Facebook Libra is a Big Step Forward for Privacy — The Walls of the Walled Garden Just Got Thicker — First Read on Important Points
Facebook is taking its first steps in releasing its cryptocurrency with the founding of the Libra Association in Geneva and the release of its white paper. We believe this is a seminal moment in the future of technology, cryptocurrency and advertising. As we have said in prior commentaries, we believe this is as much about advertising as it is about payments. This network offers a big improvement for users in that it will better protect users by ensuring more privacy. It could also provide Facebook with richer data to serve advertising, the company’s core business at $14.9 billion of $15.08 billion of total revenues in Q119.
What People Mean When They Say “I Don’t Care About Privacy.” We believe this means that they agree to an initial contract, better described as, “I will give you my data and you will give me a free service.” What users don’t agree to is selling their media and activity to third-parties in some form. The domino effect of data brokers and the reselling such data (see prior Real Time Bidding comments from a conversation with Johnny Ryan here) led to Cambridge Analytica and the current regulatory crisis that Facebook and others in Big Tech now face. An opportunity emerges here when one considers that both users and regulators will find fewer issues with the ability to engage in a marketplace for one’s data, leveraging blockchain technology. Facebook is addressing regulatory concerns by building a thicker wall of the walled garden, which includes even richer data to serve users ads.
The Potential for Richer Ad Data. There will be options on the type of wallets, both custodial, Calibra, which will require KYC, or Know Your Customer, and non-custodial, which will likely be developed by others. Calibra, as a custodial wallet, will allow for Facebook to serve richer ads but within the walled garden. From the white paper -
“When you authorize a payment, we share data with third parties necessary to process that transaction. We also share Calibra customer data with managed vendors and service providers — including Facebook, Inc. — that support our business (e.g., to provide technical infrastructure or direct payment processing). In both cases, we share only the Calibra customer data that is necessary for completing the defined activity or service.”
Regulator Friendly.
US regulators have known about Facebook’s aspirations for at least the past six months, and our conversations with lawmakers suggest that Facebook’s Government Affairs team has been aggressively cooperating with financial regulation. Primary concerns fall under Know Your Customer/Anti-Money Laundering laws and money transmitter licenses and this initial white paper addresses these. Additional items addressed: fraud detection, user surveillance, and transaction censorship. This hand-in-hand approach will undoubtedly allow the currency to gain traction far quicker than any of the other networks that have sacrificed decentralization in the name of performance or even more egregious, “ask for forgiveness instead of permission” approach.
Financial Services & Payments Friendly. Launch details were leaked to journalists at The Block and The Information and the graphic below was especially useful in showing the amount of support that Facebook has garnered from the Payments and Financial Services community. They are launching with 29 partners, including MasterCard, Visa, PayPal, Stripe and eBay.
Even Cryptocurrency Purist Friendly? While the network will start as permissioned, which will disappoint cryptocurrency purists, Facebook aims to make it permissionless with one hundred validating nodes. Facebook will be one of the hundred nodes and will only account for 1% of the voting power. The cryptocurrency, Libra, will be backed by a basket of financial assets (Libra Reserve) denominated in USD, EUR, GBP and JPY.
Imagining a New World of Advertising. While it is still early, one can imagine a world in which Libra could provide many ways for users to garner value on the platform and then “spend” it in various ways. Imagine clicking on an ad to earn value that could be used later to pay for a subscription to The NY Times. We attended video game conference E3 and the Facebook Gaming booth and wondered whether Libra could eventually augment “stars”, allowing gamers to “tip” other gamers with real value in an eSports environment. Directly paying users for their data with Libra and getting more specific spending behavior patterns will be very valuable. This could allow Facebook to retain rights for cross-service data analytics, while acting as a non-arbitrary mechanism by which to onboard users to the new currency.
Weeding Out the Weakest (Fiat) Link. Six out of Facebook’s ten most represented countries fall outside of the OECD, and together they total over 650 million users. Whether it’s because of demonetisation in India, inflation in Turkey, or volatility in Brazil, users will be drawn to the competitive alternative that Libra’s bundle of currencies and low-risk securities provides. Factor in the rapid growth of cell phone penetration seen across the developing world in recent years, and its possible that emerging market currencies will see their market share in domestic retail transactions slip. If Libra is adopted widely, a new currency could emerge which could not only reduce the demand of individual emerging market currencies, but also reduce demand (on the margin at least) for a single currency like the dollar used to quote cross border pricing of goods and services.
Balancing this, precedents for government clampdowns throughout the Arab Spring and Russian 2014 elections indicate that Facebook and the Libra Association will know better than to take national currencies head-on. One could imagine developing countries enforcing mandated minimums on domestic assets owned by Libra, such as money market equivalents and low risk bonds, as well as leveraging user profiles and transaction histories for taxation purposes. A potential bright spot in this conversation could be the financing Libra could provide for startups across developing countries.
Providing a Bitcoin Education On-Ramp. The impact of Libra with a $1 billion stablecoin capitalization will be its role as a gateway cryptocurrency. With Coinbase, Andreesen Horowitz, and Xapo as founding members of the Libra Association, it stands to reason that Libra wallets will come integrated with exchange channels. In that sense, it could prove to be a significant catalyst for global adoption of Bitcoin.
Imagine 100 Bitcoin rabbit holes with people from the traditional payments world in them.
Libras founding members in the White Paper
