Given yesterday’s blog on Open Banking, Open Payments and Trust Networks I can’t resist writing on what I believe was the greatest, most innovative, trust network in the last 20 years: Libra. David Marcus’ design of Libra is brilliant, and will stand as THE REFERENCE MODEL for creating a trust network (apart from a market).
If your not familiar with Libra, read the fantastic Tech Crunch article by Josh Constine (June 2019) or the official Libra white paper. First off, Libra should never be viewed as a Facebook effort, but rather an effort launched by Facebook in support of a common payment scheme to support every person in the world. While the growth of electronic payments is incredible, and there are over 20B cards in circulation, these instruments are held by fewer than 40% of the world’s population with 90% of electronic transactions occurring in the top 10 OECD countries. For the 60% that do not hold cards, most do not have a bank account. For the 40% that do hold cards, the ability to transfer funds or between schemes is complex (or not available).
The need for a universal small transaction payment scheme is enormous. It is a key component to engaging the world’s rural poor in the growing virtual economy (see blog) AND also enabling global service provision to high tech millennials. Facebook’s 2 Billion WhatsApp user base provides a great starting point for a consumer friendly network.
There are several amazing elements to Libra:
- Bitcoin tied to stable currency and muli-currency Libra Coin (≋LBR)
- Libra Association – and independent governing body of the network (based in Switzerland) includes merchants, networks, MNOs, VCs, Tech and Marketplaces, Blockchain specialists and NGOs
- Vetting, Approval, Financial Risk and performance of association members
- Trusted association members as owners of a closed and permissioned Libra Blockchain (shared ledger) against a stable coin – The Trust Network
- Currency exchange with the Libra Reserve. Think of this as the Libra’s central bank managing M1 that is pegged to a stable coin. There is always a 1:1 value of ≋LBR to Local Currency.
- Economic model is defined, with upside for the association and for merchants. The case for consumers and banks is much weaker.
- Association members earn fees on the Libra Reserve
- Merchants – Near 0 cost of acceptance
- Consumers – ubiquitous, anonymous, global payment scheme
- Privacy/protection. All of the benefits of blockchain, with trusted intermediaries (and known) holders of the ledger. Important to note that Facebook created Calibra to ensure anonymity and protection of transactions (no mixing of FB and Libra data).
Cash Out (external value exchange) is the primary issue facing Libra (the nightmare of MSBs and the Bitcoin world). The exchange of currencies and cross border movement of money is heavily regulated (see article). In most geographies, commerce transactions are squeaky clean, however it is difficult to prevent money laundering (ie fake merchants). In the V/MA models, merchants are acquired by banks and banks manage merchant KYC AND risk (ex holdbacks). Similarly, issuers manage consumer risk and KYC. Regulators are reluctant to support non-bank efforts to provide payment services (see How to Deregulate Payments).
Additionally, MPESAs success showed how quickly new schemes can impact bank liquidity, with over 10% of Kenya’s GDP in MPeasa (in a Citibank account in 2008). Beyond bank liquidity, this new type of M1 is global in nature and outside the typical controls of central banks.
I can’t understate the BRILLIANCE of Libra. This is the right model, and the political attack was “being at the wrong time and the wrong place” with congress. Unfortunately this led to a loss of some association members, but the association is going strong with a Stuart Levey appointed as the new CEO in May. In this appointment, we see that Libra clearly recognizes its primary hurdle (legal and regulatory issues).
The US lost in this setback… BIG TIME. There will be a common value exchange scheme based on blockchain. IT WILL HAPPEN. Having a US company in the drivers seat, with the thoughtful trust structure above would have allowed US regulators and politicians to exert influence. Killing it just moves the opportunity to another country, to another provider and to another set of owners. I hope we haven’t lost our opportunity to rally around it.
If I were at Libra, I would start where there is non-consumption of existing service and high whatsApp penetration. For example, emerging markets, telecom operators and bill payment. Or gain the support of NGOs delivering aid directly to the end beneficiaries. I could also make a case for disbursements such as pensions, dividend distribution, government payments. My message to Libra.. Get a success story.. Find a country and a use case that regulators will approve. Give me a ring if you want ideas.
Libra is a case study in trust networks, and I believe it to be the biggest long term threat to any payment network. David seems to be continuing his work with Facebook under a new Libra backed wallet called novi.