At announcement, I read the white-paper and the accompanying documents. I then waited for people smarter then me to make sense of it (with some progress here and here). Then last week I attended the second OECD Blokchain policy forum where Bertrand Perez, COO and Deputy Managing Director Libra Association presented (btw, his was just one of many super interesting presentations that I will discuss in other posts). Despite all this, I still don’t get it.
The first thing to know is that Libra is both a blockchain and a cryptocurrency. As a blockchain, it is similar to Ethereum, in the sense that it has a scripting language that can be used to create smart contract. It could be used, for example, to manage people’s identity and data. I suspect that, following recent regulation and recent events, someone at Facebook reached the conclusion that owning a mountain of personal data can also be a liability. Moving some of these data (for example, everything that has to do with authentication) “to the blockchain” could be a way to reduce this liability. In any case, if kept open, it could become the central infrastructure around which several other services are built.
From the purely engineering viewpoint, once you have a blockchain the easiest thing you can do with it is building a cryptocurrency, which may explain why they started one. But what they produced is, from the economic viewpoint, something that makes no sense, at least to me.
To start, Libra is supposed to be a stable currency backed by a basket of currencies plus safe short-term assets. But this is a contradiction: the value of a basket of currency is by definition NOT stable. For example, take a basket composed by 50% US Dollars and 50% Euros. Because the EUR/USD exchange rate fluctuates, then the value of this basket will not be constant neither with respect to the dollar nor with respect to the Euro.
Whoever wrote the white paper is probably aware of this, which is why the volatility of Libra is compared to that of other cryptocurrencies. Indeed, Libra will most likely be less volatile than most cryptocurrency and hence should be preferred for everyday transactions to cryptocurrencies (which is not very informative: the only thing more volatile than some cryptocurrencies is ice-cream in the summer). But by this same logic, people in the US should prefer the US Dollar (in one of its electronic form such as Venmo) to Libra because the US Dollar is the most stable thing there is relative to the US Dollar. Similarly, people in Kenya (or in most other African country) should prefer electronic Shillings (via MPesa) to Libra. This it to say: there is absolutely no reason people should use Libra for everyday payment, outside maybe people living in extremely dysfunctional places such as Venezuela. And even there, these people will probably want to hold Libra rather than using it as a currency, which is what Libra promoters believe should not happen.
And then there is the most absurd claim of all: that Libra is a tool to foster financial inclusion. Now, a good chunk of my research is about financial inclusion. I have been to several places in Africa, and tried out various mobile money systems. And I can tell you: they are everywhere, in a way that is difficult to understand for people living in the “developed” world. For example, paying a bus ticket with your phone is just normal in many African countries, while it sounds like science fiction in most “developed” countries. It even works with old “dumb” phones. Of course, financial inclusion remains a huge problem, but not so much with respect to bringing electronic money to poor people around the world —-this is rapidly being solved via mobile money. The problem is providing these same people with some forms of savings accounts (i.e., something that generates an interest and can be used for long-term planning) and access to credit.
My takeaway is that whoever wrote the white paper has no clue about what “financial inclusion” is, and yet emphatically claims that libra will solve it. Furthermore, the whole thing is just plain illogical. Mobile money systems do not yet reach 100% of the population: for the poorest of the poor even a dumb phone may be too expensive. But then, how can a fancy, cutting edge, latest technology, blockchain based cryptocurrency reach those who are left behind by a system that works even on dumb phones?
So what is Libra (the currency)? Is it a severely flawed product? Or it is a perfectly fine product given its goals, which are however different from what officially stated? I have no idea, but I think regulators are right to be worried.