Ideological purity is a common affliction these days. It’s also one the cryptocurrency community is particularly prone to. Witness the upset over this week’s announcement from Facebook that it is to be the prime mover behind a new cryptocurrency, Libra.
Everyone instantly hated the idea. Real cryptos are about privacy and freedom. They are decentralised and permissionless – no one runs them, no one can be prevented from using them and the system never needs reference to a central authority.
Libra is to be none of these wonderful things. It is to be run by an actual organisation – the Swiss based Libra Association, made up of Facebook and 27 partners. It is centralised and permissioned – and its value will depend not on anything intrinsic to it but on the value of a basket of currencies, something that makes it seem more like an exchange-traded fund than a currency in its own right. Worst of all, the Libra Association is planning to make money from Libra, too.
Facebook has an obvious interest in bringing the world’s financial transactions in-house. But there’s another element: the interest from the deposits and government bonds backing Libra will not go to the people holding it. It will be used to pay for the system’s operating costs and, once those are covered, to the founding members as dividends. Add it all up and, to anyone of a puritanical crypto bent, this is clearly not quite right.
Libra could be a sovereignty game-changer
There is lots of detail still to come on how Libra will work. While we wait for some of that, it is true that there are things to worry about. One is privacy. Christina Frankopan, special projects lead at colony.io and a senior adviser to Lazard, questions the use of the metadata Libra will throw up, given that Facebook may be able to “triangulate this with other data sets to give them unprecedented knowledge of consumer behaviour and spending”.
If you are worried about the way financial apps might use data on your spending patterns, you should be really worried about how a vast social network morphing into a financial network might use it.
Anyone with your social media data can guess what you might buy. Anyone with your financial data knows already. Longer term there are the huge issues of what happens if Libra were to become genuinely successful. How does that affect national sovereignty?
Bitcoin has caused endless angst among central bankers but it hasn’t much bothered governments. That’s partly because, so far, it has been marginal stuff. But also because it hasn’t really acted as a currency. It isn’t a particularly effective or scalable means of payment, since almost no one actually uses it. It is a hopeless store of value – huge unpredictable swings don’t work for most buyers or sellers.
And it has not become a value reference in itself. If you have bitcoin you think about their value not in bitcoin but in dollars. Libra could be entirely different, particularly in the last sense. If it really is based on a basket of currencies and is stable as a result it might not take long at all for us to refer to the value of things in Libras. A Libra could just be a Libra. That is a sovereignty game changer.
Libra could work precisely because it isn’t a cryptocurrency
But let’s put all this to one side. Stop thinking about Libra as if you were a cryptocurrency expert. Start thinking about it as a consumer and you can see why it might work.
We haven’t adopted bitcoin or any other cryptocurrency for all sorts of reasons. We can’t quite get our heads around the idea that it makes sense to use something invented by a very shadowy and entirely unidentifiable entity. We can’t really understand the way bitcoin is mined (using computers to solve increasingly difficult maths problems). Our minds boggle every time we read about how mining for bitcoin uses as much energy as mining for gold. Then there is the scalability, the volatility and the difficulty of storage and use. Baffling.
Libra could solve all these problems. Facebook might be a bit shadowy but at least it exists as an accountable brand. And while we might not trust it as a standalone backer, we all quite clearly trust the likes of Mastercard, Visa and PayPal (all also founder members of the Libra Association) with our money.
Libra could be a sovereignty game-changer
There is lots of detail still to come on how Libra will work. While we wait for some of that, it is true that there are things to worry about. One is privacy. Christina Frankopan, special projects lead at colony.io and a senior adviser to Lazard, questions the use of the metadata Libra will throw up, given that Facebook may be able to “triangulate this with other data sets to give them unprecedented knowledge of consumer behaviour and spending”.
If you are worried about the way financial apps might use data on your spending patterns, you should be really worried about how a vast social network morphing into a financial network might use it.
Anyone with your social media data can guess what you might buy. Anyone with your financial data knows already. Longer term there are the huge issues of what happens if Libra were to become genuinely successful. How does that affect national sovereignty?
Bitcoin has caused endless angst among central bankers but it hasn’t much bothered governments. That’s partly because, so far, it has been marginal stuff. But also because it hasn’t really acted as a currency. It isn’t a particularly effective or scalable means of payment, since almost no one actually uses it. It is a hopeless store of value – huge unpredictable swings don’t work for most buyers or sellers.
And it has not become a value reference in itself. If you have bitcoin you think about their value not in bitcoin but in dollars. Libra could be entirely different, particularly in the last sense. If it really is based on a basket of currencies and is stable as a result it might not take long at all for us to refer to the value of things in Libras. A Libra could just be a Libra. That is a sovereignty game changer.
Libra could work precisely because it isn’t a cryptocurrency
But let’s put all this to one side. Stop thinking about Libra as if you were a cryptocurrency expert. Start thinking about it as a consumer and you can see why it might work.
We haven’t adopted bitcoin or any other cryptocurrency for all sorts of reasons. We can’t quite get our heads around the idea that it makes sense to use something invented by a very shadowy and entirely unidentifiable entity. We can’t really understand the way bitcoin is mined (using computers to solve increasingly difficult maths problems). Our minds boggle every time we read about how mining for bitcoin uses as much energy as mining for gold. Then there is the scalability, the volatility and the difficulty of storage and use. Baffling.
Libra could solve all these problems. Facebook might be a bit shadowy but at least it exists as an accountable brand. And while we might not trust it as a standalone backer, we all quite clearly trust the likes of Mastercard, Visa and PayPal (all also founder members of the Libra Association) with our money.
Image: uncredited
