Last evening Facebook released an extensive whitepaper detailing its new ‘Libra’ cryptocurrency.
Cryptocurrencies—like the original, Bitcoin—create a secure, trustworthy and verifiable technology to maintain the entries within an accounting ledger. They’re secure because they use cryptography—similar to what your web browser uses when talking to your bank. They’re trustworthy because transactions are subject to a consensus-based approval of everyone using the currency, so no one can cook the books. And they’re verifiable because anyone can come along and inspect those books—if you claim you have a certain amount of cryptocurrency, that claim can be proven (or disproven) easily.
Invented as a solution for online payments, individuals have been trading in Bitcoin for a decade. But Bitcoin is slow—it can take ten minutes to ‘settle’ a transaction. (Imagine waiting that long at the cafe to pay for your latte!) Furthermore, Bitcoin holders treated it like a new asset class (via a mathematically enforced scarcity: only 21 million Bitcoin can ever exist) so Bitcoin appreciated in value well beyond any intrinsic utility as a facilitator of payments. Proving the theory of cryptocurrencies, Bitcoin failed the real-world-use case.
Cryptocurrencies arrived in 2008, a silent partner to the largest technological revolution in history—the smartphone. A decade later, and four billion of the planet’s seven-and-a-half billion people own a smartphone. This universal tool for communication, coordination and commerce has become the foundation for 21st century—so much so it’s become difficult to remember our lives before the smartphone.
For all its utility, the smartphone has proven difficult to use in a commercial context. Credit cards can be used to pay for a ride or something off eBay, and that’s been ‘good enough’ for most Australians (and Americans and Europeans) most of the time. But credit cards reach less than a billion of the four billion people using smartphones. Although there are far fewer ‘unbanked’ than just a few years ago—thanks to Narendra Modi’s efforts to get a billion Indians their own bank accounts—these individuals do not have credit cards, nor likely ever will. Right now that means none of them can trade using their smartphones, because they don’t have any payments system that works on their smartphones.
Facebook’s Libra has been designed to precisely fill the gap between the unrealised potential of the smartphone as a universal trading platform, and the need of billions to be able to trade. Facebook needs to solve this problem if it wants to be able to grow into the future—beyond advertising, into commerce.
The majority of Facebook’s users live in Indonesia and southeast Asia and India and Africa—areas of the world where Facebook is synonymous with the Internet. Facebook’s apps dominate the attention of smartphone users. Two billion people use Facebook’s properties every day—Facebook Messenger, WhatsApp and Instagram—where it is accessed almost universally on smartphones. Facebook has both the platform and the reach to successfully translate that attention into commerce—it only needs a payments solution that works for people who do not have credit cards.
For half a decade, every time I’ve found myself in face to face with a central banker or financial system regulator, I’ve suggested (and occasionally begged) that they should create a cryptocurrency—a digital representation of their state currencies. I pointed toward the growing shortfall between the payments system already on offer and the needs of billions of smartphone owners. A need that would only grow more pressing over time.
It hasn’t happened—central bankers are conservative, and consider cryptocurrencies a bit too ‘exciting’ for widespread adoption. That failure to innovate has created the opening into which Facebook has walzed, Libra in hand, ready to fix the fundamental problems of trading in a hyperconnected world.
Libra has been developed as a ‘stablecoin’—whose value is pegged to a basket of national currencies—and means both that it has no particular allure for investors, and assures businesses that payments made in Libra will be worth the same tomorrow as yesterday. Using Libra does not present a foreign exchange risk—something that might frighten away the tens of millions of sole traders and small businesses who can now use Facebook as a trading platform.
Because that’s the big play here. In a stroke, Facebook has both the reach and the payments infrastructure to become a global rival to eBay, Alibaba, and Amazon—only it will be able to reach billions who never could trade on those platforms, hindered by the need for bank accounts and credit cards.
Regulators in the US, France and the EU have already pronounced that they’ll work to block Facebook and Libra—but those regulators are operating within national boundaries—and catering to populations who already have access to sophisticated financial instruments. Facebook doesn’t need the US or the EU to make Libra a success. Facebook can focus Libra exactly where they can not follow: the billions of unbanked and underbanked who need a payments system but have never had one.
Although I feel deeply uneasy about Facebook disrupting one of the sovereign functions of the nation state—to issue and manage its currency—I can also see exactly why it happened. Nations need to innovate within their financial institutions just as much as any bank does. Where they don’t, they leave the field open for new players to use technology innovation to their advantage. The central bankers have done this to themselves: Libra is a response to their lack of responsiveness.
On the bright side, about half the planet now have access to a payments platform and a range of financial services that will be far more sophisticated, efficient and capable than anything on offer in the ‘developed’ economies of the world. This should unleash a decade of unprecedented economic growth in the developing world, as it builds out new commercial opportunities, enabled by Libra.
Libra is a very big deal. Possibly the most important technology to come along since the smartphone. We can thank Facebook—and risk-averse central bankers—for that.
Libra will transform the daily lives of billions, and it will change the way all of us use money. Forever.