My Conversation with a Congresswoman on Libra
Author’s note: below is a fictitious conversation between myself and an imaginary member of congress about stablecoins and Libra.
Hello. My name is Omid. I’m a blockchain writer, professor and consultant , and am here to answer any questions you may have on Libra.
Great, because I have many questions. First, what is a Libra token?
People call it a cryptocurrency, stablecoin or digital token, but those are unhelpful words that have yet to form consensus definitions. A simple description might then be more useful. A Libra Token is a transferable and programmable digital token redeemable for fiat money. It’s a digital token issued for payments and backed by cash being held somewhere safe.
Why does that sound familiar?
Because that’s how most payment methods work already. Everything from a bank check to a debit card or even Venmo operate on the same principle. Sending actual cash back and forth is not very convenient, so we use proxies instead. As long as people are confident the proxy can be redeemed for the money backing it in the future, the system works. Libra tokens work the same way, except that they ride on a brand new transfer mechanism known as a blockchain.
What is a blockchain?
All payment methods, including the ones mentioned above resolve themselves via some kind of a financial ledger — like the one inside your bank, an even bigger one maintained by the Federal Reserve, or the database used by PayPal. Blockchain is simply newer and better ledger technology.
Why is it better?
Blockchains are distributed, meaning many copies are kept by different users, and decentralized, meaning new entries are made democratically. Those two things make them more resilient than traditional ledgers. They are also transparent so both users and regulators can look inside and inspect them anytime they want, and made immutable with cryptography so it’s harder to commit fraud. Lastly, they are programmable, meaning companies can build more sophisticated accounting into them.
These features mean you can use them for payment schemes that look and feel like the ones we already have, but with several distinct benefits. They include faster, cheaper and more global payments, easier incorporation of digital identity, easier fraud prevention with tighter security, and programmable infrastructure that lets companies offer users cool additional features like instant rewards and smart coupons.
Hmm. That doesn’t sound half bad.
There’s more. Because blockchain is newer and better infrastructure, it’s theoretically easier to build a payment system that is more open and accessible. That’s why the Libra people keep talking about their project being aimed at the poor and unbanked. There’s a large swath of the population that’s been left behind by digitization, and some believe blockchain can bring them into the fold.
So why am I so suspicious?
That’s a good question. It could be because the project is being spearheaded by Facebook, a company that you have good reason to be suspicious of, or that blockchain reminds you of Bitcoin, and you’ve always been told that Bitcoin is bad.
Depends on your perspective. There’s a lot about Bitcoin that even you could appreciate. After ten years of operation, its blockchain has never made a mistake, defrauded a user or imposed hidden fees. Nor has it ever discriminated against a user because of race, nationality, gender or class.
Wow. We sure can’t say that about our old school financial infrastructure.
Yup. Plus there’s more, and you might really like this given your political ideology. Although the Bitcoin network is worth billions of dollars, no individual or corporation owns it. It’s owned and operated by a community that is open for anyone to join.
So the Bitcoin blockchain is socialist?
Kind of, except that you don’t have to wait three months for mediocre service provided by a bored bureaucrat. And since it’s fully decentralized, you don’t have to worry about some populist taking over and abusing the system for selfish gains, or restricting access to people they don’t like. Bitcoin is censorship resistant, so nobody has the power to keep anybody else from using it.
But isn’t that why criminals and money launderers like it?
Sure, just like criminals and money launderers like $100 dollar bills, shell companies and Rolexes. That doesn’t mean we should be banning Rolexes. Anything that is good for the general public, right down to the internet itself, can also be abused by the bad guys. But it can also be used by law enforcement. Bitcoin’s transparency means in some ways it’s easier to track criminal behavior than ever before.
And Libra is like Bitcoin?
Yes and no. Think of them as different implementations of a similar idea. The biggest differences are that the Bitcoin blockchain is totally decentralized and run anonymously, while Libra will be run by an association of the world’s biggest companies. Also, whereas the value of a Bitcoin is based entirely on supply and demand and fluctuates wildly, the value of Libra tokens will be tied to a reserve of cash and will be relatively stable.
So Facebook isn’t inventing it’s own private currency?
Not at all, at least no more than PayPal or Starbucks have invented their own private currencies with their mobile wallets.
But isn’t Libra an illegal security?
Think about what you just said. It can’t be both a private currency and a security at the same time. More accurate is to say that it is something new and somewhat challenging to existing regulatory, legal and tax frameworks.
But that’s ok, we’ve been through this before with technology. Remember when digital music first showed up? People overreacted then too, and Metallica started suing teenagers. But Steve Jobs invented iTunes.
And why might this Libra business be a good idea?
Because the world is increasingly going global and digital, and our legacy payment systems are having a hard time keeping up. They are either slow, expensive or siloed. People just want to be able to send money from point A to point B, regardless of time, distance, denomination, amount or reason. They want to be able to send a payment as easily as they can send an email. None of our existing infrastructure can do that but Libra, or another solution like it, might, assuming it’s built and operated correctly.
So what you are telling me is that Libra is a lot like other payment solutions, and the infrastructure it plans to build has some appealing features?
Yes. There are some differences, like the fact that Libra will be backed by a basket of major currencies instead of just one. I’m not sure whether that’s a good idea or not.
Won’t Libra compete with national currencies?
Only in places where the local currency is poorly managed. For reliable currencies like ours, Libra will actually increase their reserve status by providing digital access to millions of people all over the world. Think about how great that would be in all the countries where the government periodically destroys its own currency, mostly at the expense of the poor and powerless.
You sound pretty convinced that Libra will succeed.
Not at all. Facebook’s reputational issues are an impediment, despite what I consider a good faith effort by them to minimize their role in the design and governance of this project. Also, blockchain is really new, and the first iteration of a new item seldom takes over. That said, I do think all the possible benefits of existing currencies riding blockchain rails will eventually lead to a successful implementation.
I hadn’t considered all of that. Maybe I shouldn’t be so knee-jerk against this project, and should instead take some time to think about it.
There’s a first time for everything.
Don’t be so snarky.
I can’t help it, it’s in my nature.
Actually, don’t I know you from somewhere?
Maybe you’ve read my book?
No, but you sound familiar, particularly in the way you mix humor, education and condescension.
Ah. You must have seen my cartoon.
Yes, that’s it! You were really critical of the Fed and Quantitative Easing. Weren’t you totally wrong about that?
Yes and no. Some of my predictions didn’t come true, but I stand by my overall criticism that printing money doesn’t really solve any of today’s problems and creates bigger ones down the road. But there are certainly elements of QE, negative interest rates and aggressive monetary policy that have turned out to be absolutely wonderful.
You could have bought Bitcoin for less than five bucks when my cartoon first came out.
What’s it worth now?
A tad bit more.
The opinions expressed here are strictly my own and not that of any client, employer or associate.