Libra is Alive and Kicking (as are its foolish skeptics)
Boy, people really hate Facebook, don’t they? You can see it in the latest round of biased coverage surrounding Libra, including this hatched-job in the FT. The legacy news outlets have always done a poor job of covering crypto, and their Libra coverage has been particularly weak. You could argue that there is a certain logic here, since crypto is a challenge to the notion of ‘important gatekeeper’ which newspapers used to be (and Facebook is a challenge to the profits newspapers used to make.)
That FT article is so one sided that I had to check several times to make sure it wasn’t an opinion column. Even the title, “How Facebook’s Libra went from world changer to just another PayPal” smacks of ignorance. Before getting into why, let’s review the changs the Libra Association just announced:
The focus has shifted from a single “basket coin” to multiple single-currency stablecoins (LibraUSD, LibraEuro, etc) with their own cash reserves. There is now a more sophisticated compliance framework. Most users are expected to access the network via a KYC’ed wallet issued by an authorized provider, and those who don’t (thus accessing the network pseudonymously) will face balance and transaction limits. There will be AML inspections, sanctions blocks, and all of the other oversight that is a staple of the payment industry. The network will remain permissioned forever.
Yes, the project has compromised many of its original ambitions (some of which, like the bakset idea, were dumb to begin with) in order to cowtow to the authorities. But no, that doesn’t make it “just another PayPal.” Anyone who makes a statement like that knows little about stablecoins and even less about PayPal. To wit:
- PayPal doesn’t let you program your payments
- PayPal doesn’t let you issue an infinite variety of other tokens
- PayPal doesn’t give you transparency into it’s ledger (or its reserves)
- PayPal doesn’t allow non-KYC’ed usage (sorry poor, unbanked or undocumented people)
- PayPal doesn’t interoperate (not even with Venmo, which it owns!)
- PayPal doesn’t allow others to build around it or on top of it
Even a regulated and somewhat defanged Libra offers features that PayPal does not, will not and could not. But perhaps more important are the things that PayPal does offer but Libra lacks:
- PayPal does charge both a fixed fee and a variable fee for every online merchant transaction
- PayPal does charge an even higher fixed fee and variable fee for cross-border transactions
- PayPal does charge even more fees if an account is funded via debit or credit rails.
A cross-border PayPal payment can cost merchants upwards of 5% in fees. The same payment on Libra may cost as little as 5 cents. I’ll leave it up to you to decide if an online merchant with $1m in annual sales would like to save $50k. We still don’t know too much about Libra’s fee structure, but if it’s anything like the other stablecoins out there, they’ll be a small fraction of most legacy options.
Blockchain networks have a radically different business model because they use fees to seek security, not rent. There are many consequences to this distinction, the biggest one of which is the fact that blockchain payments are amount-agnostic, so a $1000 payment costs the same as a $1 one. Transitioning to such a model would impair the revenue growth of any payment network. Blockchains have the luxury of not caring about revenues.
Now, can Facebook or the Libra Association still try to charge PayPal like fees if they wanted to? Sure. But that will just aid the adoption of Tether, USDC and Dai. Although the economics of joining the Libra Association remain murky, it’s unlikely any of the existing members are expecting PayPal like profits.
If anything, companies like Uber and Shopify joined to try to force payment revenues down across the board, to reduce costs. Uber reported in its IPO filing that it spent $750m on credit card processing fees in 2017. That number is probably north of $1B today. The one thing legacy payment providers and FinTechs (and their investors) never seem to appreciate is that their revenues are the rest of the digital economy’s expense. The more payment-related revenues grow, the greater the incentive for the rest of the world to find an alternative. (Enter stablecoins, stage left.)
Tellingly, a lot of the shade being thrown at Libra in the FT article comes from the crypto community. One reason why stablecoins keep being ignored — despite their potential and continued growth — is because they are unsatisfying to both ideological extremes. Not as proprietary as PayPal, but also not as decentralized as Bitcoin — the technological equivalent of whatever idea doesn’t get much coverage on MSNBC or Fox News. That’s how we know they are a good idea.
There is much that remains to be seen about Libra. But the recent update reveals that the project hasn’t just gone into hibernation as many had hoped. There are also rumors of association members having finally made a financial commitment. But even if the project never launches, it has done a lot of the heavy lifting to pave the way for a stablecoin future. Some of its most recent innovations, such as throttled non-KYC’ed accounts, will probably be adopted by others, including central banks rushing to issue CBDCs.
Notably, the project’s new white paper directly invites central banks to issue digital currencies into its network to eliminate the need for a reserve altogether. If you are a PayPal executive, that’s the kind of development that should keep you up at night.
The opinions expressed here are strictly my own and not that of any client, associate or employer.
