TLDR. Will the Blockchain Economy be acquired by the Facebook Economy? Tuesday’s announcement by Facebook ranks as the 3rd big event in the 10 year history of the Blockchain Economy (the first two being the Bitcoin and Ethereum white papers in 2009 and 2014).
This update to The Blockchain Economy digital book covers:
- The biggest losers will be global banks
- Move will get a lot of traction with developers (despite many negative technical reviews)
- We have all contributed a lot of free brainstorming and market testing for their future product.
- Libra is a stablecoin with unknown constituent parts
- Facebook’s delicate dance with regulators
- They have brilliantly coopted the regulated Legacy Finance world as Nodes
- Facebook will ignore all the early adopter howls of protest because they are going direct to the mainstream
- The Calibra wallet will probably drive mainstream adoption of Bitcoin
- There are lots of opportunities for agile entrepreneurs but never forget who owns this playground
- XRP just became a lot more risky and be careful investing in ETH
1. The biggest losers will be global banks
Facebook Libra will obliterate the bank’s advantages in three ways
- A Stablecoin switchboard is vastly more efficient than today’s interbank foreign exchange market. What I mean by a Stablecoin switchboard is that all currency prices are quoted against the Libra Stablecoin price. Oops DB!! This comes at a horrible time for Deutsche Bank (DB) which many think will be the next Lehman due to their massive derivatives exposure. One area of strength for DB amid all this turmoil is their dominant position in the today’s interbank foreign exchange market which will now be disrupted by the Libra Stablecoin switchboard.
- Facebook has a global footprint without any of the overheads of global banks. I observed how global banks were replacing the correspondent bank network at SIBOS Geneva 2016. If you have invested lots of money over many decades building a physical branch network around the world, Facebook’s global reach looks hugely threatening. This is big threat to banks such as HSBC and JP Morgan. The latter created JPM Coin specifically for payments across the JPM network.
- Libra eliminates the need to use the banking system to move money. You move Libra and then either pay in Libra or convert to your local currency via the Stablecoin switchboard.
David Marcus, the very smart leader of this part of Facebook, has been super articulate and on message in interviews. The only point where he looked a bit uncomfortable was when asked why no banks participated. Grab your popcorn folks, this one will be epic.
2. Move will get a lot of traction with developers (despite many negative technical reviews).
Move is the programming language on the Libra blockchain. There is much commentary that it is not as flexible and open as programming on Ethereum or other similar open consensus networks. Despite these negative technical reviews, I predict that Move will get a lot of traction with developers for two reasons:
- Move is safer. An inexperienced developer is less likely to make a rookie mistake using Move that costs a lot of money (eg a DAO like hack).
- Move brings you scale aka more users today. Why do you program mobile apps in IOS? Technical excellence is less important than the fact that Apple sells a lot of mobile phones.
3. We have all contributed a lot of free brainstorming and market testing for their future product.
Myself included – no, Facebook did not pay me for this analysis.
Tuesday was the start of Step 3 in a 5 Step dance
Step 1. Recruit David Marcus. This happened in 2014. I wrote about Facebook Ambitions in Fintech at that time and correctly identified the direction of travel ie where the puck was headed. How long they spent in planning took me by surprise but now, seeing how well they have planned it and the scale of the ambition, it makes sense.
Step 2. Create a plan. Facebook has spent 5 years on this plan. It is a) very well thought through b) existentially critical to a $500 billion market cap company.
Step 3 Run it up the flagpole. This what they did on Tuesday. All of us have given Facebook a ton of well considered feedback aka free market testing and brainstorming and we will continue to do so in the weeks and months ahead.
Step 4. Adapt based on this feedback. The feedback already includes howls of protest from privacy advocates. Crypto folk are certainly privacy advocates; so we can expect this phase to be very, very noisy. Facebook will have planned for this. Based on past Facebook launches, we can expect them to:
- first, take one step back. Facebook issues a sort of apology and it appears as if privacy advocates win.
- then, take two steps forward. A little later, Facebook quietly does what it intended to do in the first place, tweaking it to allow for the step back.Watch the $FB stock price – that will be the signal among all the noise. If investors believe that Facebook has no control over private data, they will sell the stock.
Step 5. Launch & execute in 2020
4. Libra is a Stablecoin with unknown constituent parts.
Critical to their very well thought-through plan is the use of a stable cryptocurrency in the Stablecoin switchboard that I described in Takeaway 1. Interestingly enough, considering how critical this is to their plans and how much detail there is in other parts of the white paper, critical details, such as what Fiat currencies are in the Libra currency basket, are missing from the white paper.
That is why Daily Fintech created the GOSCI – Global Open Source Currency Index as an independent volatility benchmark for Stablecoins. If a Stablecoin claims low volatility, one should be able to measure that volatility against other Stablecoins.
5. Facebook’s delicate dance with regulator
Facebook’s delicate dance with regulators has three clever pieces:
- Self sovereign ID. Page 9 of the white paper says “We believe that a decentralized and portable digital identity is a prerequisite to financial inclusion and competition”. Governments have historically controlled Identity artefacts such as passports, work permits and drivers licenses. The Facebook deal with Governments might be to allow Facebook ID if that meant that only real ID people can use Libra (and acceptable to users if the ID is controlled by user ie it is self sovereign ID).
- Giving regulators control of the on and off ramps. This is a trojan horse for regulators. If Libra becomes an independent Unit Of Account (get paid in Libra and pay in Libra) the on and off ramps will become relics of history.
- Using regulated entity partners to provide customer facing services (such as on and off ramps). This means Facebook does not need to become regulated as a financial entity itself.
Facebook’s delicate dance with regulators over Libra needs to be seen within the wider context of Facebook being regulated as a dominant social media platform. They can now say “see, we are not dominant within the wider market of financial services, so a break up should not be on the cards”.
6. Facebook will ignore all the early adopter howls of protest because they are going direct to the mainstream.
Like most crypto early adopters I am a bit of a “privacy nut” but I am under no illusions that my opinion will matter to Facebook. They know they cannot meet the 5 five pillars of open blockchains as defined by Andreas Antonopoulos:
- censorship resistant.
Without those 5 pillars you will never win over the crypto early adopters. With most launches that would be game over, as the only route to market is via the early adopters. Facebook is taking Libra direct to the mainstream users who don’t give hoot about those 5 pillars.
The irony today is seeing crypto early adopter cypherpunk libertarian types happily saying that Libra will be stopped by regulators.
7. The Calibra wallet will probably drive mainstream adoption of Bitcoin
I say “probably” because this is dependent on Calibra wallet allowing coins other than Libra. I think this will happen because a single coin wallet will not be popular unless Libra is the only currency/coin we ever use. If Calibra wallet allows coins other than Libra, it will introduce millions of new users to Bitcoin.
8. They have brilliantly coopted the regulated Legacy Finance world as Nodes.
The list of partners leads people to a conclusion that Facebook can only win, that it is game over. Yet many of the partners have more to lose than to gain. For example credit card networks will lose if payments moves to crypto and VCs will lose if Facebook has too big a hold on crypto innovation and value creation. It remains to be seen if these are PR partners or real partners. In a PR partnership, both parties get something but don’t have much skin in the game.
9. There are lots of opportunities for agile entrepreneurs but never forget who owns the playground.
Libra is like Apple creating the Apple Store, a defining moment full of opportunities for agile entrepreneurs. As long as you never forget who owns the playground, your business won’t be obliterated when/if Facebook changes the rules.
10. XRP just became a lot more risky and be careful investing in ETH
Ripple wants to enable cross border payments via banks. Some banks will run into the arms of Ripple because they are scared of Facebook, but what was a risky speculation pre Libra (can Ripple persuade banks to use XRP) just had another layer of risk added (if banks can be persuaded, can they beat Facebook?).
The ETH Ethereum story is more nuanced. The total openness of Ethereum means that there maybe use cases nobody ever dreamed of (ICOS and CryptoKitties was not part of Ethereum plan in 2014). Yet a platform like Libra can attract lots of less experienced developers who want to win over Facebook’s 2.4 billion users.
Context & References
Facebook Ambitions in Fintech (note, from October 2014)
I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post.
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