Four Big Things the Libra Association Must Do to Earn My Endorsement
This is my personal opinion and does not represent that of any company I have founded.
Last week, Facebook announced its Libra coin. Is it just another power grab by a big company set on harvesting and controlling our data? There are good reasons to be skeptical. Many pundits are already making assumptions and crying wolf. It’s easy to rely on stereotypes, jump to conclusions, and judge without understanding the facts.
I am optimistic. Matthew Hine has an excellent review of the technology decisions and the Move language. I think the project has the potential to be a huge benefit to the world. But I think the plan, and especially the governance, needs adjusting. In this essay, I will ask four hard questions and suggest four important changes that will earn my respect and support.
What is Libra?
I gave a webinar on it recently and described the project enthusiastically:
What makes Libra exciting is that it is a) stable and b) will have scale immediately, and those two properties are game changing. David Marcus, who has been involved in messaging and mobile payments for his entire career, heads the Libra team. Marcus understands cryptocurrencies. His vision of a currency for the world should be taken at face value until proven otherwise.
However, after thinking about it for a few days, I realized I can see four big risks and some serious adjustments I would want them to commit to before I endorse the project. If they can overcome these risks, I think Libra can be an important platform for innovation and change.
Risk Number 1: Overregulation
The biggest risk is overregulation or even a government attack on the project itself. I’m very worried about this, because as I mentioned in my presentation, the Financial Action Task Force, which has created this monstrous web of regulation called Anti-Money-Laundering, which is 99.9 percent ineffective at catching criminals, has their eye on all cryptocurrencies. The risk to Libra is the same as the risk to bitcoin, ether, etc.
At the moment, the FATF is requiring exchanges to share “beneficiary information” with other exchanges when moving cryptocurrencies. They want to monitor all movement of cryptocurrencies to see if anything bad is taking place, even though 30 years of AML enforcement have had zero effect on crime. In fact, banks are eager to help criminals launder money and may be involved in up to $2 trillion of money laundering each year. Anti-Money-Laundering laws may be the least effective regulatory intervention, anywhere.
Furthermore, the SEC has come after many crypto projects with outdated and ineffective securities regulations. Kik has recently challenged the SEC and is putting together a group to defend themselves.
We also live in a world where elected government officials ask companies to stop innovating until they can look into it and decide if they want to stop the company or let it continue development. Perhaps congress would like to set up a kiosk in Mountain View and require all startups to present their business plans for approval before going to market?
There are risks of fraud being committed, and it will be. The non-crypto world is full of fraud, liars, cheats, politicians, and people who want to take your money. They will phish you, get you to tell you their passwords and take anything they can. The same is true in blockchain and cryptocurrencies.
From a risk and privacy perspective, Libra is in the same boat as bitcoin, ether, USDC, TrueUSD, and many others. But from an influence perspective, Libra has something the others don’t: the resources to combat bad policy.
Solution: Form a worldwide task force of government and policy influencers. Libra would have the resources to go up against misguided, outdated, and corrupt government officials. The Libra team could explain to the G20 and other world governments that we have been living in a regulatory fantasyland, and make the case for better rules, agile governance, and innovation. They can push for permissionless finance and a decentralized world.
Almost no one is working on this at the international level. We need an Electronic Frontier Foundation for Finance. Libra should lead it. This could flip most crypto-enthusiasts to joining their cause.
Risk Number 2: The Calibra Wallet
I believe it is very important that the Calibra wallet not be the Facebook wallet. It should be the reference implementation of an open-source wallet that anyone can use to access the Libra ecosystem. It should not be Facebook branded, it should not include your Facebook address book, it should not ask if you want to “import” all your Facebook friends, and it should have absolutely no favoritism toward Facebook at all. Whatever data Calibra publishes it should put in the public domain. In short — it should not be “connected” to Facebook; it should give people digital sovereignty over their own identities and data.
I know a bit about wallets. Two years ago, I led a team of volunteers to raise money for the Pillar Project, an open-source wallet that is the easiest-to-use consumer crypto wallet. The wallet is now in the App store and the team is building innovative new features that put the customer at the center of her digital world. Pillar is ahead of Calibra because Pillar’s motives are solely to benefit the user. If Calibra is seen as a Facebook front-end, it will be even better for Pillar and all the other wallets that give users sovereign ownership and control over their own data and assets.
Solution: Establish Calibra as an independent nonprofit foundation whose goal is to provide end-users with complete control over their identity and assets, with no Facebook involvement. Tell Facebook they can integrate the code into their own products if they wish.
Risk Number 3: The Association Model
Efi Pylarinou pointed out that Libra is a Swiss association rather than foundation. This means profits flow out to individual members. The 28 founding members have all invested $10 million in the project. My guess is that this structure allows members to take profits on their investment — they had to do that to get the early investors onboard. VC firms are not allowed to donate their investors’ money to charitable causes. By investing in Libra, they will get a share of the profits generated by the currency. This is how I think that would work:
Libra will get billions of dollars from customers and use that money to buy currencies and bonds. Those assets will generate returns on the order of one percent per year or less. As the reserve account grows, that income will first be used to run the association. The association will lose money in the early years and then make money later. While it is not leveraged, the sheer size of the reserve account will pay the early investors a good return on their investment. At $100 billion in the reserve account, returns could approach $1 billion a year. This is exactly the situation with the Federal Reserve.
It’s also a situation I think Libra doesn’t want. It’s too much profit for something meant to benefit people in the developing world. When the reserve account is holding $1 trillion worth of financial instruments, it could be sending $5–10 billion of profits back to members of the association. With a cash cow like that, it will be difficult to add members or go toward a permissionless system. From a game-theoretic point of view, the interests are not properly aligned.
They are interested in more members, which is a good sign. But unless I’m missing some key details, the association structure is a red flag.
Solution: The association should commit to turn itself into a Swiss foundation, with no profits and no shareholders within three years. This must be a unified commitment. Making a bit of money on a risky investment is fine, but making rich people richer should not be the intent or purpose of Libra.
Risk Number 4: Monetary Policy
One risk some people are worried about is the undue influence of private companies on any single central bank. It’s worth understanding.
If you have a share of Apple stock, do you have any influence on how the company is run? You would need to have enough stock — let’s say at least $30 billion — to become a voice at the annual meeting.
The same is true of Libra. Because of the mix of currencies and bonds, I estimate there would have to be around $1 trillion in Libra before it would be time to start thinking about how Libra could influence the monetary policy of the countries whose currencies are in the basket. If we have the right people on the council, I honestly think this would be a good thing. It’s time to pull central banks out of their Keynesian caves and help them understand how to improve their policies for the benefit of their citizens. As a student of monetary policy, I believe there are some systemic problems in most countries’ central banks that need serious attention. Do not assume central bankers know how to best serve their citizens or that banking regulators keep customers safe. They don’t.
One interesting question is how the Libra influences an economy like India’s. When Indian citizens have about $200 billion worth of Libra, it will be time to go talk with their central bank about reform. I think this is exactly the kind of stimulus the Indian government needs to help their people avoid recessions, currency crises, and target an optimal growth path of either nominal wage or nominal GDP growth.
On the other hand, Australia is managing their money supply quite well. Not optimally, but better than almost any other country. The Libra team could learn a lot from them.
Libra could become an influential factor in the monetary policy of smaller economies, like those of Kenya, Panama, Myanmar, Ghana, and many others. Like the Fed and the Bank of England, these central banks hurt their people by implementing bad monetary policies. I believe this healthy competition will lead to advances in central banking that would otherwise take decades. Assuming the Libra team understands macroeconomics and will work to benefit the citizens of those countries, the pressure will help bring about important change.
I can imagine the Libra taking over in very small economies, like Nicaragua, Mauritius, Madagascar, Chad, and Haiti. First, this would be driven by demand of their citizens, not by evil Facebook marketers. Second, Libra will likely be a far better stable coin than any other crypto asset we have today. But at that point, the Libra team will have to start looking at and adjusting for shocks to regional aggregate demand. This would make the Libra team a de-facto central bank that can and should be better than what the citizens of those countries have now. But they will need to understand their responsibility to educate and work with those banks, and they should pledge now to help those economies target an optimal growth path of nominal wages or nominal GDP. If the Libra council members don’t understand this, they need a crash course in money.
It doesn’t make sense to assume that the Libra team would want to weaken or endanger any country’s currency. The risk is that the Libra team doesn’t know what they are getting into, doesn’t understand the political nature of central banks, or how to actually fix the monetary regimes of various countries. Each country has its own considerations and must be addressed carefully.
One last thing: It’s important that the Libra association never just print extra Libra without assets to back them up. The Libra White Paper says:
The association will pay out incentives in Libra coin to Founding Members to encourage adoption by users, merchants, and developers.
Contrary to David Hoffman, I believe they can do this without just printing Libra out of thin air. For example, they can use $2 million of each investor’s money as collateral, add it to the reserve account, and give each investor $2 million worth of Libra coin to play with. This makes sense, because they only need say $20 million more in the reserve account than Libra outstanding to ensure that the project can be properly wound down in case it needs to be.
I disagree that Libra has the power to create money, and I disagree that Libra is a de-facto central bank. Again, the white paper says:
Unlike the majority of cryptocurrencies, Libra is fully backed by a reserve of real assets.
I take them at their word on this — if they violate it the project will tank.
Libra will will become a de-facto central bank only in places where demand for Libra exceeds the demand for the local currency. I would say that is probably a good thing, but they need to be prepared. Who are the economists on the team? What are their views? What have they published?
Solution: Put together a sharp team of monetary policy experts and be very clear about working with each country to better manage their money supply. Because monetary policy and the banking system is so dysfunctional, I believe this is another huge benefit of the Libra project. I would be very happy to help.
Can we Trust Facebook?
Let’s assume the Libra association is sincere and they will commit to improvements I’ve suggested above. Should we trust them?
I believe Libra is an independent organization that will govern the project in the best interests of people around the world, not the founding investors and not Facebook. Rather than being a wolf in sheep’s clothing, I think Libra could be a Facebook PR move to improve their repuation by doing something positive for the world.
In fact, I would go further. I would say Facebook needs this to work as advertised and not be a wolf in sheep’s clothing. If Libra is seen as a benefit to society that creates a level playing field where Facebook has no particular advantage, that will help the company’s image.
My belief is that Libra will give Facebook users an easy on-ramp to a new world of transactions and P2P commerce, and they will welcome it. Facebook can use Calibra’s tools, code, and tokens to make their platform that much more functional without hijacking the Calibra brand and mission. People will spend even more time on this new Facebook platform, and they will sell more ads.
That’s fine with me. As long as the Libra platform is open-source and well governed, as long as the Calibra wallet is independent and a level platform anyone can use for innovation, I have no problem with Facebook reaping those benefits on their own platform. The rest of us can use Libra to kickstart the world of decentralized finance. We can build our own wallets and tools and experiences that have nothing to do with Facebook, and the market can decide what it wants.
So many crypto/blockchain projects have had problems with governance that it pays to be extra sensitive and open about the process. I don’t have inside information, so my assumptions may be wrong, but given my understanding, I would want to see these four changes before I wholeheartedly endorse and defend the project:
- Commit to saving people of the world from misguided and corrupt government officials. We need an Electronic Frontier Foundation for Finance. Libra should lead it.
- Commit to transforming to a Swiss foundation structure as soon as possible. Eliminate all profits and plough any money back into the organization to develop programs that continue to level the playing field for all. Get all members to sign onto this agreement immediately.
- Make Calibra an independent, open platform for innovation with no Facebook influence.
- Form an international monetary-policy task force to help the people of the world. They don’t realize that poor monetary policies are hurting them. This is going to be about education, advocacy, and influence, but with an evidence-based approach to governing money worldwide. Much needed.
I would also suggest the following steps to instill more confidence:
- Have each association member make a public statement on why they are involved, how they plan to participate, what value they add, and what they will do with their profits.
- Be insanely transparent in all dealings, finances, and documentation. Collaborate with Messari and others to create a dashboard where people can see everything at a glance with nothing hidden. Keep all your accounts in Libra and use the blockchain as your information source.
- Form advisory boards to address governance, ethics, philanthropy, mission, security, privacy, monetary policy, data protection, and more. These external groups must listen and be sensitive to the needs of people whose voices are not normally very loud.
- Balance the membership with a second tier of NGOs, family offices, and people dedicated to lifting the poor out of poverty. The sooner you get it to 60 members, the better. They should not have to put up $10 million and not have to run nodes.
- Form a third tier of members made up of “the crowd” — not to give people participation in any profits but to give them a voice. This should be considered carefully and not implemented until most of the regulatory uncertainty has cleared. For more on this, see Barry James’ piece on the Crowd Node.
It’s an exciting project. Done properly, it will help give Facebook a facelift. I would like to help. I hope I can.
David Siegel is a serial entrepreneur, author, educator, and voice for reason. In 2017, he led a team of volunteers to raise $21 million to create the Pillar smart wallet for cryptocurrencies. Follow him on Twitter and subscribe to his newsletter at Cutting Through the Noise.