Facebook’s Cryptocurrency Has an Important Advantage: Users

Ahead of the introduction of Facebook’s Libra, a hot debate in the cryptocurrency world has been whether a “permissioned” coin can really be called a “cryptocurrency.” The original cryptocurrency, bitcoin, runs on an open blockchain: Anyone can create transactions, run validating nodes, mine blocks, and propose amendments to the code that makes the system run. Libra, on the other hand, will be run by a consortium of multinational corporations, each ponying up $10 million for a seat on a governance council headquartered in Switzerland.

On the narrow semantic point, I favor using the word “cryptocurrency” for currencies that secure themselves via cryptography, i.e. public-private key pairs. Let other language describe administrative choices like “permissioned” or “open.” Libra is a permissioned cryptocurrency. That’s fine, though it has far fewer of the characteristics that made bitcoin revolutionary.

But the plan released today states several times that the goal is for the Libra network to become permissionless. No longer a corporate-owned and government-controlled network, it would become a global public resource like the internet itself. The Libra Association is to begin the transition to fully open within five years of the public launch of the Libra Blockchain and ecosystem. Mark your calendars.

On “the characteristics that made bitcoin revolutionary” — should one talk about bitcoin in the past tense? That depends on whether Libra eclipses bitcoin and all the other cryptocurrencies and utility tokens that now swarm the field. Over the past few years, bitcoin’s leadership has made technical choices that severely constrain its throughput in the interest of protecting its decentralization. That could be making the perfect the enemy of the good, or it could be what solidifies bitcoin as the gold standard in open cryptocurrencies (pardon the pun).

Meanwhile, Libra may have something that no other cryptocurrency has: users. Network effects are not just a thing in a currency. They are the first thing. Garnering any users was a feat for bitcoin, but BTC and the lesser cryptocurrencies have struggled to gain a user base beyond the fanatics who number in the mere millions. Facebook and its partners can reach billions, and with some sense for user experience, they are likely to build an exchange platform people will use.

Five years ago, during my tenure at the Bitcoin Foundation — a briefly important organization dedicated to advancing cryptocurrency — an outcome we sought from bitcoin was improvement in global financial inclusion. As the Libra white paper notes, some 1.7 billion adults globally do not participate in the formal financial services sector. The “unbanked” routinely suffer catastrophic losses of what wealth they can scrape together. That translates into tremendous lost opportunity to trade and to save, and, through savings, to start new enterprises, provide for the health and education of children, and so on. Where people can save and do business, they can contribute to a tax base that supports legal institutions and the rule of law. Societies in far-flung parts of the world may become more stable and orderly thanks to cryptocurrency, which will contribute to global security. A useful cryptocurrency has tremendous power to do good.

But it comes at some risk. Last week, people protesting a proposed law allowing extradition from Hong Kong to mainland China lined up to buy single-journey subway tickets with cash. With the Hong Kong government becoming more closely intertwined with Beijing and its infamous social credit system, they know that their payment systems can provide data to government monitors that may be turned against them.

Libra will be housed in a separate entity from Facebook, and transaction data will not be available to Facebook’s advertising systems — this, emphasized in a briefing I received last week. But Libra will also be compliant with the substantial financial surveillance requirements of the Bank Secrecy Act in the United States and similar requirements promoted and coordinated globally by the Financial Action Task Force. “Know Your Customer” and “Customer Due Diligence” are euphemisms for tracking what people do in case it may be useful later for law enforcement. The “travel rule,” promulgated by the US Treasury Department’s Financial Crimes Enforcement Network, requires financial institutions to share account holders transaction details among each other (above certain thresholds) so that transactions can be tracked. By unifying global payment systems, Libra may unify and strengthen global financial surveillance, which is not an unalloyed good.

There are many other fascinating dimensions to a cryptocurrency with an installed base of users potentially in the billions. The Libra will be a “stablecoin” backed by a basket of major fiat currencies. As an amateur monetary economist, I’m interested in what happens when one of the lesser currencies in the basket starts to inflate and people find that their Libra coins are maintaining value. They may pour their money into Libra and hyperinflate their domestic currency. Then the next weakest fiat currency might go.

This all might be concerning, and it may cause significant dislocations, but the status quo in payments and currency is very poor. Whatever results from stirring the currency and payments pot is likely to be better than what we have now. We might just end up with a secure, privacy-protective internet of money.