blockchain technology, and Facebook has opened the source of the technology to the public, but the control of the blockchain will remain in the neutral hands of the Association that had been based in Switzerland, arguably for its more welcoming regulation for blockchain based technologies. However, in contrast to the Bitcoin blockchain, which is also an open source, the Bitcoin blockchain remains decentralized, and it is open to all users who download its software and run it on their computers.[12] Such an association, according to Facebook’s white paper, will eventually consist of 100 founding members.[13] Each member will have to invest a total of $10 million in the Association as an entry fee.[14] In return, members are expected to receive “investment tokens,” and such tokens will entitle the members to receive an interest of the reserve, and will also benefit from having a voice in the managing of the reserve.[15] With the investment of the founding members, Facebook will overcome the initial problem of creating an initial “reserve” for Libra.
As discussed above, Libra is 1:1 backed by fiat money, and if there are already some funds in the reserve, people will feel more comfortable when exchanging a perfectly liquid dollar with Libra to assure that in case of withdrawal, there will be sufficient funds in the reserve.[16] The technology behind Libra is blockchain. However, it is different from the Bitcoin’s blockchain. For example, Libra’s blockchain is a permissioned one, whereas Bitcoin’s blockchain is permissionless[17]. Further, Bitcoin allows anyone who downloads the software to act as a “node” to validate the transactions made via the blockchain platform.[18] Whenever a Bitcoin is transferred between and among users, those network participants verify settlements of the transactions by solving a complex algorithm problem, the first node to solve the algorithm problem is rewarded by a fraction of a Bitcoin. In a process called “mining,” other nodes have to reach consensus on the answer in order to validate the transaction and thus, for it to be completed and permanently added to the distributed ledger. The whole process is known as “proof-of-work.”[19] This resolved the trust problem between nodes or any trust in one centralized entity. The proof-of-work in Libra functions differently, and the validation protocol allows transaction to be valid if 2/3 of the network members in the Association agrees that the transaction is valid.[20] The idea behind such protocol is that those members are reliable, well-established entities with experience in the field, and such validation process is cheaper comparing to Bitcoin in terms of computing efforts (thus, electricity).[21] Nevertheless, Facebook’s plan is to become a permissionless blockchain within five years of its launch.[22]
One might wonder what’s in it for a company like Facebook to enter into the payment market. Libra’s goals, as stated in the white paper, are all altruistic values such as financial inclusion and “banking the unbanked.”[23] However, Facebook’s history has shown that Facebook is as for-profit as any other modern capitalist company that works to maximize shareholder value. In the Libra case, it will be achieved by inventing ancillary services to Libra.[24] To that extent, Facebook is also launching Calibra, “a newly formed Facebook subsidiary whose goal is to provide financial services that will let people access and participate in the Libra network.”[25] Calibra itself is essentially a digital wallet in which users can save, spend and use Libra for a fee per each transaction.
The founding members joined the Libra Association for several reasons, and one could argue that once they are in the Association, they will benefit from the abandoned financial data that might be available to them when validating the transactions. The other reason might be associated with Libra Association’s reserve, because they will have a voice in managing of the reserve, which will potentially be in the hundreds of billions considering Facebook’s 2.2 billion users over the world. Such scale of potential holders of stablecoins alarmed the chairman of the Financial Stability Board (“FSB”) who sent an alarming letter to G20 financial ministers and central banks governors warning that stablecoins could have “challenges for financial stability; consumer and investor protection; data privacy and protection; financial integrity including AML/CFT and know-your-customer compliance…”[26]
Nevertheless, the Libra Association, which was to consist of 28 members at the start of October, came down recently to only 21 members due to what is speculated as political pressure. The issue started with the withdrawal of PayPal and later followed by the defections of others, most notably, Mastercard and Visa.[27] Such defections have a negative impact on the chances of Libra to see the light, and with fewer well-established financial entities like Mastercard and Visa and other mainstream companies, the Libra project is likely to gradually lose its credibility and support.[28]
Ultimately, the Libra Association publicly and consistently said that it wants to work with regulators and that it will not launch prior to receiving regulatory approval in Europe and the USA. Both David Marcus, the head of Calibra, and more recently, Mark Zuckerberg in the hearing in front of House Financial Services Committee, were asked if the Libra Association will eventually launch Libra regardless of the U.S. regulators approval, Zuckerberg answered that Facebook will “be forced to withdrawn from the Association.”[29]
Aside from raising financial questions, Libra and Calibra also have privacy and data protection risks that everybody should be aware of, for Calibra will potentially hold financial information from about one-third of the world’s population—and possibly even more. In a joint statement, data protection officials from around the world addressed their concerns regarding the Libra project, emphasizing that members of the association will “instantly become the custodian of millions of people’s personal information.”[30] Even though Facebook and Calibra made a public statement with respect to privacy, they are still unable to present the information-handling practices that will be in place to assure that personal data is secured—particularly, whether the user’s financial data stored in the Calibra wallet will be available to the Association members.[31]
The relationship between Calibra and Facebook is a more pressing one, in my view. Facebook is essentially an ad platform and a very powerful one. The mere possibility that Facebook will be in hold of financial information on top of all the information that it already collects about us is dangerous. Although regulators around the world are now more aware of Facebook’s capabilities and influence, unfortunately, it was only after the Cambridge Analytica scandal. Moreover, the reverse flow of information—from Facebook to Calibra—is also a matter to be contemplated heavily. We can only hope that this instance will not be dealt by regulators ex ante, and that a strong regulations structure will be in place before the launch of Libra.
Footnotes
