2020 was a year of changed plans.
Whether it was because of the spread of COVID-19, the tumultuous elections in the United States, the numerous natural disasters that plagued many parts of the world, things did not go as expected this year, trips were cancelled, events rescheduled; in the business world, fortunes were made and lost for completely unpredictable reasons.
Perhaps one of the biggest changes in plans in the business world was the decisive shift in the course of Facebook’s Libra project, which was announced in the middle of 2019.
Libra’s entrance onto the global scene was made with the “move fast and break things” bravura that Facebook has become known for. The plan was to build a global financial system that could be used by everyone everywhere; however, things did not go as planned.
Indeed, almost as soon as Libra appeared, a massive regulatory outcry began. As a result, nearly a year after Libra 1.0 was announced, Facebook announced Libra 2.0, a new plan for a more scaled-down, regulatory-friendly financial network.
But, the story is much more complicated and interesting than that.
Recently, Finance Magnates went down the Libra rabbit hole with David Gerard, who recently published Libra Shrugged: How Facebook Tried to Take Over the Money. The new book serves as a definitive volume on Libra’s birth, growth, and the massive change in plans that Facebook was forced to make in order to preserve the project’s life.
David is known as a crypto sceptic, blockchain pundit, and the author of cryptocurrency and blockchain news site Attack of the 50 Foot Blockchain. In 2017, David published his first book on the crypto space, dubbed Attack of the 50 Foot Blockchain: Bitcoin, Blockchain, Ethereum & Smart Contracts.
”A Weird Little Story”
The life of Libra is a complex tale; we asked David to start at the very beginning.
“It’s a weird little story,” David said. “It’s like Facebook did this coin, and it was a huge thing all over the news, and then, of course, the governments of the world slapped it down. The uniformity of the response was amazing.”
Despite the amount of mainstream media attention that Libra got around the time of its launch, David said that he believes that “Libra is not taken as seriously as seriously as it should be in the cryptocurrency world.” After all, “it was started by four Bitcoiners,” he continued.
“It’s full of Bitcoin and blockchain ‘world ideas,’” including “all of the amazing promises that people make about cryptocurrency: it’ll solve inequality; you can do remittances with it and it’ll bank the unbanked, and all of that sort of thing,” David said.
In addition to these “Bitcoin ideas,” David explained that the creators of Libra “threw in a few ICO ideas,” such as “let’s have a token that you can buy to be an investor in Libra” and “let’s swing around trillions of dollars of reserve currency.”
In other words, “all of the things that you would see written on ICO papers in 2017.”
“The thing was, though, this is Facebook, and Facebook is huge,” David said. “Facebook is important, and Facebook is also widely distrusted.”
Waning Public Trust in Facebook
Why is this?
“They’ve misbehaved in so many ways, and they’ve broken people’s trust repeatedly,” David said. For example, Facebook was fined by the Federal Trade Commission in 2019 for breaking its 2012 settlement with the same entity on user data privacy matters.
Therefore, when Libra first debuted on the global stage, regulators seem to have had good reason to react with distrust.
David also commented on the public perception of the individual leaders involved with the Libra project.
For example, after reading more than 10 years’ worth of material “by and about him,” David Gerard said that “David Marcus strikes me as a completely sincere guy.”
“If David Marcus says that he thinks XYZ, he probably does think those things, and will act as though he does,” David Gerard explained. For example, “when he says that Facebook’s ‘Novi’ wallet will not leak your personal information to the advertising engine, I don’t doubt his sincerity.”
However, in David Gerard’s eyes, Mark Zuckerberg is another story.
“Every chance he’s ever had, he breaks privacy and leaks information, and then apologizes for it and does it again,” he said.
“The Regulators Looked at Facebook’s Plans and Said, ‘You Are Not Doing This.”
“Therefore, when Facebook brought this Libra scheme out, with all of these esoteric ideas that most people didn’t understand,” regulators were not exactly pleased.
David pointed out that France’s Minister of the Economy and Finance, Bruno le Maire, who happened to be in the middle of a live interview when the announcement was published, responded negatively to Libra literally “within minutes” of its first public appearance. Other politicians and government officials quickly followed suit.
Interestingly, though, when Libra first made its public debut, the project was far from finished: “Facebook basically decided, ‘well, we’ll go live; I’m sure it will be fine,’” David said. Meanwhile, “they hadn’t finished their software, and they hadn’t finished their economic plan, but they decided to release them anyway.”
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“The regulators looked at Facebook’s plans and said, ‘you are not doing this,’” David explained.
After all, “it’s ok if you’re tiny and you’re economically illiterate,” he continued. “If you’re tiny, regulators just nod and smile and say, ‘that’s ok, just don’t break any laws.’ And then they break the laws, and the Securities and Exchange Commission fines them.”
However, “when you’re Facebook,” it is another story: “Facebook has two billion users,” David said. “What if all of those people get into Libra?”
After all, “Facebook would like them [to be a part of Libra.] They were thinking about a big plan from the beginning when Morgan Beller was initially telling everyone about this thing, she was saying things like, ‘how can we apply blockchain technology to our user base of two billion people?’”
Regulators Saw Libra as a Threat to the Global Financial Status Quo
And given the current state of the financial landscape across the globe, Libra could have easily become massive.
While Libra’s plans never explicitly say how big the project’s pile of reserve currency would get, “everyone’s guess was that the reserve would be on the order of a trillion dollars,” David said. The plan was that the interest in this reserve pile would be used to pay for the operational costs of the Libra network.
“That’s a lot of money, it turns out,” he said. ”enough to actually affect economies.”
David also pointed out that the plans for Libra in its early stages closely resembled “a money market fund,” in other words, “the things that were so popular in 2008, like Lehman Brothers and Bear Stearns. You may have heard of them.”
A Short History Lesson: the 2008 Financial Crisis
David explained that in the years leading up to the 2008 financial crisis, money market funds were quite popular, ”the idea was that you would put your money with them, the fund managers would put them into super-safe investments, and you’d get a bit more money back out. They were considered as high-quality investments; people treated them like super-secure banks.”
However, “it turns out that they were not secure banks.”
“There was so much demand for some of the ‘super-secure’ investments that the funds were pouring money into, that people tried creating new super-safe investments. And you can’t really do that, it turns out.”
For example, “they did ‘super-safe investments’ that turned out to be based on, say, mortgages, and then some of those mortgages went bad; this then led to the investments collapsing, and then the money market funds collapsing, and therefore, the people relying on the money market funds collapsing.”
What happened then? “The Federal Reserve had to come in and bail out everyone,” David said. “Otherwise, the whole financial system would have collapsed.”
Did Libra 1.0 Essential Lay out Plans to Recreate the Conditions That Led to the 2008 Financial Crisis?
What does this have to do with Libra?
“Ever since 2008, the one thing that regulators fear is someone trying to do this again. The one thing that they fear is someone being that foolish a second time,” David said.
“So, when Facebook walked up with the Libra whitepaper, which basically had the same plan that led to the 2008 financial crisis, regulators weren’t happy with it.”
David called the whole thing “bizarre”: after all, “they have an economist, Christian Catalini. He’s an academic economist; he’s not foolish, he’s not uneducated. But, he somehow missed that Libra’s plan recreated the conditions that caused the 2008 financial crisis.”
Not to mention “all the regulation stuff,” David continued. “The only way that blockchains are a better remittance channel than what’s traditionally available is when you’re not worrying about regulation at either end. Because we know how to move numbers on a computer, and Libra would have to be a part of the financial system if it was going to work with ‘real money’.”
What Could Libra 1.0 Have Done to Smaller Economies?
David also pointed out that Libra could have been particularly dangerous for countries with particularly small and fragile economies.
“The 2008 crisis seriously affected the United States, which has one of the biggest and healthiest economies in the world,” he said. “What would it do to smaller ones?”
For example, “I think they had a plan to put the Singapore dollar into the Libra reserve at some point,” he said. “Singapore’s a tiny country. It has a tiny currency. The Singapore dollar is kept stable by two large sovereign wealth funds that add up to about $600 million or $700 million…that’s the whole reserve.”
“Libra would just break it,” David said.
The “Libra-Ization” of Everything
This points to another of the regulators’ fears about what Libra could have done: the “Libra-ization” of everything.
“It’s like dollarization, which is the word for when a country’s economy is totally overtaken by US dollars,” David said. “Sometimes it happens inadvertently; sometimes it happens deliberately.”
For example, when Ecuador dollarized in the early 2000s, “they had hyperinflation, and everyone started using dollars instead of their local currency, and the government went, ‘fine, we’ll just make the dollar the currency.’ So, the Ecuadorian currency is now the US dollar.”
“The thing is that Libra-ization could happen the same way,” David said. “That would be quite bad, because while the US dollar is maintained by the Federal Reserve for US interests…there is some sort of public service aspect to dollarization. If the US abuses the power of the dollar, then people won’t want dollars quite so much anymore.”
However, the US is unlikely to want to abuse its power, because “the US gets really quite a lot out of having the dollar as an international currency. It’s a massive, massive amount of power for the US. So, they don’t want to mess that up.”
Therefore, regulators around the world, and particularly in the United States, feared that Libra could overtake the dollar’s role as the default international currency.
“Libra was actually thinking in terms of people using Libra tokens instead of their local currency,” David explained. “[…] You can’t expect governments to really welcome that.”