Cryptocurrency

What We’ve Learned From Libra

PayPal officially pulled its support of Facebook’s Libra initiative after it no-showed at the Libra Association meeting last week in Washington, D.C. PayPal’s endorsement of the Libra mission, signed by CEO Dan Schulman when Libra was officially unveiled in June, has also been removed from the Libra site.

We’ll know today how many others may follow. According to the FT, members have been asked to sign a membership declaration by today. It wouldn’t surprise me if we see more follow PayPal’s lead.

Before the launch of Libra a few short months ago in June of 2019, the 28 (now 27) founding members of the Libra Association committed nothing more than to show up at a meeting to hear more about Libra’s plans at some point in the future. A $10 million payment to remain a founding member would come sometime after that meeting took place – before the end of the year, it was said.

Last week’s meeting was presumably an important milestone to keep the 27 remaining founding members in the boat –and motivated enough to sign that declaration and later, open their checkbooks to fork over the $10 million down payment on the Libra vision.

In addition to getting an update on Libra’s progress (now four months after its public debut and reaction), it is likely that Libra executives were pressed hard last week on how it will address the concerns of global regulators – who have largely thrown up the idea that Libra, and Facebook, even getting close to running a parallel global payments network and monetary system using its rails and “currency” is a big non-starter. Questions about regulatory compliance related to money laundering were reported to be the reason for PayPal’s exit.

What has happened four months after the official launch of Libra was highly predictable – and a path that I laid out in the 10 pages I published the day the news broke.

Instead of piling on, though, I’d rather be constructive and lay out what we’ve learned from the Libra experience that may be helpful to other innovators who have big ideas to change the world.

And how everyone can use those lessons to reliably predict failure for future payments efforts.

One: Solve A Solvable Problem

Bloomberg published an Index last week that measures the relative wealth of people based on a ratio of assets to liabilities. The Index goes from a -2 to 11.

There are two people in the 11th Wealth Index bracket – Bill Gates and Jeff Bezos. Both have a net worth of $100 billion-plus – and, the Index says, have enough money to do just about anything.

There are 150 in the 10th bracket – those with a net worth of $10 billion-plus who can do lots of things, too, like buy professional sports teams.

On the other end of the spectrum are the 1.5 billion people in the -2 to +2 net worth bracket, whose wealth ranges from having a penny to $100 in net worth. As Bloomberg reports, these are the farmers in developing economies and the simply “dirt-poor” people who have no net worth because they have no money to do anything with.

These are the same 1.5 billion people that Libra said at launch it intended to help.

Access to smartphones is giving people unprecedented access to financial services, Libra recounted at launch – and the Libra network and currency, coupled with the Calibra wallet, would accelerate and democratize access to those services.

As noble and inspiring as this sounds, as I wrote in June, there’s a pretty huge flaw with that storyline.

The 1.5 billion people targeted by Libra as the unbanked without access to mainstream financial services are largely those living hand-to-mouth every day. Before people need a digital wallet in which to store their money, they need to have the money – and food in their bellies. Before they get a phone that supports a digital wallet, they need to have money to buy that phone and purchase airtime.

Before they can gain access to the financial services mainstream, they need a way to make enough money to live.

Some innovators the world over are solving the real problems of these 1.5 billion people, as well as the very poor people in the next level, by helping them make money.

Whether it’s ride-hailing platforms like Grab or Gojek; delivery aggregators like Zomato; eCommerce marketplaces like Vesicash, Flipkart or Jumo; supplier-centric FX trading platforms like Verto FX; digital platforms that help farmers sell their crops more efficiently; or microlenders who give sellers a hand in making and selling their crafts on a global marketplace, there is now a groundswell of innovation that gives those at the lowest levels of income and wealth in developing economies a shot at improving their standing.

Telcos, banks and PSPs, and global remittance platforms are also providing those 1.5 billion people with bank accounts and digital wallets, enabling them to accept payments in a familiar currency.

Libra’s mission and the network targeted a huge number of people who have problems and need the world’s help, but it didn’t give them what they really need to solve them.

Two: Be Clear About What You Are

The launch of Libra ignited a global debate over the role of cryptocurrencies in payments and financial services.

Some central bankers have expressed interest in creating digital fiat currencies – and one country, China, says it’s ready to launch its own version of Libra.

Others have used the occasion of Libra’s launch to further elevate the threat of money laundering and the potential for financial crimes – with crypto specifically and cross-border money movement more generally.

Still others are trying to sort out the potential value of crypto in streamlining the movement of money between countries and bank accounts, or in protecting people living in countries with corrupt governments from currency manipulation and runaway inflation rates.

But nearly all of them have raised big red flashing cautionary flags over the notion of a single global currency, Libra, running over new payments rails, and into a Facebook wallet called Calibra. The potential for an association of private companies, conceived by Facebook, to operate a network and a currency that could usurp the power of central banks and governments to make fiscal and monetary policy has proven a bridge too far for them to cross.

David Marcus, Facebook’s chief Libra architect and now CEO of the Calibra wallet that will store and manage the Libra currency, has attempted to assuage regulators’ concerns by telling them Libra won’t move forward until they are comfortable.

As part of that narrative, Marcus recently told regulators that Libra really isn’t a new currency, but that it is a “better payment network utilizing national currencies to deliver meaningful value to consumers all over the world.”

Except that’s not what the Libra whitepaper says.

The first two sentence in that whitepaper goes like this:

“Libra’s mission is to enable a simple global currency and financial infrastructure that empowers billions of people. This document outlines our plans for a new decentralized blockchain, a low-volatility cryptocurrency and a smart contract platform that together aim to create a new opportunity for responsible financial services innovation.”

Taking the Libra Association at its word, Libra is a new currency whose value is pegged to a basket of low-volatile currencies like the USD, the euro and the pound sterling managed by the Libra Reserve. It runs over a new network also called Libra, managed by the Libra Association, whose membership now seems a bit in flux.

You really can’t blame the regulators for being nervous, and maybe even now a little confused. Particularly when it’s not at all clear that the people Libra says it launched its network to help – those 1.5 billion people with less than a dollar in wealth – are its intended targets.

Especially when the only other example of a global cryptocurrency running over new rails at scale is bitcoin – a crypto that every cybersecurity expert says has ignited cybercrime and funded efforts by authoritarian states to disrupt the world’s financial and political systems.

It was a tough sell at launch. Four months later, it has become even tougher.

Three: Don’t Try to Boil the Ocean                                                                      

One of the things I pointed out in my June piece was how everything about Libra and Calibra was new – and that adoption and ignition depended on every single stakeholder being okay with an entirely new way of moving money between people, globally.

Users had to be okay with downloading and setting up a new digital wallet, and using a new currency they’d never heard of from a new network called Libra (which they had also never heard of). And when sending money to someone else who really needed to get it, they had to trust that the service was going to be better than what they used today, like Western Union, Xoom, MoneyGram, M-Pesa, GCash – you name it.

And the 1.5 billion people with barely any money to their names, who may not be financially literate or even literate at all, would have to trust their limited funds to a network they’ve never heard of – when they need every penny just to stay alive.

Central bankers have to be okay with the notion of a new global financial network moving a new crypto that is detached from their own fiat currencies and that could, at scale, compromise their ability to control their fiscal and monetary policies.

Regulators have to be assured that Libra isn’t a new way for bad guys to transact. And both have to look past the idea that Libra and Calibra – the network construct, the code, the initial digital wallet, the currency – is the brainchild of the social network that is already in their crosshairs for a raft of privacy and user data issues. And the fact that Facebook’s influence, long-term, will be muted by an association whose committed membership as of today seems a bit uncertain.

Card networks and banks have to trust that Libra and Calibra will somehow end up being good for them at some point in the future, rather than a Trojan horse.

Digital wallet providers have to be okay with the promise that they’ll be able to participate, once Calibra gets off the ground and beyond the initial P2P use cases that many of them already enable today.

And everyone has to be convinced that, despite all of this, it’s collectively worth putting $1 billion into the Libra Association’s bank account to get it off the ground.

The world is a big place, and igniting a new global financial services network is expensive, time-consuming and daunting. There’s a reason there are only a few global card networks or global FinTechs with the scale of a PayPal in the world.

The decision to take on the world – and payments – in this way is puzzling, given Facebook’s success in creating, launching and scaling a global social media and advertising network. Facebook first ignited its social network by going campus to campus and building a base of users and their friends. It used that critical mass to open up the network to anyone who wanted to invite a friend to join. Only years later, once that critical mass was achieved on a global scale, did Facebook open its network to advertisers as a way to monetize its user base.

Libra took the position that the financial system is broken and that the cross-border movement of money is too expensive and clunky. Fixing it required a total overhaul, the creation of a new network from scratch that would reinvent the process.

Except the global financial system isn’t broken – even though everyone agrees it could be better. People in developing economies can get money from senders in minutes, via mobile money accounts or in cash. Innovators in developing economies are using existing rails to ignite digital wallet schemes, including what wallet providers are doing to leverage the card rails to make their own wallets global and interoperable for their users.  Alipay leveraged existing bank and card rails to scale. WeChat Pay leveraged its social network and existing bank and card rails to do the same.

New platforms have many points of failure, but time is probably their most potent threat. The longer it takes for critical mass to take hold on any side of the platform, the less likely it ever will.

Libra has too many moving parts and nothing as a cornerstone to give it a plausible toehold to ignite, at least in the near term. Libra leadership say that they are patient and are in it for the long haul. In the meantime, innovators across the world will continue to innovate, use existing rails and networks to do so, and create the interoperability built on trust to solve the payments problems that create friction for all of the people in the world.

Four: Timing Is Everything

Let’s suppose that all of these challenges could be overcome, and that Libra as a concept was just the thing the world needed to reinvent the movement of money between them. That would mean Facebook bringing Libra to market as its creator, initial funder, network and currency architect in June of 2019 was a great idea – but one that launched at a really, really bad time.

In the leadup to Libra’s launch, Facebook and its leadership had been grilled by just about every regulatory authority in the world over its privacy, its user data violations and its role in enabling the Russian meddling in the 2016 U.S. presidential election. If trust is the cornerstone of financial and payments systems, Facebook – and thus Libra – was at an all-time low.

I mentioned this notion of bad timing to several payments execs at its launch since I was curious about why Facebook would risk putting forward such a bold notion at what was obviously such an inopportune time. Some posited that it might be a way for Facebook to prove that it had the best interest of the world’s people at heart by tackling the big problem of financial access and helping people at the low end of the wealth index become part of the financial mainstream. If that, was in fact, their plan.

But that was then, and this is now. If anything, Libra seems to have only stiffened the regulators’ resolve about its intention, along with its ability to preserve the safety, soundness and integrity of our global financial system.

So now what?

That will depend on how many of the original Libra Association’s founding members remain, as each is likely weighing its continued support of Libra against the risks of being caught up in regulatory battles. Few may be keen to meet with regulators and to have their own important global payments initiatives hijacked by conversations about their support of Libra. More important than Libra’s success, as interesting a concept as it might be, are their own reputations and a desire to advance their own global payments innovations.

One possibility is that Facebook could turn Libra into Facebook Credits, version two, a closed loop network operating with its own ecosystem. When Facebook first announced its intentions to create its own global payments network, I wrote about the failure of Facebook Credits in 2010 to ignite due to a lack of liquidity. When it was launched, Facebook Credits aimed to give users a way to buy and use that digital currency to play games on the Facebook platform. As games moved off of Facebook, so too did users’ interest in buying Credits. No place to spend Credits meant no reason to buy them. Credits folded.

Since then, commerce on Facebook has been a work in progress, not going much beyond advertisers using payments credentials to buy ads. If more Libra Association members bail, maybe Libra will decide that its best bet is to become a payments network inside of Messenger or Facebook, to enable commerce between the people and merchants already there. Messenger’s strategy of using chatbots to ignite commerce on that platform has also met with lackluster response, and Facebook may think Libra could give it a fresh start.

Anything’s possible.

But creating a payments network on Facebook means first creating a commerce platform inside of it. That means getting enough merchants to sign on and agree to get paid in Libra currency. And getting enough users on board who are comfortable using Libra currency to buy things – users who probably aren’t the 1.5 billion people who Libra initially said it aimed to help.

And even if they are, all of whom would have to trust Facebook with their money when many other familiar and trusted alternatives for shopping, and payments already exist, globally and within their own domestic market – all of which begs the question: why not use existing rails, like Amazon, WeChat, and Alipay have done, to get commerce off the ground?

Libra has performed one really great service — it has provided valuable lessons on what not to do to launch a new, global payments network.

If enough people take those lessons to heart, Libra will save entrepreneurs a lot of time and investors a ton of money.

 

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NEW PYMNTS STUDY: ACCELERATING THE REAL-TIME PAYMENTS DEMAND CURVE – NOVEMBER 2020

About: Accelerating The Real-Time Payments Demand Curve:What Banks Need To Know About What Consumers Want And Need, PYMNTS  examines consumers’ understanding of real-time payments and the methods they use for different types of payments. The report explores consumers’ interest in real-time payments and their willingness to switch to financial institutions that offer such capabilities.

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