When Facebook announced that it was working on a new cryptocurrency called Libra, the social media giant named a long list of impressive partners.
The venture had the backing of Visa, Mastercard, Andreessen Horowitz, Uber, Spotify, and Stripe among others. Altogether, Libra could count on the support of no fewer than 28 association members drawn from the worlds of finance, digital technology, and the sharing economy.
That was in June 2019. Less than a year later, a quarter of those original backers have dropped out. Just 21 remain. The latest to leave was Mastercard, and in an interview with the Financial Times, the company’s CEO Ajay Banga explained his reasoning.
Banga had liked the idea of a global currency that would ease international trade, he said, but he had three issues.
The first was regulations. Mastercard, he says, operates in 200 countries and obeys the local regulations in each of those places. The Libra association’s key members would not commit “not to do anything that is not fully compliant with local law.” When he asked them to put in writing that they would commit to follow due diligence considerations such as know your client, anti-money laundering, and data management, they refused.
The project had also stopped being altruistic. Facebook had positioned Libra as a tool of financial inclusion, Banga said, but had then wanted to link it to their own proprietary wallet, Calibra. “For financial inclusion, the government has got to pay you in this [currency], you've got to receive it as an instrument you can understand, and you have to be able to use it to buy rice and cycles,” Banga said. “If you get paid in Libra which go into Calibras, which go back into pounds to buy rice, I don't understand how that works.”
But perhaps the most important reason is that he couldn’t see how Libra would make money. That concerned him. “When you don’t understand how money gets made, it gets made in ways you don’t like.”
The Financial Times also suggested an important reason of its own. A blockchain-based payment system could, it suggested, develop into a global payments network that could threaten and even kill off private networks like Mastercard.
Banga’s comments show the complexity of the issues that cryptocurrencies raise. Facebook’s attempts to push Libra into its own wallet is a warning sign. That decision creates a monopoly. Users of Libra would be better served by being able to choose from competing wallets offering different features at different prices. If they can only use Calibra, that wallet will have no reason to develop better features in order to beat competitors.
But Facebook is harming itself first with that decision. Libra is only one cryptocurrency among many. If the lack of competition in the currency’s service makes it less convenient than Bitcoin or Litecoin or Anyothercoin, Libra will struggle to grow. Facebook might have removed competition in its own ecosystem, but there’s no shortage of competition in the world of cryptocurrency as a whole.
The issues of regulations and profits, however, show that Banga didn’t understand Libra—or cryptocurrencies—at all. Digital coins are supposed to be able to avoid regulations. Users don’t want governments or central banks telling them how they can spend their money. And they certainly don’t want to have to pay to receive or send money. Digital currencies make both of those requirements irrelevant. The distributed networks that make up the blockchain show everyone where funds are flowing. The data management, money laundering, and know your customer rules are relevant for the wallets, where fiat enters and leaves the system. But within the blockchain anyone can see where each coin has come from and where it goes.
And as for making money with Libra, apart from small fees for miners, there’s no reason to pay anyone for handling a transaction in a currency owned and managed by everyone.
Ajay Banga pulled out of Libra because he said he didn’t understand it. He didn’t understand how it could avoid the regulations his company has to obey. He didn’t understand the lack of competition. And he didn’t understand how he could make money out of it.
Cryptocurrencies aren’t supposed to make money for companies or obey government rules. They’re supposed to free currencies from the control of central banks and cut out the traditional payment system for the rest of us. Ajay Banga was never supposed to get it.
Joel Comm is New York Times best-selling author, blockchain enthusiast, futurist speaker, social media marketing strategist, live video expert, technologist, brand influencer, and eternal 12-year old. His latest project is as co-host of The Bad Crypto Podcast, a top cryptocurrency show making the future of digital payments easy to understand.
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