Given how slowly Washington lawmakers
have taken to devise a coherent, informed view of cryptocurrency, the
Chair of the House Financial Services Committee’s rapid leap to action
last week over Facebook’s ambitious Libra project was remarkably fast.
But let’s reflect not on the details of Rep. Maxine Waters’ (D-Calif.) urgent requests that Facebook to cease work on Libra until after hearings are held or on how European lawmakers made similar appeals.
The important takeaway from these legislators’ actions is that they are
able to make such demands at all. since this is not the case with truly
decentralized projects.
Unlike with bitcoin, representative
in Congress can directly identify and talk to the people in charge of
the Libra project. They can subpoena them and, thus, pressure them. They
might start with David Marcus, head of Facebook subsidiary Calibra,
but, ultimately, it’s Facebook
CEO Mark Zuckerberg who’ll give lawmakers the greatest leverage.
In this case, the buck stops with Zuck.
Now, imagine a Congressional leader
calling for a halt in bitcoin development. Who exactly are they going to
pressure to end an open-source project involving millions of globally
spread mostly unidentifiable developers, miners and users?
This distinction – between one
project with a single, identifiable authority figure and another whose
governance is distributed and leaderless with a founder who has never
revealed their identity – goes to the heart of a crypto community
critique that the social media giant’s initiative is not censorship
resistant.
When there’s someone in charge, an
interested party – a policymaker, a banker, a regulator, a shareholder –
can lean on them to make changes. And when the blockchain consensus
model is based on a club-like permissioned membership, a coordinated
effort to alter, or censor, the ledger is always possible. And if the
ledger or its software can be altered by this pressure, the Libra
platform can’t unconditionally promise to support open, unfettered
access for users and a permissionless innovation environment for
developers.
Let’s be clear: Libra’s designers
have thought deeply about how to protect their project from Facebook
itself, both in a real sense and that of public perception. In its
commitment to decentralization, the team has put the code under an
open-source license, handed the network’s governance authority to a
separate Swiss-based foundation, brought in 27 external partners to work
alongside Facebook as independent, permissioned nodes in the network,
and verbally committed to transition to a permissionless model over
time. There is a structure and roadmap in place for Libra to grow and
survive regardless of its genesis as a Facebook project.
All that’s fine. But we’re still at
the genesis phase, one that is and will for some time hinge on the
centrality of a particularly powerful company.
The culture problem
At the risk of stating the obvious,
Marcus and his team are paid by Facebook. Follow the money, as they say.
But also, follow the code.
The Libra protocol’s all-important
source code is now open-sourced, but it was conceived and gestated
inside Facebook. So, whether the project managers and programmers resist
or not, the culture of that organization will inherently feed into
Libra’s design priorities.
The elephant in the room is that a
drumbeat of recent news has revealed Facebook’s corporate culture to be
profoundly toxic. The company’s model of surveillance capitalism has
turned users into pawns in a global game of data manipulation,
cultivated echo chambers of narrow-mindedness, done irreparable harm to
the worthy cause of journalism, and deeply undermined our democracy.
This legacy is the unavoidable reason
why people, including lawmakers, are alarmed that Facebook might be on
the verge of creating a new international model for money and payments.
Rightly or wrongly, there’s a fox-in-the-henhouse optic here that’s
unhelpful.
Wharton Professor Kevin Werbach argued in the New York Times this week
that Facebook’s Libra is a bold effort to win back public trust by
leveraging the accountability ingrained in blockchain technology. But at
the project’s genesis phase, with no choice but to trust Facebook’s
early input, that legacy of prior mistrust could easily become a huge
barrier to its progress.
We should support Libra, not Facebook
Notwithstanding all the above, I
actually want Libra to succeed. (Note: I also want Facebook to die.
That’s not a contradiction; those two outcomes can and should be
separate. In fact, it’s the nub of the issue.)
The Libra team has set its sights on
achieving financial inclusion for the 2 billion adults worldwide who
don’t have bank accounts. It’s a noble goal, and they are going about in
an intelligent way – from a truly international, cross-border,
cross-currency perspective. Bring all those people into the
international economy and the payoffs could be huge, for them and for
the rest of us.
And let’s face it, bitcoin has
dismally failed to live up to its advocates’ promises of a financial
inclusion solution. Bitcoin’s and other cryptocurrencies’ impact on the
$800 billion global remittances market is puny.
Sure, uptake could rise if the
off-chain Lightning Network lives up to its promise to enable
larger-scale transaction-processing, if stablecoin projects resolve
bitcoin’s volatility problem, and if new encryption solutions can
improve both security and user experience with crypto wallets. But these
solutions will take time. We need to act now.
In the end, it’s not at all clear
that global person-to-person payments are a viable use case for bitcoin,
perhaps because too many HODLing speculators crowd all the spenders
out. And, of course, no other payments-focused cryptocurrency has put a
big enough dent in the remittance market.
So, perhaps the recipe for a global
broadening in payments lies with a cross-border, low-volatility
international stablecoin backed by a basket of leading fiat currencies
and developed with the formidable programming and marketing resources of
28 tech and financial giants. Also, when you combine Facebook’s,
Instagram’s and WhatsApp’s user count, the number of potential wallets
runs to 4 billion. Global network effects. Instantly.
All other things being equal – that
is, if we ignore, for now, the genesis problem of Libra inheriting
Facebook’s toxic roots – one could also argue that a permissioned,
corporate network is the best approach for the Libra blockchain in place
of a fully open, permissionless chain such as bitcoin’s or ethereum’s.
The heavy lifting needed for early global traction – the software
development, the marketing effort and the public policy outreach –
requires that significant corporate resources be deployed in a targeted,
coordinated manner that’s hard for open-source blockchain communities
to achieve. There are efficiency advantages to be had from
centralization.
Over time, as the project grows,
Libra hopes to expand the consortium. That could undermine the
coordination efficiency, but in a classic
centralization-versus-decentralization tradeoff, the addition of new
members – more NGOs, some banks, a workers union perhaps, and some
public pension funds – will achieve greater diversity and lower
collusion capacity. It’s far from perfect but the timed transition
brings things closer to censorship resistance at a time in the future
when it will matter — if it they get there.
What this means for bitcoin and crypto
As an aside, I also believe Libra’s
success would be a positive for bitcoin – and the past week’s price
action suggests that the market sees the same.
Here’s why: Currently the one value
proposition that holds well for bitcoin is that it will be a more
liquid, digitally up-to-date risk-hedging vehicle than gold when people
need to preserve value in something immune from political and
institutional risk. That argument could be enhanced if Libra succeeds in
converting billions of people to digital payment wallets, because it
will more broadly establish the power of blockchain-based digital money
as the way of the future. At the same time, because of its genesis as a
Facebook-initiated, permissioned system, Libra will not shake the
perception of being prone to political – i.e. censorship – risks. For
many, then, Bitcoin, aka digital gold, will become the obvious
alternative.
The currency-basket-backed Libra
token is, however, a real competitor to other reserve-backed
crypto-tokens, such as USDC, issued by the CENTER coalition initially
formed by Circle and Coinbase, GUSD, Gemini’s stablecoin, and PAX, from
Paxos.
But we can imagine events working in the latter’s favor. Developing countries like India, for example,
may become hostile to a new currency entering circulation that sucks
demand away from their local currencies, but they would be more
accepting of a digital dollar, given that the greenback already
circulates in their economies. Users, also, might be happier holding
tokens pegged to single sovereign currencies rather than in a
hard-to-measure basket. And if concerns about centralized control
undermines trust in Libra or limits innovation, the fact that these
tokens are built on truly permissionless blockchains may make them more
appealing (even if you still have to trust the reserve-holder to
guarantee to the price stability.)
Whatever happens, the world of money
flows is mind-blowingly huge. There are $6 trillion a day in foreign
exchange transactions alone. That allows plenty of room for different
models, different tastes, and different trust systems for coordinating
digital value exchange.
Getting our priorities straight
The bigger risk is not that Libra
succeeds and enriches Mark Zuckerberg even more but that neither Libra
nor one of its crypto competitors ever succeeds in breaking down the
barriers to economic participation. Financial exclusion breeds poverty,
which in turn breeds terrorism and war.
And if we assume that the technology,
if it isn’t yet ready, will ultimately get there, then the biggest
threat to that is from a policy mistake.
The subtext of both Waters’
statements and those of European lawmakers was that this private
exchange system can’t be allowed to replace national currencies. Thats’
not what Libra intends, but the perception that it is undermining nation
states’ sovereignty over money could stoke fears and lead to a ban on
Libra. And if that happens, it sets an ugly precedent for or all other
competing ideas, whether it’s USDC, GUSD, PAX or DAI or something else.
The projects capacity to foster
financial inclusion could also be hurt by the Financial Action Task
Force’s, or FATF, embrace of a new rule for exchanging cryptocurrency. If
ratified by enough countries that could curtail the free flow of
cryptocurrency among addresses that haven’t been through a bank-like
“know your customer” process. In other words, it could pose a real
barrier to Libra’s and everyone else’s dream of financial inclusion for
the “unbanked.”
The bottom line: the Libra team has
its work cut out, and we all have a lot riding on it. The project’s
representatives must face the reality that, for now at least, the buck
still stops with Zuck, and that regulators will use that against them.
We should all wish them success in
trying to convince policymakers that an open-system to global financial
transactions is important. (It’s encouraging that the Bank of England is
taking an open-minded view, proposing that tech companies like Libra be allowed to access funds directly from central banks.)
But, by the same token, we must be
vigilant against corporate power that could easily convert this
important project into something more sinister. Facebook’s own history
is a reminder of the risks we face.
I wish it were a different company
running with this ball right now. But since it’s not, the need for all
of us to take a direct interest in this project is even greater.
We must demand that our
representatives provide clear-headed, informed oversight that holds
corporations like this to account and curtails their monopolizing
powers. But we should also expect smart, open-minded regulation that
encourages companies to compete and innovate in an open system that
creates opportunities for everyone on this planet.
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