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Perspectives on Ca-Libra # 1: getting rid of three smokescreens..

Last week the world witnessed the announcement by Facebook of Calibra, a digital currency wallet and company. The wallet holds Libra, a virtual currency, with the idea to be used globally. Its distribution and use will be further promoted, organised and executed via an association of partners, called the Libra-association. The information pack (download here) also outlines more technical details on programming languages, future plans and committment to regulatory compliance.

As the Libra-initiative can be viewed from many angles, I plan to write this series of blogs and label them as perspectives. The very first challenge that exists, when discussing the Ca-Libra virtual currency initiative, is to separate fact from fiction and to be precise in terminology. That is why, over on my blog, I seek to get rid of the three biggest smokescreens that we were facing this week. This e-mail is a brief summary.

Smokescreen #1: libra association is not an ecosytem but a payment association with added functionalities
To blow away the first smokescreen, let's analyse the difference between the old Facebook e-cash or e-money with fiat currencies and the new Facebook libra, as distributed by Libra Association.

What we can see is that Facebook seeks to move the fiat-currency of its e-money system out of its direct control and responsibility as an issuer. Facebook Payments Inc is currently the entity that is responsible and guards all the relevant rules with respect to working with the e-currency. But in the new construct Facebook Calibra is merely one validator that can use the Libra-system under open source rules. So we see the fiat-e-currency companies of Facebook stepping aside and a new Libra association entering the playing field. At the same time, the technology shifts from in-house proprietary systems to an open-source codebase in the hands of no one in particular.

Effectively the Libra association is a the manager of the governance and operational arrangements and activities that come with using the virtual currency Libra and participating in the Libra scheme. This Libra scheme is a private and commercial arrangement which:
- defines a unit of account for a new virtual currency: the Libra,
- defines the asset mix that backs one currency unit,
- lays out the distribution and management rules of the currency units and reserve funds,
- lays out commercial rules and does a private placement to further promote the use of the Libra by giving them away (for free or at a discount).

The Libra association itself will be steering future technical development and is charged with the project goal to move the whole infrastructure towards a permissionless setup. This is however practically impossible (as these associations act with oil-tanker dynamics) but that brings us to the next smokescreen.

Bringing the currency to the public or ducking the issuance responsibilities?
Of course one could frame the above shift of roles as bringing a currency to the public. Facebook is however dumping its core-responsibilities with respect to shaping and operating a currency-system and moving a lot of activities to an ill-equipped new Libra association with no track record at all.

While Calibra states that it will comply with all relevant legislation, we can see that the actual information of the Libra Association in this respect is pretty thin. They issue a currency-like digital token/record but do not explain which legal regimes would apply. Also their actual claim as whether they are a not-for-profit organisation does not align fully with this twitter thread outlines that it is a regular company with wider statutes.

Smokescreen #2: Libra is not a blockchain, not a cryptocurrency but a digital virtual currency /financial instrument
It was fascinating to see that the carefully crafted and prepared introduction of the Libra sought to position it as blockchain and as a cryptocurrency. This creates a lot of noise. Also, the use of similar words for different concepts and organisations is confusing.

We should distinguish between:
1- Calibra, the organisation, a 100 % subsidiary of Facebook, acting as a validator node,
2- Calibra, the branded digital wallet developed by Calibra to carry the Libra virtual currency,
3- Libra, the digital currency that will be in the Calibra wallet
4- Libra, the reserve pool of assets that backs the digital currency,
5- Libra Core, the Network or 'blockchain' that forms the core operating technology for clients and validators,
6- Move, the programming language developed for the Libra Network.
7- Libra, the association governing, promoting and executing the virtual currency system,
8- Libra members, big commercial players that may join the Libra association, provided that they are a validator.https://moneyandpayments.simonl.org/2019/06/perspectives-on-ca-libra-1-first-we-get.html

What struck me in the communication is the flagrant re-definitioning by Facebook of the concepts blockchain and cryptocurrency. Facebook really wants to be seen as doing some cryptocurrency stuff. But in reality it isn't. Their own technical papers confirm that there is no blockchain in sight and their claim that it is a cryptocurrency is pretty flawed. I would argue that without a proper blockchain, it is impossible to have a native blockchain cryptocurrency (but do read the blog itself for the whole explanation).

Facebook cloaking its plans in cryptoterms,but why?
Let's face it. This whole complex open source, cryptocurrency story that Facebook has published is not necessary. If Facebook Payments Inc or Facebook Ireland wishes to change its currency mechanism towards a different setup it could do so itself. Why is there a need to involve other stakeholders with a trendy and hip storyboard on decentralisation, blockchains, cryptocurrencies and such?

It can't be a money issue. Facebook has sufficient resources to fund the whole exercise itself. And the quality of the exercise could then convince other commercial partners to join. So why the need to step out of its digital currency issuing role itself?

To me it is pretty clear that Facebook seeks to move up in our lives. Doing our financial business is not enough. It is all about entering our mind at a deep level. At the fiat currency level. We should think prices in terms of Libra, not in terms of fiat currency. And there is a good power reason for it. Because as long as Facebook uses digital fiat currencies it can be under the rule of the government that issues it. Now, by having a basket of currencies, Facebook can kick out currencies/countries if need be. State regulators and supervisors lose their power.

In addition, Facebook chooses to limit its own role and hide behind am Swiss association, to cover the fact that they don't want to take the responsibilities that come with issuing a worldwide association. They are suckering/forcing partners into joining this programme, without alerting them to the obvious violations of competition rules that may arise. They leave out all mentions of safeguards and contractual arrangements that can aid in ensuring operational integrity for this worldwide currency. Rather they throw the technology in the public domain, knowing well that this means that it's use cannot be fully controlled.

Smokescreen #3: Libra is not a charity exercise that seeks to operate a public good but a commercial enterprise
A huge amount of effort has gone into convincing the public this week that Libra is all about helping the rest of the world. Getting more inclusive finance. Making payments faster, easier and such. It is striking that these statements mirror the claims that originally come from the Bitcoin community or from the Fintech community.

The public good narrative: unbelievable coming from Facebook
What struck me most, coming from Facebook as a centralised company that is not interested in respecting democracies and laws written by those democracies, is the sketch of opportunities in the White Paper. And do have a look at the phrasing on public good.

Given that the design of the Libra association and its constituency is far below the usual standards to be expected from payment schemes, you can imagine that I was unable to reconcile these laudable beliefs with the actual proposition.

If you truly wish to create a new public good, a new worldwide currency, it is not impossible to deliver this with private sector entities. There is a whole range of public policy theories (delivery of universal services or service of general interest) that can help out here. But putting the richest, biggest enterprises of the world in one room, to distribute a world currency/investment proposition without proper safeguards or recognition and qualification of the activities of the issuing association is not the way I would go about.

It is therefore no surprise that US politicians immediately responded and called for a moratorium on the further development of the project and hearing in parliament. And some days after the release, the regulators diplomatically voiced their thoughts.

What is it then, to be exact?
If we blow away the smokescreens, what is left is the following qualification, which I will further detail in next posts on my blog.

Bottom line: Facebook have chosen to use a derivative/financial instrument to facilitate making payments on the web. It is a bit of a complex idea, as they don't use e-currencies, but it can be done. In the Netherlands for example we had at some point the prepaid purse scheme Chipknip using the legal construct that the consumer barters an actual activity (performing the steps to execute the administrative transaction) as payment in kind for the goods. So using the payment in kind could be done.

It is however quite another thing to first make up a selfinvented currency, which effectively is an mini-investmend fund and then use it to do payments. This means both payment and securities legislation applies, as well as the relevant legal frameworks for consumer protection and competition. The only positive effect of this, is that this will invite sufficient supervisory scrutiny for the activities. But it doesn't seem to be the smartest business decision. Just issuing a facbook USD stablecoin would have been much easier.

My qualification is therefore:

Libra is a privately issued and distributed digital and virtual ‘currency’, that is intended to function as a means of payment.
It is not a true currency because its actual composition/counter value is a basket of fiat-currencies and financial instruments.
It is not e-money as the Libra is not ‘monetary value’.
The digital value qualifies as a financial instrument (a mini-participation in an open ended investment fund) and is used as in open source payment instruments for payment and acquiring.
Libra validators act bots in a distribution intermediary role and as the providers of payment services.

I leave the result for you to ponder and thank you for bearing with me in this long e-mail.
Up next I expect blog 2 to be about EU-definitions and legislation.