Facebook Libra: What the regulators should do.

As expected, the US Senate and House hearings regarding Facebook Libra were not dissimilar and showed a strong bipartisan consensus. This consensus is anger, frustration, and distrust based on Facebook’s historical track record at handling user data along with the fact that the company has become in less than 15 years one of the ten most significant companies in the world. After all, the regulators perceive Mark Zuckerberg as Victor Frankenstein, who after having created a monster (Facebook), wants to create another one in another domain. And at this point, regulators would rather be in the situation of Captain Walton watching Facebook drifting away into oblivion rather than seeing Facebook’s leadership creating another monster.  

Day 1

[youtube https://www.youtube.com/watch?v=xUQpmEjgFAU&w=560&h=315]

Day 2

Even if these feelings are understandable and the opinions warranted, one can look at the Frankenstein metaphor as the wrong metaphor for technology. After all, technology only succeeds from trial and error, and if every person were not trusted because they failed, there wouldn’t be one successful entrepreneur. Why should Facebook be any different? After the hearing, we are still left with the two fundamental questions: is Facebook the right company to be leading a project like this and should Facebook be allowed to do this? 

Libra cryptocurrency mobile phone payment system

Libra (for more on Libra click here to download our whitepaper)  is a contender in the financial services space and tackles a very different but valuable problem: providing an affordable payment platform to the 1.7 Billion unbanked who have access to a cell phone not to a banking system. This is a BIG issue largely ignored by the current incumbents, which requires an entirely new infrastructure and business models, where Facebook can provide a significant impact with its installed base. So new thinking is required to develop this innovation and one approach is to use Blockchain technologies and cryptocurrencies.

Blockchain seems promising to a lot of people but is still immature, with many issues. For instance, the leadership at FedEx genuinely believes that it will transform distribution, but that it won’t happen overnight and will require collaboration and regulation changes. This led FedEx to start collaboration efforts and requests regulators to mandate blockchain for international shipping. 

The banking industry offers a similar landscape with JP Morgan leading efforts through Quorum and others organizing themselves around R3’s Corda. Both these enterprise blockchains are leaders in the industry with a broad ecosystem of 150+ participants across multiple industries in both the private and public sectors. In June 2019, Swift joined R3’s Corda to begin allowing blockchain firms to make use of its Global Payments Innovation (GPI) platform for near real-time payments. With Libra, Facebook has now involved itself in a technology that is not proven yet at scale, which requires collaboration, so the approach taken to tackle the problem is the right one and involve an infrastructure and business question. 

At the infrastructure level, Facebook took clear steps to ensure the Libra ecosystem was developed in alignment with the framework presented in the General Theory of Decentralized Applications (DApps). The theory contains four areas of criteria that an application must meet to qualify: 

  1. The application must be completely open-source, it must operate autonomously, and with no entity controlling the majority of its tokens. The application may adapt its protocol in response to proposed improvements and market feedback but all changes must be decided by a consensus of its users.
  2. The application’s data and records of operation must be cryptographically stored in a public, decentralized blockchain in order to avoid any central points of failure.
  3. The application must use a cryptographic token (bitcoin or a token native to its system) which is necessary for access to the application and any contribution of value from (miners/farmers) should be rewarded in the application’s tokens.
  4. The application must generate tokens according to a standard cryptographic algorithm acting as a proof of the value nodes are contributing to the application.

With what has been presented thus far, Libra follows the DApps and blockchain guidelines for building a permissionless blockchain. While Libra does not yet fully meet the guidelines as its  first step is truly to be permissioned based, there is no reason to assume that it won’t achieve such a goal. Facebook has the set ambition to transition toward a permissionless blockchain while maintaining sustainable business models across the board for the parties who are investing in the greater ecosystem. 

Facebook’s ability to lead Libra and gather a community around it will be a direct consequence of the trust it will be able to generate around this project. The lack thereof at the congress level is the reason for the heated exchange during yesterday’s hearings. Facebook has been able to attract already 28 recognizable names in the Industry including 2 of the savviest investors in Cryptocurrency and Dapps, Andreesen Horowitz and Union Square Ventures and the top payment processing companies like Visa, Mastercard and Paypal. As an active member of the open-source movement, Facebook understands what needs to be done fairly well. Furthermore, even Jim Zemlin, Executive Director of Linux Foundation, the driver behind Linux, highlights Facebook as a critical driving force behind open source. There are, of course, many examples of successful Facebook open source projects but also a lot of failures. Failures usually come when the community doesn’t trust a project or when the project doesn’t find a market fit. Forking also can happen when control of the community is not relinquished entirely. 

From an infrastructure standpoint, Facebook follows a blueprint that is not it’s own (Dapps) and has the competencies and the knowledge drawn on its open-source involvement to be successful.

From a business standpoint, many Dapps have no business models and won’t have one in a long time until the ecosystem is built and things start playing out. In a way and as a next evolution of software deployment, Dapps are very similar to SaaS back in the end of the 1990s, an immature technology with no business model per say. A lot was tried, ASPs, marketplaces, … technologies were built until the market fully developed into the SaaS market as it is today a $ 200 Billion market worldwide.  So if all the questions around Libra are warranted, asking for answers is not practical and basing a judgement based on those answers completely erroneous. 

When asked if we should trust Facebook to be doing this, the information is clearly yes:

  1. Facebook has the knowledge and the track record to lead, for now, then release control and allow for a project like this to be successful;
  2. Libra also needs to develop a strong application ecosystem beyond the infrastructure being put into place. One that will enable any business opportunity to be created. Again, Facebook has more than ten years of expertise in this domain. 
  3. Facebook, as the number 10 company in the world, has the clout to bring a consortium like this together;
  4. Facebook has the reach which will help them provide the right level of liquidity if the project becomes successful;
  5. Facebook also has created a governance framework open to Social Impact companies and Universities without them needing to contribute the required $10 million investment other founding members must provide, opening the governance to not for profit for up to 30% of the voting power.

Libra Cryptocurrency Online banking using smartphone with credit card Fintech and Blockchain concept

At the question, should regulators prevent Facebook from doing this? This is a good question as Facebook given its size could have a predatory behavior but the hearings and the set up laid down by Facebook lead quickly to a no answer. Facebook has put in place a framework that will limit its influence on the Libra project over time. If the temptation of regulators is still not to trust anymore and prevent Facebook to act, Dapps and blockchain appears as transformative if not more than SaaS and Cloud computing and it needs the biggest companies involvement to be successful. Preventing Facebook to be involved will stifle innovation. After all, open source would not have been as successful without IBM involvement in the early days. 

So what should the regulators do? A more rational approach is to let this project develop itself, gain the trust and commitment needed to make it successful, then get involved once the project has advanced far enough to be fully understood and then decided of a regulatory framework if any is needed.

If the regulators want to learn from the past mistakes, the key learning is not let technology develop by itself and to get involved early to understand the ramifications of what is happening as it develops. Facebook and the Libra Association offers all the transparency necessary to let regulators and external agencies be involved in such a project so it may be a fertile ground for the interested regulators to learn how to work with innovations early. The learning will be applicable in many other areas, including artificial intelligence (A.I.) and IoT as well as the other industries which require an overhaul.

Regulators could also start to get educated and participate in conferences. In December, we will review the best business and technology practices around this new Dapps phenomenon at the Edge Computing World Conference. We will also review the best practices around public and private partnerships to enable this new industry to emerge and flourish. You are all invited and will make sure to send personal invitations to all regulators involved in the current hearings.

Philippe Cases and Kyle Ellicott

Join us this coming December 2019 as we review the best business and technology practices around the rising DApps ecosystem at the Edge Computing World Conference. We will also review the best practices around public and private partnerships that enable this new industry to emerge