know your customer

Libra - Facebook's cryptocurrency

Facebook today announced Libra, a cryptocurrency that put Bitcoin and Ether on notice.  This is Facebook's latest foray into the financial services sector.  It is also an attempt to diversify the company's revenue streams away from advertising.  Undoubtedly, today Youtube and Facebook Watch will be awash with influencers shilling the same story: FaceBook shareholders will "get rich!" However, that remains to be seen. 

Note: the following comments are based on a preliminary review only.

Facebook is notably launching with existing players in the payments side of the financial services market like Visa and Mastercard.  Even Stripe and PayPal are along for the ride. Unfortunately, or fortunately, depending on your position on the value chain, there are no banks. Facebook's 2.3 billion monthly active users and WhatsApp 1.5 billion users is a formidable customer base to challenge the central banks for ascendancy.  

Assembled under the Libra Association, Facebook is positioned to lead the consortium that will manage the Libra Blockchain, Libra Currency and ostensibly the programming language Move. Calibra, the wallet will be maintained by Facebook and will undoubtedly be part of WhatsApp and Messenger. (If this feels like Facebook is copying the innovative "Swiss army knife" operating models of China's messenger apps, you are not wrong.) Will they offer smart contract capabilities like Ether, you ask? They reportedly will. 

Takeaways: 

Over the last several years, Bitcoin and Ether evangelists have turned blockchain into a religion rather than a trusted financial services product. Even with the counterfeit transaction volumes discovered at the exchanges, raise detailed questions, you were labeled an unbeliever.  Frankly, it a rather cultist way to bridge the startup Valley of Death, but let's think about the implications.

Fragmentation - We see continued fragmentation in the cryptocurrency world.  What interoperability is already available is unclear.   Unlike Bitcoin and Ethereum, Libra will be a permissioned blockchain meaning that only a small list of approved companies can run a node.  This means, for now, Libra is not decentralized. Consequently, transaction processing should be faster.  Depending on the success of Libra, the transition to permissioned to permission-less will be interesting.

Privacy and Security - With respect concerns about privacy and security in the wake of Facebook's previous lapses. With any financial product, there is a KYC process, i.e. Know Your Customer.  This means that users will need to provide government-issued ID before using the service.  How that process will be managed and maintained is also unclear.  Despite Facebook's pledge, Facebook currently drives the development process.  

Regulations - Financial services are governed by the laws in the particular jurisdiction the Libra is operating in.  As such, there are licenses and compliance factors which Facebook will have to bear. This will translate into fee percentages users will pay for using the Libra.  These costs are not unlike those paid for by other multi-national bank operating in various countries. That being said, crypto-currencies have a much higher bar to be legal in a country.  They are fundamentally in opposition to the fiat currency of a nation state. Nation-state treasuries make money from printing money. Governments manage financial crises through the contraction and expansion of the money supply.  So consumers will have to ask the question: In Who do you Trust?