Handing a large chunk of the global transaction system over to Facebook would be dangerous for the entire society. Regulators must act swiftly to freeze the project.

The white paper released in mid-June by Libra.org features a cleverly designed system for a single, global currency, supported by an extensive, built-from-scratch infrastructure that will allow a nearly frictionless transaction.

Libra is ingenious in its central argument: granting access to cheap capital and transaction system to the 1.7 billion people deprived of access to any banking system. They are called the “unbanked.” But as often happens, the way Facebook sees it is mostly disconnected from the reality, to put it gently (we will come back to that in a next Monday Note).

Libra is also smart in its duplicity. It is supposed to be a global financial system, but it is not a bank. Therefore it escapes the accompanying regulations for such institutions. Similarly, it is not a new currency per se in the sense that its creation does not impact the global monetary supply, strictly protected by central banks; it is a panel of unspecified currencies backed by a set of robust assets — the Libra Reserve — made with government securities and bank deposits. All of the above is supposed to ensure stability. Truth is: no one knows how stable Libra will be; even Facebook, in its presentation of the system, acknowledges that the Libra will indeed fluctuate and that it is not immune to inflation.

In short, Libra is a typical Facebook concept: easy to grasp, apparently beneficial to the many, especially the neediest. And it is huge in its scale. If Western depositors were to move only a tenth of their bank savings to Libra, its reserve fund would be worth $2 trillion. Incidentally, it would make Libra the largest single player on the bond market.

“Quid lucrum istic Facebook est”

What’s in it for Facebook? Two things.

1. It has already made money of Libra. Each of the early backers has paid $10 million. For the initial batch of 27 partners, that already translates into $270 million. By the time it launches in 2020, Libra expects to have enrolled 100 companies. Assuming they pay the same price, it will be a cool billion dollars in one-time fees. Not bad for a mostly FOMO motivated clientele. But that is a pittance compared to what’s ahead.

2. In the nearly frictionless promise of a global transaction system, the most important word for Facebook is “nearly.” On a captive customer pool of 2.4 billion people, the slightest variation in the ARPU can have a massive impact on the company’s revenue.

Right now, Facebook’s Average Revenue Per User (ARPU) and revenue distribution look like this:

While for the Western regions, ARPU is challenging to move upward, Libra’s primary target is the last two lines: Asia Pacific and ROW. On these two, if Libra is able to move the needle by just one dollar per year and per user, it will translate into $1.4 billion in additional revenue, most likely entirely in profit since the cost of operating the structure is mostly offset by the fee paid by the corporate memberships. And that is just for the lowest hanging fruit. We are not talking of the Western market or the elusive “unbanked”.

The former is complicated to assess as Westerners are much more suspicious of Facebook than people from the Philippines, Brasil, or India (WhatsApp’s biggest markets).

In any case, we are likely talking of several additional billions in profit to Facebook’s profit and loss (net income of $22B in 2018), that could appear for the financial year 2021…

But no matter how attractive the maths seem, we are not there yet.

Lines of defense

In the development of Libra, Facebook is facing three lines of resistance: regulators, financial institutions, and public trust.

1. Regulators are way more powerful in the West than elsewhere. Already, the US Federal Reserve, the European Central Bank, and others do not intend to let Libra glide on smoothly. As the custodians of the stability of the financial system, they are not keen to see such a mammoth player emerging without due oversight. As for EU regulatory bodies, they have been rather silent on the matter. The notoriously anti-American and anti-tech Margrethe Vestager, in charge of maintaining fair competition in the EU, has not spoken out (she is usually more obsessed with Google than Facebook or Amazon). Ignoring such a too-good-to-be-true case of abuse of power by a dominant player looks weird, even if Vestager is currently busy campaigning for the presidency of the EU Commission.

2. Traditional financial institutions have a lot to lose but won’t give it up easily. Retail banking is a sector that is prone to massive disruption. It offers an onerous and mediocre service and has shown a remarkable inability to evolve. As a mere example, while I’m able to go ten years back in the history of my Amazon transactions (across three countries), my French bank is unable to give me more than six months of statements which are available only in PDF, i.e., useless. Their cost of operations is high, and their performances indicators are terrible. To put it bluntly, a Schumpeterian destruction of the retail banking system is largely overdue — even if digital native companies like Stripe, PayPal, Coinbase or TransferWise have put a dent in their business (see a list of largest Fintech here).

More specifically, the rise of Libra could hurt banks’ balance sheets by drawing away from the vast pool of Facebook users. On the US Canada and Europe markets alone, Libra will have access to more than 600 million potential customers, which is 12 times larger than an online banking outlet like JP Morgan Chase. Besides, no one in the financial industry wants to see a newcomer of such magnitude entering the securities market. Apart from credit cards, the financial sector is notably absent from Libra’s first backers, a sign that it will fight tooth and nail to preserve the status quo.

Facebook: Trust me. With your data. With your money.

The biggest obstacles to the deployment of Libra remains the lack of trust in Facebook, especially in the Western world.

In the end, the questions boil down to this: do we want to hand over our money to a company that:

— Has the worse possible record on handling personal data?

— Keeps saying that there will be a Chinese wall between the social network and the e-wallet managed by a Swiss non-profit called Calibra — really? Like between Instagram or WhatsApp and the mothership for instance?

— A company that is already using tools able to detect our moods, health disorders, political affiliations, and sexual preferences?

— A company that holds it can change its commercial rules at any time without any consideration for its customers or partners?

— A company whose management would have been overthrown many times over by its shareholders if not for its specious ownership structure?

— A company that internally functions as a dictatorship, without any counter-power, but with a cult of personality around a leader who openly admires China, the grand architect of an emerging hyper-surveillance society?

I doubt you would.

My take is that Libra simply won’t happen. But it will be a tough battle.

— frederic.filloux@mondaynote.com

Two weeks ago, our Deepnews Digest newsletter was about Libra with a selection of great stories ranked by the Deepnews.ai scoring system. Have a look, and Subscribe!