Author of The Crypto MBA, Forbes contributor and advisor for VC/PE and crypto funds.
With Paypal withdrawn and Visa and Mastercard soon to follow suit, the death knell has sounded for Facebook’s cryptocurrency, Libra. Here’s an analysis of what happened in just 4 months.
Following over 2 years of carefully orchestrated rumours, Facebook finally revealed its cryptocurrency to the world on June 18th, along with a white paper and an impressive graphics listing 30 "heavyweight" partners in their respective industries. Barging its way straight through the front door, Facebook was about to set the crypto-world alight, bringing its 2 billion users into the space.
However, I wasn’t convinced. In my previous columns on the topic I ruminated on a dystopian vision of the future stemming from this project, and attempted to highlight some aspects of our friend Mark’s hidden agenda (the same Mark who sold his users' data without their knowledge). And for all their lofty aspirations, it doesn’t take a genius to realise that the currency was doomed from the start. Here’s why.
Libra’s launch party took place just one year after the Cambridge Analytica scandal, revealed in March 2018, and which resulted in (among other negative consequences) Zuckerberg being summoned to appear before Congress. Any wise leader would have understood that it’s a bad idea to follow such a cataclysm with the launch of a project as disruptive (to say the least...) as a global cryptocurrency.
What Facebook did not realise is that concurrent to the case going through the courts, journalists were doing deep dives on the company. These investigations would be concluded and made public just as Libra saw the light of day, the best example of which is the documentary, ‘The Great Hack’. Released by Netflix at the beginning of July, just a few days after the Libra launch press conference, The Great Hack irrefutably demonstrates, with documents and testimonies from key players (most notably, Brittany Kaiser — former business development director for Cambridge Analytica), how Cambridge Analytica used Facebook data to influence the outcomes of a dozen democratic elections around the world, including that of President Trump in 2016.
Someone please explain to me how Facebook could, for one second, think that launching a global cryptocurrency is a smart idea in the wake of these revelations, especially as regulation concerning cryptocurrencies is firmly in the limelight and scepticism at an all time high?
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Even those that take the time to understand the technical and ideological foundations of cryptocurrencies will agree that ‘crypto’ is steeped in controversy. After all, it is only the fundamental disruption of money, finance and basic business models...
It therefore seems quite incomprehensible that Mark and his partners did not discuss the project with the G20’s regulatory bodies before the official announcement, if only to avoid a fait accompli.
Why didn’t they opt for a two-step strategy instead: the first step consisting of a simple announcement of Facebook’s intentions to discuss the subject of a ‘universal’ cryptocurrency between private partners, politicians, and regulators, rather than outright asserting itself as the project leader from the fore? They could have then modified the project before the official presentation, and have avoided adding failure along with scandal to the long list of Facebook’s rap sheet
An incomplete selection of partners
Mastercard, Visa, Coinbase, Ebay... The project’s 28 partners are undeniably impressive. But behind the announcement effect, there are two clear concerns that arise on closer inspection:
First, the term “partnership” is a bit strong. In fact, we are merely talking about letters of intent with no firm commitment other than to invest a minimum of $10 million in the collective, and without full details of the conditions under which this investment will be entered and exited. We can see today that the 28 partners have not publicly discussed the project before the announcement, and that Paypal has left the project by issuing a simple press release.
Second, there are three key sectors/groups that are totally absent from the consortium:
Banks and funds (e.g. JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., etc.) that have developed their own crypto solutions, or are waiting to see what position regulators will take.
Bricks and mortar retailers: no Walmart Inc., Tesco plc, Target corp., etc., which are still reluctant to include cryptocurrencies in their payment processes due to volatility and low adoption rates.
GAFAM and others, many of which have already deployed their own payment solutions, and have the means to develop their own cryptocurrencies. This is no doubt due to the fact that none of them want to be associated with the gang's "ugly duck" and its highly questionable ethics regarding respect for its users' data. Tim Cook confirmed this position again last Friday, the day before the announcement of Paypal's withdrawal.
Libra is not a "real" cryptocurrency
Google recently announced that it has succeeded in running a quantum computer (based on its 54 qubit Sycomore processor) efficiently (i.e. by solving specific calculations that traditional supercomputers would take several tens of thousands of times longer to complete). Sensationalist headlines weren’t far behind. Based on a paper posted and then removed by Google from the NASA site, journalists immediately took to the press to announce the end of cryptocurrencies and the "public/private key" cryptographic technology on which they are based.
This is obviously inaccurate, since the power required to "crack" a private key from a public key (using the Shor algorithm) has been estimated to be 1,500 qubits. We are still a long way off this sort of processing power, not least because as we increase the number of qubits, the amount of errors in the doors that connect them increases while the duration of coherence decreases. This tendency of the media to spin stories out of fragments of information is painful to say the least, and it was in a storm of the same sort of sensationalism that Libra went public.
Libra was announced to the world as a cryptocurrency, but is it? A cryptocurrency is defined by 5 precise criteria, which stem from blockchain on which it is based (dixit A. Pompliano):
- Openness (accessible to all)
- Globality (it is not affected by borders)
- Neutrality (unconditionally transferable to anyone)
- Freedom (no authority may oppose a transfer)
- Transparency (transactions are stored publicly)
Libra is a stablecoin with a fiat counterpart (its value is pegged to the euro, dollar, yen, etc., or to stablecoins pegged to one or several of them), and is based on centralized digital registry technology (run by the famous partners). So not open, transparent or neutral. But that’s just the tip of the iceberg.
As Bill Maurer and Daniel Tischer brilliantly explain in their article for theconversation.com, behind the lyrical flights of the white paper it is quickly understood that the secret agenda is to create an alternative to Visa. One that reinterprets the principles of Visa's creator, Dee Hock, to the advantage of the small, closed circle of its founding partners:
The association's members are guaranteed profits in proportion to their participation. Unlike Visa, whose members compete for market share, Libra members passively collect interest resulting from their investment in Libra's stock. In addition, profits are not shared with users, who also do not receive interest on the corner balance they will hold. As with Visa, members have voting rights, but, unlike Visa, they depend on their level of investment in the project, not on their level of participation in the system. It's a plutocracy: the richest participants will profit the most.
Without having to go into the details of the technological foundation upon which Libra is based, it is necessary to question the hidden agenda of its founders by analyzing precisely how this technology will be used by the consumer, and what its remuneration and redistribution mechanisms are. And it was in taking this approach that the regulators quickly became uncomfortable.
But it’s not all doom and gloom. And fundamentally it’s not important whether Libra will succeed or fail, but instead how it affects the public perception of cryptocurrencies as a whole. With an actor the size of Facebook bringing together monsters like Visa and Mastercard, there is no doubt that politicians and regulatory bodies will have to produce a relevant and sustainable legal framework for cryptocurrencies. Personally, I don’t see Libra ushering in the age of ‘mass adoption’, but forcing the hand that will sow the seeds instead.
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