Readers, I confess that I have not followed the blockchain/cryptocurrency universe for awhile; at one time, I followed CoinDesk but sadly, I was not able to distinguish actual news from breathless evangelism, not to say calculated propaganda, so I gave up the unequal struggle. However, now that Facebook has announced Libra[1], which is a blockchain cryptocurrency at least for marketing purposes[2], I’ve brushed up on the topic enough do this round-up. Bloomberg summarizes Libra:

Facebook Inc. unveiled plans for a new, global financial system with a broad group of partners from Visa Inc. to Uber Technologies Inc. on board to create a cryptocurrency it expects will one day trade much like the U.S. dollar and inject a new source of revenue. Called Libra, the new currency will launch as soon as next year and be what’s known as a stablecoin–a digital currency that’s supported by established [fiat] government-backed currencies and securities [see Reuters on stablecoins here]. The goal is to avoid massive fluctuations in value so Libra can be used for everyday transactions across Facebook in a way that more volatile cryptocurrencies, like Bitcoin, haven’t been. To come anywhere close to matching the U.S. dollar for utility and acceptance, Libra will need to be widely trusted.

As we shall see below, trust issues are key to the entire venture. Friend-of-the-blog Matt Stoller has an Op-Ed in the New York Times that you should all read; he expands on how the “partnership” may work:

As far as I can tell, Facebook aims to build a new payments and currency system using blockchain technology. Facebook is starting a subsidiary, Calibra, to “provide financial services” to individuals and businesses, including saving, spending and sending money. The actual standards for the currency will be managed by a nonprofit in Switzerland called the Libra Association. The currency will have its own central bank known as the Libra Reserve, and the board will be the committee of corporations that helped set it up.

Needless to say, a privatized Central Bank will take some time to set up (Bloomberg also says the Libra Association’s Charter is not yet written). Facebook COO Sheryl Sandberg:

We announced this early. We know this is a heavy, heavily regulated space. We need to talk to people, meet with people and that’s what we’re doing and we are then going to launch.

More trust issues. Here is the optimistic, evangelistic view of the venture:

Libra will introduce more users to Bitcoin than any other coin before. 2.6 bullion that are one step closer to learning about, buying, and understanding $BTC. Thanks Zuck! https://t.co/TcuX7TgodY — Luke Martin (@VentureCoinist) June 17, 2019

And the view of Libra’s marketing team:

Why we think stable coin $libra will be big

1. No 3% merchant fee saves companies billions of USD/Yr

2. Instant secure settlement vs stolen cards/fraud saves billions

3. $Libra will be run by a consortium of 100 including facebook, stripe, uber, PayPal, MasterCard and Visa 🤯 pic.twitter.com/lCQq2wIGxC — Libra News (@LibraCoin_) June 17, 2019

(I have to say I’m given pause by seeing Kiva, whose business model has been characterized as “controversial,” besides “predatory” and a “farce,” positioned as a top partner; see Thomas Frank for the virtue signaling zeitgeist of the microloans universe.)

Others are more skeptical. One rattlesnakedave (via):

Finally, a cryptocurrency with the ethics of Uber, the censorship resistance of PayPal, and the centralization of Visa, all tied together under the proven privacy of Facebook. Just what I’ve been waiting for.

As Hyman Minksy famously said: “Everyone can create money; the problem is to get it accepted.” That places — absent force majeure — trust, and lack of trust, at the center of the Libra effort. Libra’s trust issues sort themselves into three buckets: User, Technical, and Regulatory. I will look at each of these topics in turn, and conclude by considering (as Stoller does) whether Libra is a sovereign (wannabe or not).

User Trust

Should users trust Libra? The Financial Times poses the question concisely:

The final question concerns how widespread usage will be. Consumer privacy concerns mean users are already revoking Facebook permissions. If they do not trust Mr Zuckerberg’s company with their phone number why would they trust it with their money?

One reason to answer no is that Facebook CEO Zuckerberg is a vicious and unrepentant crook and con-man, and has been since his days at Harvard. Famously, this chat session:

ZUCK: yea so if you ever need info about anyone at harvard

ZUCK: just ask

ZUCK: i have over 4000 emails, pictures, addresses, sns

FRIEND: what!? how’d you manage that one?

ZUCK: people just submitted it

ZUCK: i don’t know why

ZUCK: they “trust me”

ZUCK: dumb fucks

When someone shows you who they are, believe them the first time.

Further, in a world where the rule of law applied to Silicon Valley oligarchs, Facebook would already be a criminal enterprise. Bloomberg, “Facebook Wants to Know If You’d Trust It With Your Money“:

Regulatory pressure on Facebook has never been greater. The Federal Trade Commission is finalizing an investigation into its privacy practices, which the company has said could lead to a fine up to $5 billion. Presidential hopefuls Elizabeth Warren (D-Mass.) and Bernie Sanders (I-Vt.) have called for investigations into the big tech companies and the power they wield over Americans’ lives. Facebook co-founder Chris Hughes has said the social network should be broken up. Reacting to the Libra announcement, Ohio Senator Sherrod Brown, the top Democrat on the U.S. Senate Committee on Banking, Housing, and Urban Affairs, said, “We cannot allow Facebook to run a risky new cryptocurrency out of a Swiss bank account without oversight. I’m calling on our financial watchdogs to scrutinize this closely to ensure users are protected.”

We don’t let the Mafia print its own money, so why Facebook? Of course, to a corporation of Facebook’s scale, $5 billion is just a cost of doing business. And Facebook’s scale may neutralize its user trust issues in the privileged West. As Vox says, “Facebook may have too many users for its cryptocurrency to fail — even if you don’t trust it“:

[M]ost people I’ve spoken with in recent days believe Libra can be successful, largely because of Facebook’s enormous scale. They’ve posited that the platform’s unprecedented user base is the only global population that’s big enough to organize around a single currency.

One obvious initial use case for a “global population” — “Facebook and its family of apps, which have more monthly active users than the populations of China and the US combined” — would be remittances. From the Financial Times:

Creating a “stablecoin” digital currency pegged to a basket of assets and a digital wallet that can hold it is well suited to the international remittance market.

And remittances are a nice little business to be in. From the World Bank:

In 2019, remittance flows to low- and middle-income countries are expected to reach $550 billion, to become their largest source of external financing…. The global average cost of sending $200 remained high, at around 7 percent in the first quarter of 2019, according to the World Bank’s Remittance Prices Worldwide database.

7% is a pretty big cut if you’re a “helper” in Hong Kong sending money back to the Philippines, so the remittance market would indeed seem ripe for disruption.

However, it’s important to understand that Libra’s architecture — very much unlike the original cryptocurrency, Bitcoin — requires users to trust Libra, the central issuing authority:

Bitcoin’s digital gold, but Facebook’s Libra is the digital dollar—here’s why that matters

[Bitcoin bull Brian Kelly], founder and CEO of BKCM and resident bitcoin expert on CNBC’s “Fast Money,” said there are some crucial differences between Libra and a cryptocurrency like bitcoin. With Libra, Facebook users will be able to exchange their dollars for Libra tokens, thus entrusting Facebook and its fellow backers with building a reliable ledger of all transactions, Kelly said. “You have to trust Facebook that they’re going to hold onto those dollars, they’re going to keep track of the ledger, and that your token’s going to be worth something. You go out, you buy your goods and services on the Facebook platform, whoever else is using it. Maybe Uber somehow is involved. And then you’re left with the Libra tokens that are left over,” he said. That trust defines the main difference between cryptocurrencies like bitcoin and Libra, Kelly said. Bitcoin buyers don’t need to entrust a third party with their money or information, whereas Libra users will have to trust the company that has perhaps been most plagued by issues around trust and privacy: Facebook. “This is about that trusted third party and, to me, that’s the revolution of crypto, is that it is peer-to-peer. You disintermediate financial services,” Kelly said. “So, when you talk about the differences between this and something like bitcoin, bitcoin is trustless. You don’t need to believe that anybody’s going to check that ledger; you can do it yourself.”

That distinction may not matter to the Hong Kong helper; it may matter very much to users in the United States or the European Union. The pink paper’s question remains salient: “If they do not trust Mr Zuckerberg’s company with their phone number why would they trust it with their money?”

Technical Trust

Libra is not only a group of partners, a governance structure, and a currency: It is software that delivers financial services in that currency. Bloomberg’s Joe Weisenthal offers perspective:

I think Facebook is aspiring to be to Libra what Google is to the Android operating system. In other words, if successful, the right way to think about this is not as a coin or a cryptocurrency, but rather an open-source platform for building money-moving applications . Unlike traditional open source software, which anyone can in theory fork, modify or develop for their own needs, a monetary system must maintain some consensus on things. What is the unit of account? Who has the money? Who is allowed to issue it? And so unlike a normal piece of software, an open-source money system needs all kinds of governance mechanisms. But in theory, if Libra launched and gained momentum, you could imagine it as a platform in which anyone anywhere could write an app that moves money to anyone else in a fashion they please . Right now, there are numerous closed payment applications, but they’re not interoperable. A person using Venmo can’t send money to someone using Zelle or WeChat. The potential with Libra is that they could.

But should we trust the application developers? From TechCrunch, “The real risk of Facebook’s Libra coin is crooked developers”:

Facebook naturally has a huge target on its back for hackers. Not just because Libra could hold so much value to steal, but because plenty of trolls would get off on screwing up Facebook’s currency. That’s why Facebook open-sourced the Libra Blockchain and is offering a prototype in a pre-launch testnet. This developer beta plus a bug bounty program run in partnership with HackerOne is meant to surface all the flaws and vulnerabilities before Libra goes live with real money connected. Yet that leaves one giant vector for abuse of Libra: the developer platform. “Essential to the spirit of Libra . . . the Libra Blockchain will be open to everyone: any consumer, developer, or business can use the Libra network, build products on top of it, and add value through their services. Open access ensures low barriers to entry and innovation and encourages healthy competition that benefits consumers,” Facebook explained in its white paper and Libra launch documents. It’s even building a whole coding language called Move for making Libra apps. Yet the Libra Blockchain itself is irreversible. Outside of custodial wallets like Calibra, there’s no getting your stolen or mis-sent money back. There’s likely no customer support. And there are plenty of crooked crypto developers happy to prey on the inexperienced. Indeed, $1.7 billion in cryptocurrency was stolen last year alone, according to CypherTrace via CNBC.

Of course, all financial systems enable fraud to some extent; the question is whether Libra enables fraud at scale; and one answer is that if enough developers are crooked, it will. But there’s another reason for concern, more basic to the nature of computing.

Ken Thompson, the designer and original implementor of Unix (now at Google) embedded a Trojan Horse into his own C compiler undetectably (“the cutest program I ever wrote”), and so could log in as root to any system compiled with it. He concludes his classic paper “Reflections on Trusting Trust” as follows:

The moral is obvious. You can’t trust code that you did not totally create yourself. (Especially code from companies that employ people like me.) No amount of source-level verification or scrutiny will protect you from using untrusted code. In demonstrating the possibility of this kind of attack, I picked on the C compiler. I could have picked on any program-handling program such as an assembler, a loader, or even hardware microcode. As the level of program gets lower, these bugs will be harder and harder to detect. A well-installed microcode bug will be almost impossible to detect .

At this point, we note that Move, the language in which Libra apps are written, has, if not a compiler per se, a bytecode verifier and a bytecode interpreter. Of course, I could have unknowingly slipped over the line into paranoid fantasy. However, consider that a Trojan Horse backdoor into the transactions of two billion people would be an asset of almost inestimable value to Zuckerberg and his posse as a form of primitive accumulation. And if you view the Libra ecosystem as a phishing equilibrium, if fraud can happen, it has already happened.

Regulatory Trust

Regulators, even in these benighted times, at the very least insist that regulatory forms be obeyed. Here I will consider, in the United States, the states, Congress, and most importantly, the IRS. Finally, I will consider the reaction international regulators.

I have heard that at the state level, the price of regulatory forbearance is a steak dinner. Certainly Uber has done very well for itself. And Libra is making progress:

Another tidbit on the regulatory side of Facebook's new #crypto project #Libracoin: Calibra has 7 state money transmitter licenses so far, the earliest from mid-April. FB says it's working to get licenses in states that treat crypto as $$ equivalent (for licensing) pic.twitter.com/I1t0sMsy2k — Lydia Beyoud (@ElleBeyoud) June 19, 2019

Congress has bestirred itself, though we will see what the outcome is. MarketWatch, “Senate banking committee sets July date to hold hearing on Facebook Libra coin“:

The Senate Banking committee on Wednesday set July 16 as the date to hold a hearing centered on Facebook Inc.’s Libra coin. House Financial Services Committee head Maxine Waters on Tuesday said Facebook “is continuing its unchecked expansion and extending its reach into the lives of its users.”

And Waters in the Financial Times:

“The cryptocurrency market currently lacks a clear regulatory framework to provide strong protections for investors, consumers, and the economy,” Ms Waters said in a statement on Tuesday, as she called on regulators to “get serious”.

As for the IRS, Lawfare writes in “Facebook’s Cryptocurrency: Stop It Before It Starts“:

A true cryptocurrency such as Bitcoin or Libra is considered property by the Internal Revenue Service . That means a gain of $1 due to volatility between when the cryptocurrency is acquired and when it is transferred to someone else is a $1 taxable event. And since any integration into Facebook Messenger or WhatsApp is under the control of Facebook, Facebook should probably file income tax documents and keep track of the otherwise difficult cost-basis math on behalf of Facebook’s customers, like other investment brokerages do. The IRS needs to remind both Facebook and the public of these implications and requirements. Of course this would make Libra completely useless in the U.S. by increasing the cost of using it beyond any utility.

(See also this useful thread on Twitter and this white paper.)

And finally, the international reaction. From the Financial Times, “Facebook’s Libra currency draws instant response from regulators“:

The G7 working group will also consider how to ensure proper controls against money-laundering, according to a letter from Bruno Le Maire, the French finance minister, and François Villeroy de Galhau, the governor of the Banque de France. The French hold the rotating presidency of the G7. Central banks and the International Monetary Fund will also participate, according to the letter, which was seen by the Financial Times.

(The surprisingly quotable Le Maire’s initial reaction: “‘It is out of question’ that Libra ‘become a sovereign currency. It can’t and it must not happen.”) The concern, quite naturally, is money laundering. Again from the Financial Times, “Four big questions facing Facebook’s Libra coin”

[A]t the top of the list is money laundering. Before traditional lenders open accounts for customers, they must undertake rigorous background checks to ensure funds are not ill-gotten gains. Facebook’s plans allow for “pseudonymous” users able to create multiple accounts not based on their real-life identity. “This approach is familiar to many users, developers, and regulators,” its official documents read. One UK official remarked: “This is particularly weasel-worded. We may be familiar with it but that doesn’t make us comfortable with it.”

Trust once more.

Sovereigns and Sovereignty

Stoller, in his Op-Ed, raises the question whether Facebook is heading toward some form of sovereignty (real, not metaphorical):

A permissionless currency system based on a consensus of large private actors across open protocols sounds nice, but it’s not democracy. Today, American bank regulators and central bankers are hired and fired by publicly elected leaders. Libra payments regulators would be hired and fired by a self-selected council of corporations. There are ways to characterize such a system, but democratic is not one of them. Years ago, Mark Zuckerberg made it clear that he doesn’t think Facebook is a business. “In a lot of ways, Facebook is more like a government than a traditional company,” said Mr. Zuckerberg. “We’re really setting policies.” He has acted consistently as a would-be sovereign power. For example, he is attempting to set up a Supreme Court-style independent tribunal to handle content moderation. And now he is setting up a global currency. The way we structure money and payments is a question for democratic institutions. Any company big enough to start its own currency is just too big.

While Zuckerberg’s “”Move fast and break things” does seem uncomfortable like an American-style version of fascist legal theorist Carl Schmitt’s “Sovereign is he who decides on the exception,” I’m not sure how Facebook, absent the coercive powers of a typical state, can be said to be sovereign. Also, Facebook relies on fiat currency created by states; it’s not (at this point) seeking to challenge their respective national monopolies with its own global fiat currency. However, it does seem that as the liberal rules-based international order breaks down, various entities are attempting to fill the power vacuum (the ISDS system does this implicitly, just like Zuckerberg’s “independent tribunal”) and perhaps Facebook is morphing into one such entity. Would — say — the denial of Facebook financial services coerce a Hong Kong helper in the same way that the Hong Kong police would? Doubtful, but the future lies ahead.

Conclusion

LawFare writes:

Facebook however is committing to integrating Libra as the payment channel into its applications, bypassing the opportunity to integrate a more conventional solution similar to Venmo, M-pesa, Zelle, or ApplePay. Given a conventional solution would probably result in a payment channel rivaling PayPal’s $2 billion a year in net income, this represents a huge opportunity cost. It only makes sense for Facebook as a moral crusade rather than a business decision: it seems intended to be exempt from any government’s controls.

I find it unlikely that Facebook is engaged in a moral crusade of any sort. And I don’t see how Facebook can exempt itself “from any government’s controls” when the Libra is “backed by” fiat currencies minted by those same governments. Perhaps Facebook is taking the long view, and would prefer not to give Venmo et al. a cut. (But then why are they Facebook’s partners? Friends close, enemies closer?) Perhaps Facebook is willing to accept the opportunity cost because it is in quest for some other very great advantage as yet unseen; the transaction data of two billion users would seem of sufficient scale (see the discussion of Trojan Horses above). The future, again, lies ahead.

NOTES

[1] On Libra the astrological sign, Wikipedia: “The symbol of the scales is based on the Scales of Justice held by Themis, the Greek personification of divine law and custom…. The Moon was said to be in Libra when Rome was founded.” A cursory Internet search shows that depending on his actual date of birth (disputed) the Roman Emperor Augustus has been said to be a Libra, which might have personal resonance with Facebook CEO Zuckerberg.

[2] FT Alphaville has a fine discussion of whether Libra is really a blockchain or not (no). “This is just one of a series of Alphaville posts on Libra coin, which we are calling Breaking the Zuck Buck, in which we will seek to show how nonsensical, pointless, stupid, risky, badly thought-out and blockchainless the whole thing is.”