Facebook’s choice to issue a centralized, semi-anonymous, permissioned token (Libra) is puzzling. First, Facebook’s understanding of the concept of modern money seems ambiguous at best, this is because Facebook indicated that Libra will be backed by a basket of currencies and financial assets. While FIAT currencies have been backed by trust since the US left the gold standard in the 70’s; it is unclear why Libra would be backed by a FIAT basket. This may have been a marketing choice to paint Libra with legitimacy or it is a form of appealing to monetary authorities.
“Pegging Libra to a FIAT asset basket is meaningless and it would at minimum transfer volatility risk to the basket itself.”
There are important elements to consider when issuing currency, that Facebook and any other similar projects would need to first understand. They are as follows:
- Government Oversight: issuing a currency has been usually subject to strict government oversight to control supply and demand for the currency. Trying to avoid this would result in legal challenges for the issuer.
- Privacy and Tax Evasion: if Facebook wants Libra to be a true private token, Facebook would become liable for covering up incidents of Tax evasion, for example merchants and buyers can transact without charging sales tax. On a large scale, this will impair the ability of governments to effectively collect taxes in the Libra world. This effect will exacerbate the government’s pain from the lack of oversight on issuing currency.
- Currency Volatility: a global currency system is inherently unstable. Libra’s global approach will be faced with issues such as mobility restrictions, and price variations for product and services. Pegging Libra to a FIAT based asset basket is meaningless and it would at minimum transfer volatility risk to the basket itself.
Libra as a central issuing entity: Pros and Cons
There are many advantages to a central government entity issue and record currency transactions. Some of the most important advantages are: first, the ability to reverse transactions in case of an error. Second, the ability to return currency in case of void/criminal/un-authorized activities. Third, the ability to use the currency to pay for government services including taxes (government acceptance).
However, the advantages come with many drawbacks, central issuing entities usually face inflationary pressures due to market dynamics. In addition, a controlling central entity is an easier target for adversaries. Another drawback for users of a central issued currency is that the central entity can impose limits on transactions and establish requirements for approval for some transactions.
In order for any business to be successful in the long term and to deliver value to its shareholders, it must be built on a sound business strategy. As we mentioned before, Facebook always relied and still relies solely on advertisements at the core of its revenue model. This reality imposes an imminent risk of being disrupted or being replaced by the next big mainstream social ad technology. This would sabotage long term sustainability of the Facebook ad business, especially in the already crowded tech space.
There is no doubt that Facebook has an advantage of having a vast and sparse network, and owning personal data of millions. However, the company is still trying to prove that it can be a long term disruptive force like Microsoft and Alphabet.
“Facebook always relied and still relies solely on advertisements at the core of its revenue model.”
What can Facebook do?
From a strategy standpoint any tech company with a similar audience to Facebook should do the following when looking into currency business:
- Spend resources researching and understanding Cryptoeconomics.
- Trash a company branded project “Libra” and adopt projects like ETH and BTC.
- Introducing a wallet that allows exchanging any currency for ETH and BTC and transact on top of them.
- Invest in building useful currency tools that leverages network and platform to build Applications such as DApps that run on the ETH blockchain.
